Regulatory Compliance Update

By: Bill Elliott, Senior Consultant and Manager of Compliance

We usually try to use this space to share information that will help you prepare for what has been released, and for what will be required in the coming months. However, at this writing we find ourselves in a unique position; almost nothing (at least in the near term) is changing is the world of compliance. That does not mean that we can relax too much, just that we have a little time to catch up and get ready for the next round of changes.

Here is a sampling of where we are today: ƒƒ

  • Expedited Funds Availability (Regulation CC) Update: The CFPB promised it for late last fall, but have not yet released it. (Note: this is maybe their fifth release date.) They have been working on it for about 6 years.
  • Privacy (Regulation P) Update: This was also promised for last fall, but it has not yet appeared. In the interim, the prudential regulators have stated that banks that do not share (and therefore have no opt out) can follow the new privacy law. This means no annual privacy notice mailings of any kind, unless your privacy notice has to change. If you do change your notice and/or start to share, you will have to mail the new notice to all customers annually, so you may want to think about the mailing expense before you make any changes that would require the annual mailing.
  • Prepaid Cards Update: The new prepaid card rule has been delayed for six months (April 2018) to allow for the changes that will essentially turn all prepaid cards that have the ability to be reloaded into an “account.” They will then have rights similar to an account holder; they can ask for transaction histories, dispute items, etc. This is probably going to make these cards more expensive and therefore less attractive to your customers, and may end up not being a profitable item for many banks.
  • TRID Update: They have published a proposal, but we will have to wait to see what the final rule looks like. It will be a number of months at least before anything is finalized on this subject.
  • Home Mortgage Disclosure Act Update: The major item on the compliance agenda for 2017 is the Home Mortgage Disclosure Act. Management needs to assure that staff training occurs – and soon. We created a manual for our live seminars that runs 210 pages. We also created a listing of every possible code that might be needed, and that runs 33 pages in Excel. So this will not be an easy transition, and waiting until December to think about it does not seem like a good idea. If you do not have an LEI number and you are a HMDA bank, you should get it very soon. It will be required for 2018. We should also mention that the CFPB published a 150-page update with changes and corrections to the HMDA rule. These changes should be final by the first of the year.

Stay Tuned
We will continue to use the newsletter to keep you informed as the CFPB finally publishes updates and new regulations. But in the near term, the staff can work on absorbing what already has been issued. If we can help in any way, please feel free to call Karen Clower at 330.422.3444 for assistance. She can also be reached at kclower@younginc.com. 

New Prepaid Rule

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

On October 5, 2016, the CFPB issued a final rule amending Regulations E and Z to create comprehensive consumer protections for prepaid financial products. The result of this rule is that many of you may not continue to offer these accounts, and those of you who do not currently offer the accounts may not want to start. The purpose of this article is not to talk you into or out of these products, but to give you the basic facts so that you can make the best decision for your institution.

The Prepaid Rule runs 1,501 pages, so we can only do an overview in this article. You may also want to look at the following: http://www.consumerfinance.gov/policy-compliance/guidance/implementation-guidance/prepaid

Another site worth your time might be: http://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/prepaid-accounts-under-electronic-fund-transfer-act-regulation-e-and-truth-lending-act-regulation-z/

Prepaid Accounts
The Prepaid Rule adds the term “prepaid account” to the definition of “account” in Regulation E. Payroll card accounts and government benefit accounts are prepaid accounts under the Prepaid Rule’s definition. Additionally, a prepaid account includes a product that is either of the following, unless a specific exclusion in the Prepaid Rule applies:

  1. An account that is marketed or labeled as “prepaid” and is redeemable upon presentation at multiple, unaffiliated merchants for goods and services or usable at automated teller machines (ATMs); or
  2. An account that meets all of the following:
    1. Is issued on a prepaid basis in a specified amount or is capable of being loaded with funds after issuance
    2. Whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, to conduct transactions at ATMs, or to conduct person-to-person (P2P) transfers
    3. Is not a checking account, a share draft account, or a negotiable order of withdrawal (NOW) account

There are exceptions to the rule. Under the existing definition of account in Regulation E, an account is subject to Regulation E if it is established primarily for a personal, household, or family purpose. Therefore, an account established for a commercial purpose is not a prepaid account.

