Bill Elliott, Senior Consultant, Manager of Compliance Services

04/2010

The compliance “hot topic” for 2009 was lending related. With the difficulties experienced in the markets, and the blame game that appears to be ongoing regarding the mortgage and foreclosure crisis, bankers experienced major changes in the steps required for making new mortgage loans. The mortgage loan pain is not over. Bankers can expect additional changes over the next 12-18 months. The following is a brief synopsis of additional lending issues that bankers will face in 2010 and beyond.

Higher Priced Mortgage Loans
In the world of mortgage lending, beginning April 1, 2010 for closed-end first mortgage loan applications of all types, banks will be forced to impose escrow for at least one year if the resulting loan is classified as a higher priced mortgage loan (HPML). For applications dated October 1, 2010 or later, banks will be forced to impose escrow for mobile home loans that are classified as an HPML. This may result in banks deciding to leave the mobile home loan business. Most standard first mortgages are not HPMLs; however, I cannot conceive of a bank approving a rate for a mobile home loan without it being an HPML.

Closed-End Credit
Additional closed-end changes are on the horizon. The Federal Reserve Board issued a massive proposal to change Regulation Z for mortgage loans. The comment period ended on December 31, 2009, so we can expect a 2010 release, with probably a 2011 implementation. Among other things, they are proposing changing the rules regarding finance charge, changing the current one-page truth in lending into at least a two-page document that will look much different than the current document, and requiring delivery of the final truth in lending three days prior to closing.

Open-End Credit
On the open-end credit side, banks faced an initial round of changes in the credit card rules in 2009, with some changes becoming effective on February 22, 2010, and additional changes slated for July 1, 2010 and August 22, 2010. There are also changes slated for HELOC loans as of July 1, 2010, as well as HELOC changes that will be a part of the Regulation Z release discussed in the previous paragraph.

With all of the changes, the regulators do not appear to be considering those institutions that may not use sophisticated computer loan document generation systems. With the tremendous breadth of these changes, banks that do not have the hardware and software to develop these documents may find themselves in a very difficult situation.

Regulation E
On the deposit operations side, banks are facing a mid-year Regulation E change that will limit the ability to charge overdraft fees for ATM and point of sale (POS) purchase transactions. If you wish to charge these fees, you must get a customer “opt-in.” If you do not get them to opt in, then you will be forced to either permit overdrafts at ATM and POS without charge, or you can reject the transaction. At that point, you can be sure that the customer will call screaming that you “did this to them” – even though they did not bother to read the information you sent them about opt¬ing in.

FACT Act
In the midst of these changes, the regulators have finally completed work on the remaining FACT Act items that were to be in place statutorily by 2004. The three changes are in the areas of accurate reporting to the credit bureaus (which hopefully will not create much work beyond preparing a policy and procedures); the direct bank handling of customer complaints regarding credit ratings; and, at the first of 2011, the requirement that the bank has to provide more credit score information to customers.

Compliance Review – We Can Help
As you can see, there are many issues to address. In addition to the absolute slowing of your mortgage pipeline, and the resulting customer upset, your back-end costs will increase. Whether you perform a compliance review for mortgage loans internally or hire third parties to perform this function, you can expect increases in costs. To perform a complete file review, the reviewer will have to look at all of the various timing rules to determine if the bank was in compliance. And whether internal or external, time is money.

Young & Associates, Inc. has expanded our compliance staffing as we prepare to assist banks facing these long lists of changes. Should you feel the need for any assistance, feel free to call 1.800.525.9775, or you can e-mail me directly at bille@younginc.com. We wish you all the best of luck – you may need it.

Bill Elliott, Senior Consultant, Manager of Compliance Services

12/2009

In the compliance department here at Young & Associates, Inc., we have recently been teaching a seminar to assist banks in coping with the regulatory overload. Every bank and financial institution is facing severe stress trying to keep up with the changes, and the seminar is an attempt to put the changes in chronological order. This allows bankers to assure that they have not missed anything for changes already in place, and helps them prepare for future changes. We knew that the list of issues would be fairly long, but were surprised when our final list of “compliance” issues from January 1, 2009 through 2010 (including proposed changes) resulted in 31 items.

