NAFCU Compliance Blog

Deconstructing the QM Safe Harbor in Construction to Permanent Loans; CFPB Mortgage Servicing Guide Updates

By: Reginald Watson, Regulatory Compliance Counsel

Greetings Compliance Friends!

It has been a few years since the CFPB's implementation of the ability to repay requirements and qualified mortgage safe harbor, yet many credit unions still find the points and fees calculations confusing, particularly the scale of the exemption for construction loans in the context of a hybrid construction to permanent loan.  As a reminder, Regulation Z now requires credit unions to consider a consumer's ability to repay a residential mortgage loan and these requirements are set out in section 1026.43(c).

Loans that meet the standard of a qualified mortgage under sections 1026.43(e) or (f) are given a presumption that the borrower has the ability to repay. The calculation of all applicable points and fees are an aspect of determining whether a transaction is a qualified mortgage and therefore, whether the transaction is presumed to meet the “ability-to-repay” requirements of section 1026.43(c). The procedures for counting points and fees are the same as those provided in the high cost mortgage rule found in section 1026.32(b)(1). The credit union is required to establish a member's ability to repay for only those residential mortgage loans which are covered by the scope of section 1026.43(a), which contains a specific exemption for "a construction phase of 12 months or less of a construction-to-permanent loan." 12 C.F.R. §1026.43(a)(3)(iii). If a loan is outside the scope of section 1026.43(a), then there is no regulatory requirement to establish a consumer's ability to repay under section 1026.43 or calculate the points and fees.

So, how do we account for the points and fees calculation when the credit union is financing the permanent loan in addition to the construction phase? 

The commentary to Regulation Z seems to give us two options: for purposes of the qualified mortgage rule, the credit union may treat the construction phase and the permanent phase as one single transaction, or as two separate transactions.  Either way, the credit union would be required to follow the procedures under section 1026.32(b)(1) to calculate the points and fees for all applicable charges for both the construction phase and the life of the loan. However, it is not entirely clear how to allocate fees between the construction and permanent phase of a loan – but the preamble to the ATR/QM rule indicates that the ability to treat these kinds of loans as either one or two transactions draws upon section 1026.17(c)(6)(ii)-5. The preamble also referred back to section 1026.17(c)(6)(ii) in other areas, so while not entirely clear, it seems this rule may be helpful guidance generally.  The staff commentary to section 1026.17(c)(6)(ii)-5 seems to suggest that when separating the transactions, the points and fees may be allocated as the credit union sees fit:

5. Allocation of costs.When a creditor uses the special rule in §1026.17(c)(6) to disclose credit extensions as multiple transactions, fees and charges must be allocated for purposes of calculating disclosures. In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges under §1026.4 and points and fees under §1026.32(b)(1) that would not be imposed but for the construction financing. For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase and may not be included in the disclosures for the permanent phase. If a creditor charges separate amounts for finance charges under §1026.4 and points and fees under §1026.32(b)(1) for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges under §1026.4 and points and fees under §1026.32(b)(1) must be allocated to the permanent financing. Fees and charges that are not used to compute the finance charge under §1026.4 or points and fees under §1026.32(b)(1) may be allocated between the transactions in any manner the creditor chooses. For example, a reasonable appraisal fee paid to an independent, third-party appraiser may be allocated in any manner the creditor chooses because it would be excluded from the finance charge pursuant to §1026.4(c)(7) and excluded from points and fees pursuant to §1026.32(b)(1)(iii).

Thus, it seems that the credit union may make a risk-based business decision when allocating points and fees for purposes of the qualified mortgage safe harbor for the permanent financing phase of the loan. Appendix D to Reg Z provides specific guidance on how to make the actual calculations when these loans are treated as separate transactions in Part I or as a single transaction in Part II.

***

CFPB Issues Update to Small Entity Compliance Guide

On March 29, 2018, CFPB updated the Mortgage Servicing Small Entity Compliance Guide (version 3.1) to incorporate recent amendments to the 2016 Mortgage Servicing Rules. As you may recall, we discussed these amendments in a previous NAFCU blogpost. Check out this link for our other blogs on the 2016 Mortgage Servicing Rules. CFPB also recently created a mortgage servicing coverage chart that credit unions may find helpful.

Breaking Down the TRID Fix: 60 Days Isn't Really 60 Days, Except When It Is; Two Upcoming CECL Webcasts

 Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

On July 6^th, the CFPB finalized its TRID "Fix" rule. Unfortunately, the CFPB continues to punt on addressing some obvious issues with TRID, including declining to address the obvious errors in their own sample forms. In TRID-land, we'll take what we can get.

Before jumping into the nuts and bolts of the final rule itself, it's important to get one thing straight: the effective date.

TRID "Fix" Implementation Dates

The proposal included a 120-day effective date for the implementation of the changes to TRID.

It its comment letter on the proposed rule, NAFCU reminded the CFPB that, as with the initial implementation of the TRID rule, credit unions will have to work with vendors to update processes and systems, perform testing and provide training to incorporate the changes. As such, the proposed 120 day time period for implementation was simply not realistic.

NAFCU also specifically asked for an extended period or 12 months to implement the changes, and for the Bureau to allow for early compliance where possible. Apparently NAFCU's requests were echoed by the majority of other industry commenters and the Bureau heard us.

For the majority of the changes, the rules themselves will become effective in the Code of Federal Regulations 60 days after they are published. However, compliance with the changes will not become mandatory at that time. Instead, compliance will become mandatory for applications received on or after October 1, 2018.

Regarding how credit unions can begin to implement the changes, the Bureau stated:

"For these reasons, the Bureau agrees with several commenters that it is appropriate to allow creditors flexibility to comply with the 2017 TILA-RESPA Amendments all at one time, or to phase in the changes prior to the mandatory compliance date. After considering the comments, the Bureau does not believe that it would be optimal in these circumstances for the Bureau to impose a detailed schedule for creditors to phase in the changes required by this final rule, for example by establishing multiple effective dates that are staggered over time. Thus, after the effective date of the 2017 TILA-RESPA Amendments, creditors generally may phase in the 2017 TILA-RESPA Amendments as best comports with their business models, whether based on application dates for specific provisions or even during the course of a transaction, although such phased-in compliance may not place the creditor in violation of provisions of Regulation Z (as interpreted by the commentary) unchanged by this final rule…" Final Rule, p. 416.

Exceptions for Two Post-Consummation Requirements

There is an exception to this implementation framework regarding a change to commentary implicating two requirements: (1) subsection 1026.20(e) regarding escrow cancellation notices and (2) the partial payment policy disclosure required by paragraph 1026.39(d)(5). Both of these provisions address notices which may be required during the life of the loan, possibly long after consummation.

There has been some confusion as to when exactly these post-consummation requirements applied to loans that might have been applied for or originated before the October 3, 2015 TRID implementation deadline. To clarify the issue, the CFPB is amending comment 1 to the scope of Subpart E to address this. New comment 1 to paragraph 1(d)(5) explains when these post-consummation requirements apply:

"Additionally, §§ 1026.20(e) and 1026.39(d)(5), as amended or adopted by the TILA-RESPA Final Rule, took effect on October 3, 2015, for transactions for which the creditor or mortgage broker received an application on or after October 3, 2015, and take effect October 1, 2018, with respect to transactions for which a creditor or mortgage broker received an application prior to October 3, 2015." Final Rule, p. 461.

This commentary becomes effective 60 days after publication of the final rule in the Federal Register, and there is no delayed implementation for that guidance. We will continue to dig into the so-called TRID Fix, and we will let you know what we find.

Two Upcoming CECL Webcasts

CECL - A Deep Dive Into 5 Implementation Models (For Purchase)
Wednesday, July 19 | 2:00 p.m. – 3:30 p.m. ET

NAFCU teamed up with a renowned team of data scientists to analyze the pros and cons of five implementation models for the new CECL rules. Hear what we found so you can choose the best model for your credit union.

 

CECL Roadmap - Understanding Requirements, Dispelling Myths & Planning Implementation (Free)
Thursday, July 20 | 2:00 p.m. – 3:30 p.m. ET 

Hear directly from FASB regulators the key steps and actions credit unions should take for a successful CECL implementation. You'll also gain a general understanding of CECL requirements.