Pre-Acquisition Disclosures
The Prepaid Rule contains pre-acquisition disclosure requirements for prepaid accounts. The requirements are detailed. However, there often will be a reseller of these products, meaning that the seller must prepare this disclosure for you. This “short form” disclosure includes general information about the account.

Outside but in close proximity to the short form disclosure, a financial institution must disclose its name, the name of the prepaid account program, any purchase price for the prepaid account, and any fee for activating the prepaid account.

There is also a long form disclosure which sets forth comprehensive fee information as well as certain other key information about the prepaid account.

The Prepaid Rule includes a sample form for the long form disclosure. The long form disclosure must include a long laundry list of items that details every nook and cranny of the account’s use. The Prepaid Rule also requires financial institutions to make disclosures on the access device for the prepaid account, such as a card. If the financial institution
does not provide a physical access device for the prepaid account, it must include these disclosures on the website, mobile application, or other entry point the consumer uses to electronically access the prepaid account.

All these disclosures are in addition to your standard Regulation E initial disclosure. The initial disclosures must include all of the information required to be disclosed in the pre-acquisition long form disclosure.

Error Resolution and Limitations on Liability
Prepaid accounts must comply with Regulation E’s limited liability and error resolution requirements, with some modifications. This may or may not be your problem, depending on who owns the account. But if your third-party vendor must give the customer these rights, the cost will likely go up, possibly making selling these cards a problem.

Periodic Statements and the Periodic Statement Alternative
The Prepaid Rule requires financial institutions to provide periodic statements for prepaid accounts, such as payroll accounts. However, a financial institution is not required to provide periodic statements for a prepaid account if it makes certain information available to a consumer, such as:

  • Account balance information by telephone
  • ƒElectronic account transaction histories for the last 12 months
  • ƒƒWritten account transaction histories for the last 24 months

Overdraft Credit Features
The Prepaid Rule amends Regulations E and Z to regulate overdraft credit features that are offered in connection with prepaid accounts. It adds the term “hybrid prepaid credit card” to Regulation Z and sets forth specific requirements
that apply to hybrid prepaid-credit cards. Doing something like this will materially increase your costs. Of course, there are many more rules on the subject that we cannot include in this article.

Effective Dates
The Prepaid Rule is generally effective on October 1, 2017.

What Should You Do?
Over the next few months, you need to talk with any existing companies that you do business with for this kind of product. They may still be struggling with how they are going to approach this, so you may not get all your answers immediately. But you need to know what your role is going to be after October 1, 2017 so that you can make the best decision for your institution. And all new product offerings, whether internal or external, need to be examined carefully to make sure that you can comply with the rules.

For more information about this article, contact Bill Elliott at 1.800.525.9775
or compliance@younginc.com.

 

 

New Customer Due Diligence (CDD) Requirements for Banks

Effective DATES: The final rules are effective July 11, 2016. Banks must comply  with these rules by May 11, 2018 (Applicability Date).

Summary
Banks have not been required to know the identity of the individuals who own or control their legal entity customers (also known as beneficial owners). This is viewed as a weakness of the system that they are trying to correct.

FinCEN believes that there are four core elements of CDD:
1. Customer identification and verification
2. Beneficial ownership identification and verification
3. Understanding the nature and purpose of customer relationships to develop a customer risk profile
4. On-going monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information

Banks must now identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted). A bank may rely on the beneficial ownership information supplied by the customer, provided that it has no knowledge of facts that would call into question the reliability of the information. The identification and verification procedures for beneficial owners are very similar to those for individual customers under a bank’s customer identification program (CIP), except that for beneficial owners, the institution may rely on copies of identity documents. Banks are required to maintain records of the beneficial ownership information they obtain, and may rely on another bank for the performance of these requirements, in each case to the same extent as under their CIP rule.

