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HMDA Alert – Smaller Mortgage Producers May Have to Comply in 2023

Written by admin on . Posted in Uncategorized.

By Bill Elliott, CRCM; Director of Compliance Education

On September 23, 2022, the United States District Court for the District of Columbia issued an order vacating (cancelling) the 2020 Home Mortgage Disclosure Act (HMDA) Final Rule. That final rule changed the limits for closed-end mortgage loans. At the time, that final rule raised the “minimum” for mandatory reporting from 25 to 100 closed-end mortgage loans in each of the two preceding years.

The court vacated that change, and so the threshold for HMDA reporting in the regulation for 2023 and into the future has been reset back to 25 closed-end loans. Banks that have been able to avoid HMDA because they made fewer than 100 loans are required to comply in 2023. A blog entry issued by the Consumer Financial Protection Bureau (CFPB) on December 8, 2022 stated that the CFPB (and we presume the prudential regulators) will not require backfiling, nor would they cite banks for the absence of 2020, 2021, and 2022 filing data, but said nothing about 2023. Therefore, if your bank made more than 25 closed-end mortgage loans in 2021 and 2022, HMDA is now a requirement for closed-end mortgage loan reporting for your institution – starting January 1, 2023.

We are unsure why the CFPB waited about 10 weeks to inform us. But you will need to dust off those old policies, procedures, systems, and operations to come into compliance, or perhaps create new policies, procedures, and operations in a hurry. Additionally, there may be applications from 2022 that do not have the government monitoring information in file, because it would have been a violation for non-HMDA banks to collect that information. We believe that your institution needs to go back and collect that information for all loans that had an application in 2022, but that close in 2023.

The 25 vs. 100 threshold was a decision made by the CFPB, and that was reversed. The partial exemption changes – impacting a number of the data elements required to be collected – were the result of a change in law, so the partial exemption remains unaffected by this reversal.

HMDA Review
Do you need a validation of your HMDA data prior to the 3/1/23 filing deadline? Young & Associates offers an off-site compliance review of your institution’s HMDA data. Using our secure file transfer system, we will validate your HMDA data to detect errors and issues before the filing deadline. For more information on our HMDA Review service, click here or contact Karen Clower, Director of Compliance, at 330.422.3444 or kclower@younginc.com.

The Importance of Documentation to Support Your Information Security Program

Written by admin on . Posted in Uncategorized.

By: Mike Detrow, CISSP, and Brian Kienzle, CISSP, OSCP

Written records are generally more trustworthy than human memory. Examiners and auditors typically take the following stance: if it isn’t formally documented, it didn’t happen. It is usually not possible to accurately recall all the details from an activity that we performed six months to a year ago. That is why it is important to formally document your monitoring activities to ensure that the specific details about any work performed is available for your reference and for examiners and auditors to review.

Common Documentation Gaps

Proper documentation has generally improved in recent years; however, there are still some areas where we commonly see documentation gaps. Some of these areas where we continue to note weaknesses in documentation during our IT Audit engagements include:

User Access Reviews

We commonly see a checklist or spreadsheet that identifies various systems/applications and the date(s) that the user access was reviewed. While this format can help to provide a summary of the dates when system/application user access was reviewed, it does not allow an examiner/auditor to understand what was reviewed, any exceptions that were found, nor any changes that were made because of the review. A better approach is to document the review on the actual system reports or screenshots, or to document the review process in a write-up that identifies the review process and any noted exceptions or changes made as a result of the review.

Vendor Monitoring

We still see some instances where ongoing vendor reviews are not formally documented using a checklist or a formal write-up of the details associated with the review and any exceptions that were noted. In these cases, the institution may only have a spreadsheet where they indicate that various vendor documents were reviewed on a specific date. However, this does not allow an examiner/auditor to understand the details about the review, nor does it identify any exceptions that were noted. This same issue occurs with the review of the complementary user entity controls that are identified in vendor SOC reports. Institutions should ensure that they formally document their implementation of each complementary user entity control.

Firewall Audits

Often we see a simple statement in minutes or in an email chain that indicates that a firewall audit was performed. However, this isn’t enough information to know if the firewall audit was comprehensive enough to know if the firewall is properly configured. At a bare minimum, a firewall audit should include a review of all firewall access rules for appropriateness and a review of security services, such as intrusion prevention, and web content filtering. Documentation of this review, showing all areas of the firewall configuration that were reviewed is an essential piece of documentation.