Truth in Lending and RESPA
Clearly, the Truth in Lending and Real Estate Settlement Procedure Act changes are the most confusing to banks and will be confusing to customers. While we applaud the intent of the changes – that is, no one gets to the closing table and is “surprised” at the amount of the check that they have to write – the execution requires that the bank, in some cases, give RESPA-related disclosures that are inaccurate. You will know that they are inaccurate, but they will be legal. At the time of this writing, the U.S. Department of Housing and Urban Development has issued at least 3 versions of “frequently asked questions” regarding the new Good Faith Estimate and HUD-1 forms and rules. In making the decisions that lie ahead, we recommend that management consider these questions and answers, knowing full well that much more regulation is sure to follow.

Bank Resources
As your bank tries to cope with this nightmare, we strongly recommend that management review the requirements of all changes, and make sure that there are sufficient resources allocated to assure appropriate and timely implementation. In making decisions regarding the allocation of resources, management should consider not only human resources, but also technological resources. The changes that are on the way (especially the proposed Regulation Z changes that will likely come out in 2010) will require that the bank consider purchasing new software or paying for a major upgrade to current software.

Impact on Customers
In seminars of late, I have been suggesting that we are heading toward regulatory Nirvana. We reach this regulatory Nirvana when financial institutions will no longer actually be able to close a loan. While that is an attempt at humor, banks will need to consider the requirements of these new regulations not only in resolving internal issues, but also when considering the impact on the bank’s customer base. The reality is that the time between application and closing for real estate related loans will continue to increase, and educating your customer base regarding this may reduce customer dissatisfaction. The only “good news” is that all of your competitors are facing the same dilemma, and there will be no legal way for them to shorten the delay timing.

In Conclusion
Compliance is always an area of the bank that taxes bank resources without appearing to provide much reward. However, one of the facets of many of these new regulations is that the non-compliance penalties are increasing and, therefore, risk increases as well. The U.S. Congress and regulators appear to be on a track to make the punitive damages for non-compliance strong enough that bankers and others in the financial services industry take notice.
If we can be of any assistance with these transitions, please feel free to telephone us at 1.800.525.9775, or click here to send an Email. We wish you all the best of luck as you cope with these challenges.

Bill Gaidis, Consultant

10/2009

Since the beginning of this year, banks have been buried in new federal regulations. Every week has brought something new that a bank will have to put in place, often, it seems, with little warning.

Here is a partial list of recent regulatory changes:

• Regulation Z: Closed-end; Changes in coverage; Early TIL; Disclosure delivery; Dis¬closure timing; When you can close; When you can collect fees; HOEPA; Higher priced mortgage loans and documenting ability to repay; Mandatory escrow; Reg¬ular homes and manufactured housing; Open-end disclosures; 21-day timing of statements; 45-day timing for notification of changes; New appraisal coercion rules; New adverting rules; New commentary
• RESPA: GFE changes; HUD changes; Escrow changes; Ac¬count analysis
• BSA: Exemptions – rules relaxed; Guidance on 314(b) information sharing; MSB registration list
• Reg D: Changes in reserve re¬quirements; Relaxation of the 3 transaction limit on checks pay¬able to third parties
• Reg CC: Combining check pro¬cessing districts; In November 2008, the Fed announced that it had altered its restructuring plan substantially to ultimately make the Cleveland office the single paper check processing and ad¬justments site, and the Atlanta of¬fice the single electronic check processing site for the Federal Reserve System.
• Servicemembers Civil Relief Act: The protection given to service members in terms of the amount of time they have to respond to a proceeding or foreclosure is ex¬tended from 90 days to 9 months after they leave military ser¬vice. These changes are in effect through December 31, 2010.
• Flood: Final Revised Interagency Q & A
• Appraisals: 2008 code of conduct; Appraiser independence; Reg Z ap¬praiser coercion – new rules
• FCRA: Accuracy of information re¬ported to credit bureaus; FAQs on ID theft rules; Technical correc¬tions; FTC “Red Flags Website”
• Proposed SAFE Act: A national reg¬istry of mortgage originators – fin¬gerprint requirements
• FTC proposal to curb unfair and deceptive mortgage practices
• Federal Reserve proposal to change disclosure for closed-end mortgages and HELOCs

Conclusion
Each of these new or proposed regulations will affect different departments in your bank, and to comply, you may have to change processes, procedures, and checklists; train the appropriate personnel; and develop audit or process tracing techniques to make sure you are in compliance.