 

CFPB Proposes Reg B Amendments Given Interplay with HMDA; Regulatory Compliance School Kick Off

Written by Brandy Bruyere, Vice President of Regulatory Compliance

It seems unkind to start Monday morning off with something relating to the Home Mortgage Disclosure Act (HMDA), but we had to fit this one in sometime and today's the day.

On March 24, 2017 the CFPB published proposed amendments to Regulation B that would "facilitate compliance with [HMDA], to add certain model forms and remove others… and to make various other amendments to Regulation B and its commentary to facilitate the collection and retention of information about the ethnicity, sex, and race of certain mortgage applicants." This is in addition to a notice issued in September 2016 that approved use of the 2016 Uniform Residential Loan Application (URLA) for collecting information relating to ethnicity and race under HMDA. In fact, one of the proposed amendments would incorporate the 2016 URLA into the appendix of model application forms, replacing the 2004 version of the URLA.

First, let's start with why this kind of rule alignment is necessary. Section 1002.5 of Regulation B addresses limitations for requesting information regarding an applicant's race, color, religion, national origin, or sex:

"(a) General rules—

(1) Requests for information. Except as provided in paragraphs (b) through (d) of this section, a creditor may request any information in connection with a credit transaction. This paragraph does not limit or abrogate any Federal or state law regarding privacy, privileged information, credit reporting limitations, or similar restrictions on obtainable information.

(2) Required collection of information. Notwithstanding paragraphs (b) through (d) of this section, a creditor shall request information for monitoring purposes as required by §1002.13 for credit secured by the applicant's dwelling. In addition, a creditor may obtain information required by a regulation, order, or agreement issued by, or entered into with, a court or an enforcement agency (including the Attorney General of the United States or a similar state official) to monitor or enforce compliance with the Act, this part, or other Federal or state statutes or regulations.

[…]

(b) Limitation on information about race, color, religion, national origin, or sex. A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) and (b)(2) of this section…." (Emphasis added.)

The rule goes on to discuss situations where requesting this kind of information may be permitted for conducting certain self-testing functions under section 1002.15.  Of course, Regulation C (HMDA) requires collection of some of this data, which is discussed in the staff commentary to section 1002.5(a):

"Paragraph 5(a)(2).

[…]

2. Information required by Regulation C.Regulation C generally requires creditors covered by the Home Mortgage Disclosure Act (HMDA) to collect and report information about the race, ethnicity, and sex of applicants for home-improvement loans and home-purchase loans, including some types of loans not covered by §1002.13 [which allows collection for purchases and refinancings of dwelling secured loans that will be the applicant's principal residence]."

While Regulation B allows collecting information that is otherwise prohibited in order to comply with HMDA the rule uses terminology that does not align with the amended version of HMDA and the proposal addresses these kinds of issues. The proposal would also add section 1002.5(a)(4) which would set forth "other permissible collection of information" to allow credit unions to collect this kind of data even if not subject to HMDA reporting. For example, a credit union that submitted HMDA data in any of the past 5 years, but is not currently a "financial institution" under HMDA would be permitted collect information for HMDA covered loans. The proposal would also amend section 1002.13(b) to give credit unions the option to allow applicants to self-identify using the specific race and ethnicity categories required by HMDA.

The actual text is pretty technical so for those working on HMDA compliance at a credit union, it may be worth taking a look at the specific language in the proposal. The CFPB is accepting comments on the proposal, so if it seems something is missing, please let us know.

Compliance School Kicks Off Today. NAFCU's compliance team will be at our spring Regulatory Compliance School this week working with a great group of credit union professionals who are seeking or renewing their NCCO designation. Our email and phone responses may take a bit longer than usual, but we will still be responding to members throughout the week. Thanks for your understanding!

“I’ve Got to Keep on Moving”: CFPB Continues Its Prosecution of RESPA Violations

Written By Shereefat Balogun, Regulatory Compliance Counsel

Any P.Diddy fans out there?! Well, Diddy’s 1997 hit “Can’t Nobody Hold Me Down” rings loud in my head as I read through the latest CFPB Order against a mortgage lender for violating the prohibition on “kickbacks” in Section 8(a) of RESPA.  Now many of you are aware that the CFPB’s order and penalty against PHH Corporation similarly alleging RESPA violations was reversed by a panel of the U.S. Court of Appeals for the D.C. Circuit.  Notwithstanding, the CFPB seems resilient in its efforts.

The Story

A few days ago, the CFPB announced consent orders against Prospect Mortgage, LLC (Prospect), a mortgage lender for paying illegal kickbacks for mortgage business referrals, and some of its partners.  Essentially, the order against Prospect accuses the lender of using a variety of schemes to pay kickbacks for referrals of mortgage business in violation of RESPA.  Here are some of the activities the CFPB found to be in violation of Section 8(a) of RESPA:

• Using Lead Agreements to Pay Brokers for Referrals. According to the order, Prospect entered into agreements whereby it paid real estate brokers for each lead it received.  A lead generally consisted of a prospective buyer’s name, address, email address, and phone number, which Prospect would then use to reach out to the prospective buyer to market its loans products.  Moreover, under these agreements, brokers would also take steps to steer consumers to Prospect, many times under Prospect’s encouragement.  For example, the order states that Prospect paid one broker between $25 to $500 per lead, typically totaling $2k to $3k a month.  The broker, in turn, would hand out $20 bills to their agents, one for each consumer that the agent directed to Prospect’s loan officers.
• Encouraging Brokers and their Agents to Require Buyers to Obtain Preapprovals with Prospect’s Loan Officers. The CFPB found that Prospect violated Section 8(a) by providing that a broker listing a property for sale would require any prospective buyer seeking to submit an offer to first obtain a preapproval from Prospect. For example, one lead agreement required the broker to “educate and train” its agents on the need for consumers to seek Preapproval with Prospect, and that the broker would only earn lead fees for those listings “in which Prospect has been designated as the preferred lender such that the listing agent is required to have all customers who desire to submit an offer on the property receive a Prospect Mortgage pre-qualification.”
• Paying a Mortgage Servicer for Referrals. The CFPB alleges that Prospect had a contract with a mortgage servicer whereby the mortgage servicer would market Prospect’s services to its servicing clients, and tried to persuade them to refinance their existing mortgage with Prospect.  In return, Prospect paid the mortgage servicer a portion of the proceeds received from any resulting refinance and also gave them the mortgage servicing rights on the refinance mortgage.
• Encouraging Brokers to Use Fees and Credits to Pressure Consumers into Using Prospect. The order alleges that in response to pressure from Prospect, brokers at time took steps to economically coerce consumers into using Prospect. For example, one broker made a seller’s credit conditional on using Prospect for the mortgage.  Also, other brokers allegedly imposed per diem fees (a penalty imposed on the buyer for each day beyond the contractual closing date the buyer was unable to close because financing had not been approved) unless the buyer used Prospect.

Remind Me About Section 8(a) Again.

Section 8(a) of RESPA generally prohibits any person from giving or receiving a fee, kickback, or other “thing of value” in exchange for the referral of a settlement service involving federally related mortgage.  See, 12 U.S.C § 2607(a). “Thing of value” is broadly defined, and thus many credit unions tend to be cautious regarding real estate transactions and referrals.  In short, a credit union may not pay another company or its employees for the referral of settlement service business.  

What Are Compliance Folks Saying?

“OK, I understand the general prohibition, but I thought some activities were allowed.  What about Section 8(c)?”  Interestingly, the CFPB did not even mention Section 8(c) in its orders. 

Section 8(c) lists several types of conduct that are permitted, so long as certain conditions are satisfied.   Indeed, Section 8(c), states:

Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed…

12 U.S.C § 2607(c)(emphasis added).

Regulation X further expressly permits:

• A payment to an attorney at law for services actually rendered;

• A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;

• A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;

• A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;

• A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.);

• Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or

• An employer's payment to its own employees for any referral activities.

See, 12 C.F.R. §1024.14(g)(iv)(emphasis added.).

Despite acknowledging that referrals are inherent in real estate transactions, the CFPB did not provide much guidance as to how lenders and other industry partners should structure referral arrangements to comply with RESPA.  

If it’s any consolation, the rule does advise that the CFPB “may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation.”  12 C.F.R. §1024.14(g)

What Now?

If your credit union is offered some kind of referral or similar arrangement, or is involved in referral programs that may not have previously been vetted, it may be worth calling your lawyer.  In light of RESPA’s already restrictive language, coupled with the recent CFPB interpretations and aggressive prosecution, credit unions involved in the mortgage business are advised to consult with counsel before making referrals.