E911 Testing

Voice over IP (VoIP) telephone systems communicate with emergency services differently than traditional phone lines. If an IP phone is moved to a different physical location, but the corresponding address information is not updated, then incorrect address information could be seen by emergency responders when that phone is used to dial 911. E911 testing ensures that proper address information is seen by emergency responders. We check that this testing is occurring during our IT audits, and documentation of this testing is the primary method we use to verify this.

While it can sometimes seem like the time spent to formally document your activities is unproductive, especially when some institutions are working with limited staffing, it is critical to maintain this documentation to allow examiners/auditors and the board to have confidence that the institution’s information systems are being managed and monitored appropriately.

Young & Associates offers a variety of IT consulting services to help your financial institution comply with regulations, protect against vulnerabilities, and provide seamless IT service to your customers For more information on this article, or to learn more about how Young & Associates can assist you with your IT needs, visit our website at www.younginc.com or contact us at mgerbick@younginc.com.

Why Banks Should QC In-Portfolio Loans

Written by admin on . Posted in Uncategorized.

By: Donald Stimpert, Consultant and Manager of Secondary Market QC Services

As a result of higher mortgage interest rates and inflation continuing to weigh on affordability, Fannie Mae revised downward their forecast for 2022 single-family mortgage market originations. Fannie Mae now expects 2022 single-family mortgage market originations of $2.3 trillion, a 49% decrease from 2021, with approximately 70% of activity for the full year of 2022 expected to come from purchase originations.

Fannie Mae currently projects a further decline in single-family mortgage market originations in 2023, to $1.7 trillion, with 77% of that activity coming from purchase originations. Fannie Mae expects that multifamily mortgage market originations for 2022 will be between $400 billion and $430 billion, down from the $475 billion estimated at the start of this year, due primarily to rising interest rates and a slowing in multifamily property sales.

As a result of the higher mortgage interest rates, more lenders are holding on to their loans and keeping them as in-house portfolio loans. Young & Associates is currently working with several clients to conduct not only residential secondary market loans, but in-house portfolio loans as well. By reviewing in-house portfolio loans, Young & Associates will provide the same QC services as we do on the residential secondary market loans while providing financial institutions with the peace of mind that underwriting standards are maintained in accordance with policy directives.

Organizations with a commitment to quality control recognize that loan quality begins before an application is taken and continues throughout the entire mortgage origination process. Young & Associates has provided education, outsourcing, and a wide variety of consulting services to community financial institutions for over 44 years. We are committed to your bank’s future success and look forward to assisting you to ensure or enhance that success. Please click here to learn more, or contact me directly at 1.330.442.3459 or dstimpert@younginc.com.

Brushing Up on Disclosures for ARMs

Written by admin on . Posted in Uncategorized.

By: William J. Showalter, CRCM, CRP, Senior Consultant

Now that interest rates are moving up, many bankers are blowing the dust off their adjustable-rate mortgage (ARM) loan offerings. Interest rates for fixed-rate loans have been so low for quite some time, which made them much more appealing to mortgage loan customers. But now with rates increasing, the lower initial rates of ARM loans are beginning to look more appealing to at least some borrowers.

The problem is that many of us are so out of practice at making ARMs that we need a refresher to remind us of what we need to do. This article will serve as a primer to help us re-learn how to meet disclosure requirements for ARM loans.

Different Types of ARMs

When we think of an adjustable-rate mortgage, the first thing that comes to mind is likely the classic loan with an interest rate that can change at some regular interval based on the movement of some external index. There is a wide variety of initial time periods for which the rate is fixed and later intervals for rate changes over the life of the loan. Common initial fixed periods are one, three, five, seven, or 10 years, while probably the most common interval for later rate changes is one year.

But that is not where the variety of ARMs ends. The Official Staff Commentary on Regulation Z discusses a number of other loan structures that are considered to be variable-rate transactions subject to the ARM disclosure requirements. These additional loan structures are:

  • Renewable balloon-payment loans where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer’s option (or is obligated to renew subject to conditions within the consumer’s control) and has the option of increasing the interest rate at the time of renewal
  • Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event (e.g., an employee leaving the employ of the creditor, or an automatic payment arrangement being ended) and the note reflects the preferred rate (though a number of the ARM disclosures are not required for preferred-rate loans)
  • “Price-level-adjusted mortgages” or other indexed mortgages that have a fixed rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation (again a number of the ARM disclosures are not required for price-level-adjusted loans)

It is important to note that graduated-payment mortgages and step-rate transactions without a variable-rate feature are not considered variable-rate transactions under Regulation Z. This is likely because changes over the term of the loan are known at the outset – specified payment and/or interest rate increases.

