IAM SURE MOST OF YOU HAVE BEEN ON A ROLLER COASTER at

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1 The Compliance Regulatory Roller Coaster Just A LOOK AHEA IAM SURE MOST OF YOU HAVE BEEN ON A ROLLER COASTER at some point in your lives. The ride provides thrills, drops, hills, sharp turns, high speeds, then comes to a welcome stop. At the ride s end some of you probably have said whew, glad that is over! Unfortunately, our roller coaster of compliance management does not seem to have a stopping place, nor do the new requirements appear to be fewer in number or complexity. With more regulations coming online, more regulatory guidance needed (but not always provided in a timely manner), and with tougher examinations today s norm, what is a compliance officer expected to do? The continual bombardment of issues that need to be addressed and the enormity of the tasks can feel overwhelming. I do not have enough space within this article to describe in detail everything you may face in the coming year, but I do highlight a few regulatory changes on the horizon. Make sure your lap bar is locked and your items are secure, because this roller coaster is about to take off again. 30 ABA BANK COMPLIANCE JANUARY FEBRUARY 2016

2 SHUTTERSTOCK Keeps Rolling D TO 2016 BY RICK FREER, CRCM JANUARY FEBRUARY 2016 ABA BANK COMPLIANCE 31

3 A LOOK AHEAD TO 2016 Flood Disaster Protection Act (FDPA) The agencies finalized their flood regulations in June of 2015, and FDPA changes related to detached structures and force-placed insurance became effective in The regulatory requirements involving the escrow of flood insurance premiums and fees become effective on 1/1/2016. Thus begins a new regime covering escrow requirements on designated loans and new required disclosures. In addition, it may mandate changes to loan notes and other documents to cover the possibility that escrow may be required at some future date. Remember there is a small lender exemption and various designated loan exceptions from the escrow requirements as well. Unfortunately, there are unanswered questions about some of these requirements, which we hope the agencies will answer as the year moves forward. One issue to be decided is the regulatory requirements regarding private flood insurance policies. While private flood insurance requirements are detailed in Biggert-Waters Act amendments to the FDPA, the agencies have yet to issue a final regulation implementing those requirements. And if that is not enough, FEMA discontinued its Mandatory Purchase of Flood Insurance Guidelines which had served as a life line for many bankers in their efforts to comply with the flood rules. Unfortunately, neither FEMA nor the agencies appear willing, at this point, to provide a similar guidance piece in the future. FEMA is also continuing to make additional changes to the flood insurance program, to remap communities, and to amend other policies and processes required by the 2012 Biggert-Waters Act and the 2014 Homeowners Flood Insurance Affordability Act. All of these issues impact your flood insurance compliance efforts and your efforts to keep your head above the flood waters to ensure you are treating your borrowers fairly and with accurate information on the need for flood insurance and their obligation to obtain and maintain adequate flood insurance on designated loans. Home Mortgage Disclosure Act (HMDA) The Consumer Financial Protection Bureau s (CFPB) Regulation C (HMDA) is now final. Many of you may not have yet had a chance to read this lengthy amended regulation in its entirety since its effective date is not until calendar year Even though 2018 seems a long way away, you need to begin now to identify necessary changes to loan operating systems, data flow processes, collection and reporting procedures, and training to make sure you report accurate HMDA data. These changes may also have a significant impact on staff levels and their responsibilities that will need to be addressed well before Depending on your institution s size, complexity of operations, number of secured residential mortgage products offered, and geographical footprint, getting ready by the implementation date will be no easy task. Who reports has changed to include an additional criteria; an institution reports data for the current year if it originated at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the preceding two calendar years. The reporting standard is also new and covers loans secured by a dwelling whether closed-end or open-end that is for personal, family, or household purposes. On the other hand, business loans will be reported if secured Even though 2018 seems a long way away, you need to begin now to identify necessary changes to loan operating systems, data flow processes, collection and reporting procedures, and training to make sure you report accurate HMDA data. These changes may also have a significant impact on staff levels and their responsibilities that will need to