InCompliance Update White Paper 2017 About the Author... Martin (Marty) Mitchell has over 18 years of experience in the regulatory compliance field. After retiring from a successful career as a U.S. Army officer, he served as a commissioned federal compliance examiner with the FDIC evaluating financial institution compliance with consumer protection laws and regulations. He also served at the FDIC Washington DC Headquarters. During his tenure with Capital One, he led the design and implementation of their corporate level mortgage compliance program through a period of business closures, Servicing Rules: Revisions & Additions to TILA/RESPA The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) added and revised many servicing rules in the Truth-in-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). From the time these changes were implemented in Regulations Z and X, respectively, institutions have asked the Consumer Financial Protection Bureau (CFPB or Bureau) to clarify or revise the rules in light of questions and uncertainties regarding certain servicing procedures, particularly those that relate to consumers in bankruptcy. Accordingly, the CFPB recently finalized rules clarifying, revising, and amending provisions regarding a number of servicing provisions, including force-placed insurance notices, policies and procedures, early intervention and loss mitigation requirements under Regulation X s servicing provisions, and prompt crediting and periodic statement requirements un- der Regulation Z s servicing provisions. The final rule also addresses proper compliance regarding certain servicing requirements when a person is a potential or confirmed successor in interest, is a debtor in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act (FDCPA). The final rule also makes technical corrections to several provisions of Regulations X and Z. The Bureau issued concurrently with the final rule an interpretive rule under the Fair Debt Collection Practices Act relating to servicers compliance with certain mortgage servicing rules. The final rule is effective on October 19, 2017. However, the amendatory provisions regarding successors in interest and the modified periodic statements for consumers in bankruptcy will be effective April 19, 2018. The rule covers the following major topics:
About the Author... multiple acquisitions, and intense regulatory scrutiny. With PBS, Marty served the largest most complex clients nationwide. For the past six years, he has led the compliance consulting division. Marty and his colleague Robert (Bob) Mullenbach are in attendance at LendIt USA 2017, visit them at booth 136. They also welcome your call or text to their cell phones if you d like to discuss further. Marty s cell is 502-608-9627 and Bob s cell is 502-475-1639. If email is preferred, please use: mmitchell@probank.com or rmullenbach@probank. com. Successors in interest. The Bureau finalized three sets of rule changes relating to successors in interest. First, the Bureau adopted definitions of successor in interest. Second, the Bureau finalized rules relating to how a mortgage servicer confirms a successor in interest s identity and ownership interest. Third, the Bureau is applying the Regulation X and Z mortgage servicing rules to successors in interest once a servicer confirms the successor in interest s status. Definition of delinquency. The Bureau finalized a general definition of delinquency that applies to all of the servicing provisions of Regulation X and the provisions regarding periodic statements for mortgage loans in Regulation Z. Delinquency means a period of time during which a borrower and a borrower s mortgage loan obligation are delinquent. A borrower and a borrower s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow, becomes due and unpaid, until such time as no periodic payment is due and unpaid. Requests for information. The Bureau finalized amendments that change how a servicer must respond to requests for information asking for ownership information for loans in trust for which the Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac) is the owner of the loan or the trustee of the ~Page 2~ Servicing Rules: Revisions & Additions to TILA/RESPA, cont d. securitization trust in which the loan is held. Force-placed insurance. The Bureau finalized amendments to the force-placed insurance disclosures and model forms to account for when a servicer wishes to force-place insurance when the borrower has insufficient, rather than expiring or expired, hazard insurance coverage on the property. Additionally, servicers now will have the option to include a borrower s mortgage loan account number on the notices required under the force-placed insurance rules ( 1024.37). The Bureau also finalized several technical edits to correct discrepancies between the model forms and the text of force-placed insurance rules ( 1024.37). Early intervention. The Bureau clarified the early intervention live contact obligations for servicers to establish or make good faith efforts to establish live contact so long as the borrower remains delinquent. The Bureau also clarified requirements regarding the frequency of the written early intervention notices, including when there is a servicing transfer. In addition, regarding certain borrowers who are in bankruptcy or who have invoked their cease-communication rights under the FDCPA, the Bureau finalized exemptions for servicers from complying with the live contact obligations but requiring servicers to provide written early intervention notices under certain circumstances.