Application Disclosures

Two ARM disclosures must be given to applicants for such loans at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. There is an exception allowing the disclosures to be delivered or placed in the mail not later than three business days following receipt of a consumer’s application when the application reaches the creditor by telephone or through an intermediary agent or broker.

For an application that is accessed by the consumer in electronic form – including an online application portal – the required ARM disclosures may be provided to the consumer in electronic form on or with the application.

These two early ARM disclosures are:

  • The booklet titled Consumer Handbook on Adjustable-Rate Mortgages (CHARM booklet), or a suitable substitute, and
  • A loan program disclosure for each variable-rate program in which the consumer expresses an interest (each comprised of 12 specified pieces of information about the ARM program)

TRID Disclosures

The Loan Estimate (LE) and Closing Disclosure (CD) both require some additional disclosures for ARMs. The LE must be provided to an applicant no later than the third business day after their application is received by the lender, while the CD must be provided no later than three business days before consummation. (There are also situations permitting or requiring these disclosures to be revised, but that’s a subject for another time.)

The particular TRID (TILA-RESPA Integrated Disclosures) items impacted by a loan being an ARM are:

  • “Interest Rate” in the “Loan Terms” section – If the interest rate at consummation is not known, the rate disclosed must be the fully-indexed rate, which means the interest rate calculated using the index value and margin at the time of consummation. The lender also should disclose “Yes” for the question “Can this amount increase after closing?” In addition, disclose the frequency of interest rate adjustments, the date when the interest rate may first adjust, the maximum interest rate, and the first date when the interest rate can reach the maximum interest rate, followed by a reference to the Adjustable Interest Rate (AIR) Table (discussed below).
  • “Monthly Principal & Interest Payment” in the “Loan Terms” section – If the initial periodic payment is not known because it will be based on an interest rate at consummation that is not known at the time the LE must be provided, for example, if it is based on an external index that may fluctuate before consummation, this disclosure must be based on the fully-indexed rate disclosed above. The lender also should disclose “Yes” for the question “Can this amount increase after closing?” In addition, disclose the scheduled frequency of adjustments to the periodic principal and interest payment, the due date of the first adjusted principal and interest payment, the maximum possible periodic principal and interest payment, and the date when the periodic principal and interest payment may first equal the maximum principal and interest payment.
  • “Principal & Interest” payment in the “Projected Payments” section – The table of payments (principal and interest, mortgage insurance, etc.) will include more than one column due to the possible (projected) changes in the interest rate, up to a maximum of four columns. The maximum principal and interest payment amounts (in each column) are determined by assuming that the interest rate in effect throughout the loan term is the maximum possible interest rate, and the minimum amounts are determined by assuming that the interest rate in effect throughout the loan term is the minimum possible interest rate. If the ARM has a negative amortization feature, the maximum payment amounts must reflect this feature, as spelled out in Regulation Z.
  • “Adjustable Interest Rate (AIR) Table” – An ARM must disclose a separate table in the “Closing Cost Details” section on the LE and the “Additional Information About This Loan” section on the CD, under the heading “Adjustable Interest Rate (AIR) Table,” that contains specified information about the index and margin, increases in the interest rate, initial interest rate, minimum and maximum interest rate, frequency of adjustments, and limits on interest rate changes.
  • “Annual Percentage Rate (APR)” and “Total Interest Percentage (TIP)” in the “Comparisons” section on the LE and the Loan Calculations section on the CD – Calculation of both these values must account for variations in the interest rate permitted for the ARM.

Interest Rate/Payment Change Notices

The creditor, assignee, or servicer of an ARM secured by a borrower’s principal dwelling must provide consumers with written notices in connection with the adjustment of interest rates in accordance with the loan contract that results in a corresponding adjustment to the payment.  These notices must be separate from any other disclosures or notices.

There are exemptions for the following: ARMs with a term of one year or less; first interest rate adjustment to an ARM if the first payment at the adjusted level is due within 210 days after consummation and the new interest rate disclosed at consummation was not an estimate; or when the lender/servicer is subject to the Fair Debt Collection Practices Act (FDCPA) for the loan and the customer has sent a notice to cease communications.

