February 2011 Legal Update

 By Pauli Loeffler

 

 

Congress enacted the Secure and Faire Enforcement for Mortgage Licensing Act (the SAFE Act) in July, 2008. Two years later, in July 2010, the financial institution regulatory authorities and the Farm Credit Administration published final rules on registration of mortgage loan originators. Under the law and rule, employees of financial institutions and any subsidiaries that are regulated by a Federal banking agency must register with the Nationwide Mortgage Licensing System and Registry (NMLS) if they meet the definition of “mortgage loan originator” (MLO). The institution itself has obligations under the SAFE Act as well, including adopting policies and procedures (the deadline for that was October 1, 2010), completing its own registration, and keeping its information current. Aspects of the SAFE Act and rules have been covered in previous Legal Updates.

 

What’s new is that the NMLS is finally open and accepting registrations. That means the clock is running. All MLOs must be registered within a 180 day period which ends July 29, 2011.   Don’t wait until the 11^th hour. 

 

Here are some tips for getting the job done:

 

§ Keep in mind that the bank must register first. Choose your administrators. Get your Verisign security code. Place your information on file with the Registry to pave the way for registration by your MLOs.

§ Figure out how and when you are going to post your list of MLOs and their unique identifiers. Don’t forget your website.

§ There is a two prong test for determining whether an individual is a mortgage loan originator. To be required to register, the individual must satisfy both prongs of the test.   Prong 1: the person takes a residential mortgage loan application; and Prong 2: the person offers or negotiates terms of a residential mortgage loan for compensation or gain.   Appendix A to the regulation sets forth examples of what does, and does not, qualify under each of the two prongs. We suggest taking the list, picking out the activities that do trip the trigger, and putting it on a form that you pass out to any employee you believe might need to register. Ask them to circle each activity that they perform – even if it is only occasionally. Once they do so, look to see if they have at least one activity under each prong. If they do, they need to get registered.

§ Give your MLOs notice that they are going to need to provide a number of things, including financial services-related employment history for the 10 years prior to the date of registration.

 

Way back during the Gulf War in the early 1990s, Oklahoma banks became very familiar with important protections for military personnel and their families contained in what was, at that time, the Soldiers’ and Sailors’ Civil Relief Act. That law was rewritten in 2003 by the Servicemembers Civil Relief Act (SCRA), which carried forward and updated the provisions which are designed to allow those serving in the military to be able to concentrate on their jobs, free from many financial worries.

 

Now it is 2011 and SCRA is back in the news for four reasons. First, JP Morgan Chase has disclosed that it may have overcharged 4,000 servicemembers on their mortgage loans and 14 foreclosures of military homes were made by Chase in contravention of the SCRA.   Members of Congress and the Attorney General of Delaware are among those condemning the bank’s actions and demanding full accountability. 

 

Second, two sets of protections for servicemembers were lengthened by legislation that was originally set to sunset the end of 2010. Recent legislation pushed back the sunset to the end of 2012, thus leaving the extended protections in place for two more years. The SCRA states that in a legal action to enforce a debt against real estate that is filed during, or within 9 months after the servicemember’s military service, a court may stop the proceedings for a period of time, or adjust the debt. In addition, the sale, foreclosure, or seizure of real estate shall not be valid if it occurs during, or within 9 months after the servicemember’s military service unless the creditor has obtained a court order approving the

sale, foreclosure, or seizure of the real estate. (After the sunset the 9 month periods will return to 90 days.)

 

Third, HUD has updated its notice of servicemember rights which is designed to spread the word about legal rights and protections under the Servicemebers Civil Relief Act as it applies to real estate. The notice is to be sent out by lenders to all delinquent home borrowers within 45 days of the delinquency. The newly updated version of the form should be used immediately and should be used in connection with all delinquent conventional mortgage loans, since it is impossible to ascertain with certainty which borrowers are protected under the SCRA umbrella.