be addressed well before by a dwelling and the loan purpose is for home purchase, home improvement, or refinancing. The HMDA-LAR will include 25 new data elements to include additional information regarding applicants and borrowers, the institution s loan processes, the property securing the loan, certain loan features, and specific loan identifiers. These changes will require a comprehensive planning process and an implementation team devoted to determine what needs to be done reviewing numerous loan data systems, relying on third party venders, outlining your HMDA infrastructure, and most likely spending more money and staff resources than you had planned. Also during this preparation time it is very possible that regulatory clarifications or more formal guidance will be provided on some of the changes so you can get it right the first time. This is also a good time to rethink your current HMDA data analyses and merge it with fair lending and CRA analyses. Military Lending Act (MLA) The final amendments to the MLA were published by the Department of Defense (DOD) in July The rule becomes effective on October 3, 2016 with the exception of the credit card rules which become effective October 3, This rule is different from the Servicemembers Civil Relief Act so do not confuse the two; there are different requirements. The MLA regulation covers most consumer loans as defined by Regulation Z; it excludes only residential mortgage and purchase money loans. The rule only applies to members of the armed forces who at the time they become obligated on a consumer transaction or establish a consumer credit account are serving on active, active guard, or reserve duty, and to the service member s spouse and other dependents. The rule imposes a Military APR (MAPR) not to exceed 36%. While this may sound simple, it is anything but simple. The 36% cap is not an interest rate cap or a traditional APR cap under Regulation Z, but an all-in APR. It includes fees like application fees and annual fees that would not be considered finance charges under Regulation Z. Because these differences exist you need to remember that when calculating the MAPR for any covered loan offered to a service member or his/her dependent or spouse the 36% is an all-in APR an can easily be exceeded when fees are included with the loan interest rate. 32 ABA BANK COMPLIANCE JANUARY FEBRUARY 2016

4 Additionally, for covered loans to military personnel and their dependents financial institutions will be required to provide certain oral and written disclosures, will not be able to enforce arbitration agreements, or other legal notice and action provisions. One of the more difficult provisions to comply with, at least at this time, is that institutions will not be allowed to depend on the applicant when determining his/her military status. This means that you will be required to contact the DOD database (or perhaps a nationwide consumer reporting agency with similar information, if one exists next October) to document the applicant s status. Either way, this may not be an easy task. While some of the provisions are transparent there are other provisions that will need to be clarified as you begin to set up programs to serve military personnel and their dependents. And if that is not enough to worry about, violations of the act can result in criminal penalties, contract voidance, private right of action, civil liability, and payment of costs related to the action and reasonable attorney fees. Mortgage Servicing Rules The mortgage servicing rules were finalized in late 2014, but proposed amendments designed to clarify certain issues may be finalized and published as early as March The proposed effective date is expected to be 280 days after rule publication with a one year effective date for changes related to periodic statements for borrowers in bankruptcy. The amendments will cover such issues as: successors in interest, information requests for loans in trust related to Fannie Mae and Freddie Mac, force-placed insurance, early intervention and loss mitigation provisions, prompt payment crediting, and periodic statements. Two requirements that will present particular challenges are: whether a separate accounting on periodic statements for borrowers in bankruptcy will be required, and whether successors in interest will have the same rights as borrowers under the revised rules. If the final rule is adopted as proposed it will create additional servicing burdens which means servicers should expect significant implementation costs and significant legal risk. Fair Debt Collection Practices Act (FDCPA) While some time as elapsed since the CFPB issued its Debt Collection Practices Advance Notice of Proposed Rulemaking, it looks like a Small Business Review Panel will be convened in early 2016 with a proposal to follow. Whether a final rule is published by year-end 2016 is debatable at this time. As mentioned in a similar article for the 2015 Jan/Feb addition of the