NAFCU Compliance Blog

We Listened So You Don’t Have To – CFPB’s HMDA Identifiers and Data Points; Issues With MLA Database

 By Stephanie Lyon, Regulatory Compliance Counsel

I hope everyone had a nice restful weekend! D.C. is offering unseasonably warm weather so we enjoyed pretending to be tourist in the city while my puppies sun-bathed (see pictures below). Now on to business…

This is the second of a series of HMDA webinars that the bureau will present to help credit unions comply with the upcoming HMDA implementation deadline.  The first webinar gave an overview of the rule while this second webinar focused on identifiers, applications and covered loans; property and loan originators; and data points. This webinar had over 300 slides, so despite the blog’s title, if you are tasked with HMDA implementation, it may still be worth a watch. Similar to the TRID implementation process, these webinars supplement the bureau’s HMDA resource page which is full of helpful materials such as the small entity compliance guide, sample data collection forms, and instructions on when to report “not applicable” in certain fields.

Identifiers

The 2015 HMDA rule requires that all financial institutions (FIs) obtain a Legal Entity Identifier (LEI) as this will be required to create a Universal Loan Identified (ULI) for each application received, covered loan originated, and purchased covered loan. See, revised 12 C.F.R. § 1003.4(a)(1)(i). NAFCU previously blogged about this requirement here. In summary, the bureau suggests that credit unions obtain their LEI number as soon as possible.

Think of the ULI as a routing number in the sense that it is made up of different numbers and it allows the credit union to identify a unique covered loan or application. The three components that make up the ULI are: (1) the credit union’s LEI; (2) 23 characters that identify a covered loan or application and; (3) a check digit. The bureau explained that the 23 characters should not contain information that may identify a covered borrower such as the borrower’s social security number, name or other personal information. The credit union can find more requirements on the ULI in Appendix C of the final rule.

Applications

The final rule requires credit unions to report certain loan preapprovals. See, revised 12 C.F.R.  § 1003.2(b). Certain types of applications and covered loans are always reported as not involving a request for preapproval, even if a preapproval request was made. This includes: (1) purchased covered loans; (2) open-end line of credit; (3) reverse mortgages; (4) denied applications; (5) applications that are closed for incompleteness; (6) withdrawn applications; (7) applications or other covered loans for any purpose other than a home purchase loan; and (8) a covered loan for home purchase secured by a multifamily dwelling or an application for such a loan.

In the webinar, the bureau also clarified that the new rule will not require credit unions to differentiate between when a preapproval was not requested and when a preapproval was not applicable.

Data Points

Collection of Ethnicity, Race and Sex

Section 1003.4(a)(10)(i) and Appendix B of the final rule has detailed instructions and a sample form for the collection of ethnicity, race, and sex. The rule requires credit unions to ask the applicant to report this information whether the application is take in person, by phone, Internet or mail. However, the credit union cannot require the disclosure of this information so the credit union may want to test its online application to ensure this information is not a required field.

An interesting fact the bureau noted in the webinar is that if the member checks a box that states the applicant does not wish to provide information when applying but nonetheless discloses the information on the form, the credit union must report the information provided. For applicants that are not natural persons (i.e. corporation, partnership or trust), the credit union should not report the ethnicity, race or sex of the applicant even if the covered loan or application includes a guarantor.

The bureau created this chart to assist credit unions in the collection of this information.

Collection of Age, Credit Score, Income and Debt-to-income (DTI)

The final rule requires the reporting of age as of the date of the application. There are a couple of instances when the credit union does not have to report age (1) instances where the covered loan was purchased and institution chose not to report age (2) the applicant is not a natural person. See, revised 12 C.F.R. § 1003.4(a)(10)(ii).

Additionally, the credit union must report credit scores, gross annual income, and the DTI “relied on” to make the credit decision. The bureau noted that relied on means the information was used as a factor in the credit decision even if information was not a dispositive factor. For example, if the credit union considers an applicant’s credit score but chooses to deny the loan because of a high DTI, the credit union should still report the credit score as it relied on it to make its credit decision.