 

Fourth, The new Bureau of Consumer Financial Protection has brought on Holly Petraeus (wife of General Petraeus) to head up its Office of Servicemember Affairs. She wrote to CEOs of the country’s 25 largest banks to urge them to ensure they were complying with the SCRA. Pointing to the Chase problem (without identifying the bank), she says “In view of recent experience, I would urge you to take steps to educate all your employees about the financial protections that the SCRA provides and to review your loan files to ensure compliance.”

 

That’s good advice for all lenders from Ms. Petraeus. We have tons of SCRA resources on BankersOnline, from an SCRA page to a special forum on Lending to Servicemembers that explores not only the SCRA, but also the John Warner National Defense Authorization Act provisions. View my 17 minute SCRA video on the SCRA page to quickly get up to speed on what you need to know.

 

Please tell me you aren’t one of those people who saw the Interim rule which amended the Interim rule which amended Regulation Z and mistakenly concluded that the most recent action pushed back the compliance deadline to October. It’s easy to become confused with the way the changes have been made, but the bottom line is that for applications received on or after January 30, 2011 for closed-end consumer credit transactions secured by either real estate or a dwelling, the way you make your disclosures has changed.

 

What’s gone for these types of loans? The number, amounts, and timing of payments scheduled to repay the obligation. You will no longer show those things in the Fed box. Instead, you will be giving new disclosures mandated by Section 226.18(s), setting forth in a table (or as the Federal Reserve likes to put it, a “tabular format”) an interest rate and payment summary.

 

Exactly what you include will depend upon whether the loan is amortizing or non-amortizing, fixed rate, adjustable rate, or stepped rate, whether it will have a payment increase that isn’t sparked by a change in the rate, and whether there will be a balloon. In each instance, you’ll be including new “no guarantee to refinance language.”

 

That October 1 stuff? Clarifications. We’ll tell you all about them at a later date.

 

 

 

I can’t remember the last time this happened. The Federal Reserve has decided not to finalize three pending proposals. Its reasoning is good – the proposed rules covered subject matter that will be within the jurisdiction of the new Dodd-Frank-mandated Bureau of Consumer Financial Protection. Since authority will be transferred to the Bureau in July 2011, the Federal Reserve Board says it “has determined that proceeding with the 2009 and 2010 proposals would not be in the public interest.” 

 

That is a very welcome announcement. Our fear was that the FRB would rush to finalize the proposals, we would all wear out our printers and minds to get up to speed, then the new Bureau would make its own changes.  So, here’s what is now (temporarily, at least) off the table:

§ Proposed revisions to Truth in Lending disclosures for closed-end mortgage loans;

§ Proposed revisions to Truth in Lending disclosures for HELOCs;

§ Proposed revisions to rescission notices and rights, disclosures for reverse mortgages, new disclosures for loan modifications, advertising restrictions for reverse mortgages, and changes to loan servicer disclosure obligations.

The first meeting of the OBA Compliance Roundtable discussion group will be held March 9, 2011 at the OBA’s Harris Education Center from 11:30 to 1:30. The cost is $20 and lunch is included. All compliance professionals are urged to attend. It’s an excellent opportunity to access the experts – both your fellow compliance officers and OBA’s compliance crew. See the OBA website for details and registration information.

 

Rack up some steps on your pedometer by taking a stroll around the bank to make sure your signs (aka “federal wallpaper”) are where they are supposed to be and are the correct versions. The deadline for posting the updated FDIC Official Sign at all teller windows was January 3, 2011. Your signs about the temporary full insurance coverage for noninterest-bearing transaction accounts should also be hanging in your lobby, as well as your website.

 

While most people were rushing around in their preparations for the 2010 year-end holiday season, bank compliance officers were focusing on lots of other year-end deadlines, not the least of which were some significant changes in federal deposit account coverage and the attendant notification requirements and signage changes. In this article, we review the latest changes to help you ensure you’ve taken care of all the details.