The AML program requirement for banks now explicitly includes risk-based procedures for conducting ongoing customer due diligence, to include understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile.

A customer risk profile refers to the information gathered about a customer at account opening used to develop a baseline against which customer activity is assessed for suspicious activity reporting. This may include self-evident information such as the type of customer or type of account, service, or product. The profile may, but need not, include a system of risk ratings or categories of customers.

In addition, CDD also includes conducting ongoing monitoring to identify and report suspicious transactions and to maintain and update customer information. For these purposes, customer information shall include information regarding the beneficial owners of legal entity customers. The regulation requires that banks conduct monitoring
to identify and report suspicious transactions. Because this includes transactions that are not of the sort the customer would be normally expected to engage, the customer risk profile information is used (among other sources) to identify such transactions. This information may be integrated into the bank’s automated monitoring system, and may be used after a potentially suspicious transaction has been identified, as one means of determining whether or not the identified activity is suspicious.

When a bank detects information (including a change in beneficial ownership information) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer, it must update the customer information, including beneficial ownership information. Such information could include, e.g., a significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason or a significant change in the volume of activity without explanation. This applies to all legal entity
customers, including those existing on the Applicability Date.

This provision does not impose a categorical requirement that banks must update customer information, including beneficial ownership information, on a continuous or periodic basis. Rather, the updating requirement is event-driven, and occurs as a result of normal monitoring.

Your Response
This is going to entail changes mostly in the deposit area. Your loan area probably already collects most of this information, as they require guarantees. Also note that we stated at the beginning of this article that the mandatory date is not until 2018. It is likely that there will be changes so an immediate response to this rule does not seem reasonable. Please, however, do not lose sight of this timetable to make sure you have it in place in plenty of time before the mandatory dates. If we can help in any way, please let us know. We will also be happy to assist in any other way to help you meet your BSA and compliance needs. This could include hands-on assistance and/or consulting assistance depending upon your needs. For more information, contact us at 1.800.525.9775 or compliance@younginc.com.

The World of Overdraft

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

For some time now, I have been saying in seminars that the federal government will not rest until there are no overdraft fees. On February 3, 2016, the Consumer Financial Protection Bureau (CFPB) stated that they wish to improve checking account access. They sent a letter to the 25 largest retail banks encouraging them to make available and widely market lower-risk deposit accounts that help consumers avoid overdrafts. Of course, anyone can avoid overdrafts by managing the account properly, but this was not mentioned in the letter.

As a companion item, the CFPB also issued a bulletin warning banks and credit unions that failure to meet accuracy obligations when they report negative account histories to credit reporting companies could result in Bureau action. For the industry, this seems to be of more interest.

The CFPB reminded all banks to “establish and implement reasonable written policies and procedures regarding the accuracy of the deposit account information provided to the consumer reporting companies.” Make sure that you can show an accurate and fully functioning system to your examiners at their next visit. This means policies, procedures, and practices to accurately report information and also a system to handle consumer disputes about these issues.

This is not a new requirement – just a reminder of existing requirements. Mistakes do happen, but we need to be very careful with all reports to all types of credit reporting agencies. This is obviously something that the CFPB is going to be pushing very hard. They are all about the consumer, and do not spend much time worrying about the financial services industry. But if we do our jobs correctly, there really is no issue here. If the correct information results in a decline of a deposit account, the consumer will have to deal with the result.

The CFPB is providing consumers with resources to help navigate the deposit account system. CFPB Director Richard Cordray stated, “Consumers should not be sidelined out of the basic banking services they need because of the flaws and limitations in a murky system. People deserve to have more options for access to lower-risk deposit accounts that can better fit their needs.” Many bankers would find fault with that statement, as there is a percentage of customers who just cannot manage their checking account. But this seems to be the direction the CFPB is going. Their notice on this issue stated, “the CFPB is weighing what additional consumer protections are necessary for overdraft and related services.”

This following section is a direct quote from the CFPB’s notice about these issues, and is something that we should keep in mind for the future.