I know this is a lot of mechanical information so again, it may be helpful to watch the entire webinar and download the slides when testing your credit union’s HMDA readiness.

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MLA Database Processing Issue. Last week, the MLA database reported that there was “a problem” processing Multiple Record Requests between February 9, 2017 and February 15, 2017. This prevented 149 requests from processing, so the DoD says if a credit union’s multiple record request “failed to process” the credit union should “submit the file again for processing.” What DoD did not clarify was what impact this would have on a credit union’s ability to still claim a safe harbor – especially with the rule’s prohibition against historic lookbacks. If your credit union was impacted by one of these 149 requests, it may need to consult with counsel to discuss further. Casually, a couple of days before the error occurred, the MLA website was down for system maintenance. While we don’t know if this caused the issue, credit unions that rely on the DoD’s database for its covered borrower check may want to monitor the MLA’s news page for a heads-up on future maintenance to the site.

To make up for all the information above, here is a picture of my two happy fur-children and my amazing husband Devon taken as went sightseeing in D.C. this past weekend:

We Listened So You Don’t Have To: Interagency Overdraft Services Webinar

Written by Stephanie Lyon, Regulatory Compliance Counsel

On Wednesday, November 10^th, the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA) and other financial services regulators joined to present a webinar on overdraft practices and issues identified through consumer complaints, examinations, and enforcement actions. You can listen to the audio of the webinar here and download the presentation slides here.

Unfair, Deceptive or Abusive Acts and Practices (UDAAP)

The key issues identified by the regulators centered on unfair and deceptive practices such as failing to obtain proper opt-ins, having overdraft practices that differed to those disclosed on the opt-in forms, and misrepresentations from staff regarding the service. The NCUA representative did state that the Agency continues to be impressed with credit unions’ tendency to promote financial literacy such as educating members on the benefits and the fees associated with the use of overdraft services. However, there are a few examples of unfair and deceptive acts and practices that are worth reviewing.

Some of the practices regulators found problematic are:

• Promoting constant use of overdraft service
• Not explaining overdraft alternatives that may be cheaper
• Improperly trained staff that is unable to explain program and alternatives
• Suggesting the overdraft service is free when there is a fee associated with the use
• Transaction re-ordering to increase consumer costs

It is no secret that CFPB and other regulators have their eye set up overdraft services. Credit unions can review CFPB’s supervisory highlights to get an idea of the overdraft practices that are raising potential UDAAP concerns in the industry.

Risk Management

The regulators gave a few options for monitoring overdraft services to mitigate the risk of facing an enforcement action. Among these suggestions a couple can be beneficial for credit unions:

1. Comparing the credit union’s disclosures to its actual policy and procedures to ensure that they accurately describe the credit union’s practices.

For example, if the credit union uses the member’s available balance to decide if there is an overdraft, the disclosures should clearly and conspicuously explain the practice so members are not caught by surprise if they incur an overdraft when there would be no overdraft if the member’s ledger balance was taken into account. Another important instance is when a software change makes the system operate differently than the disclosures anticipate.

2. Monitoring member complaints to identity systemic failures that should be reported to senior management.

A credit union that actively monitors member complaints is better positioned to find trends of potential member confusion or staff misrepresentations regarding overdraft services. For instance, if one teller consistently tells members that the service is free to encourage them to opt-in and the credit union receives 3 complaints from members who were charged an overdraft fee, this can serve as an early warning signal.

3. Monitor and control risks presented by third party vendors.

This risk management strategy is best understood by reviewing a recent CFPB enforcement action against Santander’s Bank. The Bank’s third party service provider was enrolling customers without affirmative opt-in and providing deceptive information to get consumers to opt-in. According to the enforcement action, Santander did not exercise appropriate oversight of its third party overdraft service provider and was ordered to pay a whopping $10 million civil money penalty.  You can read more about this enforcement action here.