When Congress struggled to assemble the puzzle called the Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”)[1] in July of last year, one of the pieces was § 335, which made permanent the 2008 temporary increase to $250,000 of the coverage limits for FDIC and NCUSIF insurance. The FDIC gave banks until January 3, 2011 to display new official signs with the “at least $250,000” wording, and references to the temporary nature of the increase were expunged from collateral materials and customer service scripts everywhere.

 

The FDIC created the Transaction Account Guarantee (TAG) program in October, 2008 to help stabilize deposits (particularly business deposits) during the then-threatening economic crisis. The TAG program extended an unlimited guarantee (not insurance) to all “noninterest-bearing transaction accounts” in insured banks that did not opt out of the program.[2] The FDIC twisted definitions a bit, and included Interest on Lawyers Trust Accounts (IOLTAs) and NOW accounts with an interest rate ceiling[3] under the program. TAG was extended twice and at each extension banks were allowed to drop out. It finally ended on December 31, 2010. The lobby and website notices required by the program should have been removed at the close of business on December 31, 2010.

 

The FDIC might have extended the TAG program beyond December 31, 2010, but for the intervention of Congress, which mandated in Dodd-Frank Act § 343 that the FDIC and NCUSIF provide temporary unlimited insurance coverage on “noninterest-bearing transaction accounts” beginning on December 31, 2010. Although anyone can hold such accounts, Congress’s intent was to continue stabilizing business deposits at insured institutions. Prospective repeal provisions in the law will end the temporary insurance coverage on December 31, 2012 (unless the law is again amended). Congress defined a “noninterest-bearing transaction account” as an account—

1.      with respect to which interest is neither accrued nor paid;

2.      on which the account holder or depositor is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to third parties or others; and

3.      on which the insured depository institution/credit union does not reserve the right to require advance notice of an intended withdrawal.[4]

Section 343 required the FDIC and NCUA to craft amendments to their respective deposit insurance regulations. The FDIC’s proposed amendments were published on September 30, 2010,[5] and final rules hit the Federal Register on November 15, 2010,[6] with an effective date of December 31, 2010. The NCUA issued a proposed rule on December 22, 2010.[7] The FDIC’s rule repeated the statutory definition of “noninterest-bearing transaction account” and established three notification requirements (which were later changed by additional legislation (see below):[8]

1.      All insured depository institutions (IDIs) were required to post a specifically-worded notice in their lobbies and, in most cases, on their websites, to announce the temporary coverage and describe the accounts to which it applied (and specifically that it did not apply to NOW accounts and IOLTAs).

2.      IDIs still in the TAG program on December 31, 2010 were to send notices (with essentially the same information contained in the lobby notices) to depositors with IOLTA and TAG-covered NOW accounts.

3.      IDIs making certain sweep arrangements or changes to deposit account agreements that would remove funds from the temporary unlimited coverage (e.g., a change to start paying interest on demand deposit accounts on or after July 21, 2011 (when it becomes legal to do so)) must notify affected depositors of the change in coverage.

Behind the scenes, Congress was successfully lobbied to extend the temporary unlimited coverage to IOLTA accounts. Legislation was finally signed into law on December 29, 2010.[9]

As an interim measure while it worked to again amend its regulations, the FDIC instructed banks to post their lobby and website notices with the wording of the then-current regulation by December 31 notwithstanding the change in the law, but suspended the requirement to send notices to IOLTA depositors.

 

 On January 18, 2011, the FDIC Board approved a final rule to amend its Deposit Insurance Regulations to include IOLTA accounts within the definition of “noninterest-bearing transaction accounts,” and quickly notified banks to that effect.[10]

1.      New lobby and website notices with updated prescribed language reflecting the inclusion of IOLTA accounts must be posted by February 28, 2011.

2.      Institutions that notified IOLTA customers that IOLTA accounts would not be included are encouraged to, but need not, notify those customers of the change.

3.      Institutions with covered IOLTA accounts must follow revised guidance for Call Report Schedule RC-O and FFIEC 002 Schedule O when completing their December 31, 2010 reporting. That guidance is included in the FIL.