Screening Accuracy Improvements
The bulletin issued by the CFPB today warns banks and credit unions that they must have systems in place regarding accuracy when they pass on information, such as negative account histories, to checking account reporting or other credit reporting companies. The consumer reporting companies focused on checking accounts typically generate reports on charge-off amounts, past non-sufficient funds activity, unpaid or outstanding bounced checks, overdrafts, involuntary account closures, and fraud.The CFPB is concerned about inaccuracies and inconsistent information provided by the financial institutions to the reporting companies. In a recent Supervisory Highlights, the CFPB noted that examiners found that one or more financial institutions failed to “establish and implement reasonable written policies and procedures regarding the accuracy of the deposit account information provided to the consumer reporting companies.” Examiners also found that at least one entity violated its federal obligation to handle consumer disputes about these issues.Banks should expect accurate information from checking account reporting companies to make fair assessments of deposit account applicants. If the system is tainted with incomplete, inconsistent, and inaccurate information, banks and credit unions cannot make informed decisions.”

This is one of the many areas that is concerning the CFPB, which means that it needs to concern us as well. If you need any assistance in this or any other area of compliance, contact us at 1.800.525.9775 or compliance@younginc.com.

Compliance Reviews and the Impact of Technology

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

When I was working in a bank, we had a conference room available for meetings for up to about 10 people. As with most institutions, there was always a battle regarding who could use the room when, as there was only the one room for meetings. So you had to sign up quickly or you had to camp out in there to make sure you had the room when you needed it. Of course, most of the time there was no hope – safety and soundness examiners, compliance examiners, IT examiners, internal auditors, external auditors, consultants, etc., were already in there, and the bank’s meetings would have to move somewhere else. All of you know the feeling – someone seems to be in your shop almost every day examining something.

Benefits of Off-Site Reviews
The days of having every portion of any examination, audit, or review on-site have come to an end. While some institutions still rely mostly on paper, many have a great deal of the required information in an electronic form. And if it is available electronically, much of what needs to be done can now be completed off-site.

There are clear advantages in an off-site review that go beyond freeing up a conference room. Whoever is coming into your shop will have expenses, sometimes significant expenses, such as food, mileage, lodging, etc. So every day that they do not have to be there saves you money. From the standpoint of the examiner, auditor, or consultant, every day that they are not on the road is a plus. Both parties benefit from off-site work.

Off-Site Compliance Reviews
As the head of our compliance division, I will put this in the context of compliance reviews. I can see no reason for a deposit review to ever be completed 100% on-site. Even if your bank has no technology, which is unlikely, Truth in Savings disclosures could be snail-mailed to wherever they need to go with no risk, as there is no customer information on those documents. Some banks can make many other portions of the review materials available electronically, further reducing the on-site time. We generally still have to come on-site for certain portions of the review, such as Regulation E error resolution reviews and Regulation CC hold notice reviews, as most banks do not store that information electronically, at least not yet. But the policy review portion of Regulation E and Regulation CC reviews can certainly be done off-site.

On the loan side, we at Young & Associates, Inc. are doing more and more loan compliance reviews off-site or partially off-site. As technology continues its relentless advance, we can do the necessary review work easily and efficiently. If all we are doing is loan file review, we can complete many of these reviews without ever appearing at the bank. Exit meetings are done via telephone, and with all of the other communication methods available today, there just is not a need to physically come to the bank.

We now have several clients with monthly or quarterly review schedules who see us on-site one time per year. And they have seen significant cost savings due to the reduced travel. By the way, if the work is being completed off-site, ask for a discount in the fee when you can. You do not have to ask for a discount for retainer engagements from Young & Associates, Inc. Every retainer engagement we send automatically has a discount feature built in that ranges from 5 percent to 15 percent depending on several factors, including the amount of consultant time that will be saved by not having to travel to your location.

We offer other services electronically as well. Our Virtual Compliance Consultant (VCC) program, which offers tremendous compliance support via a monthly compliance conference call for compliance discussions or training, compliance policy assistance, and access to all of our compliance-related products, is all electronic. We also offer board of director training live, using electronic methods. And the list will continue to grow.