The content for these change notices is spelled out in detail in Regulation Z and the timing depends on whether the rate/payment change is the first one to occur for the ARM loan or a subsequent change.

  • The initial adjustment notice must be provided to consumers at least 210 days (but no more than 240 days) before the first payment at the adjusted level is due. If the first payment at the adjusted level is due within the first 210 days after consummation, the disclosures must be provided at consummation.
  • All subsequent adjustment notices generally must be provided to consumers at least 60 day (but no more than 120 days) before the first payment at the adjusted level is due. The disclosures must be provided to consumers at least 25 days (but no more than 120 days) before the first payment at the adjusted level is due for ARMs with uniformly scheduled interest rate adjustments occurring every 60 days or more frequently and for ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date.

Periodic Statements

If your bank has taken advantage of the “coupon book” exception from periodic statements for mortgage loans with fixed rates, you will have to begin producing periodic statements when you begin originating ARMs. Or, you will need to expand your statement output as more of the bank’s loan production shifts to ARMs from fixed-rate loans (if you still want to use the coupon books exception for your fixed-rate lending).

Conclusion

If your institution is like many community banks and has not been making ARMs for some time, you likely have some work to do to ramp ARM lending back up. Systems and disclosures need to be updated and/or activated. Disclosures need to be procured or prepared. Staff needs to be trained, at least some refresher training.  Good luck re-ARMing up.

2023 Rescission Reference Chart

Written by admin on . Posted in Compliance & Regulations.

View and download the Young & Associates 2023 Rescission Reference Chart to assist your lenders in preparing the Notice of Right to Cancel. Please forward this document to someone in your organization who will use this helpful tool.

For 44 years, Young & Associates has provided consulting, training, and practical tools for the banking industry. Thank you for the opportunity to serve your needs.


Looking for the latest calendar? Click here to access the 2025 Rescission Reference Chart!

Ensure your Advertising is Complete, Clear, and Compliant

Written by admin on . Posted in Compliance & Regulations.

In today’s competitive environment, getting the word out about your products and services is crucial. Do your ads meet regulatory expectations, include all advertising terms, and clearly explain what your products and services are to your customers and potential customers?

Get peace of mind with Young & Associates’ Advertising Review Service.

It’s Easy!
As part of the advertising review engagement, Young & Associates will:

  • Review all print and electronic advertising material provided by the bank. *
  • Respond to each submitted item in writing within 2 business days, presenting any compliance issues that may be present in the ad.
  • There is no minimum or maximum number of advertisements in a year. Submit advertisements that require that “second look.”
    * The review will not include verification of any APR or APY.

Trusted Guidance
Young & Associates provides an unmatched depth of practical expertise. Our compliance consultants are comprised of former banking executives, compliance regulators, and tenured finance professionals. We’re uniquely qualified to understand and solve your challenges, because we have personally experienced those same issues. For more information on this service, contact Karen Clower at kclower@younginc.com or 330.422.3444.

To submit your ad for review click here.

Embracing New Technology ̶ “Lead, Follow, or Get Out of the Way”

Written by admin on . Posted in Information Technology, Management & Planning.

By: Bill Elliott, CRCM, Director of Compliance Education

I have been teaching for Young and Associates for over 20 years. Twenty years ago, when I asked about “the percentage of customers that enter your lobby in any given month,” the answers I got from attendees were usually around 80%. Twenty years later, the answers are almost always under 25%. Just recently a banker in a seminar told me that they have a branch that has almost no foot traffic.

The reason for this change is obvious ̶ why go to the bank or credit union when you can do it electronically? And the generations of customers coming up are more than willing to figure out how to do it on their smartphone. Since banking via your smartphone is readily available to anyone who has a decent cell signal, it is hard to argue with that position.

The problem for financial institutions is the constant struggle with technology and finding ways to leverage it better and faster. And the last two years of COVID have exacerbated the problem greatly, as customers were either reluctant to leave their homes, or institutions were unable to service customers except through perhaps the drive-through window. The result of all this is that some financial institutions have lost customers due to the lack of technology, while others have done very well because they had the technology available and could enable it to serve their customers.

Another question I ask in seminars is, “How many of you believe that you will get to retirement before your institution is opening accounts online?” If I have a 60-something person in the crowd, maybe I will get a hand raised. For everyone else, they can see it is either here or coming soon.