The FDIC also updated its FAQ pages on the Dodd-Frank Act[12] to incorporate information on the additional coverage for IOLTAs and otherwise address questions on the temporary unlimited coverage. One key clarification is found in questions 2 and 8—Covered IOLTAs only include accounts established by attorneys or law firms and containing client funds, interest on which is paid to state bar associations or other organizations to fund legal assistance programs. Other fiduciary accounts maintained by attorneys or others, including Interest on Realtor Trust Accounts (IORTAs) are not covered by the special IOLTA-inclusion legislation. If held in demand deposit accounts on which no interest is paid, these other fiduciary accounts will be covered by the temporary unlimited insurance. Otherwise, they will be covered by the FDIC’s standard insurance limits.

 

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 (http://www.federalreserve.gov/boarddocs/caletters/2010/1014/10-14-attachment.pdf) establishing Interagency Examination Procedures Regarding Risk-Based Pricing. Based on the number telephone calls and emails received both before and since the mandatory compliance date of January 1, 2011, this article will serve to “flesh out” the prior one. – Pauli Loeffler

 

The first question that must be addressed is whether or not the bank is even required to give the Reg V notices. This is a two pronged test, and both prongs must be satisfied before Reg V notices are necessary:

1)     A consumer credit report has been used in connection with an application for consumer credit (primarily for personal, family or household purposes), and

 

2)     The terms of the credit granted, extended or provided the consumer is on materially less favorable terms then the bank’s best terms available to a substantial proportion of the bank’s consumers for such credit based in whole or part on the consumer report

 

          What this actually means is that merely using a credit report or a credit score in order to determine credit worthiness for loans will NOT require the bank to provide either the RBPN or the credit score exception notice UNLESS the report is used to set the credit terms. (Note that the NOTICE TO HOME LOAN APPLICANTS under FACTA applies regardless of Reg V). For instance, I know one Oklahoma bank that pulls a credit report BUT only to determine whether to approve the loan. If credit is granted, the credit terms for all new car loans, for all lines of credit, for all mortgages, etc. are the same regardless of the score and do not vary whether the applicant has been an outstanding customer of the bank for 20 years or just walked in off the street.   

         

 

 Question of the Month (and then some)

Every trust shall be revocable by the trustor, unless expressly made irrevocable by the terms of the instrument creating the same. Provided, that any trust may be revoked by the trustor upon the written consent of all living persons having vested or contingent interest therein. The term "contingent interest," as used in this section, shall include an interest which a beneficiary may take by purchase, and exclude any interest which a beneficiary may take by descent. Provided further that this section shall not apply to a spendthrift trust unless same is created by the trustor for his own benefit.

          What this language means is that a trust is revocable unless it states that it is irrevocable and may be revoked by the grantor. Further, since the only person with a vested or contingent interest under the trust is normally the grantor (because in most trust situations these days, the grantor is the beneficiary during his life and other beneficiaries of the trust only have an interest when the grantor dies) the grantor is the only one with the ability to revoke the trust. Once the grantor dies, the trust cannot be revoked, hence it is irrevocable.

 I may revoke this Trust Agreement in whole or in part and may amend this Trust Agreement at any time.

          While the successor trustees may be given the same powers to deal with the assets of the trust as the Grantor has, revocation or amendment of the trust is no longer possible upon the death of the Grantor. This also means that once the Grantor dies, the trust becomes irrevocable and requires an EIN be issue. Please note that just because John Doe, the grantor of “The John Doe Revocable Trust” is deceased, the trust is NOT renamed “The John Doe Irrevocable Trust” although the successor trustee does occasionally obtain the EIN in that name. If that happens, you will restyle the account using the EIN with the “new” name. 