In light of the interest overdraft services are receiving from regulators and potential plaintiffs alike, credit unions may want to ensure their program follows Regulation E’s disclosure and opt-in/opt-out requirements as well as review consumer complaints to identify potential unfair, deceptive or abusive practices.

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Early Thanksgiving

This weekend, my family celebrated thanksgiving early because we will not be able to be together on the actual date. It is the third year I celebrate thanksgiving with my wonderful husband Devon, and as usual, we made enough food to feed a family of 12. I have to admit, I was thrilled to have an excuse to use the wedding china we received for our wedding.

We Listened So You Don’t Have to – Part Two from the CFPB’s April 16 TRID Webcast

Written by Brandy Bruyere, Director of Regulatory Compliance

A couple of weeks ago, I blogged on a couple of questions from last month’s TRID webcast and promised we’d do a little more. I know you’ve all been waiting anxiously for me to do this because who does not love starting their day with TRID? Just in case, for those of you wondering:

It sure was, I know TRID is not fun, but if it will help some folks out, then believe it or not, I’m happy to blog about it. So back to this webcast...

The rules permit the use of an alternative Loan Estimate in transactions without a seller but this has caused some confusion for how to handle some items in a refinance loan. One question the CFPB answered during the April webcast dealt with disclosing the amounts from an escrow account that the member has as part of their existing loan that will be used to fund the escrow account for the new (refinanced) loan. According to the Bureau, there are two possible ways to disclose this on a Loan Estimate:

“When a consumer pays a mortgage loan in full, several things can happen to the amount remaining in an escrow account. This question asks about one specific scenario. The creditor in a refinance transaction uses a balance in the escrow account associated with the prior loan to fund the escrow account associated with the new loan. In other words, the balance is transferred. Generally, this scenario might arise when the creditor on the prior loan and the creditor on the new loan are the same entity and when the loan is being held within the creditor's portfolio. The rule does not explicitly address how to disclose the transferred escrow balance using the alternative forms. So a creditor using those forms has some flexibility in determining how to disclose the transferred escrow balance.

Today we will discuss two possible ways to disclose the transferred escrow balance on the alternative Loan Estimate. The creditor should keep in mind that, depending on the circumstances and particulars of the transaction, there may potentially be additional ways of accurately reflecting this transaction. While we will discuss two acceptable methods today, we can't address every potentially acceptable disclosure method in every scenario. Creditors will have to determine whether a particular method of disclosure is appropriate under the facts and circumstances of a specific transaction in accordance with applicable provisions of the rule. Turning back to the question.

First, a creditor using the alternative Loan Estimate may disclose a transferred escrow balance as a separate item in [the rule] for the initial escrow payment at closing, which appears on page 2. Under section 1026.37(g)(3), a creditor must disclose an itemization of the amounts that the consumer will be expected to place into a reserve or escrow account at consummation to be applied to recurring periodic charges. In the scenario we're discussing, the creditor places the transferred escrow balance into a reserve or escrow account at consummation, and that amount is to be applied to recurring periodic charges. Accordingly, the transferred escrow balance may be disclosed as a separate item in [the rule]. Note, however, that the dollar figure should be disclosed as a negative number because the transferred funds are essentially a credit to the consumer. That is, they reduce the amount the consumer must pay at consummation.