Servicing Rules: Revisions & Additions to TILA/RESPA, cont d. ~Page 3~ Loss mitigation. The Bureau finalized several amendments and clarifications relating to the loss mitigation requirements. Prompt payment crediting. The Bureau clarified how servicers must treat periodic payments made by consumers who are performing under either temporary loss mitigation programs or permanent loan modifications. Periodic payments made pursuant to temporary loss mitigation programs must continue to be credited according to the loan contract and could, if appropriate, be credited as partial payments, while periodic payments made pursuant to a permanent loan modification must be credited under the terms of the permanent loan agreement. Periodic statements. The Bureau finalized several requirements relating to periodic statements. The final rule: Clarifies certain periodic statement disclosure requirements relating to mortgage loans that have been accelerated, are in temporary loss mitigation programs, or have been permanently modified, to conform generally the disclosure of the amount due with the Bureau s understanding of the legal obligation in each of those circumstances, including that the amount due may only be accurate for a specified period of time when a mortgage loan has been accelerated; Requires servicers to send modified periodic statements (or coupon books, where servicers are otherwise permitted to send coupon books instead of periodic statements) to consumers who have filed for bankruptcy, subject to certain exceptions, with content varying depending on whether the consumer is a debtor in a Chapter 7 or 11 bankruptcy case, or a Chapter 12 or 13 bankruptcy case, and includes proposed sample periodic statement forms that servicers may use for consumers in bankruptcy to ensure compliance with the periodic statement rules; and Exempts servicers from the periodic statement requirement for charged-off mortgage loans if the servicer will not charge any additional fees or interest on the account and provides a periodic statement including additional disclosures related to the effects of charge-off. Small servicer. The Bureau finalized certain changes to the small servicer determination. The small servicer exemption generally applies to servicers who service 5,000 or fewer mortgage loans for all of which the servicer is the creditor or assignee. The final rule excludes certain seller-financed transactions and mortgage loans voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee, from being counted toward the 5,000 loan limit, allowing servicers that would otherwise qualify for small servicer status to retain their exemption while servicing those transactions. The Federal Emergency Management Agency (FEMA) revised the Standard Flood Hazard Determination Form, Form 086-0- 32 (SFHDF) as of June 1, 2016. The SFHDF is required for all federally-backed loans and is used by lenders to determine the flood risk for their building loans. The SFHDF is authorized by the National Flood Insurance Reform Act of 1994 (NFIRA) and is imposed on lenders by Flood Certification Revised their regulatory entities. The previous form that expired on May 30, 2015 can continue to be used during the phase in period of the new form. For more information or to obtain a copy of the form to download and print, please visit FEMA s website at: www. fema.gov/media-library/assets/documents/225.
Redesigned URLA & Acceptance ~Page 4~ The Uniform Residential Loan Application (URLA) is used by the mortgage industry to collect certain information when a consumer requests a mortgage loan. This collected information includes an applicant s ethnicity, race, and gender in order to comply with Section 1002.13 of Regulation B. Regulation B Section 1002.13 governs the collection of this information on an application for credit primarily for the purchase or refinance of a dwelling occupied or to be occupied by the applicant as a principal residence and where the extension of credit will be secured by the dwelling. The URLA may also be used to collect information on an applicant s marital status and age, among other applicant information, which is also governed by Regulation B. On August 23, 2016, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) issued a revised and redesigned Uniform Residential Loan Application. Although the federal lending compliance rules do not require a creditor to use the URLA, the Consumer Financial Protection Bureau (CFPB) has provided that a creditor who does so without modification would not violate the Equal Credit Opportunity Act or Regulation B. In particular, the CFPB approved the revised URLA in two ways: The URLA is in compliance with: Regulation B Section 1002.5(b) rules concerning requests for information about race, color, religion, national origin, or sex; Section 1002.5(c) rules concerning requests for information about a spouse or former spouse; and Section 1002.5(d) rules concerning requests for information regarding marital status, income from alimony, child support, or separate maintenance, and childbearing or childrearing. The CFPB provided notice that at any time from January 1, 2017 through December 31, 2017, a creditor may, at its option, permit applicants to self-identify using disaggregated ethnic and racial categories as instructed in Appendix B to Regulation C, as amended by the 2015 HMDA final rule. During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories will not be deemed to violate Regulation B Section 1002.5(b) rules. The revised URLA includes such disaggregated ethnic and racial categories. The redesigned URLA provides: A consumer-friendly format and supports accurate data collection; A dynamic electronic form in a fillable format where sections expand/contract based upon information provided; Collection of loan application details that are relevant and useful in making an underwriting decision; Consistent and simplified organization of fields and labels; Clearer upfront instructions to enable borrower self-service; New and updated fields to reflect today s mortgage lending business and eliminates obsolete fields; and Updated government monitoring information, as required by the new HMDA amendments. In response to industry inquiries, Fannie Mae and Freddie Mac have clarified the effective date for the redesigned URLA and have republished the forms with the footer Not for Current Use rather than Effective 1/2018. As a reminder, the redesigned URLA should not be used until Fannie Mae and Freddie Mac have established final effective and mandate dates. Lenders may use the published forms to identify required changes to their processes and procedures. On October 15, 2015, the CFPB published a final rule amending Regulation C and the Home Mortgage Disclosure Act (HMDA), which modifies the reportable data requirements related to the collection of borrower ethnicity, race, and sex. Lenders are required to collect the new and amended borrower demographic information on loan applications taken on or after January 1, 2018. However, lenders may begin collecting the expanded demographic information in 2017 as part of their preparation to meet the January 2018 mandate date. Fannie Mae and Freddie Mac have also published a Demographic Information Addendum to provide lenders the ability to collect the new and expanded