Embracing Change
Management sometimes is reluctant to embrace change, which is understandable, as few enjoy it. But not changing may come at a cost that your organization is not willing to pay. To remain independent, financial institutions must step out of the comfort zone of, “We have always done it this way” and embrace the technology necessary for their survival and for their consumers’ needs. Pretending that it simply isn’t going to happen will not work ̶ it has already happened.

One of our clients is situated in an area where cows outnumber people three to one. Around 90% of their mortgage applications come in electronically and the bank encourages applicants to do it electronically, as that speeds the process up. A loan that closes faster means that the organization makes more money earlier, certainly a worthwhile goal.

On the deposit side, watch any football game, and major financial institutions tout the abilities that are available to the customer using their smartphone. One bank indicates that you can open a checking account online in five minutes. I’ve never tried it, but since the average customer takes more than five minutes to choose their check style, I’m not sure it is 100% accurate. But it is the wave of the future, or perhaps I should say the wave of the present.

Tips to Consider
After you decide why your organization wants to invest and leverage new technology (gain more customer insight, improve customer experience, penetrate new markets, etc.), here are some basics that you need to consider:

  • First, what systems are available that interface easily with your core processing system? If you cannot interface, you probably ought not be interested. The goal is to make everything flow from space to space to space with a minimum of human intervention, with high-quality information at each step to support why you are making this investment. While admittedly that means your staff must pay attention to get everything correct early in the process, once you do that, completing the transaction should be fairly simple. If your core processing system supports very little that would be useful to you in this new electronic banking world, it is possible that you may need to consider replacing it with something a little more flexible.
  • Second, you need to have the ability internally to manage the new processes and technologies. And you need to ensure that you have the training available to your staff so that they understand their role and responsibilities necessary to support your customer base.

There is no question that all this costs money ̶ but not doing anything also carries costs. Some of the cost of new technology may be offset by closing branches that are not necessary as these new delivery systems grow and mature. Closing a branch has its own real dollar costs, and management must assure that the closure will not impact the organization’s Community Reinvestment Act or fair lending positions. All this needs to be considered – and maybe discussed with regulators – before closing a branch. And even if you do not close a branch, some savings is possible with a reduction in your overall staffing levels.

I personally have a checking account that I really don’t need anymore, but I have several bills paid out of that checking account directly. Since the account is free, I’ve never bothered to do anything other than adequately fund the account, because moving all those transactions to my “main” checking account seems just too cumbersome. So, the technology keeps me a customer.

Once customers begin to intertwine bill pay, budget models and other products, they may think long and hard before unpacking all these services to move the account and business somewhere else. The digital experience is just as impactful to the overall customer experience as face-to-face contacts. And an integrated digital platform may help retain customers that may not be thrilled with your organization; however, the digital experience becomes so difficult to “unpack” that they accept their pain points and continue to remain customers. This retention provides you the time to address their pain points and transform them into advocate customers speaking highly of your quality of services to others.

“Lead, Follow, or Get Out of the Way”
Years ago, I heard the phrase, “Lead, follow, or get out of the way.” That certainly is our world today. Your best possible position is to be a leader. If you choose to follow, you may do just fine. But if you try to simply get out of the way, you may find yourself in a difficult position. So, you must consider your options here, and frankly do it very quickly.

Many in the industry are talking about Banking as a Platform (BaaP), Digital Transformation, and Banking as a Service (BaaS). These are all different concepts, yet all very relevant and available. It is our hope you make the choice to “lead” or “follow” closely and have your customers or new markets choose you for banking services. Please do not “get out of the way,” as it will be more challenging for you and your organization in the long run. Given how quickly technology and related issues advance, the “long run” is now measured in shorter and shorter time frames.

For more information on this article and how Young & Associates can assist your organization to position your organization to leverage technology to better serve your customers, contact us at mgerbick@younginc.com or 330.422.3482.

Key Elements of Effective Credit Underwriting

Written by admin on . Posted in Lending & Loan Review, Uncategorized.

By: Ollie Sutherin, Principal, Y&A Credit Services

The focus of this article is to provide an overview of what Y&A Credit Services, LLC views as key elements during the underwriting process. While there are many variables needed to effectively underwrite credits, below are the primary focal points of any quality credit presentation that we underwrite or review.