If you have any questions on this or any other compliance issue, please feel free to reach out to us.  We’re here to help you!

CFPB Publishes 2017 Rural and Underserved Counties Lists; 18-Month Exam Cycle is Back

Written by Pamela Yu, Special Counsel for Compliance and Research

Happy Monday!  Last week, CFPB published a list of counties determined to be rural and a list of counties determined to be rural or underserved for use in 2017. 

CFPB has several rules that refer to its “rural or underserved” and “rural” counties lists.  Each year, the Bureau publishes new lists for use the following year.  As a refresher, the rules that refer to these lists are:

• Escrow requirements under TILA/Regulation Z.
• Ability to repay and qualified mortgage standards (ATR/QM) under TILA/Regulation Z.
• High-cost mortgage and homeownership counseling amendments to TILA/Regulation Z and RESPA/Regulation X.
• Appraisals for higher-priced mortgage loans (HPML).

Why does this matter? Well, the lists can significantly impact mortgage originations for certain entities. Credit unions operating predominantly in rural or underserved counties are exempt from certain regulatory requirements.

For example, as we blogged about back in September 2015, the CFPB’s final amendments to its definition of small creditors and rural or underserved areas under Regulation Z provided some credit unions with regulatory relief, specifically with respect to the HPML escrow requirement, which contains an exemption for small creditors; the high-cost mortgage rule, which exempts small creditors from a prohibition against balloon payment features on these kinds of loans; and the ATR/QM rule, which permits small creditors to make certain portfolio and balloon payment QMs.

In amending the rural definition by substituting the word “area” for “counties” within the regulation, the September 2015 final rule moved to a more granular approach than the previous standard, thus providing greater relief to certain credit unions.

CFPB’s rural counties lists are generally defined by using the United States Department of Agriculture Economic Research Service’s urban influence codes, while the underserved counties lists are defined by reference to data collected under the Home Mortgage Disclosure Act (HMDA).  The 2017 lists also include, in their entireties, the following U.S. territories as rural areas: Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, and the U.S. Virgin Islands.

***

NCUA’s 18-Month Exam Cycle is Back—Hooray!

Last Thursday, the NCUA Board approved, as part of the agency’s 2017-2018 budget, ten recommendations from the agency’s Exam Flexibility Initiative  working group, including an extended 18-month exam cycle for well-managed, low-risk federal credit unions with assets of less than $1 billion.  Since NCUA moved to an annual exam cycle at the height of the financial crisis, credit unions have contended with more frequent exams of increased scope and complexity in the post-Dodd-Frank era.  However, as the industry has recovered along with the overall U.S. economy, NAFCU and its member credit unions have called for relief in this area. 

In response, in May 2016, NCUA Chairman Metsger established the Exam Flexibility Initiative to review NCUA’s examination and supervision program and to consider ways to modernize and improve the agency’s examination process.  A working group formed under the initiative solicited input from credit union stakeholders and, as a result of that feedback, issued a report in October 2016 making ten recommendations for approval by the NCUA Board.  Specifically, in addition to an 18-month exam cycle for certain well-run credit unions, the working group recommended the following:

• An 8- to 12- month examination cycle, timed from the prior exam completion date, for federal credit unions not meeting the criteria for an 18-month exam cycle.
• Enhanced examinations of small federal credit unions.
• Enhanced coordination of exams for federally insured, state-chartered credit unions.
• Establishment of an NCUA and state supervisor working group.
• Establishment of provisions for all federally insured credit unions relative to random sampling examinations, measurement of exam cycles, and NCUA’s authority to conduct more frequent examinations.
• Enhanced examination planning and notice procedures.
• An optional post-exam credit union survey.
• Reduction of NCUA’s onsite exam presence.
• Improved consistency of examiner training.

The working group’s full report is available here. 

While the NCUA Board’s approval of these recommendations is mostly welcome news for credit unions, NAFCU continues to call for an extended exam cycle for all well-run, healthy credit unions regardless of asset size, as well as an independent appeals process for disputing exam results.

The extended exam cycle will become effective January 1, 2017. Other improvements, including the post-exam credit union survey, will begin in July of next year.

***

Upcoming NAFCU Webcast: CFPB Mortgage Servicing Rules – 2016 Final Changes

Live Webcast Wednesday, November 30, 2016 | 2:00-3:30 p.m. ET

Although most of the new requirements are not effective until October 19, 2017, our experiences with the CFPB have taught us that it's best to begin implementing reviews and processes early rather than wait to implement changes within tight timeframes. Attend this strategic webcast to explore the details of the new final rule and the potential impact on your credit union's servicing processes and procedures.

CFPB Issues Supervisory Highlights Expressing Concerns with Automobile Loan Servicing, Debt Collection, Mortgage Origination and Fair Lending

Written by Benjamin M. Litchfield, Regulation Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On October 31, 2016, the CFPB issued its latest voluminous supervisory report sharing multiple observations from recent examinations and other supervisory activities. The report covers issues observed by the Bureau in the areas of automobile loan servicing, debt collection, mortgage origination and fair lending. Other topics, such as student loan servicing, are also addressed. Provided below is a digest of some (but not all) of the Bureau’s many findings.

Automobile Loan Servicing.  In recent examinations of nonbank auto loan servicing companies, CFPB examiners identified unfair practices relating to repossession fees. The supervisory report alleges that certain nonbank servicing companies would often hold personal property seized as part of repossessing an automobile and refuse to return the property until after the borrower paid a fee for storing the property. Supposedly, if the borrower did not pay the fee, the companies would dispose of the property rather than returning it to the borrower.

Regardless of whether these companies had the contractual authority to engage in such practices, Bureau examiners felt these practices were unfair because the tactic was often used to leverage personal situations for collection purposes with extreme examples including retaining tools essential to the consumer’s livelihood and retention of personal possessions of negligible market value but of substantial emotional attachment or practical importance to the consumer. Examiners also found that some agreements, while disclosing that property would be stored, failed to disclose that a fee would be assessed for storage.

[Authors Note: Unlike the Federal Trade Commission, which promulgated a rule prohibiting certain unfair or deceptive credit practices after extensive public hearings, the Bureau continues to define unfair practices through examination and enforcement without providing credit unions with much guidance or prior notice. Even the FTC’s statements on unfairness and deception, which have defined which practices are prohibited under the FTC Act for decades, are mere guidance to the Bureau that it does not feel obliged to follow.]

Debt Collection.  Bureau examiners also identified several violations of the Fair Debt Collection Practices Act (FDCPA), including charging unlawful convenience fees, making several false representations, and unlawfully communicating with third parties in connection with the collection of a debt. [Author’s Note: While credit unions collecting debts on their own behalf are not considered “debt collectors” subject to the FDCPA, the CFPB has signaled its intention to use its UDAAP authority against so-called first-party debt collectors that engage in the types of acts or practices prohibited by the Act. In other words, the CFPB is trying to get all actors to follow a law that, by definition, credit unions are not required to follow.]

In recent examinations, the Bureau identified situations where debt collectors imposed convenience fees to process payments by phone or online that were not explicitly authorized by the loan agreement or permitted by law in violation of Section 808(1) of the FDCPA. Likewise, debt collectors are reported to have stated that all fees were “nonnegotiable,” which examiners felt amounted to a false representation of the types of compensation which may lawfully be received by a debt collector in violation of Section 807(2)(B) of the Act.

The supervisory report also highlights circumstances where debt collectors would use false representations or deceptive means to collect a debt in violation of Section 807(10) of the FDCPA. For example, the report alleges that debt collectors would place calls to consumers purporting to assess the consumer’s creditworthiness, credit scores, or credit reports, or stating that an immediate payment would need to be made in order to prevent any negative impact on the consumer’s credit. In addition, debt collectors are reported to have also impersonated consumers while using the original creditor’s consumer-facing automated telephone system to obtain more information about the consumer’s debt.

Finally, debt collectors are stated to have disclosed both the nature and purpose of collection calls to third parties when attempting to gather more information about the consumer in violation of Sections 804 and 805 of the FDCPA. These communications were often caused by inadequate identity verification during telephone calls. Collectors would also identify their employers to third parties without first being asked for that information by the third party in violation of Section 804 of the Act.