~Page 5~ Redesigned URLA & Acceptance, cont d. race and ethnicity subcategories while still using the current URLA dated 7/05 (revised 6/09). The Addendum replaces the existing Section X, Information for Government Monitoring Purposes, which must be crossed-out, shaded-out, or otherwise deleted if the Addendum is used. Lenders may begin using the Addendum at any time on or after January 1, 2017. For updates on the URLA and various information documents, visit Fannie Mae s website at: www.fanniemae. com/singlefamily/uniform-residential-loan-application#. SCRA Protections Extended On March 31, 2016, the Foreclosure Relief and Extensions for Servicemembers Act of 2015 was signed into law. The Act once again extended, until December 31, 2017, protections provided to servicemembers under Section 303 of the Servicemember Civil Relief Act (SCRA). The extensions provide that: Any sale, foreclosure, or seizure of property based on a breach of a secured obligation is not valid if made during the period of military service or one year thereafter (unless made pursuant to a court order or servicemember waiver); and A stay of proceedings or adjustment of an obligation may be made during the period of military service or one year thereafter. Beginning January 1, 2018, unless Congress passes another extension, there will be a period of 90 days after the end of the servicemember s military service during which a foreclosure, sale, or seizure of the servicemember s property based on a breach of a mortgage, trust deed, or other security, without a court order or waiver, will not be valid. During this period, a court may also stay proceedings en- forcing such obligations. The Housing and Urban Development Act of 1968 requires lenders to send a notice of servicemembers rights to borrowers within 45 days of the date a missed payment was due on a mortgage secured by the borrower s principal residence, unless the borrower pays the past-due amount before the expiration of the 45-day period. The contents of the notice are prescribed in HUD s Servicemembers Civil Relief Act Notice Disclosure. CFPB Prepaid Accounts Rule The Consumer Financial Protection Bureau (CFPB or the Bureau) issued a final rule to create comprehensive consumer protections for prepaid accounts under Regulation E, which implements the Electronic Fund Transfer Act; Regulation Z, which implements the Truth in Lending Act; and the official interpretations to those regulations. The final rule modifies general Regulation E requirements to create tailored provisions governing disclosures, limited liability and error resolution, and periodic statements, and adds new requirements regarding the posting of account agreements. Additionally, the final rule regulates overdraft credit features that may be offered in conjunction with prepaid accounts. Subject to certain exceptions, such credit features will be covered under Regulation Z where the credit feature is offered by the prepaid account issuer, its affiliate, or its business partner and credit can be accessed in the course of a transaction conducted with a prepaid card.
~Page 6~ CFPB Prepaid Accounts Rule, cont d. Except for the rule requiring submission of prepaid account agreements to the CFPB, the rule is effective October 1, 2017. Overview The final rule s definition of prepaid accounts specifically includes payroll card accounts and government benefit accounts that are currently subject to Regulation E. In addition, it covers accounts that are marketed or labeled as prepaid that are redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or are usable at automated teller machines (ATMs). It also covers accounts issued on a prepaid basis or capable of being loaded with funds, whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, or at ATMs, or to conduct person-to-person (P2P) transfers, and are not checking accounts, share draft accounts, or negotiable order of withdrawal (NOW) accounts. The final rule adopts a number of exclusions from the definition of prepaid account, including gift cards and gift certificates; accounts used for savings or reimbursements related to certain health, dependent care, and transit or parking expenses; accounts used to distribute qualified disaster relief payments; and the P2P functionality of accounts established by or through the United States government whose primary function is to conduct closed-loop transactions on U.S. military installations or vessels, or similar government facilities. Pre-Acquisition Disclosures The final rule establishes pre-acquisition disclosure requirements specific to prepaid accounts. Under the final rule, financial institutions must generally provide both a short form disclosure and a long form disclosure before a consumer acquires a prepaid account. The final rule provides guidance as to what constitutes acquisition for purposes of disclosure delivery; in general, a consumer acquires a prepaid account by purchasing, opening, or choosing to be paid via a prepaid account. The final rule offers an alternative timing regime for the delivery of the long form disclosure for prepaid accounts acquired at retail locations and by telephone, provided certain conditions are met. For this purpose, a retail location is a store or other physical site where a consumer can purchase a prepaid account in person and is operated by an entity other than the financial institution that issues the prepaid account. The final rule also includes requirements to disclose certain information such as any purchase price or activation fee outside, but in close proximity to, the short form disclosure, disclosures required to be printed on the prepaid card itself, and short form and long form disclosure requirements for prepaid accounts with multiple service plans. The final rule requires financial institutions to provide pre-acquisition disclosures in a foreign language if the financial institution uses that same foreign language in connection with the acquisition of a prepaid account in certain circumstances. The financial institution must also provide the long form disclosure in English upon a consumer s request and on its website where it discloses this information in a foreign language. Access to Account Information The final rule adopts an alternative to Regulation E s periodic statement requirement that permits financial institutions to make available to consumers certain methods for accessing information about their prepaid accounts in lieu of sending periodic statements. The final rule also adopts a requirement that financial institutions provide summary totals of the fees they have assessed against the prepaid account on a monthly and annual basis. Limited Liability and Error Resolution Including Provisional Credit The final rule extends Regulation E s limited liability and error resolution requirements to all prepaid accounts, regardless of whether the financial institution has completed its consumer identification and verification process with respect to the account, but does not require provisional credit for unverified accounts. Once an account has been verified, the financial institution must comply with the provisional credit requirements, for both errors that occur prior to and