This task can be mammoth; you have a bank to run. One solution is to involve some outside experts that can help you make the changes, train the appropriate personnel, and then leave.

Young & Associates, Inc. has a dedicated staff of compliance consultants that specialize in regulatory compliance. We can help. Give us a call at 1.800.525.9775.

Don L. Blaine, Consultant

05/2009

Fair Lending issues were at the top of everyone’s agenda earlier this decade, but the Department of Justice’s (DOJ) last major consent order was in 2007 and did not involve real estate loan products. Who knows where the banking regulatory agencies will concentrate their 2009 efforts with a new administration in Washington and public angst over the subprime meltdown?

Could the next focus be in areas like loan modifications or collection efforts on troubled loans? It’s conceivable as the banking regulatory agencies realize that many such programs were likely cobbled together at the last moment and have yet to face any regulatory scrutiny. Are you absolutely sure that your bank offers loan modifications to minority borrowers as frequently as to non-minorities, or to female borrowers as regularly as to male borrowers? Are your foreclosure rates higher for whites or minorities? For females or males? Your friendly federal banking examiner likely will expect you to have this knowledge at your fingertips, and if you don’t have it, they likely will dissect your files and provide it to you along with a request that you explain any discrepancies.

Remember that the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B state that “a creditor shall not discriminate …” regarding ANY part of a credit transaction. The “ANY” covers the applicant from the time the bank first advertises for a loan product to the time that they have paid off the loan 30 years later. This is the “cradle to grave approach.” Collection efforts, loan modifications, payment extension on consumer loans – it’s all covered by Regulation B and your bank had better be gender and race neutral in all functions that impact your applicants, as well as your loan borrowers.

What Are The Regulators Looking For?
Your federal banking regulatory agency has general regulatory authority over your bank and monitors you for compliance with the ECOA as well as the Fair Housing Act (FHA). The ECOA requires these banking regulatory agencies to refer matters to the Justice Department (DOJ) when there is reason to believe that a creditor is engaged in a pattern or practice of discrimination which appears to violate the ECOA. My guess is that every bank ever referred to the DOJ did not think they were engaged in any of these patterns or practices.

These regulatory agencies also may refer to the DOJ matters involving an individual incident of discrimination. Setting the threshold at one seems to be harsh, but it’s up to your regulator and the DOJ, not the bank, to decide. The bad news is that the banking regulatory agencies must refer evidence of discrimination they may uncover to the DOJ or HUD even when discovered through a lender’s self-testing effort. However, the good news is that voluntary identification and correction of violations disclosed through a self-testing program will be a substantial mitigating factor in considering what further actions might be taken by the DOJ or your banking regulatory agency. The latter is absolutely the lower risk alternative in that the DOJ never loses a case and the best a bank can hope for is a consent judgment or a referral back to the banking regulatory agency.

Fair Lending Risk Assessment
It is important to ensure that your bank has an effective fair lending risk assessment program that is integrated into your bank’s overall risk management process. Your fair lending program should examine all of your bank lending products and document how the institution identifies, measures, controls, and monitors lending activities. Remember the examiner’s mantra – “if is isn’t documented, it wasn’t done.” This program will help evaluate how well your bank complies with fair lending laws and regulations, supervisory expectations, and your bank’s own policies and procedures. The banking regulatory agencies are as concerned about whether your actual practices conform to your own written loan policies and procedures as they are that you are meeting the letter of the law from the ECOA and the FHA.

Don’t simply concentrate on race or gender, even though these are obviously important. Marital status, age, national origin, ethnicity, familial status, etc., are also on the examiners radar, so risk rate the 11 protected classes listed either in the ECOA or the FHA given your bank’s demographics and start your assessment. Guidance distributed by the banking regulatory agencies has discussed alternative means that an institution may use to discover uneven customer service or inconsistent lending practices that may be considered discriminatory. Regulators expect financial institutions to have a system in place to periodically compare the treatment of loan applicants and borrowers to identify differences and correct potential problems. Remember – if it’s broken, they do expect you to fix it.