Mortgage Origination.  CFPB examiners also found deficiencies in mortgage origination compliance management systems which allowed for violations of Regulations G, N, X, and Z. One such purported violation was the reported failure of some financial institutions to verify income using reliable third-party records when conducting an ability to repay analysis. The report notes that examiners supposedly found that income disclosed on a mortgage application was not verified but instead was tested for reasonableness using an internet-based tool that estimates income based on zip code, job title, and years at the current occupation. [Author’s Note: Aside from the rather technical Regulation Z issues raised by the Bureau, this practice could also pose some rather obvious fair lending risks if credit eligibility is being determined, in part, by zip code which can be a proxy for race. #LowHangingFruit] Bureau examiners also identified instances where institutions failed to provide Loan Estimates within 3 business days in violation of the TILA-RESPA Integrated Disclosures Rule.

Fair Lending.  Bureau examiners also observed situations in which they felt that a financial institution’s treatment of limited-English-proficiency (LEP) and non-English-speaking consumers posed fair lending risk. One example offered by the report involves an institution that marketed only some of its available credit card products to Spanish-speaking consumers, while marketing several additional credit card products to English-speaking consumers. The institution lacked the appropriate documentation describing the business decisions that were made to market some but not all products to Spanish-speaking consumers which raised fair lending concerns for CFPB examiners. The report noted that some treatment of LEP and non-English-speaking consumers has led to enforcement actions by the Bureau and the Department of Justice in the past.

The supervisory report also notes that redlining will remain a supervisory priority for the Bureau. When assessing redlining risk, the Bureau will look to several factors including the unique attributes of the relevant geographic areas, lending patterns, peer and market comparisons, marketing, mapping, and additional evidence such as whistleblower tips. Rather than identifying instances of redlining, the supervisory report discusses ways in which credit unions can have a strong compliance program and outlines the Bureau’s approach to examining for illegal redlining. [Author’s Note: Even more information on redlining can be found in this interagency webinar that was held on October 4 and available on demand.]

These are just some of the highlights from the CFPB’s report. The full report is available here. As we can see, the Bureau remains laser-focused on third-party debt collection as it prepares for a possible rulemaking in this area and possible fair lending concerns involving the treatment of LEP and non-English-speaking consumers. If that is true, I may need a stronger prescription for my glasses.

Updated URLA/Form 1003; Early HMDA Compliance Period for Ethnicity and Race Data Collection

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

Freddie Mac and Fannie Mae have issued an updated Uniform Residential Loan Application (URLA, also known as the Form 65 or Form 1003). The URLA can be used by creditors to ensure compliance with Regulation B (see 12 C.F.R. Part 1002, Appendix B) and is required under Freddie’s Seller/Servicer Guide and Fannie’s Selling Guide.

The CFPB used its approval of the revised and redesigned forms, published in the Federal Register on September 29^th, to also address the collection of applicant ethnicity and race information in advance of the new HMDA rules.

Early Compliance on Ethnicity and Race Data Collection Permitted

Generally, Regulation B prohibits credit unions from inquiring into an applicant’s race or ethnicity. However, Regulation B permits inquiries for monitoring purposes in connection with HMDA reporting. See, 12 C.F.R. § 1002.5(a)(2). Thus, until HMDA’s new provisions are in effect, credit unions can only inquire into race and ethnicity to the extent required by the current HMDA provisions, unless otherwise permitted.

The Bureau’s approval of the updated form cited that the revisions to HMDA do not require the collection of disaggregated race and ethnicity categories until January 1, 2018. However, in an effort ease the transition to new HMDA and provide space for the implementation of new policies and forms, the Bureau is permitting early compliance with the collection of disaggregated race and ethnicity categories. In the approval, the Bureau stated:

“At any time from January 1, 2017, through December 31, 2017, a creditor may, at its option, permit applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule. During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule, shall not be deemed to violate Regulation B § 1002.5(b). During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule, shall also be deemed to be in compliance with Regulation B § 1002.13(a)(i) even though applicants are asked to self-identify using categories other than those explicitly provided in that section. The issuance of this Bureau official approval has been duly authorized by the Director of the Bureau and provides the protection afforded under section 706(e) of ECOA.” 81 Fed. Reg. 66930, 66931. (Emphasis added.)

For more information on the new disaggregated ethnicity and race categories, as well as new HMDA’s special transition rule for collecting ethnicity, race and sex information, NAFCU members can view this July 2016 Monitor Article.

Credit unions complying early should continue to submit aggregated data throughout 2017, even though they are collecting data in a disaggregated form. The approval notice contains instructions on how to re-aggregate the information for submission. We have created a chart of the re-aggregation below for credit unions’ convenience:

NAFCU Webcast – Save $100 by Registering by Thursday

Credit Union Vendor Management: Basic Concepts and Risk Mitigation Techniques

Live Webcast Thursday, October 13, 2016  |  2:00-3:30 p.m. ET

NAFCU's Director of Education Devon Lyon and Regulatory Compliance Counsel Benjamin Litchfield will discuss operational and compliance challenges posed by managing vendor relationships. Attend this webcast to pinpoint frequent vendor management trouble areas for credit unions, and learn agency supervisory expectations. Early-bird registration expires tomorrow!

 

"Abacus: Small Enough to Jail" and Non-Traditional Underwriting Resources

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

This past week, my husband and I were on vacation in Toronto, Ontario, attending the Toronto International Film Festival. We had a tremendous time. One film we saw, and were both very excited about, was the world premiere of the documentary Abacus: Small Enough to Jail.

The film chronicles the legal struggle of family-run Abacus Federal Savings Bank, the only U.S. bank indicted for mortgage fraud related to the 2008 financial crisis. It was a gripping and sobering reminder of the damage caused by irresponsible lenders, the unfair legal burden on small financial institutions, and for me, most critically, the importance of credit unions, their mission and their role in their communities.

Abacus: Small Enough to Jail will have its U.S. premiere at the 54th New York Film Festival in October. It was produced by PBS’s Frontline and will air in early 2017. I'd recommend it to everyone.

One of the areas that got Abacus FSB in trouble was insufficient documentation when underwriting loans. Abacus FSB’s customers are frequently cash-only businesses and credit-invisible borrowers, especially Chinese immigrants. Credit unions often have similarly situated members, so, as a reminder, below are some resources for credit unions with similar memberships:

• NCUA’s April 2016 report Serving the Credit Invisible discusses loan application evaluation and underwriting programs for members who have little or no credit history.
• NCUA’s Letter to Credit Unions 10-CU-01 and its enclosure, Supervising Low Income Credit Unions and Community Development Credit Unions also contains useful discussion. The guidance describes alternative sources of funding, common characteristics of borrowers for LICUs and CDCUs, and how to properly credit risk these loans.
• NCUA’s Letter to Credit Unions 05-CU-01 regarding supervising CDCUs and its enclosed white paper: Supervising Community Development Credit Unions ― Balancing Their Mission and NCUA's Regulatory Responsibilities, may also be helpful. The enclosure describes for examiners the non-traditional underwriting practices of CDCUs due to the modest means and unique circumstances of their members. The white paper discusses the need to verify and document non-traditional income.
• FFIEC BSA/AML Examination Manual section on Cash-Intensive Businesses.
• NCUA’s December 1, 2015 webinar entitled Unique Challenges and Opportunities Servicing Hispanic Credit Union Members which discusses several issues in serving immigrant populations with unusual documentation and underwriting needs.
• NCUA’s Legal Opinion Letter 05-1219 discusses when it is permissible to underwrite an MBL using cash flow as collateral.
• NCUA’s Letter to Credit Unions 04-CU-10 discusses underwriting MBLs made to self-employed borrowers.
• NCUA’s Letter to Credit Unions 99-CU-05 on risk-based lending.

We Listened So You Don’t Have To: Know Before You Owe Mortgage Disclosure Rule – Construction Lending Webcast, Part 1 of 2

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

The CFPB’s TRID Construction Lending webcast ran long, did not cover Closing Disclosures at all and was, frankly, a bit of a slog.

So, let me start by saying: You’re welcome.

But even docking points for reading directly from the regulation, the webcast was very helpful in that it answered a couple burning questions about the construction loans and the Loan Estimate. So what did we learn?

Construction Holdbacks Can Be Disclosed As “Other” Costs In Box H!