~Page 7~ CFPB Prepaid Accounts Rule, cont d. after account verification, within the provisional credit time frame. Submission and Posting of PrePaid Account Agreements Under the final rule, prepaid account issuers must submit their prepaid account agreements to the Bureau. The final rule also requires that prepaid account issuers publicly post on their own websites prepaid account agreements offered to the general public. Financial institutions must make any agreements not posted on their own websites available upon request for consumers who have prepaid accounts under those agreements. Remittance Transfers The final rule makes several revisions to the rules governing remittance transfers in Subpart B of Regulation E that are intended to continue the current application of those rules to prepaid products. Specifically, they clarify that for prepaid accounts other than payroll card accounts and government benefit accounts, the location of these accounts does not determine where funds are being sent to or from for purposes of application of the rules in Subpart B. They also clarify that the temporary exception allowing insured institutions to use estimates when providing certain disclosures does not apply to prepaid accounts, unless the prepaid account is a payroll card account or government benefit account. Overdraft Credit Features The final rule amends Regulations E and Z generally to regulate prepaid accounts that offer overdraft credit features. Specifically, the final rule generally covers under Regulation Z s credit card rules any credit feature offered in conjunction with a prepaid account where the credit feature is offered by the prepaid account issuer, its affiliate, or its business partner and credit can be accessed in the course of a transaction conducted with the prepaid card to obtain goods or services, obtain cash, or conduct P2P transfers. The final rule generally requires that such credit features be distinct from the asset portion of the prepaid account structured as a separate credit account or a credit sub-account to the asset account to facilitate transparency and compliance with various Regulation Z requirements. The final rule uses the term hybrid prepaid-credit card to refer to a prepaid card that can access both an overdraft credit feature that is subject to the Regulation Z credit card rules and the asset portion of a prepaid account. An issuer may not extend credit via a negative balance on the prepaid account except in several limited circumstances where the credit is incidental and the issuer generally does not charge credit-related fees for that credit. In these circumstances, the incidental credit is not subject to Regulation Z. These exceptions for incidental credit cover situations where the issuer has a general established policy and practice of declining to authorize transactions when the consumer has insufficient or unavailable funds to cover the transaction, but credit is nonetheless extended as a result of socalled force pay transactions, transactions that will not take the account negative by more than $10 (i.e., a de minimis purchase cushion ), or certain transactions that are conducted while incoming deposits to the prepaid account are pending. The final rule s provisions regarding hybrid prepaid-credit cards are largely housed in new Regulation Z, Section 1026.61. To effectuate these provisions and provide compliance guidance to the industry, the final rule also amends certain other existing credit card provisions in Regulation Z. The final rule does not adopt the proposal s provisions that would have made certain account numbers into credit cards where the credit could only be deposited directly to particular prepaid accounts specified by the creditor. The final rule subjects overdraft credit features accessible by hybrid prepaid-credit cards to various credit card rules under Regulation Z. For open-end products, this includes rules restricting certain fees charged in the first year after account opening, limitations on penalty fees, and a requirement to assess a consumer s ability to pay. In addition, the final rule requires issuers to wait at least 30 days after a prepaid account is registered before soliciting a consumer to link
CFPB Prepaid Accounts Rule, cont d. ~Page 8~ a covered credit feature to the prepaid account and to obtain consumer consent before linking such a credit feature to a prepaid account. The final rule permits issuers to deduct all or a part of the cardholder s credit card debt automatically from the prepaid account or other deposit account held by the card issuer no more frequently than once per month, pursuant to a signed, written authorization by the cardholder to do so, and requires that issuers allow consumers to have at least 21 days to repay the debt incurred in connection with using such features. It also amends the compulsory use provision under Regulation E so that prepaid account issuers are prohibited from requiring consumers to set up preauthorized electronic fund transfers (EFTs) to repay credit extended through an overdraft credit feature accessible by a hybrid prepaid-credit card. TRID Clarifications and Revisions The Consumer Financial Protection Bureau (CFPB or Bureau) published a proposed rule to implement informal guidance and make technical amendments regarding the rules and guidance on the TILA-RESPA integrated disclosure. The proposed amendments memorialize the Bureau s informal guidance on various issues and include clarifications and technical amendments. The Bureau also proposed tolerance provisions for the total of payments, extension of coverage of the integrated disclosure requirements to all cooperative units, and guidance on sharing the disclosures with various parties involved in the mortgage origination process. Acceptance of Private Flood Insurance The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of Currency (OCC), and National Credit Union Administration (NCUA) recently issued a joint proposal to amend their regulations regarding loans in areas having special Update on Recent Proposed Rules flood hazards to implement the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act). Specifically, the proposed rule would require regulated lending institutions to accept policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act and permit regulated lending institutions to accept flood insurance provided by private insurers that does not meet the statutory definition of private flood insurance on a discretionary basis, subject to certain restrictions. In addition, the agencies included in the proposed rule a compliance aid provision, which would allow institutions to rely upon certain criteria in assisting institutions in accepting private flood insurance. Comments to the proposed rule must be received on or before January 7, 2017. Payday, Vehicle Title, High- Cost Installment Loans The CFPB proposed consumer protection regulations for payday loans, vehicle title loans, and certain high-cost installment loans (81 FR 47864). Two types of loans would be covered (subject to a number of exceptions): Short-term loans that have terms of 45 days or less, and Longer-term loans with terms of more than 45 days that have: a total cost of credit that exceeds 36 percent; and either a lien or other security interest in the consumer s vehicle or a form of leveraged payment mechanism that gives the lender a right to initiate transfers from the consumer s account or to obtain payment through a payroll deduction or other direct access to the consumer s paycheck. The proposed rule focuses on practices involving consumers ability to repay their loans and other practices related to withdrawing payments from consumers accounts.
