September 2014 Legal Briefs

• If you’re a HMDA reporter
• SCRA is still in the news
• Reg. AA — Gone but not forgotten
• Revisiting foreign remittance transfers
• Integrated disclosures: Countdown begins

If you’re a HMDA reporter

By Andy Zavoina

The Home Mortgage Disclosure Act (HMDA) proposal was published in the Federal Register (Vol. 79, No. 168) on August 29, 2014. This is your three column format and it’s 151 pages long. The last page has very little text so we’ll round this down to an even 150 pages. Note that the GPO (Official Edition) version has security measures that prevent alteration, including hi-liting text on your screen. If you want to do that on your computer download the Public Inspection version which is double spaced, one column and 572 pages long. This is yet another reason not to print these types of documents. But before you dig into all that paper, we’ll review the high points we’ve found so you’ll know how important this proposal is to your bank. Cutting to the chase, if you’re a HMDA reporter we do believe this will be of interest and we believe you should comment on the points of interest. At the very least you should consider the proposal and begin formulating a plan for how you’ll comply if it is approved as it is written today.

Today, your bank submits a Loan Application Register (LAR) when certain criteria are met. The criteria differs if you are a depository or nondepository financial institution. In the former, many of the conditions are similar, asset size threshold, home or branch in an MSA and then there are variances and new requirements.

While there are other criteria, a significant one may be that in the proposal you must have originated at least 25 covered loans, excluding open-end lines of credit, to file. This is new. There is no test now other than you need not file if you have no reportable loans. With a minimum threshold those banks making only a few reportable loans (less than 25) will be exempt. In the bigger picture this will allow the regulators to focus on those larger reporters that make up the bulk of reportable loans each year and the exemption will save many smaller banks the tedious process of breaking out the “Getting It Right” manual each year to refresh themselves on the submission process. If you opt to file a comment letter, consider urging these threshold criteria to increase, to both relieve smaller institutions of the reporting requirements and allow the regulatory agencies to focus on the bigger reporters. Perhaps the $43 million asset size and the minimum 25 loans should both be increased to a more usable number to accomplish the objectives here. Currently some nondepository institutions that originate as many as 99 home purchase loans, including refinancings of home purchase loans, annually do not have to collect and report HMDA data. Perhaps 100 or 120 is a more reasonable count. Under the 25 loan rule, these nondepository institutions would have to start reporting but it may be better to raise the limit and apply that to all reporting institutions.

Loans categories reported today include home purchase, home improvement and refinancings. These can include reverse mortgages but few banks do these. Home equity lines are reported at your option, and many banks choose not to report these. The proposal would require you to report all closed end loans, open-end lines of credit, and reverse mortgages secured by dwellings. This is an expansion of reportable loan types. HELOC’s would be reportable whether for consumer or business purpose. Unsecured home improvement loans would no longer be reported at all. Excluding the unsecured home improvement loans may make life simpler but these were only reportable under certain circumstances anyway.

MISMO, the Mortgage Industry Standards Maintenance Organization says that it is “the leading technology standards development body for the residential and commercial real estate finance industries (and) is a wholly owned subsidiary of the Mortgage Bankers Association.” MISMO publishes standards that many lenders use now so that data can be collected and analyzed by the lender itself. Many of the standards MISMO has are incorporated into the new data requirements in the proposal. The CFPB feels that if the data is already there, they should take advantage of that. For those in the industry following MISMO guidelines, this alignment will be less of a burden and present standards that will allow analysis of the data to be consistent. The issue here is if these standards become rule, there will be little room for judgment or variance as to any fields content. All data will have to meet technical compliance as data fields do now. For those smaller lenders these rules may be new and require modification to processes, forms and software.

Data that will be reported will change. The Dodd-Frank Act adds 17 required data fields and the CFPB has added 20 more that it feel is necessary to provide comprehensive reporting. Currently you report general information about the application, including:

1. Loan application: application number, date, type of loan, purpose and amount requested;
2. Action taken: the type of action taken and the date with optional reporting on reasons for denials of applications (although OCC banks report these now);
3. Loan information: rate spread for certain higher-priced loans, lien status;
4. Property information: property type, owner/occupancy status, location by MSA, state, county, census tract; and
5. Applicant information: ethnicity, race, sex, and annual income relied upon in the loan decision.