          Since the IRS gets nasty about the TIN matching the name on the account, trusts can present some styling issues. Depending on the facts presented, we have to look at the names of the trustees, the grantors, and the name of the trust. Here are some examples:

A.    Trust name:  John Doe Living Trust

Trustee: John Doe
          Grantor:  John Doe
          Grantor alive:  yes

Use John Doe’s SSN, style account John Doe, Trustee, John Doe Living Trust

B.    Trust name: John and Mary Doe Living Trust

 Trustees:  John and Mary Doe

Grantors alive: John – yes; Mary – yes

Grantors:  John and Mary Doe

Use John Doe’s SSN, style account John and Mary Doe, Trustees John and Mary Doe Living Trust

C.    Trust name: John and Mary Doe Living Trust

Grantors:  John and Mary Doe

Use John Doe’s SSN, style account John Doe, Trustee, John and Mary Doe Living Trust

D.   Trust name: John and Mary Doe Living Trust

Trustee: Mary Doe
Grantors:  John and Mary Doe
Grantors alive: John – no; Mary – yes

Use Mary Doe’s SSN, style account Mary Doe, Trustee, John and Mary Doe Living Trust

E.    Trust name:  Doe Family Trust

Trustee: John Doe
          Grantor:  John Doe
          Grantor alive:  yes

Use John Doe’s SSN, style account John Doe, Trustee, Doe Family Trust

F.     Trust name: Doe Family Trust

Trustee: Mary Doe

Grantor: John Doe

Grantor alive: yes

Use John Doe’s SSN, style account John Doe, Grantor of the Doe Family Trust, Mary Doe, Trustee.

G.   Trust name: John and Mary Doe Living Trust

Trustee: Joe Doe
          Grantors:  John and Mary Doe
          Grantors alive: John – no; Mary – yes

Use Mary Doe’s SSN, style account Mary Doe, Grantor of the John and Mary Doe Living Trust, Joe Doe, Trustee

H.   Trust name:  Doe Family Living Trust

Trustee: Joe Doe
Grantors:  John and Mary Doe
Grantor alive: John – yes; Mary – yes

Use John Doe’s SSN, style account John and Mary Doe Grantors of the Doe Family Trust, Joe Doe Trustee

I.       Trust name:  Doe Family Living Trust

           Trustee: Joe Doe
          Grantors:  John and Mary Doe
          Grantor alive: John – yes; Mary – no

Use John Doe’s SSN, style account John and Mary Doe (you may put deceased) Grantors of the Doe Family Trust, Joe Doe Trustee

J.       Trust name:  Doe Family Living Trust

           Trustee: Joe Doe
          Grantors:  John and Mary Doe
          Grantor alive: John – no; Mary – yes

Use Mary Doe’s SSN, style account Mary Doe, Grantor of the Doe Family Trust, Joe Doe Trustee

•         •          •

 

The purpose of Regulation C is fairly straight forward. The Purpose is stated as:

 

You should note that HMDA data is intended to provide the public with loan data. Your HMDA data is made available to the public, but that is not your primary concern with regards to review and use of your data. When we first began assembling HMDA data it was limited as compared to the data that is now available. As lenders made their HMDA data available years ago it was assembled and published by the Federal Reserve and made available at designated central repositories. When I first became a compliance officer in the early 1990’s, I went to my local public library as that was the central repository for my Metropolitan Statistical Area. While it was a reference book and was not to be checked out, they let me remove it from the library as I worked a block away and wanted to make some copies of some tables. They told me in all the years they had it, nobody had ever requested to see it.

That was surprising because from a banker’s perspective, this data tells you who is making loans in your neighborhood. Isn’t it good to know which of your competitors is receiving applications, from what demographics, in which areas, and which of these loans are being approved? You as a compliance department, often viewed as a cost center, actually has an opportunity here to provide your lenders and marketers with what would otherwise be confidential data. But this data is publicly available.

The public is not eager to review this lending data. But some community groups are and they review and publish their analysis so that news articles will be written about it. One basic premise is to compare your areas demographics against the demographics for applications received and loans made and denied. I am reminded of the saying, “figures don’t lie, but liars figure.” So it behooves you to know exactly what your data says about your lending before anyone else does.