TILA: Annual Threshold Adjustments ~Page 9~ The Consumer Financial Protection Bureau (CFPB) and, as applicable, the other federal banking agencies, have published final rules amending regulations that implement the Truth-in-Lending Act (TILA). With respect to the following rules, thresholds and dollar amounts are required to be adjusted annually by the annual percentage change reflected in the Consumer Price Index (CPI). 2017 Truth-in-Lending/ Regulation Z Exemption Threshold Certain consumer credit transactions are exempt from Regulation Z requirements. Among others, consumer loans above a certain dollar threshold will be exempt. This exemption does not apply to private education loans or loans secured by real property or a principal dwelling. The exemption threshold will remain at $54,600 for 2017. 2017 Points and Fees Threshold Revision For 2017, the points and fees thresholds for the High-Cost Mortgage and Ability-to-Repay rules were adjusted to the amounts shown in the chart to the right. 2017 HPML Appraisal Exemption If a transaction is a higher-priced mortgage loan under Section 35, then the transaction must comply with certain appraisal requirements. However, among other loan types, transactions of $25,000 or less are exempted from these requirements. This loan amount is to be adjusted annually based on any annual percentage increase in the CPI. Based on the CPI-W in effect as of June 1, 2016, the exemption threshold will remain at $25,500 through December 31, 2017. 2017 Credit Card Accountability and Disclosure Act of 2009 Pursuant to the CARD Act, Regulation Z was amended to establish new requirements with respect to open-end consumer credit plans, including requirements for the disclosure of minimum interest charge amounts and the establishment of a safe harbor provision allowing card issuers to impose penalty fees for violating account terms without violating the restrictions on penalty fees established by the CARD Act. Specifically, for open-end consumer credit plans under the CARD Act, the threshold that triggers requirements to disclose minimum interest charges will remain unchanged in 2017. The adjusted dollar amount for the safe harbor for a first violation penalty fee will remain unchanged at $27 in 2017; the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will remain unchanged in 2017 from the corrected amount of $38 applicable in 2016. 2017 Consumer Leasing Act/ Regulation M Exemption Threshold Certain consumer leasing transactions are exempt from Regulation M requirements. Currently, if the lessee s total contractual obligation under the lease exceeds $54,600, the Consumer Leasing Act and Regulation M do not apply. The exemption threshold will remain at $54,600 through December 31, 2017. High-Cost Mortgage (12 CFR 1026.32) LOAN AMOUNT TOTAL POINTS AND FEES EXCEED $20,579 or more 5% of Total Loan Amount < $20,579 The lesser of 8% of the Total Loan Amount or $1,029 Ability-to-Repay (12 CFR 1026.43) LOAN AMOUNT TOTAL POINTS AND FEES EXCEED $102,894 or more 3% of Total Loan Amount $61,737 but less than $102,894 $3,087 $20,579 but less than $61,737 $12,862 but less than $20,579 $1,029 5% of Total Loan Amount < $12,862 8% of Total Loan Amount
CFPB Reissues Guidance on Service Providers ~Page 10~ On October 31, 2016, the Consumer Financial Protection Bureau (CFPB or Bureau) reissued its guidance on service providers, formerly titled CFPB Bulletin 2012-03: Service Providers, on it s website as Compliance Bulletin and Policy Guidance 2016-02, Service Providers. This Guidance applies to supervised banks and non-banks supervised by the CFPB. The CFPB recognizes that the use of service providers is often an appropriate business decision for these entities. Supervised banks and nonbanks may outsource certain functions to service providers due to resource constraints, use service providers to develop and market additional products or services, or rely on expertise from service providers that would not be otherwise as a means without significant investment. However, working with a service provider does not absolve the supervised bank or nonbank of responsibility for complying with federal consumer financial law to avoid consumer harm. A service provider that is not familiar with the legal requirements applicable to the products or services offered or that does not implement those requirements effectively, can harm consumers and create potential liabilities for both the service provider and the entity. To limit the potential for statutory or regulatory violations and related consumer harm, supervised banks and nonbanks should take steps to ensure that their business arrangements with service providers do not present unwarranted risks to consumers. These steps should include, but are not limited to: Conducting thorough due diligence to verify that the service provider understands and is capable of complying with federal consumer financial law; Requesting and reviewing the service provider s policies, procedures, internal controls, and training materials to ensure the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities; Including in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities, including engaging in unfair, deceptive, or abusive acts or practices; Establishing internal controls and monitoring to determine whether the service provider is complying with federal consumer financial law; and Taking prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate. For more information pertaining to the responsibilities of a supervised bank or nonbank that has business arrangements with service providers, please review the CFPB s Supervision and Examination Manual: Compliance Management Review and Unfair, Deceptive, and Abusive Acts or Practices. The new guidance clarifies that the depth and formality of the risk management program for service providers may vary depending upon the service being performed, its size, scope, complexity, importance and potential for consumer harm and the performance of the service provider in carrying out its activities in compliance with federal consumer financial laws and regulations. For more information, visit the CFPB s website at: www. consumerfinance.gov/policy-compliance/guidance/ implementation-guidance/ compliance-bulletin-and-policy-guidance-2016-02-service-providers.