The 17 fields the Dodd-Frank Act require are generally the:

1. total points and fees;
2. rate spread for all loans;
3. "riskier" loan features, such as prepayment penalties, teaser rates and nonamortizing features;
4. unique identifiers for the loan officer and the loan;
5. application channel (retail, broker, or other);
6. property value and more detailed property location information; and
7. the borrower’s age and credit score.

Additional fields the CFPB has proposed include the:

1. debt-to-income ratio;
2. combined loan-to-value ratio;
3. automated underwriting system used and the results;
4. denial reasons (now to be required by all reporters);
5. qualified mortgage status;
6. additional information on the rate, points and fees;
7. additional property information;
8. manufactured housing data; and
9. a unique financial institution identification number.

The proposal hasn’t covered which data fields will be redacted for the publicly available LAR version yet. With even more information included on the property and the borrower, concerns over privacy of consumer information can’t be ignored. This is still being discussed so do not be under the impression that these are all the final changes. More are discussed as well later in this article.

When data is reported will change for a minority of reporters. Currently you record your HMDA LAR data within 30 days of the end of a quarter. The proposed rule will require that those reporting at least 75,000 covered loans, applications, and purchased covered loans combined, for the preceding calendar year, would have to submit its LAR each quarter, within 60 days after that quarter-end. This rule is estimated to effect 28 institutions but those who report half of the annual entries overall. Having the data sooner from these high-volume lenders will make it easier to meet disclosure deadlines and for comparative analysis by all lenders.

While we don’t know for certain when the new reporting requirements will take effect, it is logical to assume that since these comments are due by October 29, 2014, a finalized rule will be released in early 2015 and data collection would begin in 2016. Some lenders would be reporting quarterly in 2016 but most would report new fields in 2017.

But the changes don’t stop here. Separately the CFPB is considering restructuring the geocoding process, creating an improved web-based HMDA Data Entry Software (DES), and otherwise streamlining the submission and editing process to make it more efficient. Data could then be entered from multiple locations and wouldn’t have to be consolidated first. This could add an entirely new dimension to the process used now by many, scrubbing and auditing the data prior to submission.

SCRA is still in the news

By Andy Zavoina

The Association of Military Banks held its annual meeting in August. Speaking to that group about the Servicemembers Civil Relief Act in general and what community banks can do to help those serving our country, were Richard Cordray, Director of the CFPB and Grovetta Gardineer, Deputy Comptroller for Compliance Policy at the OCC.

Director Cordray said in his comments that it is recognized that community banks were not the cause of the financial crisis and that many were actually disadvantaged as community banks were doing business the way it should have been done, and were losing customers and market share to many in the industry that were not similarly regulated. This was refreshing to read.

He went on to discuss the formation and use of community bank advisory councils that are providing feedback that the CFPB doesn’t hear as it oversees the $10 billion and larger banks. But these groups and consumers are raising concerns. Some areas that the CFPB will be watching include auto lending, the CARD Act, ACH transactions for payday lenders, and our implementation of the new mortgage rules. Remember the CFPB has oversight on non-bank entities too. Cordray indicated that tools at the CFPB are being used to drive cultural change. The CFPB has enforcement capabilities and the publicly available complaint database is one tool they’re taking advantage of. Patterns of complaints are influencing investigations, enforcement actions, and more attention in exams.

While he went on to say that the CFPB realizes more now that “one size fits all” doesn’t work in this industry, he noted several issues where this was taken to heart. Like complaints doing more to lead to scrutiny in exams, banks need a sound complaint process to resolve issues and increase customer satisfaction. And while community banks likely won’t fit in the in the crosshairs of the CARD Act or payday lenders, you may have affiliations or customers who do. Certainly you may be heavily involved in auto lending and the new mortgage rules. These areas should suddenly be a little higher on the your watch list.

Deputy Comptroller Gardineer commented that while non-bank entities were most often the problem in financial relationships with servicemembers, that is not exclusive. Gardineer said, “At a very broad level, compliance and operational risks are two of the key risk themes identified by the OCC in its most recent Semiannual Risk Perspective.” And she went on to say “Over the last six months, 15 percent of all small bank MRAs (Matters Requiring Attention) have involved compliance related issues. For large banks, 21 percent of MRAs involved operational risk, 14 percent involved compliance with Bank Secrecy Act and Anti-money Laundering (BSA/AML) laws and rules, and 11 percent involved consumer compliance specifically. When not addressed adequately, compliance and operational risk failures can and do result in enforcement action, and the failures in these areas are well publicized and have resulted in billions of dollars in penalties and restitution.”