Conclusion
As you contemplate this type of change, make sure that you involve your IT department to assure the information stays secure. Neither you nor your examiner/auditor/consultant need to have a breach. But it can be done, and your bottom line will be better off as a result.

To hear more about any of the compliance services mentioned in this article, or for more information on what Young & Associates, Inc.’s compliance department can offer your bank, contact Bill Elliott at 1.800.525.9775 or click here to send an email.

5 Ways to Create Compliance Depth

By: Adam Witmer, CRCM, Compliance Consultant

As football season is now in full swing, many die-hard fans find themselves viewing the player roster of their favorite teams. They do this because they are curious, not about the obvious starters, but about those who are there to back up the starters. Football fans are often interested in the depth of skill their team has retained.

Just like an NFL team has a depth chart of skilled back-up players, it is important to have compliance “depth” within our financial institutions. This is especially true today as examiners have been shifting their expectations of compliance from a one-person dictatorship approach to a fully functioning “compliance management system” (CMS).

With so many new rule changes coming out by the Consumer Financial Protection Bureau, financial institutions can no longer depend on a single individual to be the sole person knowledgeable of compliance regulations. Having a depth of compliance knowledge ̶ both in quantity (number of employees) and quality (individual knowledge) ̶ is more important today than ever before. Therefore, financial institution leaders should consider building greater depth of compliance within their teams.

The following are five ways that every financial institution can build depth into the compliance function of their organizations.

A Formal Compliance Management System (CMS) Model
One of the best ways to infuse compliance depth into a financial institution is to develop a formal compliance management system (CMS) model which ultimately steers the institution’s compliance activities. While most financial institutions have some sort of compliance management system in place – a risk assessment, training, audit and/or monitoring, designating a compliance officer, and managing complaints – we have found that many of these programs are often informal in nature and don’t always establish depth in the overall program.

A formal CMS model is an intentionally designed program that goes above and beyond the core elements of a compliance management system – the model acts as the infrastructure for a compliance program. Generally, a CMS model will produce certain results:

  • Continuity of compliance, regardless of change
  • Pro-active compliance management
  • Clear communication of the CMS to examiners, directors, and additional parties
  • Integration of compliance into applicable job functions of the organization
  • Early detection of compliance issues
  • Strong regulatory change management

The idea is that a formal CMS model helps to ensure that systems, controls, and procedures are effectively implemented and maintained, which helps to naturally build depth into the compliance structure of an organization.

Integration
Another way any financial institution can create compliance depth is to proactively integrate compliance into applicable job functions of the organization. Years ago, compliance could often be approached as an add-on or after-thought to the main task at hand. For example, prior to the late 1960’s and 1970’s, creditors didn’t really have to worry about lending fairly among minorities, protected classes, or even different income levels. Over the years, however, fair lending has evolved so much that organizations that don’t have effective systems, procedures, and controls to ensure fair lending compliance can easily place themselves in a high-risk position for fair lending violations.

Integration can occur in a number of ways. First, policies and procedures can be enhanced to include compliance components. Secondly, controls and testing can include applicable compliance elements. Finally, compliance can become an essential part of employee expectations, such as the requirement of training and even consideration in performance evaluations.

When a financial institution integrates compliance into each applicable job function, a depth of compliance is naturally infused into the organization. This is exactly why many financial institutions are adopting a formal CMS model under which they operate.

Compliance Council
For well over a decade now, we at Young and Associates, Inc. have been advocating for the creation of a Compliance Council in many of our client financial institutions. A compliance council is a group of employees, often middle to senior management, who come together on a regular basis to provide oversite of the compliance function of the organization. While only a few financial institutions operate with just a compliance council (rather than having a designated compliance officer), many of those that do have a designated compliance officer also operate with a compliance council.

There are several reasons why a financial institution will operate with a compliance council in addition to having a designated compliance officer. First, the compliance council helps to provide support for the compliance officer. In today’s regulatory environment, it is often unreasonable for any financial institution to place all responsibility of regulatory compliance on the shoulders of one compliance officer. Therefore, a compliance council can help to distribute the compliance burden and help support the compliance officer.