The second way that a creditor may disclose a transferred escrow balance on the alternative Loan Estimate is by factoring the balance into the "Estimated Payoffs and Payments" row of the "Alternative Calculating Cash to Close" table, which appears on page 3. Under section 1026.37(h)(2)(iii), the "Estimated Payoffs and Payments" row includes the total amount of payoffs and payments to be made to third parties not otherwise disclosed under section 1026.37(f) and (g) disclosed as a negative number. In the scenario we're discussing, the transferred escrow balance offsets the total amount of payoffs and payments and therefore reduces the amount the consumer must bring to closing. So assuming the creditor has not already disclosed the transferred escrow balance as an initial escrow payment at closing in section 37(g), it may treat the transferred escrow balance as a credit to the consumer for purposes of calculating the estimated payoffs and payments. Under this option, the transferred escrow balance will not appear as a separate line item on the alternative Loan Estimate. Please note that the scenario we've been discussing differs from the common scenario in which the existing loan payoff amount is reduced by the amount of funds currently held in escrow. It also differs from the scenario in which the consumer simply receives a check for the balance in the escrow account associated with the prior loan. In both of these scenarios, there is nothing for the creditor in a refinance transaction to disclose on the Loan Estimate or the Closing Disclosure regarding the escrow balance associated with the prior loan. This is true whether the refinance creditor is using the standard forms or the alternative forms.”

The CFPB went on to tease out a few more details on this that are specific to the Closing Disclosure, noting that like with the Loan Estimate, there is some flexibility for credit unions and two ways to make this disclosure, depending on the terms of the underlying legal obligation:

“The first way is in section 1026.38(g) for the initial escrow payment at closing on page 2 of the alternative Closing Disclosure. This approach is similar to the first alternative Loan Estimate option we discussed in question 10. Note again, however, that the dollar figure associated with the balance should be disclosed as a negative number because the funds actually reduce the amount the consumer must pay at consummation.

The second way a creditor may disclose a transferred escrow balance on the alternative Closing Disclosure is to include a separate entry in the "Payoffs and Payments" table on page 3 of the alternative Closing Disclosure. Under section 1026.38(t)(5)(vii)(B), the Payoffs and Payments table itemizes the amounts of payments made at closing for other parties from the credit extended to the consumer or funds provided by the consumer in connection with the transaction. In our scenario, as we discussed in question 10, the transferred escrow balance offsets the amount of payoffs and payments made at closing to other parties. The transferred escrow balance operates, in effect, as a credit and reduces the cash the consumer needs to close. Accordingly, the balance may be disclosed as a negative number in the "Payoffs and Payments" table. Note that the entry must include the payees and the description of the purpose of the disbursement, as required by section 1026.38(t)(5)(vii)(B).”

Speaking of TRID, in case you missed it, on April 28 CFPB Director Richard Cordray sent a letter announcing that the Bureau is working on a proposed rule to consider "adjustments" that "would be useful for greater certainty and clarity." Director Cordray hopes to issue this proposal in late July. The full letter can be found here:  TRID Letter NPRM

We Listened So You Don’t Have To – CFPB’s Grab Bag of TRID Questions

Written by Brandy Bruyere, Director of Regulatory Compliance

If you’re keeping count at home, the CFPB provided its eighth webcast on TRID this past Tuesday (second post-implementation of the rules). After listening to these sessions and getting the Bureau’s "this informational only and not binding" disclosure so many times, it starts to feel a bit like this:

Or maybe this:

Or even this:

In all seriousness though, there is some helpful information here. The webcast addressed 21 different questions, so today I want to highlight two that NAFCU's regulatory compliance team received from members multiple times.

The second question in the webcast aimed to clear up confusion created by the “closing handout” that the CFPB distributed several months ago (we blogged about this issue here). The question – “Is an additional 3-business day waiting period required if the APR decreases by more than 1/4 or 1/8 of a percentage point, but the finance charge remains accurate?” Here is an unofficial transcript of the CFPB’s answer, with hyperlinks to citations added:

“An APR would be considered accurate and a new 3 business day waiting period would not be required if the APR directly corresponds to a disclosed finance charge that is considered accurate. The APR tolerance rules are covered in section 1026.22 and it’s important to note that the rule did not change these requirements. Section 1026.22(a)(4) contains special APR accuracy rules for mortgage loans and explains that in addition to the quarter or an eighth of a percentage point tolerance for accuracy, the disclosed APR is also considered accurate if the rate results from the disclosed finance charge and the disclosed finance charge would be considered accurate. Next slide please.