Cash is King
“Cash is king” is a saying that we use often as it translates to, “if you don’t have the cash to repay, you shouldn’t have the loan.” So often we are presented with transactions that aren’t the strongest, don’t show cash flow, and the underlying organization has no business being lent money. Lenders often try to form complex explanations regarding the guarantor’s wherewithal, global cash flow, etc., and they lose sight of the actual company, its financial condition, and its ability to service the debt on a stand-alone basis. Every analysis should begin with the subject company and its ability to service debt. If it is a real estate holding company and the note is secured by a specific property, what is the cash flow of that property? If the most recent tax return statement, compiled, audited, etc., does not evidence the ability to service debt, what is the trend of the company? What are they doing to improve from the previous year and what is the YTD revenue/expenses compared to the prior year?

Eventually, we take into consideration the guarantor’s wherewithal and how it impacts the cash flow; however, the primary focus should always be on the company itself (the primary repayment source). If a transaction is being presented where repayment is heavily reliant on the guarantor, then the following questions must be asked: What is their character like? Have all of the assets and liabilities been verified on their personal financial statement(s)? Are other contingent liabilities factored in as well? So often, mistakes are caught when analysts simply say, “John Doe has $1,000,000 in cash and is clearly able to service the subject note should it be needed” without doing the proper due diligence verifying the source of the cash.

Quality of Information
If the cash flow of the company is the backbone of the transaction, then the quality of information is the legs, providing the necessary base for everything. We are always looking at the reliability of this information as it minimizes the risks of inaccuracy and subsequently the risk of default. For example, if borrowers only give internal statements that are hastily prepared and communicate lease details in one-two sentences in an email, this poses a much greater risk than detailed property information in the actual tax return and actual signed lease agreements provided for review. Furthermore, as it pertains to C&I transactions, internally prepared statements rarely reconcile, which makes performing a UCA Cash Flow analysis much more difficult. Tax returns and audited or compiled statements always reconcile, providing an accurate analysis.

Collateral Values
As it relates to the property or equipment securing an obligation, an appraisal is always going to be the safest way to measure the value. Too often, internal evaluations or estimates are utilized to justify a request during underwriting. To meet regulatory standards, the collateral securing an obligation must support the amount being considered and obtaining the appraisal during the underwriting phase can potentially save a significant amount of work if the value is insufficient to support the debt. For existing credits that are being refinanced, another important aspect of collateral valuations includes site visits by the account officers. Having photos and notes from the site visit will provide added support to the collateral pledged for the transactions.

Stress Testing
Stress testing individual loans during underwriting is becoming increasingly necessary, especially in today’s rising rate environment. This was a regulatory focus back in the late 2010s as there was a rising interest rate environment. Variable rate notes, property values, vacancy rates and ultimately cash flow for debt service were adversely impacted. At the beginning of the pandemic in March 2020, rates dropped markedly and remained flat until just recently. To curb inflation, the Federal Reserve began increasing rates and the extent of the impact on variable rate loans has yet to be determined.

Stressing individual loans at origination provides the institution with a tool to better understand the impact of rate increases on cash flow, property values, and vacancy rates in different scenarios. The result is a more informed credit decision during the underwriting phase. Ultimately, these variables help determine the breakeven point of a business’s cash flow and provide great insight to the actual strength of the primary borrower.

Projections / Proformas
These are something that all lenders should request from a borrower/potential borrower to justify the strength of a transaction. However, often these projections will paint an excellent picture of the company and a stellar cash flow that is more than adequate to service the underlying transaction. The intent of requesting and analyzing projections is to compare them to historical results, in many instances where the projected cash flow is higher than historical results. This is typically due to the borrower understating expenses which leads to overstated cash flow and debt service coverage. Given all of this, it is still important to obtain projections and to compare them to actual statements when available. Should they vary significantly, it will open the door to questions and force a deeper look into smaller details such as management of the company.

Y&A Credit Services, LLC
Over the past few years, a defined need has developed in the community financial institution industry. Specifically, it has been difficult for financial institutions to hire and retain quality credit professionals, especially in rural areas, to underwrite loans and perform other necessary tasks necessary for adequate credit administration. This need has led Young & Associates, Inc. to create a wholly-owned subsidiary (Y&A Credit Services, LLC) to meet the needs of these organizations. Y&A Credit Services, LLC has the mission of filling the voids of clients who have limited or even no credit staff to perform these necessary tasks. If your organization has a need for credit services, please feel free to contact us at 330.422.3482. Our services include spread sheet analyses, annual reviews, full credit underwriting and review of prepared presentations along with a full complement of other credit-related services through Young & Associates, Inc.