Need Help?
Having trouble getting started with your fair lending self assessment or worried about the lack of independence in this assessment because the only people in your bank qualified to do such an assessment are also involved in either the lending, underwriting, or second review process? Give us a call. Young and Associates, Inc. offers a fair lending assessment that is modeled after the Interagency Fair Lending Examiner Guidelines, and you know how much the examiners appreciate it when you use the guidelines they have shared with you. Our assessment includes the following:

Review of your written ln policies

Determination of whether your bank’s actual practices are coucted in accordance with these written loan policies

Comparative file analysis of marginal applicants (this alysis will also show that your bank may be denying some otherwise creditworthy loan prospects and the extra credit business may pay for the assessment)

Technical review of any and all of the requirements in Regulati B

For more information on this article or how Young & Associates, Inc. can assist your bank with a Fair Lending Assessment, give us a call at 1.800.525.9775 or click here to send an Email.

Jim Lawrence of Lawrence Victoria Insurance

01/2009

Ten Percent of mortgage loans are uninsured

As current marketplace conditions continue to increase the risk in lenders mortgage real estate portfolio, more and more lenders are deciding to partner with a professional insurance tracking firm to manage their flood and hazard insurance monitoring functions. It is estimated that currently as many as 10% of all mortgage loans do not have insurance. That compares with an historical average of between 2% and 3%.

Many banks recognize managing the process of insurance monitoring/renewal might be managed more efficiently by a professional insurance servicing firm. The reasons for this are simple:

More Effective- Professional service firms have designed systems that manage the insurance monitoring and warning letter cycles more efficiently than a bank. Lender systems were not designed to monitor insurance and as a result may not be able to match insurance documents to loans by anything other than name. For the community based lender with a robust commercial portfolio containing multiple collateral and cross collateralized loans, this usually means that the servicing area is spending a great deal of time attempting to match flood and hazard insurance documents to the correct loan. On average, each piece of collateral generates six pieces of paper insurance correspondence each year the loan is on the books. Professional service firms have designed systems that provide superior tracking and response at a fraction of the cost of bank in-house systems.

Banks Not Made Aware- Increasingly, lenders are not made aware when borrower’s insurance lapses. More and more homeowner’s insurance companies are utilizing third party mail clearing houses to process and mail policy information, including cancellation notices. Even though the lender is unaware of an exposure it is not protected from a loss. The number of situations where lenders have incurred a significant financial loss because a borrower’s flood or hazard coverage was cancelled or had lapsed and the lender was never notified is increasing

More Efficient- As the cost of a Full Time Employee (FTE) increases, employee training and staffing remains a concern. Staffing employees to manually monitor insurance correspondence is expensive and a task most employees do not volunteer for. Turnover, vacations and “special projects” reduce the amount of time that is available for monitoring, corresponding and following up on the insurance requirements for each borrower. A community banker once told me that even with a full staff monitoring insurance manually, there will always be exposure simply due to the fact that lenders are not always notified when a borrowers insurance lapses.

Reducing Charge Off’s- When a borrower lets insurance on the real estate securing the loan cancel or expire, the lender experiences substantial exposure in the form of uninsured mortgaged real estate. In most cases, if the real estate securing the loan experiences a physical damage loss and is not insured, the borrower will stop making payments and foreclosure usually results. The lender then engages the expensive, difficult and undesirable process of foreclosure on a property that, due to uninsured physical damage, is worth much less than the loan balance. The result is a large charge-off for the lender which will decrease shareholder value.

Safety & Soundness/Compliance- Bank examiners have been instructed to closely scrutinize all procedures lenders have in place to guarantee that adequate proof of flood and hazard insurance exists for all mortgaged real estate. Their concern is not directed so much at proof of insurance requirements at loan closing, but rather making sure the lender has a comprehensive system in place to determine if the loan is exposed at any point after the loan closing.

Borrower Good Will - Force placed insurance is important not only for protecting the lender, but also the borrower. Although the responsibility to maintain insurance ultimately belongs to the borrower, most lenders understand the importance of securing insurance on behalf of their borrowers who neglect to do so themselves. This is especially the case with community and regional lenders who strive to provide exceptional service to their borrowers. When a borrower forgets to pay their insurance bill, has their insurance cancelled or non-renewed and experiences physical damage to their dwelling, they will appreciate that the lender secured insurance for them. Avoiding civil money penalties is of the utmost concern.