ABA Compliance Magazine the purpose of the proposed rule will be to update the FDCPA. Additionally, the CFPB is expected to use this opportunity to write is first rule under its UDAAP authority to impose FDCPAstyle rules on first-party debt collectors, institutions collecting their own debts. At a minimum, we can expect the rules to cover: the transfer of information about the debt from the original creditor to a third-party collector, the FCRA dispute process, debt collection communications with borrowers, and to impose a number of new disclosures. The CFPB has indicated its goal is to increase consumer protection in the debt collection arena without creating undue industry burden. We will have to wait and see if this is accomplished. Small Dollar Lending In March of 2015 the CFPB published a framework outlining proposed rules for small dollar lending which includes payday and vehicle title lending and longer-term small dollar lending where repayment is made in installments or by a single payment. Simultaneous with the publication of the framework, the Bureau held the required Small Business Review Panel to gain feedback and suggestions from small businesses, including community banks and other small financial institutions. The Bureau looks ready to propose a small dollar lending regulation either in the first or second quarter of The proposed framework would impose regulations on loans whose all-in APR exceeds 36%. The all-in APR is calculated similarly to the MAPR described previously under the Military Lending Act and includes not only interest, but also fees, finance charges, and add-on product charges. For example, a 90-day loan of $500 with an interest rate of 8% and a $50 documentation fee (that is financed) would result in an all-in APR of 49% and thus would be subject to the Bureau s proposed new regulatory regime. For payday loans and other loans of 45 days or less, the lender would be required (a) to determine the borrower s ability to repay the loan by engaging in extensive underwriting; or (b) to limit the loan s amount to $500, limit finance charges to one, not require the borrower s vehicle as collateral, and cap rollovers at two, followed by a mandatory 60-day cooling off period. For loans of more than 45 days, the lender would be required: to determine the borrower s ability to repay the loan by engaging in extensive underwriting; limit the loan s amount to $1,000, impose a maximum 28% interest rate and $20 application fee; or to limit repayment to 5% of the borrower s gross monthly income. Prepaid Financial Products Another issue that has been brewing for some time is the CFPB s proposed regulation related to prepaid cards under Regulations Z and E. Changes were proposed in December 2014 and comments were due by April It is very likely that a final rule will be issued in late 2015 or early The goal of the changes is to provide more consumer protections for prepaid accounts. Prepaid cards would be treated like credit cards under Regulation Z if linked to an overdraft service or credit or if charged any fee while the account is in an overdraft condition regardless of how the overdraw status occurred. The proposal includes a definition for a prepaid account, expands Regulation Z to address overdraft services and other credit features associated with the account, creates a new disclosure regime, eliminates the need for periodic disclosures if certain conditions are met, imposes account access requirements, and requires that issuers provide prepaid account agreements quarterly to the Bureau. The Bureau proposed that the effective compliance date would be nine months after adoption. Fair Lending Fair lending supervision and enforcement activity increased in The Supreme Court ruled in the Texas Department of Housing & Community Affairs v. Inclusive Communities Project that disparate impact is recognized under the Fair Housing Act. Second, there JANUARY FEBRUARY 2016 ABA BANK COMPLIANCE 33

5 A LOOK AHEAD TO 2016 were more enforcement actions related to indirect auto financing, and third, there was a renewed interest in discriminatory redlining enforcement. Also, let s not forget that examiners are still looking at simple underwriting and pricing cases during their examinations. They are moving beyond mortgage lending into other consumer and small business loans. The agencies expect financial institutions to perform statistical analyses when appropriate, including proxy analyses for loans without government monitoring information. The result is considerable uncertainty about what financial institutions should do to ensure they are complying with the agencies evolving expectations. In the meantime, you need to continue to refine your fair lending processes, including risk assessment approaches, (perhaps using some out-of-the-box thinking), and the way you collect and analyze lending and other data. A strong defense is the best approach to confronting any potential fair lending issue the agencies present. This