Considering Anti-Money Laundering Software for Your Institution

Written by admin on . Posted in Compliance & Regulations, Information Technology.

By: Edward Pugh, CAMS, Consultant

For many financial institutions, one of the most impactful purposes of the Anti-Money Laundering Act of 2020 is the encouragement of technological innovation and the adoption of new technology by financial institutions to more effectively counter money laundering and the financing of terrorism. While a requirement to adopt technology in the AML space is not spelled out, the encouragement is being meted out in regulatory exams. Industry professionals have noted that the asset-size thresholds for scrutiny of the adoption of technology (or lack thereof) is decreasing.

Aside from regulatory expectations, there are many advantages in adopting AML technology solutions, which include better detection capability, more efficient workflows, better information flow, and many others. There is a plethora of providers in the marketplace offering a wide range of products and capabilities. However, the aim of this article is to lay out some considerations once the decision to adopt new technologies has been made. Here are some things to consider:

  • Risk Assessment. Your institution’s BSA/AML risk assessment should drive the technology selection process. It is important to be able to demonstrate that the technology does in fact mitigate the risks that were assessed. The risk assessment can also serve as a guide in determining the sophistication of the software needed; a lot of products in the market may offer many features and options that may not be necessary.
  • Data. Data quality is the most important aspect of implementing AML software technology. Any implementation will require time to be devoted to data cleansing and mapping. Most vendors offer varying levels of assistance depending on your needs. Whether this part of the process is handled in-house or through a vendor, there will be costs associated with data preparation.
  • Future-proof. While no technology can be “future-proof,” it is important to have a platform that is robust and can handle upgrades or changes in your institution’s core software and any ancillary systems that may be feeding data into the AML software. There should also be a clear process for updates as regulations, laws, and criminal typologies change or are discovered.
  • Maintenance. BSA/AML evolves constantly. Financial institutions and their customers continually change. Over time, fine-tuning scenarios and thresholds is an important periodic activity. Some software allows the institution to conduct changes to the model while others require more vendor involvement. It’s an important area to consider when choosing between the numerous options.
  • Efficiency. Properly implemented, quality AML platforms will reduce the compliance burden in your institution. However, it is important to note that there will be “growing pains” in the beginning. One of the most common surprises is the often-dramatic increase in alerts generated. This is usually due to new scenarios being monitored, and much more transaction data being monitored. It can also be due to data quality issues that can arise during implementation. This surge in alerts is temporary. The efficiency comes as the system is fine-tuned and staff becomes more acquainted with the platform and its capabilities.

One final thought: Think big, start small. AML platforms can be customized and upgraded. For many institutions, the choices are overwhelming. Of course, there are many other factors that must be taken into account, especially cost. Having a clear understanding of the above-mentioned considerations will help weigh the cost considerations in choosing between the many options available in the marketplace.

For more information on the selection of AML software, contact us at
mgerbick@younginc.com or 330.422.3482. And if your institution has AML software in place, please read the following article, AML Validation & Review, to learn more about how we can assist your financial institution in the validation and review of your existing AML software. Our BSA team is uniquely qualified to guide you through this often complicated and technical process, and we look forward to working with you to achieve your goals.

AML Validation & Review

Written by admin on . Posted in Compliance & Regulations, Information Technology, Uncategorized.

The increasing sophistication of Anti-Money Laundering/Combating the Funding of Terrorism (AML/CFT) software and modeling techniques and the broader application of these models have played an undeniable role in the enhanced effectiveness of AML/CFT programs in financial institutions.

The regulatory agencies are utilizing more analytical and statistical specialists in BSA examinations. Additionally, recent BSA examinations demonstrate that the de facto threshold for regulatory scrutiny of AML models continues to decrease. All AML models must follow the guidance of OCC Bulletin 2011-12 and the subsequent Interagency Statement on Model Risk Management for Bank Systems Supporting Bank Secrecy Act/Anti-Money Laundering Compliance (4/9/21), which outline the expectations for model risk management, especially the need for independent review and model validations.