Consider a Tracking Partner- With this difficult environment; lenders should evaluate a third party insurance tracking system to monitor their loan portfolios. There are significant advantages that can be provided, including the transfer of risk away from the lender while maintaining administrative control.

Benefits of a Tracking Partner- when considering an insurance tracking partner, lenders should expect the plan to:

Monitor: Individual hazard, flood, auto and equipment insurance policies; Minimum coverage requirements; Residential, Commercial and HELOCS; Escrowed, Foreclosed and Bankruptcy

Provide: Automatic Coverage to protect all loans (E&O); Reduce administrative costs; Increase lender control and flexibility; Compliance peace of mind; Seamless Integration of flood zone determinations into a tracking system

Produce: Warning letters to borrowers; Insurance documents when necessary; Management reports both weekly and monthly; Specialty reports on demand

Cost benefit analysis: Reduce administrative expenses; Little direct cost to lender (low per loan tracking fee); No portfolio size or system restrictions; Compliance advantages, consistent approach to monitoring; Integrated flood zone determinations; Transfer the risk yet retain administrative control; Little or no programming.

For more information on insurance tracking, please contact Jamey Lawrence at jlawrence3@lawrencevictoria.com or 440-349-0775 Ext. 205

Bill Elliott, Senior Consultant and Manager of Compliance Services

11/2008

Whenever there is a perception that constituents have been the victims of financial services charlatans, we can always count on our government officials to produce additional restrictions and regulation on the industry. Although many in the financial services industry believe that at least part of the blame for the current foreclosure meltdown should be laid at the feet of customers who “should have known better,” the mortgage industry clearly made some horrific errors. There is plenty of blame to go around. But regardless of anyone’s opinion as to the causes of the foreclosure mess in which we are currently embroiled, you can be sure that additional regulation is not far behind.

Changes to RESPA
The US Department of HUD has officially updated the Real Estate Settlement Procedures Act (HUD’s Regulation X). It is effective January 16, 2009. A summary of the changes can be found at http://www.hud.gov/news/release.cfm?content=pr08-175.cfm. Details of these changes will be covered in the next issue of the 90 Day Note.

Changes to Regulation Z However, the Federal Reserve Board (Board) published final amendments to Regulation Z to establish new regulatory protections for consumers in the residential mortgage market on July 15, 2008.

While most regulations do not have a direct impact on your decision to offer some products and not others, the Board’s recent regulatory change will impact what you will be required to do regarding mortgage loans, and therefore may force banks to at least limit some product offerings. These new restrictions were adopted under the Truth in Lending Act. Some of the restrictions apply only to a new category of “higher-priced” mortgage loans, while others apply to all mortgage loans secured by a consumer’s principal dwelling.

Higher-Priced Mortgage Loans A “higher-priced mortgage loan” is defined as consumer-purpose, closed-end loans secured by a consumer’s principal dwelling and having an annual percentage rate (APR) that exceeds an APR calculated by the Board for a comparable transaction by at least 1.5 percentage points for first-lien loans, or 3.5 percentage points for subordinate-lien loans.

Until you have an opportunity to review your portfolio of consumer mortgage loans against this new index, it will be impossible to determine exactly how much impact will be generated by this new definition. The Board started publishing this rate in October 2008, which is a full year prior to the required implementation date. As a result, you will have at least several months to determine its overall impact, and your response.

These four rules apply to these higher-priced mortgage loans. The rules will:

Prohibit creditors from extending credit without regard to a consumer’s ability to repay from sources other than the collateral itself;

Require creditors to verify income and assets that they rely upon to determine repayment ability;

Prohibit prepayment penalties except under certain conditions; and

Require creditors to establish escrow accounts for taxes and insurance, but permit creditors to allow borrowers to cancel escrows 12 months after loan consummation.

Closed-End Loans Secured by Consumer’s Principal Dwelling
Some additional parts of the regulation include all closed-end loans secured by the consumer’s principal dwelling. These include:

Prohibiting any creditor or mortgage broker from coercing, influencing, or otherwise encouraging an appraiser to provide a misstated appraisal in connection with a mortgage loan;

Prohibiting mortgage servicers from “pyramiding” late fees, failing to credit payments as of the date of receipt; or

Failing to provide loan payoff statements upon request within a reasonable time.