FDIC Issues Affordable Mortgage Lending Guide ~Page 11~ The Federal Deposit Insurance Corporation (FDIC) recently published the Affordable Mortgage Lending Guide to help make community banks aware of the wide range of mortgage products available to them. In many areas, community banks play an important role in meeting the demand for mortgage credit. The programs outlined in the Guide can provide community banks with additional pathways to provide homeownership opportunities for creditworthy borrowers in their communities, especially those with affordability challenges. These programs may also provide business opportunities for community banks seeking prudent, sustainable financial products to incorporate into their mortgage business line. The FDIC hopes this Guide will provide useful information to assist bankers in considering options to serve their communities. For more information about the Affordable Mortgage Lending Guide visit the FDIC s website at: www.fdic.gov/consumers/community/mortgagelending/guide.html. Summary of Recent Fair Lending Complaints Following is a summary of recent allegations involving various fair lending violations. Charter Bank (September 2016) The Department of Justice announced that Charter Bank of Corpus Christi, Texas, will maintain uniform pricing policies and pay more than $165,000 as part of a settlement to resolve allegations that it engaged in a pattern or practice of discrimination on the basis of national origin. The complaint alleges that Charter violated the Equal Credit Opportunity Act (ECOA) between 2009 and 2014 by charging higher interest rates to Hispanic borrowers than to similarly situated non-hispanic borrowers on vehicle-secured consumer loans. The discrimination affected approximately 500 loans made through the bank s branches. A vehicle-secured consumer loan allows a customer to borrow from the bank by tapping the equity in a car the customer already owns. The complaint alleges that the discrimination occurred because Charter gave its employees discretion to adjust interest rates upward or downward by approximately three percentage points, which was not based on the borrower s credit risk. Under the settlement, Charter will pay $165,820 to Hispanic victims of discrimination, monitor its loans for potential disparities based on national origin and provide equal credit opportunity training to its employees. Prior to the settlement, Charter revised its loan pricing policies to include objective, non-discretionary and non-discriminatory standards for determining interest rates for consumer loans. This settlement requires Charter to maintain the revised policies for at least four years. BancorpSouth (June 2016) The Consumer Financial Protection Bureau (CFPB) and the DOJ made the following allegations against BancorpSouth: Illegally redlined in Memphis. The complaint alleged that from at least 2011 to 2013, BancorpSouth illegally redlined in the Memphis area the market from which the bank received the most applications by structuring its business to avoid and discourage consumers in minority neighborhoods from accessing mortgages. Specifically, the agencies alleged that the bank placed its branches outside of minority neighborhoods, excluded nearly all minority neighborhoods from the area it chose to serve under the Community Reinvestment Act, and directed nearly all of its marketing away from minority neighborhoods. As a result, BancorpSouth generated relatively few applications from minority neighborhoods as compared to its peers. Discriminated in underwriting certain mortgages. The agencies also alleged that one of BancorpSouth s lending units discriminated against African-American applicants by denying them mortgage loans including loans with consumer as well as business purposes more often than similarly situated white applicants. Specifical-
~Page 12~ Summary of Recent Fair Lending Complaints, cont d. ly, the agencies alleged that BancorpSouth granted its employees wide discretion to make credit decisions on mortgage loans. This discretion resulted in African-American applicants being denied certain mortgages at rates more than two times higher than expected if they had been white. Discriminated in pricing certain mortgage loans. The agencies also alleged that one of BancorpSouth s lending units discriminated against African-American borrowers that it did approve by charging them higher annual percentage rates than white borrowers with similar loan qualifications. Specifically, the agencies allege that Bancorp- South granted its employees wide discretion to set the prices of mortgage loans. This discretion resulted in African-American borrowers paying significantly higher annual percentage rates than similarly situated white borrowers, costing African-American consumers hundreds of dollars more each year they held the loan. Implemented an explicitly discriminatory denial policy. The complaint alleged that BancorpSouth required its employees to deny applications from minorities and other protected class applicants more quickly than those from other applicants and not to provide credit assistance to borderline applicants, which may have improved their chances of getting a loan. The bank generally permitted loan officers to assist marginal applicants, but the explicitly race-based denial policy departed from that practice. An audio recording of a 2012 internal meeting at BancorpSouth clearly articulates this discriminatory policy, as well as negative and stereotyped perceptions of African Americans. As part of its investigation, the CFPB sent testers to several BancorpSouth branches to inquire about mortgages, and the results of that testing support the CFPB and DOJ allegations. The agencies allege that, in several instances, a BancorpSouth loan officer treated the African-American tester less favorably than a white counterpart. Specifically, the complaint alleges that BancorpSouth