means, for example, you need to know your institution s: Business model, strategic direction, and growth plans; Are you primarily a commercial lender or a consumer lender? Are you contemplating more branch locations? Where will those branches be located? Will you develop other alternative delivery systems to meet the needs of your growing market area(s)? Loan products, marketing/advertising strategies, and the changing demographics of your market area(s); Do your products and services address the needs you have identified in your market area(s)? Does your marketing and advertising cover your market area(s) or are they targeted to a specific area(s)? What is the current demographic makeup of your market areas? How is it changing? Do you know where the low- and moderate-income and high-minority areas are? Where are they in relation to your branches?; and Logical peers and how your data and market penetration stack up to theirs; How do you determine the institutions you compare yourself to? How does your lending data compare with those peers? How thorough and robust is your data analysis? Do you know what your data is telling you and can you explain it? Armed with these facts and data you can demonstrate how you ensure fair lending compliance through a holistic review approach that includes HMDA and other loan data analyses, comparisons with peer institutions, and Community Reinvestment Act performance. The CFPB, however, has still not proposed a regulation to cover the abusive standard and is relying on specific cases to identify abusive issues. Obviously this approach makes your job more difficult in deciding what your compliance programs for UDAP/UDAAP should cover. Unfair, Deceptive, and Abusive Practices (UDAAP) Whether we are looking at UDAP or the expanded UDAAP, the regulatory agencies have filed a number of enforcement cases alleging unfair, deceptive, and/or abusive practices regarding financial products, ad-on products, services, marketing/advertising, and other issues related to a consumer s interaction with a financial institution. The CFPB, however, has still not proposed a regulation to cover the abusive standard and is relying on specific cases to identify abusive issues. Obviously this approach makes your job more difficult in deciding what your compliance programs for UDAP/UDAAP should cover. To address this difficulty I offer a four question test you can use to keep you out of UDAP/UDAAP trouble. These questions can be used regardless of whether you are looking at a product, service, or other relationship with a consumer; you can also add other questions that are relevant to your circumstances. The four questions are: What is it we want to do? Why do we want to do it? What do we need to do to accomplish it? What negative unintended consequences can develop if we proceed? I believe you can also use this approach when determining fair lending risks that may be associated with loan products, loan programs, special purpose programs, and general applicant treatment. Another key to remember when reviewing UDAAP risks is the agencies focus on harm to consumers. This can be tricky since issues related to a consumer s interaction with a financial institution may not be covered by a compliance or consumer protection regulation. So if you are only focusing on the regulations you may miss an otherwise obvious risk. How does a consumer interact with your institution, what are all the touch points so to speak where a consumer could be treated badly by an institution process, system, or procedure? Lastly, do you look at the life cycle of any of the products or services you offer or are planning to offer? Everything may be absolutely fair and clear at the outset, but what can happen after the initial interaction with the consumer is past? So you do not think that is all there may be in 2016, here is another topic list of issues that are also on the horizon; cybersecurity and customer privacy, additional Customer Due Diligence rules; updated CRA guidance, continued clarifying of the TRID rules, new student lending requirements, third party vendors, and small business loan data collection and reporting. Conclusion And you thought 2015 was a busy year. The many coming attractions in 2016 will require your utmost attention to comprehend all the explicit and subtle details of the coming regulatory changes and the implementation issues they will bring with them. Now keep your seatbelt on, hone your management, communication, organizational, and program development skills, and enjoy, as best you can, the wild ride ahead. ABOUT THE AUTHOR RICK FREER, CRCM, is the Senior Director for Examination and Compliance Programs with the ABA, having retired from the Office of the Comptroller of the Currency in February in Rick works on a variety of issues including fair lending, UDAAP, Flood, CRA and HMDA, and teaches at schools and conferences. He can be reached at Rfreer@aba.com. JANUARY FEBRUARY 2016 ABA BANK COMPLIANCE 35