Mortgage Loan Disclosures
Another section of the final rules require creditors to provide transaction- specific mortgage loan disclosures, such as the APR and payment schedule for all home-secured, closed-end loans, no later than three business days after application, and before the consumer pays any fee except a reasonable fee for the review of the consumer’s credit history. Currently, this is only required for principal residence purchase loans.

Advertising Rules
There are also new advertising rules that are outside the scope of this article.

Date to Comply
Banks have until at least October 1, 2009, to comply, while some of the requirements are delayed until 2010. While immediate action is not required, we recommend that banks begin discussing the implications of the regulatory changes that are now final.

Additional Truth in Lending Act Changes
In addition to these rules, this summer’s Housing and Economic Recovery Act of 2008 included additional changes to the Truth In Lending Act (Regulation Z).

They include: Mortgage lenders will be required to present potential homeowners/those refinancing their loans with disclosures within three days of applying for a loan on some types of loans (this really will be no change).

Disclosures will also be required no later than seven days before closing, so buyers can shop for a new mortgage if they don’t like the terms.

Lenders are also required to inform potential borrowers of the maximum mortgage payment possible under the loan.

Penalties
Penalties for Regulation Z violations are also being increased in some situations, and other rules are being added or amended. For example, in those situations in which the customer alleges a “bona fide personal financial emergency,” the seven-day advance notice provision can be waived (similar to the current rescission rules). It is presumed that barring a “bona fide personal financial emergency,” there will be no mechanism to complete a real estate-related loan in less than eight or nine days, regardless of other circumstances.

Deadline
The law requires the Board to complete action on these additional items within 30 months of enactment (about the end of 2010). Given that other Regulation Z provisions already take place in 2009 and 2010, it may mean a hectic few years for you and your staff. And I am sure that Congress and/or the regulators are not finished yet. Stay tuned for further developments.

Conclusion
As new issues are raised, Young & Associates, Inc. will provide appropriate policies and other products to help banks address the issues that are on the way. For more information on these changes or how your bank can successfully comply with any upcoming regulatory changes in these turbulent times, give me a call at 1.800.525.9775 or click here to send an Email.

Bill Elliott, Senior Consultant and Manager of Compliance

07/2008

The Identity Theft / Red Flag requirements were issued by the regulators late last fall. These requirements have caused a lot of consternation in many banks over the last few months, as banks attempt to implement these rules.

At the basic level, the regulation requires banks to do just a few things:

• Risk rate all products in the areas of account opening and account access
• Determine if policies or procedures need to be updated based on the risk ratings assigned
• Write an identity theft policy
• Get board approval of the identity theft policy
• Train staff on any new changes or identity theft items
• Assign responsibility for ongoing policy or procedure changes
• Prepare an annual report to the board regarding identity theft

We find banks struggling with several of these items. This article will discuss some of the difficulties that banks are experiencing.

Risk Level

Determining the risk level for many banks that are in relatively rural or small town settings would appear to be easy; banks in this category assume that their risk level is always “low.” While “low” is often the appropriate rating, banks in this category need to take all opening and access methods into account. Once accounts are being opened electronically or accessed through electronic means (Internet or debit/ATM card), the bank begins to lose the once-tight control on accounts, and the risk level increases. Banks in urban markets need to be even more vigilant as they prepare their risk ratings.

Each account type needs to be reviewed and risk levels established for account opening and access. The bank needs to take an honest look at its approaches to these two items to assure that realistic risk levels are established.

Evaluating Identity Theft Procedures

The bank must examine procedures for any access or opening method. Special care must be given to those methods that are identified as higher than a “low” risk. Many banks are discovering that, while they perhaps have good procedures for many items on their moderate- or high-risk list, there are significant holes. The following is a simple example: A customer comes into the bank and announces that his/her checks were stolen. The bank response would be to close the account and open a new one. This would be identity theft prevention. Is it in your teller or CSR manual? It may not be, even though you have been using the same approach for many years.

It is important to make sure that your bank has all of your identity theft mitigation techniques written down and included in the procedures manuals for the job function that needs this information.

Choosing Red Flags

Another mistake that banks are making involves the 26 red flags themselves. There are a few red flags that need to be on almost every bank’s list. For instance, receiving a fraud or active duty credit bureau alert is likely for any bank that routinely uses credit bureaus. While any of the 26 red flags are possible, many are unlikely for most banks. If you choose to include all 26 red flags on the off chance that they might happen, your job increases exponentially. Each red flag that you choose means that you will need policies and procedures to address the red flag, as well as training for each employee who needs to know the new policies and procedures.