One argument lenders made in the past when data was analyzed, was that the Loan Application Register (LAR) didn’t provide a complete picture to make some assumptions. That was true. So the regulatory agencies responded by adding more data to the LAR. In 2004 pricing and other information was added.

Perhaps as early as 2013 you will have to report even more data on your HMDA LAR. The Dodd-Frank Act is going to move ownership of Regulation C from the Federal Reserve, to the new Consumer Finance Protection Bureau (CFPB). The Bureau will revise the LAR requirements and you can expect to add additional data including, but not limited to:

§ The source or channel from which you received the application

§ Credit score for the applicant

§ Actual and proposed terms in months

§ Whether or not payments other than full, scheduled payments may be made

§ A SAFE Act unique identifier

§ Property value

§ Age of the applicant

§ Total points and fees paid at origination

§ An expansion of the current rate spread rule

§ And more.

 

You will have many fires to put out between now and 2012 when you would have to actually start collecting this data. But be braced for the change as we know it will be coming.

Your LAR data is important for a number of reasons. In addition to the Regulation C requirements, this data is used as a foundation in your fair lending exams and that is used as a part of CRA exams. LAR data and the integrity of your data, supported by your internal processes and audits reaches far beyond HMDA implications. Doing your LAR right in the first place sets in place many other things going right – or wrong. 

You start “doing it right” my having quality control checks done on the LAR data being gathered initially. Quarterly this data has to be entered into the LAR form. You need not completely scrub this data quarterly, but it is certainly to your advantage to at least do a quick file sampling. Errors found should be corrected and you should expand your file review if the errors are more than anomalies. The amount of files you review will depend on your volume overall. The better your review, the better your data integrity and the less frantic you will be in February as you approach crunch time when your data has to be submitted. 

By ensuring you have quality data on a regular basis allows compliance to advise management proactively of any fair lending concerns. You can compare your applications to your approved loans by lender, ethnicity, income and any other data on your LAR and in your file. You are not restricted to LAR data here. This allows fine tuning in your marketing efforts, lender training, product offerings and underwriting standards, as needed.

The HMDA Getting It Right[i] (GIR) booklet is a tremendous resource for answering your questions on what is reportable and with which codes. As you scrub your LAR data you should review the entries.

Many software programs include all the same verifications as the FRB will use when you submit your LAR. These verifications are in the form of edits. There are two types of edits that will be of interest to you, Quality and Validity. Quality edits are entries that do not seem appropriate for the field and validity edits are those which are in error. An example of a quality edit is an entry with no income which may have been an insider whom you chose not to list this item and that is acceptable. A validity edit would be a numeric code 9 entered where the options are only 1-6. The 2011 edits[ii] were published last November. As you proof your LAR, make notes of the edits. A Quality edit doesn’t mean you have an error, it means there is a question about your data. By keeping a list of these variances you will know why the Quality edit flag is raised and you will be able to dismiss it. Validity edits are in fact errors that must be corrected.

After you have spent days and weeks scrubbing your data you may be faced with a March 1 submission that you are not ready for. Even if you know your data is incomplete and has some errors, I recommend filing it as you have it. The FRB will run the edit checks and provide you with an opportunity to investigate and correct these errors. You can amend the data as well; correcting what you know is incorrect.

Errors that are left uncorrected or entries that are simply wrong but “fit” can lead to Civil Money Penalties (CMPs). These are not cited just after you file your LAR, but when your examiners are auditing your accuracy. This may be years after submission. CMPs have increased dramatically from 2009 to 2010.

 

 

 

 

 

2009	2010
Number	34	73
Dollar	$        224,000	$     543,250
Avg CMP	$           6,588	$        7,442

 

 

With a short month remaining to scrub your HMDA LARs, pay attention to the edit warnings your software provides you and verify those unusual entries you haven’t seen before. Make notes of the errors you find and use that as a starting point for your 2011 data verifications.

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