The tests for determining whether a finance charge is considered accurate are in sections 1026.18(d)(1) and 1026.38(o)(2) and explain that the disclosed finance charge shall be treated as accurate if it is understated by no more than $100 or is greater than the amount required to be disclosed. Thus as a general matter an overstated finance charge is treated as accurate. The finance charge is defined under section 1026.4 as the cost of consumer credit disclosed as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or condition of the extension of credit. Some examples of finance charges include interest, points and loan fees. The rule did not change the definition of finance charge under TILA.

Because an overstated finance charge is considered accurate, an overstated APR that corresponds directly to an overstated finance charge would be considered accurate and an additional 3 business day waiting period would not be required. So in that case, consummation could proceed as scheduled. But, remember that not every overstatement of an APR is caused by an overstated finance charge. There may be situations where a decrease in APR would trigger a new 3 business day waiting period and consummation would be delayed. For example, if the finance charge was not overstated on the Closing Disclosure but the APR was overstated or decreased after issuance of the Closing Disclosure for reasons unrelated to the finance charge then the creditor would have to evaluate the accuracy of the APR with reference to the APR tolerances and not the finance charge tolerances. Similarly, if the disclosed APR exceeds the APR that directly corresponds to the overstated finance charge the creditor could not rely on the finance charge tolerances.

In both of these examples, if the disclosed APR exceeded the actual APR by more than 1/4 or 1/8 of a percentage point, it would be inaccurate under section 1026.22 and redisclosure with a new 3 business day waiting period is required by TILA. Don’t forget that there’s an additional APR tolerance for mortgage loans at section 1026.22(a)(5) which provides that an overstated or understated APR may also be accurate if the disclosed APR is closer to the actual APR than an APR calculated based on the disclosed finance charge would be. I would also note that in the August 2014 webinar we discussed APR accuracy under section 1026.22 and changes before consummation requiring an additional 3 business day waiting period under section 1026.19(f)(2)(ii). I encourage our listeners to review those materials…”

Another question addressed in the webcast discussed having a negative amount for the owner’s title insurance policy, particularly where there is a discount for simultaneous issuance of the owner’s and lender’s title policies. In these cases, TRID’s formula for disclosing the owner’s title insurance premium can yield a negative number. This is a question that has caused problems for many credit unions and while the CFPB informally and verbally clarified that disclosing a negative number is acceptable, there was no formal guidance on this point – until Tuesday. Here’s the question with an unofficial transcript of the answer:

“Q7: The calculation of the owner’s title policy premium in accordance with the rule might result in a negative number. Does the creditor disclose this negative number for the owner’s title policy on the Loan Estimate and Closing Disclosure?

Yes. In this case, the creditor discloses the premium for the owner’s title insurance policy as a negative number.  When the simultaneous issuance rate or discount is used, mostly in purchase transactions, the cost of an owner’s title insurance policy is disclosed as the incremental cost of that owner’s title insurance beyond the standard non-discounted cost of the lender’s title insurance policy. Comment 37(g)(4)-2 states that the owner’s title insurance premium is calculated by taking the full owner’s title insurance premium, adding the simultaneous issuance premium for the lender’s coverage and then deducting the full premium for lender’s coverage. We’ve previously discussed in detail how a creditor calculates these premiums in the May 2015 webinar which I encourage our listeners to revisit.

The calculation of the premium for the owner’s title policy as required under the rule may result in a negative number. When this occurs, the creditor discloses a negative number as the incremental cost of the owner’s title insurance policy. When disclosed in this fashion, the disclosure conveys to the consumer that it is less expensive to purchase both owner’s title insurance and lender’s title insurance together than it is to purchase just lender’s title insurance by itself.  There are no provisions in Regulation Z that would prohibit the cost of owner’s title insurance from being disclosed as a negative number. “

Other questions address topics like calculating the Total Interest Percentage, making certain flood insurance premium disclosures, disclosing transferred escrow funds in a refinance transaction, providing the seller’s Closing Disclosure, disclosing seller-paid costs including real estate fees, and handling principal curtailments. We’ll highlight a couple of these other questions in a future blog post.