NAFCU has received multiple member questions about construction holdbacks (i.e., a portion of the loan which will not be disbursed until a later time) and how they should appear on the Loan Estimate. There is no direct guidance in the rules or the commentary on this issue, but the CFPB offered their analysis of the question. In the webcast, they posed the below question:

“Q26: How may a creditor disclose a construction holdback on the Loan Estimate?”

To begin with, the CFPB stated that the Loan Estimate should reflect the terms of the legal obligations created by the loan agreements involved. The CFPB stated that, as an amount contracted to be paid to a person other than the creditor, this can be listed as a line item under “other” costs pursuant to 12 C.F.R. § 1026.37(g)(4):

“§1026.37   Content of disclosures for certain mortgage transactions (Loan Estimate).

For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section:

[...]

(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g)(1) through (6) of this section.

[...]

(4) Other. Under the subheading “Other,” an itemization of any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware at the time of issuing the Loan Estimate, a descriptive label of each such amount, and the subtotal of all such amounts.” (Emphasis added.)

The amount can be listed in Box H of the Loan Estimate and labeled “Construction Holdback,” or by some other term which clearly and conspicuously reflects the purpose of the proceeds.

Surprise Twist: Alternatively, Construction Holdbacks Can Also Be Disclosed In Cash To Close!

The CFPB offered an alternative method of disclosing holdbacks in question 27: allowing the amount to be factored into the Calculating Cash to Close table. You have to walk through the rule a bit to see how this can be done; it isn’t intuitive. We begin with what is included as “closing costs to be financed” in section 1026.37(h)(1)(ii):

“§1026.37   Content of disclosures for certain mortgage transactions (Loan Estimate).

[...]

(h) Calculating cash to close—

(1) For all transactions. Under the master heading “Closing Cost Details,” under the heading “Calculating Cash to Close,” the total amount of cash or other funds that must be provided by the consumer at consummation, with an itemization of that amount into the following component amounts:

[...]

(ii) Closing costs to be financed. The amount of any closing costs to be paid out of loan proceeds, disclosed as a negative number, labeled “Closing Costs Financed (Paid from your Loan Amount)”;” (Emphasis added.)

Straightforward enough…but not quite on point. But let’s look at the commentary to 37(h)(1)(ii) which advises how to calculate “closing costs financed:”

“37(h)(1)(ii) Closing costs financed.

1. Calculating amount. The amount of closing costs financed disclosed under §1026.37(h)(1)(ii) is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed pursuant to §1026.37(f) and (g) from the total loan amount disclosed pursuant to §1026.37(b)(1). If the result of the calculation is a positive number, that amount is disclosed as a negative number under §1026.37(h)(1)(ii), but only to the extent that it does not exceed the total amount of closing costs disclosed under §1026.37(g)(6). If the result of the calculation is zero or negative, the amount of $0 is disclosed under §1026.37(h)(1)(ii).” (Emphasis added.)

The CFPB suggests by including the construction holdback as one of these “payments to third parties not otherwise disclosed,” there is a cascading effect on the remainder of the cash to close table, which will result in an accurate disclosure. The calculation of the closing costs to be financed in section 1026.37(h)(1)(ii) affects the calculation of the “funds to the borrower” in section 1026.37(h)(1)(v). The end result, according to the CFPB, is that the cash to close box will accurately reflect the amounts the parties are actually responsible for at closing as a result of the loan agreement and the parties’ legal obligations.

We will blog again about other lessons learned in the near future. The webcast will be posted here once it is available. If you wish to check out the webcast yourself, I strongly recommend reviewing the presentation slides for questions of particular interest, and then fast-forwarding to that slide for further explanation.

CFPB Releases Monthly Complaint Report and Notes Debt Collection, Mortgage, and Credit Reporting as Top Complaints; DMDC Extends MLA Database Deadline; Free Webcast - Breaking Down the NCCO Exam

Written by Shereefat Balogun, Regulatory Compliance Counsel

On January 28, 2016, the CFPB released its Monthly Complaint Report for December 2015, which provides a high-level snapshot of trends in consumer complaints. It is important to keep in mind that credit unions under $10 billion are not included in the Consumer Complaint Database, which forms the basis of the monthly reports. Notwithstanding, the reports can be a useful tool, as they can help credit unions evaluate which products and services are more problematic and thus, should be addressed in order to avoid or mitigate regulatory risks.

As of January 1, 2016, the CFPB has handled about 790,000 consumer complaints, including approximately 20,3000 complaints in December 2015. The Report notes that:

• Complaints related to prepaid products rose from 138 complaints between October- December 2014 to 459 complaints between October-December 2015, representing a 233% increase;

• For the 28^th consecutive month, the CFPB handled more complaints about debt collection than any other type of complaint. Debt collection complaints represented about 31% of complaints in December 2015.

• Debt collection, mortgage, and credit reporting complaints continue to be the top three most-complained-about consumer financial products and services, which together represented 68% of all complaints submitted in December 2015.

• Equifax, Transunion, and Experian were the most-complained-about companies for August-October 2015.

As stated previously, credit unions under $10 billion are not included in the Consumer Complaint Database.  Rather, the CFPB will forward any complaints from these credit unions to NCUA, and credit unions will need to follow NCUA's procedures for responding to member complaints.

You can view the CFPB’s Monthly Complaint Report here: http://files.consumerfinance.gov/f/201601_cfpb_monthly-complaint-report-vol-7.pdf

You can view the CFPB’s Consumer Complaint Database here: http://www.consumerfinance.gov/complaintdatabase/

###

MLA Database Update. As NAFCU reported earlier this week, DMDC agreed to extend the deadline to seek direct access to the MLA database until February 15, 2016. Those credit unions who express interest in the direct connect option will receive a questionnaire in a response email. DMDC set a February 19, 2016 deadline for interested credit unions to complete and return this questionnaire. If you have any questions about this deadline or the database, please email Brandy Bruyere, NAFCU’s Director of Regulatory Compliance, [email protected].

###

Free Webcast - Breaking Down the NCCO Exam

Live Webcast: Tuesday, February 9 | 3:00 p.m. – 4:00 p.m. EST

As a serious compliance professional, you either have, or are thinking about earning, your NAFCU Certified Compliance Officer (NCCO) designation. This challenging but comprehensive exam will prove that you have a solid understanding of the major regulations that govern credit union operations. Join this free webcast for an in depth look at how to best prepare for the NCCO exam and utilize the material. NAFCU’s very own Director of Regulatory Compliance and Director of Education will guide you through learning the best approach for earning this prestigious designation.

Help Us Advocate for Regulatory Relief

Written by Dan O’Brien, Director of Political Affairs

Hello compliance community. Every day you see firsthand the ever growing burden of regulations inflicted on credit unions in the post Dodd-Frank world. Regulatory relief for community based financial institutions has been a hot topic in the 114th Congress (and even in the Republican and Democratic presidential debates). The need for regulatory relief is obvious.  NAFCU continues to be focused on engaging the House, Senate and Administration on various ways to provide regulatory relief for credit unions. This year alone, NAFCU has testified in front of the Senate Banking Committee, the House Financial Services Committee and twice in the House Small Business Committee on the importance and need for regulatory relief.

Several key pieces of legislation have been introduced and are working their way through Congress that would provide meaningful regulatory relief for credit unions. With just 48 days left in 2015 and the Holiday Season being around the corner, Congress is scheduled to be in session for less than 20 days. Negotiations are ongoing with members of Congress to try to see what relief can pass this year.  NAFCU is involved on the Hill and we remain hopeful that regulatory relief legislation that would help credit unions can pass before the end of this year.

Our advocacy efforts are made stronger by the skills and expertise of our members.  We need compliance experts to share their invaluable firsthand knowledge about the unnecessary burdens that over-regulation is placing on credit unions. NAFCU encourages your credit union to contact your members of Congress on the following issues that would provide regulatory relief to credit unions and could possibly see movement this year.