Here again we can interpret some of these comments and use them broadly as takeaways to mitigate risks in our banks. At the very least, the Compliance Officer should make the board aware of these types of issues as a part of compliance management.

Recent enforcement actions include Sallie Mae/Navient for student loan issues in which there were actions under the SCRA and UDAP. $96 million is reimbursements and penalties were involved in that case. Capital One agreed to pay $12 million for SCRA related violations which included wrongful foreclosures, improper repossessions of autos, improper court judgments and refusal of the 6 percent rate when requested. SCRA cases are not limited to banks. In August a soldier won a case against a storage facility that sold his property. The terms of the settlement were not made public but the property was valued at more than $40,000. It is not uncommon to read about improper foreclosures and refusal to grant SCRA rights by banks and nonbanks.

So what are banks and others doing to avoid these issues today? They’re taking pages from the enforcement actions and using them to be proactive in reacting to the needs of servicemembers. In the Sallie Mae case one remedial action that was being taken was to rely on the Department of Defense Manpower Data Center (DMDC) database of servicemembers instead of requiring that each servicemember send in a copy of their orders and formerly request protection and a rate reduction. In August, Bank of America, Citigroup, Ocwen Financial, Quicken Loans and Wells Fargo each said they would proactively scan their list of borrowers against the DMDC database and provide benefits to those positive hits. Many lenders are beginning to rely on the database as it also provides dates of active duty and the benefits are set to match those dates. This database was used in the past to check a person’s status prior to a foreclosure or repossession action. Now it is used to provide benefits as well and banks are cross-populating military status so that each area with a need to know, knows, and can service the customer’s needs accordingly. This can be lending, collections, operations and even safe deposit box areas.

While this revised process may be deemed by many as a no-brainer, others will consider it risk mitigation. The OCC has stepped up its focus on compliance with SCRA and now requires examiners to include evaluation of SCRA compliance during every supervisory cycle. On the BOL threads we are reading regularly that policies and procedures are requested from examiners. They’re testing the bank’s systems and each agency is ensuring their banks take this law seriously. There was recently a discussion in the Lending to Servicemembers forum how easy it is to batch process your CIF files against the DMDC database. You should consider doing so if this is a sufficient risk you face with your customer base.

It is time that your bank revisits the SCRA and looks at going above and beyond what the law requires?

Reg. AA – Gone but not forgotten

By Andy Zavoina

A Notice of Proposed Rulemaking was published on August 27, 2014 (Vol. 79, No. 166) that will repeal Reg. AA, Unfair or Deceptive Acts or Practices. We want to review what this means to banks.

This Dodd-Frank Act took away the Federal Reserve’s authority to update Reg. AA. Without the ability to keep it current, it needs to go away.

This regulation prohibits banks from using certain remedies to enforce consumer credit obligations and from including those remedies in their consumer contracts. Activities that are prohibited under Reg AA include the:

1. Use certain provisions such as confessions of judgment, waivers of exemptions, wage assignments, and security interests in household goods in consumer credit contracts;
2. Misrepresentation of cosigner liability; and
3. Pyramiding of late fees.

“Ownership” of Reg AA and the writing of amendments to it was not included in the consumer protection regulations transferred to the CFPB. For a variety of reasons, the other prudential regulators also do not have rule writing authority here.

To address the void and clarify the impact of this repeal the OCC, FDIC, NCUA, CFPB, and FRB issued “Interagency Guidance Regarding Unfair or Deceptive Credit Practices.” Regardless of the repeal of Reg AA, the agencies maintain that what would have been a violation of Reg AA can still violate Section 5 of the Federal Trade Commission Act and Sections 1031 and 1036 of the Dodd-Frank Act even though there are no specific regulations governing the conduct. These are the laws giving us UDAP and UDAAP (Unfair, Deceptive and Abusive Acts or Practices). The agencies have supervisory and enforcement authority regarding these poor practices and we know they will use it.

A part of the repeal of Reg AA is the elimination of the requirement to provide a “Notice to Cosigner.” The Guidance clarifies that they “believe that creditors have properly disclosed a cosigner’s liability, if, prior to obligation, they continue to provide the “Notice to Cosigner”.”