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FLSA: Information You Need to Know

Live Webcast, Wednesday, April 20 | 2:00 p.m. – 3:30 p.m. EST

 Part of the Human Resources Webcast Series

The Fair Labor Standard Act (FLSA) is a tricky field than many suspect, with many rules and regulations involved. Join this informative webcast to ensure that you’re correctly classifying your staff and understanding all aspects of the law fully. You’ll cover upcoming regulations and how they impact your credit union. You’ll also explore claims and lawsuits, exemption categories and learn best practices. Gain a better understanding of FLSA and explore ideas to implement at your credit union.

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

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

On March 2, we blogged about the CFPB’s TRID Construction Lending webcast and the clarification it provided regarding disclosure of construction holdbacks. We also promised to tell you  about additional lessons we learned.

Guidance Regarding Estimating Unknown Fees and Costs During the Draw Period

NAFCU has received member questions about how credit unions are supposed to estimate draw fees and inspection costs which may arise during the draw period. Often these are unpredictable and rely on the pacing of construction. While the CFPB did not offer a concrete response, they did give guidance on estimating these fees that is a little more based in fact that what we have had previously. The webcast posed this question:

“Q25: How does a creditor disclose inspection and draw fees when the creditor does not know how many draws there will be?”

The CFPB’s analysis is still a good faith analysis; no surprise there. Under section 1026.19(e)(1)(i), costs estimated on a loan estimate must be made in good faith:

Ҥ1026.19 Certain mortgage and variable-rate transactions.

(e) Mortgage loans secured by real property—early disclosures—

[…]

(1) Provision of disclosures—

[…]

(i) Creditor. In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.”

The commentary to section 1026.19(e)(1)(i) defines good faith with regard to Loan Estimates by referencing section 1026.17(c)(2)(i) and its commentary. According to comment 19(e)(1)(i)-1, good faith requires that where information necessary for an accurate disclosure is unknown, the credit union makes disclosures based on the best information reasonably available to it at the time. The information “reasonably available” at the time is the information obtained after an exercise of due diligence by the credit union to determine the fee. Comment 19(e)(1)(i)-1 also specifically references comment 17(c)(2)(i)-1 for further explanation of the standard. The text of comment 17(c)(2)(i)-1 is below:

“Paragraph 17(c)(2)(i)

1. Basis for estimates. Except as otherwise provided in §§1026.19, 1026.37, and 1026.38, disclosures may be estimated when the exact information is unknown at the time disclosures are made. Information is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, or to realtors for taxes and escrow fees. The creditor may utilize estimates in making disclosures even though the creditor knows that more precise information will be available by the point of consummation. However, new disclosures may be required under §1026.17(f) or §1026.19. For purposes of §1026.17(c)(2)(i), creditors must provide the actual amounts of the information required to be disclosed under §§1026.37 and 1026.38, pursuant to §1026.19(e) and (f), subject to the estimation and redisclosure rules in those provisions.” (Emphasis added.)

The comment provides some good factual examples of due diligence, none of which are on point for a construction scenario…which brings us to the central question: What is due diligence for estimating these unpredictable construction-related fees?

In the webcast, the CFPB suggested credit unions base their estimates of these construction-related fees on previous transactions that were similar in terms of structure and scope. Hopefully, by using previous transactions as a benchmark, credit unions can feel a little more comfortable that their estimates in the LE are reasonable, good faith estimates. Of course, these estimates have further significance for a credit union; they matter in the context of the good faith determination of the Closing Disclosure. But, unfortunately, the webcast did not cover the Closing Disclosure. We will have to wait for further guidance from the CFPB regarding the other half of TRID.

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.