• H.R. 2205 and S. 961, the Data Security Act of 2015, would bring retailers under a national standard akin to that prescribed under the Gramm-Leach-Bliley Act for financial institutions;
• H.R. 1210, the Portfolio Lending and Mortgage Access Act, would amend the Truth in Lending Act to provide a safe harbor from certain requirements related to qualified mortgages for residential mortgage loans held on an originating depository institution's portfolio.
• S. 1484, the Financial Regulatory Improvement Act of 2015, is a comprehensive regulatory relief package introduced by Senate Banking Committee Chairman Richard Shelby (R-AL) and was reported out by the Senate Banking Committee this spring.  Title I of this package contains a number of relief measures important to credit unions.  Among them are: requiring NCUA to hold an annual budget hearing, granting credit unions parity with community banks in FHLB membership requirements, creating a “qualified mortgage” safe harbor for certain loans held in portfolio, raising the CFPB examination threshold to $50B and indexing other Dodd-Frank thresholds for inflation, and creating an independent process to appeal exam results.  It is important to weigh-in with your Senators to let them know that credit unions need comprehensive regulatory relief like what is found in Title I of S. 1484.

For more information please go to NAFCU’s Grassroots Action Center today.  Your credit union can encourage them to support and cosponsor key pieces of legislation like the Data Security Act of 2015 (H.R. 2205 and S. 961), the Portfolio Lending and Mortgage Access Act (H.R. 1210),  and the Financial Regulatory Improvement Act of 2015 (S. 1484). All these bills cover different portions of NAFCU’s Five Point Plan for Regulatory Relief.  Share your stories on the regulatory burdens impacting you credit union with your members of Congress. It will help NAFCU’s lobbyists in their legislative efforts, strengthen our advocacy and show Congress that we are serious about enacting real relief for our nation’s credit unions.

We are happy to help your credit union with your outreach to your members of Congress and to answer any questions you may have about our advocacy efforts. If you have any interest in learning more about NAFCU’s grassroots advocacy efforts, you can email me directly at [email protected]. 

***

Friday the 13^th fact:

The 32nd President of the United States, Franklin Roosevelt, never traveled on a 13th and refused to have a meal with 13 people at the table.

CFPB Releases Report on eClosing Pilot Program; Holds Forum Discussing Results

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Happy Friday everyone! My name is Elizabeth Young LaBerge and I have recently joined NAFCU as Regulatory Compliance Counsel. My background is in litigation, and I have previously practiced law in Kansas City, Missouri and Portland, Maine. Now, I am thrilled to have joined the Compliance Team here at NAFCU. I look forward to interacting with all of you in the near future.

On April 28, 2014, we blogged about the CFPB’s announcement of a pilot research program on eClosings. This Wednesday (August 5), the CFPB released its report on that eClosings pilot and held a forum summarizing the results, featuring a panel discussion that included some participating lenders.

The pilot research program was aimed at determining whether eClosings could simplify the closing process for consumers by allowing more time for consumers to review closing paperwork, reducing the amount of that paperwork, and offering more educational materials so consumers can understand the paperwork. Seven lenders participated in the pilot, including two credit unions.

While the pilot had some significant data and methodological limitations, the report suggested that consumers who participated in eClosings expressed more perceived empowerment and efficiency in the closing process, as well as a better understanding of the loan and their own rights and responsibilities. This effect was higher among consumers in purchasing transactions than it was for consumers in refinancing transactions. Consumers who received and reviewed documents before closing also reporting higher levels of empowerment, understanding, and efficiency than those who did not. Additionally, closing meetings for eClosings were reported to be much shorter than in traditional closings.

In Section 5.1 of the report, participating lenders noted several steps they took to facilitate successful implementation of eClosing processes for their consumers:

• Clear expectations and consistent communication with all partners.
• Commitment from company leadership and buy-in across the organization.
• Sufficient time for preparation and rollout to avoid technology issues at closing.
• Early and continuous training of all stakeholders.

At the forum, two participating credit unions emphasized the importance of the first two of these steps in implementing eClosing processes. When asked by the panel about the most critical aspects of implementing eClosing processes, Lorraine Stewart, Vice President of Mortgage Lending at Boeing Employees Credit Union emphasized the importance of having strong partners in technology and settlement services who are aligned with the credit union in their commitment to provide service to members through eClosings. Amy Moser, Vice President of Mortgage Services at Mountain America Credit Union highlighted the importance of ensuring that everyone within the organization has the same level of commitment and a top-down belief in the importance of the eClosing process in trying to help members to be successful in achieving financial dreams.

The report also contains descriptions of several operational challenges presented to lenders in implementing eClosings:

• Limitations in technology platforms and concerns from compliance and legal departments lead to more lenders providing paper documents than anticipated.
• Approval processes of eClosings by secondary market investors were sometimes reported as lengthy, extensive, or confusing.
• Large-scale workflow and process changes were required to implement eClosings processes, especially for early document delivery.
• External stakeholders, such as settlement agents, real estate agents and closing attorneys found it difficult to invest the time and resources necessary to implement and learn eClosing processes.
• eNotarization capabilities were insufficient in number due to lack of confidence in the legality of the practice.
• eClosing platforms may require significant IT changes before eClosing processes can be fully implemented.

Participants recommended that while technology and compliance concerns are being resolved, lenders interested in implementing eClosings should start with a hybrid process where only some documents are provided electronically and others provided on paper. Additionally, participants recommended proactively offering educational materials about eClosings to members and stakeholders at each step of the loan process. Ultimately the CFPB determined that lenders should continue to explore eClosings as a viable option for providing an excellent experience for consumers and cost savings benefits to lenders, and suggested that additional research by stakeholders is necessary and welcome.

CFPB Bulletin on Non-Discriminatory Access to Credit for Mortgage Applicants Who Receive Public Housing Assistance; Updated Mortgage Origination Examination Procedures; Public Inquiry into Student Loan Servicing Practices

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

CFPB Bulletin on Non-Discriminatory Access to Credit for Mortgage Applicants Who Receive Public Housing Assistance. The CFPB recently released Bulletin 2015-02, Section 8 Housing Choice Voucher Homeownership Program. The bulletin is intended to remind creditors “of their obligations under the Equal Credit Opportunity Act (ECOA)¹ and its implementing regulation, Regulation B,² to provide non-discriminatory access to credit for mortgage applicants using income from the Section 8 Housing Choice Voucher (HCV) Homeownership Program.³” (Footnotes omitted). The Section 8 Housing Choice Voucher Homeownership Program (Program), created to assist low-income, first-time homebuyers in purchasing homes, is funded by the Department of Housing and Urban Development and administered by participating local public housing authorities.

The Bulletin was issued in response to certain lending practices that have come to the attention of the CFPB – namely that some financial institutions have been excluding or refusing to consider income from the Program during the loan application and underwriting process, or only permitting Program vouchers to be used for certain mortgage loan products or delivery channels. The Bulletin reminds institutions of their fair lending obligations under ECOA and Regulation B regarding the treatment of income derived from any public assistance program. From the Bulletin:

“ECOA and Regulation B prohibit creditors from discriminating in any aspect of a credit transaction against an applicant “because all or part of the applicant’s income derives from any public assistance program.”⁶ “Any Federal, state, or local governmental assistance program that provides a continuing, periodic income supplement, whether premised on entitlement or need, is ‘public assistance’ for purposes of the regulation. The term includes (but is not limited to) . . . mortgage supplement or assistance programs . . . .”⁷ As such, mortgage assistance provided under the Section 8 HCV Homeownership Program is income derived from a public assistance program under ECOA and Regulation B.

Regulation B further provides that “[i]n a judgmental system of evaluating creditworthiness, a creditor may consider . . . whether an applicant’s income derives from any public assistance program only for the purpose of determining a pertinent element of creditworthiness.”⁸ However, “[i]n considering the separate components of an applicant's income, the creditor may not automatically discount or exclude from consideration any protected income. Any discounting or exclusion must be based on the applicant's actual circumstances.”⁹” (Footnotes omitted).

The Bulletin goes on to provide guidance on managing fair lending risk in this area, such as making sure underwriting policies are clearly articulated; training underwriters, mortgage loan originators and others involved in mortgage loan origination; and monitoring for compliance with underwriting policies. For complete details, the CFPB’s press release is available here and the Bulletin is available here.

***

Updated Mortgage Origination Examination Procedures. Earlier this month, the CFPB also released updated mortgage origination examination procedures, which include guidance on how the agency will conduct examinations for compliance with the TILA-RESPA Integrated Disclosure Rule (TILA-RESPA). This document can be a handy tool for those working to implement TILA-RESPA requirements in advance of the August 1, 2015, effective date. For a complete run-down of NAFCU resources to assist those working to implement the rule, check out this blog by my colleague JiJi.