For red flags that are likely to occur, this activity has value. For those on the fringe, it may well translate into a waste of time. While we want to protect all customers and the bank from identity theft, it is important that the bank focuses on the more likely issues, rather than creating policies and procedures that are “over the top.”

Program Responsibility

When you are ready to present your policy and program to the board, we strongly recommend that the board assign a member of senior management to be responsible for the program. The regulation permits a senior management individual to change the policy, etc. regarding identity theft without board approval, in part to assure that changes are made promptly when the bank is faced with a new identity theft issue.

If the board chooses to retain control, then the board may have periods of time when the policy is often back in their pockets for re-approval. Unless the bank is experiencing an explosion of new identity theft issues that have significant safety and soundness impacts, the continual board re-approval process is likely to be a waste of time.

Conclusion

As a practical matter, most banks are not discovering significant changes in the way that they do business. For many, this is an exercise to please the regulators – but it is an important exercise. Every identity theft policy and procedure deficiency that is corrected through this process means more safety for each bank customer and for the bank itself. Therefore, this is a worthwhile undertaking, even if the law and regulators had not mandated it.

All banks will choose to address the procedure portion of identity theft differently. However, Young & Associates, Inc. can help with the most difficult portions of this process – risk assessment, policy, and training. We have developed The Red Flag Identity Theft Toolkit to help you develop and implement a comprehensive identity theft program for your bank. (See page 8 for detailed information.)

For more information on identity theft and how it applies to your bank, contact Bill Elliott at 1.800.525.9775 or click here to send an Email.

Bryan K. Bradley, CRCM,Senior Consultant

02/2008

Bankers have long awaited a number of the implementing final rules to the Fair and Accurate Credit Transactions Act (FACT Act), and the regulators have graciously granted that wish, at least in part.

On November 9, 2007, the federal regulatory agencies (OCC, FRB, FDIC, OTS, NCUA, and FTC) issued joint final rules and guidance implementing Section 315 of the FACT Act, among other related provisions.

Specifically, Section 315 of the FACT Act provides guidance regarding reasonable policies and procedures that a user must employ when a consumer reporting agency (CRA) sends a user a notice of address discrepancy. These new regulatory requirements will further pave the way for consumers, and bankers alike, to battle instances of identity theft.

The final rule will become effective on January 1, 2008; however, mandatory compliance is November 1, 2008.

In essence, this portion of the final rule will apply to any bank using a consumer report that receives a notice of address discrepancy from a consumer reporting agency. Under the final rule, a financial institution must develop and implement reasonable policies and procedures designed to enable them to validate that the consumer report relates to the consumer about whom the bank has requested the report, when the bank receives a notice of address discrepancy.

The final rule provides the following as examples of reasonable policies and procedures by comparing the information in the consumer report with information the user:

• Obtains and uses to verify the consumer’s identity in accordance with its Customer Identification Program (CIP) as part of its Bank Secrecy Act (BSA) policies and procedures;
• Maintains in its own records, such as applications, change of address notifications, other customer account records, or retained CIP documentation; or
• Obtains from third-party sources.

A final alternative would involve verifying the information in the consumer report provided by the consumer reporting agency directly with the consumer.

In addition, this part of the final rule will require a bank to develop and implement reasonable policies and procedures for furnishing an address for a consumer that the bank has reasonably confirmed as accurate to the consumer reporting agency from whom it received a notice of address discrepancy under the following circumstances:

• The bank can form a reasonable belief that the consumer report relates to the consumer about whom the report was requested;
• The bank establishes a continuing relationship with the consumer; and
• The bank regularly and in the ordinary course of business furnishes information to the consumer reporting agency from which the notice of address discrepancy was obtained.

To comply with this portion of the final rule, banks shall develop policies and procedures to assure that the address of a consumer on file is accurate and to respond to instances when the consumer reporting agency notifies the bank of an address discrepancy. This function could affect varying areas throughout the bank, including, but not limited to, new account personnel, loan staff, or operations staff.

For more information on the final rules and guidance covered in this article, contact me at 1.800.525.9775 or click here to send an Email.