In addition to providing support, a compliance council also helps to enhance communication in relation to compliance activities. While different departments within a financial institution often operate somewhat independently, a compliance council can help to bring various department managers together while focusing on a uniform goal of compliance.

A compliance council can be an integral component for building compliance depth and this is why many CMS models have a compliance council at the center of their model.

Succession Planning
Just as every NFL team has a depth chart that outlines who is ready to play a certain position, financial institutions can create compliance depth by establishing and maintaining a formal
succession plan for each applicable compliance function. While a compliance succession plan doesn’t need to be complex or even robust, having a clearly designated back-up person for each major compliance function helps to establish greater depth.

To establish depth, a succession plan should designate a back-up person for each significant area of compliance and outline who would assume responsibility in the event that the primary employee responsible for that area is unable to perform their duties. When a back-up person is formally designated and appropriately cross-trained, a CMS model will effectively continue without any major breaches in continuity, meaning that a greater depth of compliance is established.

Training
The final and probably most obvious way to create compliance depth is to conduct enhanced compliance training. Compliance depth can be added through training in two main ways: organizational training and individual training.
First, organizational training can be expanded to integrate compliance into the training rather than treating compliance as an afterthought. Therefore, compliance components should be included in new employee orientations, annual training initiatives, and even sales and other employee specific training sessions.

Secondly, training can increase compliance depth when employees, other than just the compliance team, receive in-depth training on compliance regulations that affect their job functions. For example, a loan processor manager may be able to greatly benefit from in-depth training on Regulation Z, while a lender may benefit on training specific to Regulation O.

Regardless of the type, training is a tool that helps to build compliance depth within an organization.

Summary
Creating compliance depth is going to become an even more important strategy for financial institutions as regulatory expectations continue to expand and evolve. In creating compliance depth, organizations will enhance their overall compliance posture by ensuring compliance continuity when employee positions change, providing better communication regarding the compliance function, infusing necessary components of compliance into each job function, and providing better communication to affected parties regarding the organizations compliance program.

Just as every sports team works to ensure that they have a depth of skilled players, financial institutions who establish compliance depth – through steps like establishing a formal CMS model – are going to fair much better in the long run than those who do not.

Moving Closer to a Guaranteed Statement of Costs – Integrated Disclosures

By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance

The new Integrated Disclosures will be upon us in a few short months and will create some unique difficulties for financial institutions. In the distant past, creditors gave the applicants a Good Faith Estimate. However, the United States Department of Housing and Urban Development (HUD) decided that the information was too scattered, etc., and in 2009 announced a new more consolidated format. The goal that HUD had was laudable, but their form really did not improve the situation much, if at all.

Upon the passage of the Dodd-Frank Act, a new federal agency, the Consumer Financial Protection Bureau was told to remedy this situation once again, and specifically to combine the Good Faith Estimate and early Truth in Lending Disclosure (into the Loan Estimate), as well as combine the HUD-1 and final Truth in Lending Disclosure (into the Closing Disclosure). The new forms are an improvement from the current forms, but are also quite complex. The teaching manual that Young & Associates is using for live training runs several hundred pages to explain how to complete the 8 pages of new forms.

Creditors currently have three categories of charges that exist on the Good Faith Estimate – those that have to be correct, those that (as a group) have to increase no more than 10%, and those that represent the creditor’s best guess (typically escrow, insurance, and odd days interest).

The new forms and instructions maintain the “best guess” category as it exists in the current format, so we will not discuss this category further. The issue is with the first two categories – settlement service charges that must be correct and those that must as a group be within 10%.

Settlement Service Charges

Under the current rule, some settlement service charges must be correct. These items include charges that are fully within the creditor’s control – typically their own charges or the mortgage broker’s charges. Beginning August 1, the new rule will still include the creditor’s own charges, but also expand this area as follows:

  • Amounts payable to the creditor’s affiliates and the mortgage broker’s affiliates
  • Settlement services for which the creditor will not allow the consumer to shop.  These would include:
    • Appraiser
    • Credit bureau
    • Tax service companies
    • PMI companies
    • Governmental fees for government programs
    • Flood determination fees
    • And perhaps others.