At the end of the day, when Reg AA is finally repealed for good, we will still have enforcement actions from the agencies and all that we have learned from Reg AA will now be considered a best practice to avoid violating laws that simply don’t have implementing regulations.

Revisiting foreign remittance transfers

By John S. Burnett

The Bureau makes more changes

The CFPB has amended the remittance transfers rule (subpart B of Regulation E) for the sixth time since the first final version of the rule was published on February 7, 2012. Most of the earlier amendments were made to make compliance with the rule less burdensome for remittance transfer providers, and those that are financial institutions, in particular. The latest change, announced by the Bureau on August 22, is no exception. It finalizes a proposal first published on April 15, 2014, and it will become effective 60 days after it’s published in the Federal Register.

The amendments extend a special exception for insured financial institutions, allow the faxing of disclosures, expand the circumstances when oral disclosures can be provided, and clarify some key definitions to make compliance a little simpler.

The extension

The big news in these amendments is the five-year extension – to July 21, 2020 – of the sunset date for the temporary exception in section 1005.32(a) that allows insured institutions to provide estimates of certain remittance transfer costs when the transfers are sent from a consumer’s account with the institution. When the institution cannot determine the exact exchange rate or the amount of covered third-party fees for reasons beyond its control, it is permitted to provide estimates of those rates or amounts and of the transfer amount in which the funds are to be received. The exception allowing these estimates was set to expire on July 21, 2015, before the amendment was finalized.

The Bureau indicated in its press release announcing the amendments that it believes the extension will give insured institutions that offer remittance transfers additional time to develop reasonable ways to provide consumers with exact fees and exchange rates for all remittance disclosures, and stated that the CFPB intends to work with those institutions for a more sustainable solution to the disclosure challenge inherent in the open-network transfer environment before the 2020 expiration of the exception.

Faxed disclosures

When the amendments become effective, a facsimile transmission (fax) of any of the disclosures required under section 1005.31 or 1005.36 will be considered to be provided in writing and in a form the sender may retain, and will not be subject to the requirements for electronic disclosures under section 1005.31(a)(2). This change may make providing disclosures easier when dealing with a customer from a distance, especially when different time zones are involved.

Expansion of oral disclosure situations

To make the special rules permitting oral disclosures more useful, the Bureau has updated its Official Staff Interpretations, specifically comment 31(a)(3)-2, to expand its application. The regulation provides that the prepayment disclosure may be made orally and the receipt provided by mail by the next business day if the transaction is conducted entirely by telephone. If that transfer is funded from the sender’s account with the institution, the receipt can be sent with the next periodic statement or within 30 calendar days after the transfer is sent.

The amendment allows a transfer provider to treat a written or electronic communication from a sender as an inquiry if the provider believes that treating it as a transfer request would be impractical. Such might be the case if the sender, located abroad, tries to initiate a remittance transfer by first sending a request by mailed letter. Rather than delay the transfer by mailing the prepayment disclosure and waiting for a go-ahead instruction, the provider can fax the disclosure (see above) and complete the transaction by exchanging faxes, or it can attempt to contact the sender by telephone to orally gather information or confirm the information needed to complete the transaction, make the oral prepayment disclosures, obtain the oral assent to complete the transaction, and otherwise wrap things up as if the customer had called to initiate the transaction.

Military bases abroad

The treatment of transactions involving a sender located on a U.S. military base abroad or transfers sent to accounts at institutions located on such bases was another matter cleared up in the amendments. Once again, Official Staff Interpretations are being tweaked to clarify that for the purposes of the Remittance Transfers Rule, U.S. military installations that are physically located in a foreign country are considered to be located in a State.

Two examples illustrate how that clarification can make compliance with the rule less onerous:

1. First, assume that a consumer with an account at your bank wishes to wire $500 to her son, who is serving with the U.S. Army and is currently stationed in England. He has an account with a bank located on the military installation where his unit is assigned. Because the funds are going to a bank on a U.S. military installation, the transfer is not a remittance transfer subject to the regulation.
2. Similarly, if the transfer is to be picked up at a location on a U.S. military installation abroad (as opposed to being credited to an account at a bank located at such an installation), the transfer would again not be subject to the rule, since the funds are to be collected at a place in a State. This might be the case if the funds will be picked up at a Western Union office on the installation.