***

Public Inquiry into Student Loan Servicing Practices. The CFPB has issued a request for information seeking comments from the public about industry student loan servicing practices; practices related to loan repayment, including practices related to student loan repayment for borrowers in distress; the applicability of consumer protections from other consumer financial product markets (such as consumer mortgages and credit cards) to student loan servicing; and input about the availability of data on student loan performance and on borrower characteristics during repayment. Comments are due to the CFPB on or before July 13, 2015.

***

NAFCU Webcast: UCC Provisions Affecting Your Credit Union. The Uniform Commercial Code (UCC) impacts many of your credit union’s lending and payment processing activities—but the connection usually isn’t obvious until there’s a problem. Avoid this issue by being well-informed. Attend this detailed webcast to learn how various sections of the UCC affects the different operations of your credit union, from lending to dishonored checks. The webcast will be held on Thursday, May 21, from 2:00 p.m. – 3:30 p.m. ET. Register here.

The CFPB’s Supervisory Highlights from Winter 2015; NAFCU Webcast

Written by Talia Rosenberg, Regulatory Intern

As part of the Consumer Financial Protection Bureau’s (CFPB’s) supervisory authority, it has recently released another issue of Supervisory Highlights, this time taking a look at supervisory actions found between July 2014 and December 2014. The CFPB’s Supervisory Highlights serve as a way for the bureau to communicate to the public and the financial services industry information about its examination process and the types of problems its examiners have discovered.

This report can be a useful tool for credit unions, as it points to items that the CFPB carefully scrutinized during its supervisory process. Credit unions are also able to see the seriousness of noncompliance for those particular problem areas as well as the remedies other financial institutions took to correct their deficiencies. In this issue, the CFPB focused on non-public supervisory actions involving debt collection, consumer reporting, deposit overdraft practices, mortgage origination, and fair lending. Let’s briefly look at these select deficiencies here:

Consumer Reporting (2.1): CFPB examiners found that some consumer reporting agencies fail to forward to furnishers relevant documents submitted by consumers, including cancelled checks, invoices, and correspondence. They also found deficiencies in the updating of public record information, leading to errors in the reporting of dispute results to consumers.

Debt Collection (2.2): CFPB examiners came across debt collectors employing false and misleading representation in collection communications, including misrepresenting collection calls, scripts and letters as well as practices involving ACH payments that created a serious risk of deception to consumers.

Deposits (2.3): CFPB examiners discovered that multiple financial institutions recently switched from a ledger-balance method to an available-balance method without properly disclosing this change, resulting in consumers being misled as to the circumstances under which overdraft fees were assessed.

Mortgage Origination (2.4): CFPB examiners identified multiple areas in which institutions demonstrate deficiencies in compliance with Title XIV on mortgage origination activities. These deficiencies include those in loan originator compensation, use of lender credits, responses to applications, advertisement and adverse action notices. See below for a more detailed examination of these deficiencies.

Fair Lending (2.5): CFPB examiners found multiple violations of both Regulation B and ECOA treatment of protected forms of income. They found that institutions, among other improper practices, sometimes automatically decline applications that rely on income from a non-employment source or discourage applicants who receive public assistance.

Supervision Program Developments (3.1, 3.2, 3.3): The CFPB highlights recent developments in the efficiency of its operations. These include examination procedures for credit card accounts, a guidance bulletin with information on social security disability income and compliance with the Equal Credit Opportunity Act and Regulation B, and the start of the Examiner Commission Program (ECP).

Now let’s dive into Section 2.4 on Mortgage Origination:

Mortgage Origination (2.4)

            Improper Loan Originator Compensation (2.4.1): Despite the fact that Regulation Z strictly prohibits loan originators from receiving compensation based on the terms of a consumer credit transaction secured by a dwelling, CFPB examiners found that branch managers, acting as loan originators, have received compensation based on these terms. Examiners concluded that these improperly allocated expenses resulted in marketing services entities receiving income based on the profitability of retail loans, and that supervision subsequently directed this income to loan originators.

            Improper Use of Lender Credit (2.4.2): CFPB examiners discovered that, because Regulation X requires a loan originator be bound to the settlement charges listed on Good Faith Estimates (GFEs), multiple institutions have employed the practice of reducing lender credits on an HUD-1 when the amounts that should have been disclosed on the HUD-1 were found to be in excess of those disclosed on the GFE. This consequence of inadequate training and compliance procedures, while aiming to prevent the borrower from receiving excess cash-back at closing, ultimately results in an impermissible increase in the final adjusted origination charge, a violation of Regulation X.

            Improper Failure to Provide Estimates (2.4.3): Regulations X and Z both provide three-day time limits for responses to certain types of consumer applications (Regulation X pertaining to GFEs provided by lenders and Regulation Z pertaining to good faith estimates of the Truth in Lending disclosures provided by creditors respectively). However, CFPB examiners identified policies and procedures that led to unspecific reporting of when applications were received, resulting in delays past these three-day time limits and consequent violations of both Regulations X and Z.

            Improper Use of Advertisements (2.4.4): CFPB examiners found that institutions have violated the Regulation Z rule against using triggering terms in advertisements without disclosures. These institutions advertise the length of payments, amount of payments, numbers of payments and finance charges, all without providing the requisite disclosures under Regulation Z.

            Improper Action Notices (2.4.5): CFPB examiners discovered that entities have been failing to meet the requisite provisions set forth by Regulation B with regard to adverse action notices. Examiners found that these entities not only failed to consistently notify applicants of action taken within 30 days of receiving the completed application (as is required by Regulation B), but also failed to provide the necessary information within such notifications (including the name and address of the creditor, a statement describing the provision of the Equal Credit Opportunity Act, the name and address of the agency administering creditor compliance and information regarding the specific reasons for the action taken).

            Improper Compliance Management Systems (2.4.6): CFPB examiners came across many institutions that lacked effective and proper compliance management systems. While an effective compliance management system should include board and management oversight, a compliance program, a consumer complaint program and a compliance audit program, examiners found deficiencies in the comprehensiveness and content of training, the scope of compliance audits and numerous other violations of Regulations B, X and Z.

These deficiencies have reportedly resulted in approximately $19.4 million in remedial costs for more than 92,000 consumers. Even though the CFPB only retains official supervisory authority over institutions and credit unions with total assets of more than $10 billion, a credit union with less than $10 billion in assets can still use this report to ensure that it is compliant with federal consumer financial laws.  

*** 

NAFCU Webcast - The Currency Transaction Report: Avoiding The Many Danger Zones  on Tuesday, April 14, 2-3:30 pm ET. The Financial Crimes Enforcement Network’s (FinCEN’s) Currency Transaction Report (CTR) contains more than a few intricacies that can easily cause confusion. Make it a nonissue and attend this comprehensive webcast. We’ll review the CTR line-by-line, ensuring your ability to work with all types of accounts and potential challenges that can arise. Attendees also receive a handbook with over 20 examples of how to complete the CTR for trusts, businesses, aggregated transactions, sole proprietors and more. Register by April 1 to save $100!           

HUD Proposes Rule on ARM Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages; NAFCU Webcast – Quarterly Economic Update & Credit Union Outlook

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

The Department of Housing and Urban Development (HUD) recently issued a proposed rule that would align adjustable rate mortgage (ARM) notification requirements and the look-back period for FHA-insured single family mortgages with the Truth in Lending Act (TILA), as implemented by the CFPB’s Regulation Z mortgage servicing rule (“mortgage servicing rule”) published in the Federal Register February 14, 2013, and which became effective January 10, 2014.

Currently, FHA regulations have a 30 day look-back period for determining the current index to use for interest rate changes on FHA-insured ARMs and require notification at least 25 days in advance of a corresponding change in the mortgagor’s monthly payment. These timeframes were consistent with the rate adjustment notification requirements of prior Regulation Z, which required notice of rate adjustments between 25 and 120 days before the due date of the new payment. However, going forward, these timeframes will not be sufficient to comply with the revised timing requirements in Regulation Z, section 1026.20(c), which generally requires advance notice of a rate change with a corresponding payment change between 60 and 120 days before the new monthly payment is due.

Noting the timing issue for existing ARMs with short look-back periods, the CFPB’s mortgage servicing rule included special timing requirements for providing the section 1026.20(c) notice for ARMs with look-back periods less than 45 days and originated prior to January 10, 2015.  For these loans, the section 1026.20(c) disclosure must be provided at least 25 days, but no more than 120 days, before the new payment is due. This “grandfathering” of loans with look-back periods of less than 45 days was intended to provide HUD with enough time to bring its regulations in line with TILA and the mortgage servicing rule.