employees treated African-American testers who sought information about mortgage loans worse than white testers with similar credit qualifications. For example, BancorpSouth employees provided information that would restrict African-American consumers to smaller loans than white testers. This is the CFPB s first use of testing, sometimes referred to as mystery shopping, to support an allegation of discrimination. Other government agencies, including the DOJ and the Department of Housing and Urban Development, as well as fair housing organizations, have used testers for decades as a method of identifying discrimination. Courts have long recognized testing as a reliable investigative tool. Hudson City (September 2015) The complaint alleged that from at least 2009 to 2013, Hudson City illegally redlined by providing unequal access to credit to neighborhoods in New York, New Jersey, Connecticut, and Pennsylvania. Specifically, Hudson City structured its business to avoid and thereby discourage residents in majority-black-and-hispanic neighborhoods from accessing mortgages. According to the complaint, Hudson City illegally avoided and thereby discouraged consumers in majority-black-and-hispanic neighborhoods from applying for credit by: Placing branches and loan officers principally outside of majority-black-and-hispanic communities; Selecting mortgage brokers that were mostly located outside of, and did not effectively serve, majority-black-and-hispanic communities; Focusing its limited marketing in neighborhoods with relatively few Black and Hispanic residents; and Excluding majority-black-and-hispanic neighborhoods from its credit assessment areas.
Summary of Recent UDAP/UDAAP Complaints Following is a summary of recent allegations involving unfair, deceptive, or abusive acts or practices. CFPB/Navy Federal Debt Collection/Access to Accounts (October 2016) The Consumer Financial Protection Bureau (CFPB) alleged that Navy Federal: Contacted hundreds of thousands of consumers by letter or phone expressly or impliedly threatening to take legal action on their delinquent accounts, when the credit union only filed 5,000 debt collection lawsuits during this period. Therefore, the CFPB determined Navy Federal s threats to sue were deceptive as they lacked intent to sue. Deceptively threatened to contact some consumer s/ servicemember s commanding officers about their delinquent account when it lacked effective borrower consent to do so. Deceptively advising consumers they could improve their credit scores or ability to access credit without any basis to make such assertions. Had an unfair practice of freezing consumers ability to access their electronic accounts and disabling certain electronic services after they became delinquent. CFPB/OCC/Wells Fargo Creation of Deposit and Credit Card Accounts (September 2016) The CFPB and the Office of the Comptroller of the Currency (OCC) alleged that Wells Fargo: Opened nearly 1.5 million deposit accounts potentially unauthorized by consumers and transferred funds from consumers authorized accounts. Applied for about 565,000 credit card accounts that may not have been authorized by consumers. Requested and issued debit cards without consumers knowledge or consent. Created phony email addresses to enroll consumers in online banking services without their knowledge or consent. Developed an incentive compensation program misaligned with local branch traffic, staff turnover, or customer demand. Failed to establish an enterprise-wide sales practices oversight program to prevent and detect unsafe or unsound sales practices, or mitigate the risks resulting from such sales practices. Failed to establish a comprehensive customer complaint monitoring process assessing customer complaint activity across the bank; adequately monitor, manage and report on customer complaints; and analyze and understand the potential sales risk. OCC/HSBC Bank USA, N.A. Add-On Products (March 2016) The Banks and a credit protection product vendor, on behalf ~Page 13~ of the Banks, marketed and sold CreditKeeper, a credit protection product, to customers of the Banks. The CreditKeeperr product included credit monitoring services. The OCC alleged: Customers of the Banks who enrolled in the CreditKeeper product were required to provide sufficient personal verification information and consent before their credit bureau reports could be accessed. Customers of the CreditKeeper product were provided the materials necessary to submit this information and consent. Customers could not receive the credit monitoring services of the CreditKeeper product in which they were enrolled until the information and consent were submitted. The Banks, through their vendors, billed CreditKeeper customers for the full fee of the product, even though not all customers were receiving the credit monitoring services of the product. The Banks retained a portion of the fees paid by the CreditKeeper customers, including fees paid by customers who were not receiving the credit monitoring services. FDIC/Comenity Capital Bank (September 2015) The Banks offer credit cards through various retailers nationwide that are typically co-branded with these retailers. For these cards, the banks offer Account Assure and Account Assure Pro, which