Type of funding account

focused on whether the purpose for which a funding account was established could be determinative As financial institutions became immersed in compliance with the rule beginning in October 2013, there was discussion over how to determine whether a foreign transfer is being sent primarily for personal, family, or household purposes. The principal concerns of the purpose of the transfer, particularly when the transfer request does not indicate clearly whether the transfer is primarily for personal, family, or household purposes. The amendments will make these clarifications (for the sake of brevity, I have substituted "consumer" for "personal, family, or household"):

1. In general, for transfers from an account that was established primarily for consumer purposes, a provider may deem that the transfers is requested primarily for such purposes.
2. However, if the consumer indicates that the transfer is requested primarily for other purposes, such as business or commercial purposes, the consumer will not be a sender under the definitions in the rule, and the transfer will not be subject to the rule, even if it’s funded from the consumer account.
3. If a transfer is being sent from an account that was not established primarily for consumer purposes, such as an account established as a business or personal account or an account held by a business entity (including a sole proprietorship), the transfer provider may treat the transfer as not being requested primarily for consumer purposes (and therefore the individual requesting the transfer is not a sender and the transfer is not subject to the rule). Note that this is the case even if the consumer making the request from a sole proprietorship business account states a consumer purpose for the transfer.
4. A transfer requested to be sent from an account held by a financial institution under a bona fide trust agreement is not requested primarily for consumer purposes, and a consumer making such a request is not a sender under the regulation (and the transfer is therefore not subject to the rule), notwithstanding the consumer’s statement of a consumer purpose for the transfer.

Integrated disclosures: Countdown begins

By Mary Beth Guard

When the CFPB announced the final Integrated Disclosures rule in November, 2013, some of us gasped when we got to the part of the town meeting where they revealed the effective date of the changes: August 1, 2015. It seemed like a lifetime away, and most bankers shoved it firmly to the back burner. Plenty of time to worry about it later, right?

Yes, there is enough time, no need to panic. But if you aren’t already familiarizing yourself with the sweeping changes and laying the groundwork for implementation, it’s time to get serious. The CFPB knew exactly what it was doing when it constructed this lengthy timeframe for achieving compliance. More than nine months have elapsed since the final rule was released. Tick, tick, tick.

Three sections of Regulation Z should be on your must-read list: Section 1026.19 (Certain mortgage and variable-rate transactions) is being significantly amended. Two other sections are new: 1026.37, which deals with the new Loan Estimate, and 1026.38, which addresses the Closing Disclosure.

Begin by wrapping your head around the scope of coverage of the new Integrated Disclosure rule. It’s part of Regulation Z, so you know immediately that it will only come into play if the transaction would involve a consumer applying for/obtaining credit primarily for a personal, family, or household purpose. If the applicant is a business or the purpose for which the proceeds would be used is primarily a business, organizational, or agricultural purpose, these disclosures will not come into play.

Many banks have traditionally utilized consumer-related disclosures (such as the GFE and HUD1/1A) in instances where they are not applicable, such as any time a consumer is applying for loans relating to rental property. That course of action will be fraught with peril in the future. We recommend restricting the use of the new Integrated Disclosures to circumstances where they are truly required. That means you will want to pull out Reg Z’s Section 1026.3 and its Commentary to study what I refer to as the “Reg Z tough stuff” – the complex provisions that indicate which type of rental property-related loans could possibly be covered by Reg Z. On a go-forward basis beginning 8/1/15, don’t give the Reg Z disclosures for rental property loans that are deemed to be for business purposes.

Back to scope of coverage. The new disclosures come into play with closed end consumer credit secured by real property. Real property?!? What happened to the whole “secured by a 1- to 4-family dwelling” thing? Gone! What about exceptions from coverage? Oh, yeah. There is one. Count ‘em. One. It’s for reverse mortgage transactions (which most of you reading this don’t do anyway).

Aren’t there exceptions for temporary or bridge loans? No. Property consisting of 25 or more acres? No. A construction phase of 12 months or less of a construction-to-permanent loan? No. Doesn’t it have to be the consumer’s principal dwelling? Heavens, no. There does not need to be a dwelling at all. Just dirt. If you receive an application for a closed end consumer credit that would be secured by real property, say goodbye to the GFE. You will be giving the new Loan Estimate. And if the loan is made, you will be providing the Closing Disclosure, rather than a HUD-1 or HUD-1A.

Pull up the blank model forms and start studying up!