These fees will have to be correct. This is not likely to create much difficulty, as these charges are rarely an issue. For instance, if the creditor only uses two appraisers, every Good Faith Estimate generated now will list the fee for the appraiser that charges the highest amount.

The problem is that all of these items now are removed from the 10% calculation, meaning that the “cushion” that creditors have had for 10% tolerance items will decrease, as the calculation relies on items subject to the 10% tolerance, and those items are shrinking.

You will note that the second bullet point above included settlement services for which the consumer is not permitted to shop. This creates another level of risk for creditors. For instance, if the creditor does not allow the consumer to shop for a title company, then the title company fees also must be accurate, as this fee moves from the “10%” category to the “must be correct” category. This would apply to any other service for which the consumer is not permitted to shop. So the reality is that if you decide to not allow your consumer to shop for any settlement service, every fee will have to be correct, and the only settlement service charge that will appear in your “10%” category will be filing fees.

The only protection here is to allow the consumer to shop. The phrase “allowing the consumer to shop” does not mean giving them a list and making them pick settlement service providers off the list. If creditors do that, then the creditor has not allowed the consumer to shop. Allowing them to shop means giving them a list of settlement service providers (which you should already have at least partially developed), and telling the consumer that they can shop for these services. Often, the response from the consumer will be to say, “I don’t care, use whoever you want.” If this happens, then the creditor may use their “regular” provider, and the settlement service remains in the 10% category. There is a difference between forcing them to choose off a list and the consumer abdicating their shopping rights.

Of course, the best position for the creditor is when the consumer does shop and hires another competent provider for a settlement service. As soon as they decide to do so, the consumer agrees to assume the entire liability for paying that provider. The creditor discloses what the creditor’s provider would charge, and whatever the final fee is, the consumer must pay it with no risk to the creditor.

The regulation is quite clear that in order to explain to the consumer that they have a right to shop for a specific settlement service, the service and one provider must appear on the settlement service provider list. This list, and what needs to appear on it, will now be dictated by a new form, which will become part of the application disclosures.

Preparing for the New System

To prepare for this new system, creditors need to assure that they do the following:

  • Determine settlement service providers for each service that the creditor might EVER require, even if it only is required once a year.
  • Determine what the charge will be, or determine a method to calculate the charge so that the creditor can get it “right” on the Loan Estimate. Creditors will have to understand that for settlement services that are only required every few months, they may have to telephone the provider prior to completing the Loan Estimate if they have not used that provider recently.
  • Work with settlement service providers who add on multiple fees from closing to closing. This area is mostly limited to title companies who have all sorts of small and miscellaneous fees. The discussion should probably be about how to remove these fees, because sooner or later the creditor may well have to pay them, given the smaller “10%” window.

This new structure need not create a massive increase in risk, provided you prepare for it now. Think about the providers, how they calculate their charges, and how you will assure that your staff will know what these charges will be. Just like the current Good Faith Estimate, if the first Loan Estimate has fatal flaws, there will be no legal way to repair the damage.

Integrated Disclosure Review

Young & Associates, Inc. offers an Integrated Disclosure Review service for sample documents and sample loans as you prepare for this transition and set up your loan types. You will need to provide an appropriate narrative to us that explains the loan and its terms, then provide the Loan Estimate and the Closing Disclosure. The purpose of this review is to determine that the loan type is properly set up and ready to go before the mandatory August 1 deadline. Young & Associates, Inc. will not validate APRs and other similar items. For more information, click here.

Reg Z Policy

We will also be releasing our new Regulation Z mortgage loan policy on or about June 15, allowing time for customization of the policy and board approval prior to the mandatory August 1, 2015 date. For more information, contact Bryan Fetty at bfetty@younginc.com or 1.800.525.9775.