Accordingly, HUD is now proposing two revisions to FHA regulations that would (1) establish a 45 day look-back period for FHA-insured ARMs, instead of the current 30 day look-back period; and (2) require the mortgagee of an FHA-insured ARM to comply with the disclosure and notification requirements in the mortgage servicing rule.

For additional details, the proposed rule is available here.  HUD is accepting comments until June 9, 2014.

***

NAFCU Webcast – Quarterly Economic Update & Credit Union Outlook. Economic and regulatory factors can affect you just as much as your members and employees. Gain a greater understanding of the most impactful current and forecasted economic conditions. You’ll also explore key performance metrics to help you measure the health of your credit union, such as member growth, ROA, delinquencies, and mortgage lending. The webcast will take place on Thursday, June 12, 2014 at 2:00pm Eastern time. Register by June 5 to save $100. For details on this webcast, click here.

CFPB Announces Launch of eClosing Pilot Program; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Last Wednesday (April 23), Consumer Financial Protection Bureau (CFPB) Director Richard Cordray spoke at a forum about the mortgage process.  During his remarks, Director Cordray focused on the CFPB’s planned eClosings pilot program that is aimed at helping consumers streamline the residential real estate closing process by eliminating the need for many of the forms to be completed by hand and allowing the process to be more electronic, thus giving consumers more time to review and understand the paperwork.

The eClosings pilot program is a part of the CFPB’s Know Before You Owe program and, according to Director Cordray, is just one of the ways that the CFPB is looking to simplify the mortgage process to improve the process for consumers.  The four main concerns that the CFPB is looking to alleviate are:

• Consumers lack enough time to review documents;
• Consumers are faced with too much paperwork;
• Consumers have a hard time understanding mortgage documents and disclosures; and
• Closings are unnecessarily delayed due to minor errors in mortgage documents.

Having identified these concerns, the CFPB has decided to launch the eClosings pilot program as a way to:

• Help explain key terms, the closing process, and important documents;
• Give consumers more time to review closing documents; and
• Help consumers find and fix errors in documents prior to closing.

According to Director Cordray, “There are several ways that eClosings can pave the way for a more efficient process that is also more empowering for consumers.  Electronic documents can make early delivery more convenient and simple – giving the consumer time to read the documents, consult with family members or professionals, and ask the lender questions.”  He further went on to say that “shifting to an electronic process should lead to greater consistency and accuracy, since automated processes can make it easier to detect discrepancies.”

Credit unions that are interested in being a part of the eClosings pilot program should review the CFPB’s eClosing Pilot Guidelines and the CFPB’s solicitation announcement.

***

Free Kick.  Before I jump into today’s World Cup group previews focusing on Groups D and E, I want to share Nike’s newest football ad titled Winner Stays.

Group D: The second of the three Groups of Death, Group D houses three traditional powers, plus Costa Rica.  Between Italy (4), Uruguay (2), and England (1), there are a total of 7 World Cup titles.  The three of them will duke it out for the top two spots in the group, but don’t be surprised if Costa Rica can steal a couple of points to make things interesting for one or two of the heavyweights in the group.  While all Italy, Uruguay, and England are all traditionally players on the world stage, they all come into the tournament with question marks.  Italy has a solid defense, but there are concerns up top, especially if Mario Balotelli is on the wrong side of his mercurial ways.  For Uruguay, the concern lies in their defense.  And, with England, there are just too many question marks to count with Roy Hodgson’s squad needing to gel quickly.

Key Matches: Uruguay v. England, June 19 (3:00 pm EDT); and Italy v. Uruguay, June 24 (12:00 pm EDT).

Projected Finish: (1) Italy; (2) Uruguay; (3) England; and (4) Costa Rica.

Group E: This group has two very clear tiers.  The top tier is France and Switzerland.  I believe that they will easily advance to the knock-out rounds.  Ecuador and Honduras play hard, but they just don’t have the quality to keep up with the top two teams in this group.  Things might have been different had Ecuador not suffered the tragic loss of their top scoring threat, Cristian Benitez.  Benitez passed away in July of last year of cardiac arrest after making his first appearance for the Qatari club El Jaish.  Ecuador will miss his skills and his passion, and who knows, maybe they will draw inspiration from the loss.  That said, this looks like a straight forward group.

Key Match: Switzerland v. France, June 20 (3:00 pm EDT).

Projected Finish: (1) France; (2) Switzerland; (3) Ecuador; and (4) Honduras.

FHA Makes Positive E-Signatures Change; Free Kick; ERM Webcast

Written by Ricardo Piñeres, Regulatory Compliance Counsel

With all of the new compliance requirements that have accompanied the start of 2014, it is easy to get trapped in a vortex of negativity.  Credit unions are struggling to keep up with the growing regulatory burdens, and many in our industry have suggested that instead of just adding new regulations, regulators should be looking to modernize some of their more outdated requirements.  Well, for those that have been clamoring for a step in the direction of modernity, I bring good news.  At the end of last month, the FHA announced that it would finally expand the list of documents for which it will accept electronic signatures!

Prior to this announcement, FHA only accepted e-signatures on third-party documents (i.e. sales contracts and other documents not under the lender’s control).  In addition to third-party documents, the new policy states that e-signatures are valid on the following documents:

• Origination;
• Servicing;
• Loss mitigation;
• FHA insurance claims;
• REO sales contracts; and
• Related addenda.

Lenders that choose to accept e-signatures may begin taking advantage of the FHA’s new policy immediately on both single family forward mortgages and reverse mortgages.  For the time being, the FHA will not be accepting e-signatures on the mortgage note, itself.  It is expected that they will begin accepting e-signatures on forward mortgage notes by the end of the year.

In order to take advantage of the FHA’s new policy, all lenders that submit electronically-signed documents must have specific technology and operational capabilities and controls, documented quality control processes, and the ability to adapt the electronic signature to FHA’s existing record retention processes.  Furthermore, any lender that chooses to take advantage of the FHA’s new policy must still comply with all of the requirements of the E-SIGN Act.  For more information on the requirements, credit unions should view FHA’s Mortgagee Letter 2014-03.

While this may not do much to ease the ever-growing regulatory burden on credit unions, it is heartening to see a government entity seeking to improve its processes.  I applaud the FHA for making it easier for lenders to work with them, and hope that they continue to streamline their processes.  Not only will this help lenders, but ultimately, it will help consumers seeking to take advantage of the FHA’s products.

***

Free Kick. I am in the middle of a tense two weeks.  As a die-hard supporter of Arsenal, the schedule has put together a string of fixtures that will either make or break the Gunners’ season.  If Arsene Wegner and Company can survive these two weeks, then maybe I can dream of an end to the trophy drought.

Sadly, things did not get off to a good start over the weekend.  The drubbing at Anfield saw Arsenal play its worst game of the season (excluding the league opener to West Ham).  While Liverpool has been firing on all cylinders, I’m hoping that the embarrassment of this past weekend will fuel Arsenal to seek some revenge and move into the FA Cup Quarterfinals when they host Liverpool on Sunday.

Turning to the Premier League, thankfully, Chelsea dropped two points to West Bromwich in the waning minutes of yesterday’s match.  Therefore, Arsenal can go back to the top of the Premier League with a win later today against Manchester United.  ManU, frankly, has been mediocre to start 2014, so Arsenal need all three points if they are to truly contend down the stretch.

Lastly, the knockout stages of the UEFA Champions League get underway next week.  Arsenal was unable to win their group in the fall, so they have drawn Bayern Munich.  This is a repeat of last year’s Round of 16 matchup.  While Arsenal is a much improved squad this season, I see a similar result in our future with Bayern Munich coming away with a close win over the two-legged contest.

Hopefully, the loss to Liverpool at Anfield was just an aberration, and I can continue to dream of a trophy or two!  Go Gunners!

***

Webcast. Enterprise Risk Management (ERM) – Practical Ways to Implement at Your Credit Union.

Does ERM really differ from normal risk management? Yes! ERM allows you to leverage the risk-return relationship in everything from project management to strategic planning. Register by Feb. 27 to save $100 and learn how to make your credit union more effective.