~Page 14~ Summary of Recent UDAP/UDAAP Complaints, cont d. are payment protection/debt cancellation add-on products to the credit cards. The products allow consumers who enroll to request certain benefit payments following specific life events including, but not limited to, involuntary unemployment and disability. The FDIC determined the Banks violated Section 5 by, among other things: Representing to consumers they would not be charged a fee for the products if their accounts had no balances, but charging fees to consumers in those circumstances. Making material misrepresentations and omissions regarding the refund process for consumers cancellations of the products within the first 30 days of enrollment. Making material misrepresentations and omissions regarding the conditions for receipt of the gift cards or account statement credits offered as incentives for enrolling in the products. Revised Interagency CRA Questions and Answers The Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation (the Agencies) adopted final revisions to the Interagency Questions and Answers Regarding Community Reinvestment (Q&As). These revised Q&As address alternative systems for delivering retail banking services, community development-related issues, and qualitative aspects of performance, including innovative or flexible lending practices and the responsiveness and innovativeness of an institution s loans, qualified investments, and community development services. The Agencies clarified nine of the ten proposed Q&As, revising four existing Q&As for consistency, and adopting two new Q&As. The Agencies did not adopt one of the proposed revisions to guidance that addressed the availability and effectiveness of retail banking services. The Agencies have also made technical corrections to update cross-references and removed obsolete references related to the Office of Thrift Supervision. The final revised Q&As were effective July 25, 2016 and are available on the FFIEC s website at: www.ffiec.gov/ cra/. 2017 HMDA Data Collection Changes Reviewed The Federal Financial Institutions Examination Council (FFIEC) has issued a statement to help financial institutions in preparation to collect HMDA data in 2017, for submission beginning in 2018. The statement highlights one of the changes to the HMDA submission process described in the Filing Instructions Guide for HMDA Data Collected in 2017 (FIG). Beginning with HMDA data collected in 2017, filers will submit their HMDA data to the Consumer Financial Protection Bureau (CFPB) using a web interface known as the HMDA Platform. HMDA filers will interact directly with the HMDA Platform to file their HMDA data. Information regarding the HMDA Platform can be found at: www. consumerfinance.gov/hmda/ for-filers. It is recommended that HMDA filers use a modern browser, such as the latest version of Google Chrome or Mozilla Firefox, Internet Explorer 11, Microsoft Edge, or other modern browsers when accessing the HMDA Platform. The following submission methods will not be permitted for data collected in or after 2017: PC Diskette and CD-ROM; Submission via Web (from the Data Entry Software (DES));
~Page 15~ 2017 HMDA Data Collection Changes Reviewed, cont d. E-mail to HMDASUB@FRB. GOV; nor Paper submissions. It s important to note that the data entry software (DES) currently provided by the FFIEC will no longer be available as a method of data entry or data submission for HMDA data. Some institutions, particularly those with small volumes of reported loans, that currently manually enter each loan into the DES for submission will need a software solution to create an electronic file that will be compatible to be submitted to the new HMDA Platform. Many solutions are available to credit this electronic file, such as: A financial institution s current Loan Origination Software (LOS) may meet this need. Software commonly available on desktop computers, such as Microsoft Access or Excel, may also be used for data entry and formatting. The CFPB will provide a Microsoft Excel HMDA Loan/ Application Register (LAR) data entry formatting tool. Beginning with the data collected in 2017, financial institutions will submit data collected in a pipe delimited text file (.txt). Data fields will be separated by a pipe character,, and will not be a fixed length, meaning zeros will not need to be added for the sole purpose of making a data field a specific number of characters. The CFPB s data entry formatting tool will help filers enter and format their HMDA data into a pipe delimited text file required to submit the data to the CFPB s HMDA Platform. It is expected this tool will be available for filers in early January 2017. The FFIEC encourages HMDA filers that use vendor software to prepare their HMDA data for submission to contact their vendor to confirm their software will format HMDA data collected in 2017 according to the new specified requirements. The specified requirements are included in Section 3 of the FIG document. These new requirements include the creation of the pipe delimited text file that may be uploaded to the HMDA Platform. HMDA filers should also reference Section 2 of the FIG for information on additional changes to the filing process, such as: The agency with which you file your HMDA data has changed. Financial institutions will file HMDA data collected in or after 2017 with the CFPB beginning January 1, 2018. The HMDA agencies have agreed that filing HMDA data collected in or after 2017 with the CFPB will be deemed submission to the appropriate Federal agency. The agency to which you file resubmissions of your HMDA data has changed. A resubmission means that you have already filed your HMDA submission and received a confirmation receipt, but you are submitting again. Beginning with data collected in 2017, filers will resubmit their HMDA data by filing with the CFPB. Text entries in alphanumeric fields do not need to use all uppercase letters with the exception of NA used when the reporting requirement is not applicable and two-letter state codes. The process by which you validate the edit report has changed. Financial institutions must address all edits prior to submitting their HMDA data collected in or after 2017. The edit report will be web-based and will be viewed and can be downloaded from the HMDA Platform. Beginning with the data collected in 2017, as part of the submission process, an authorized representative of your institution with knowledge of the data submitted shall certify to the accuracy and completeness of the data submitted.