Young & Associates can assist you with our AML Validation and Review.
Customized for your institution and as required by the regulators, our AML validation and review addresses:

  • Conceptual Soundness. We focus on the design, methodology, and construction of the model. This includes analysis and review of the model documentation, assumptions and limitations, data quality and completeness, and implementation
  • Ongoing Monitoring. We make sure that the model is working efficiently and as intended to meet your institution’s business objectives, and ensure that it is tailored to the institution’s Risk Assessment (AML Program Management). This includes model tuning and calibration, which is driven by several Key Performance Indicators (KPIs).
  • Outcomes Analysis. We examine the model’s output, including alerts generated from transaction monitoring, along with the supporting information used for investigation. Above-the-line and below-the-line testing is conducted to ensure that alerts are accurate and complete. Monitoring rules and parameters are also assessed.

Young & Associates collaborates with many of the AML software providers throughout the validation and review to make the process as seamless to your institution as possible.

Trusted Guidance in BSA/AML Compliance
Young & Associates provides an unmatched depth of practical expertise. Our BSA compliance team includes former banking executives, compliance regulators, and tenured finance professionals who hold the CAMS (Certified Anti-Money Laundering Specialist) designation. We’re uniquely qualified to understand and solve your challenges, because we have personally experienced those same issues. For more information on how we can assist you with your AML validation and review, contact us at mgerbick@younginc.com or 330.422.3482.

The UDAAP Hammer Drops

Written by admin on . Posted in Compliance & Regulations, Uncategorized.

By: William J. Showalter, CRCM, CRP, Senior Consultant

In our last issue, we discussed what UDAAP is and how to set up a program in your bank to avoid trouble in this important area. Our title admonished you, “Don’t Let UDAAP Spook You, Take Control.” If you have not yet taken control of UDAAP compliance, you may have been spooked by developments over the past 12 months or so. There have been three big UDAAP enforcement actions involving three financial service providers of all sizes during that time.

Background
Section 5 of the Federal Trade Commission (FTC) Act has been around for over 70 years and prohibits “unfair or deceptive acts or practices” (UDAP), the predecessor to UDAAP. Banking regulators have had the responsibility to enforce bank and thrift compliance with UDAP rules, while the FTC had the authority to interpret the statute and write any rules. The Federal Reserve Board (FRB) was given interpretive and rule-writing authority when this part of the FTC Act was amended in 1975 but continued largely to defer to the FTC.

Title X of the Dodd-Frank Act (DFA) codified UDAP law specifically for financial institutions, eliminated the FRB’s rule-writing authority, added an “abusive” standard, and moved rule-writing authority to the CFPB. The acronym became UDAAP – unfair, deceptive, or abusive acts or practices.

What are We Dealing With?
All these standards or characteristics are quite subjective. The elements of unfairness and deception have been established by statute, as well as interpretation over the years by the FTC in various enforcement actions and interpretive documents. The element of being abusive was established, in general terms, in statute by the DFA.

To be unfair, an act or practice must cause or be likely to cause substantial injury to consumers that the consumers cannot reasonably avoid or that is not outweighed by countervailing benefits. Substantial harm usually involves monetary harm, including a small monetary harm to each of a large number of consumers. A three-part test is used to determine whether a representation, omission, act, or practice is deceptive. First, the representation, omission, act, or practice must mislead or be likely to mislead the consumer. Second, the consumer’s interpretation of the deception must be reasonable under the circumstances. And, lastly, the misleading representation, omission, act, or practice must be material. “Material” means that it is likely to affect a consumer’s decision regarding a product or service. An abusive act or practice materially interferes with the ability of the consumer to understand a term or condition of a consumer financial product or service. Such an act or practice also includes one that takes unreasonable advantage of: the consumer’s lack of understanding of material risks, costs, or conditions of a product or service; the consumer’s inability to protect his interests in selecting or using a financial product or service; or the consumer’s reasonable reliance on the “covered person” (including a banker) to act in the interests of the consumer.

Recent UDAAP Enforcement Actions
In about the year 2000, banks first saw significant enforcement of UDAP (now UDAAP) from the banking agencies when the Office of the Comptroller of the Currency (OCC) took the lead. The OCC concluded that it had authority to address a violation of the FTC Act even regarding a challenged practice that was not specifically prohibited by regulation.

The three bank-related UDAAP enforcement actions to which we referred above are:

  • The Consumer Financial Protection Bureau (CFPB) issued a Consent Order to Discover Bank (Greenwood, DE) and two subsidiaries ordering Discover to pay at least $10 million in consumer redress and a civil money penalty (CMP) of $25 million for violating a 2015 CFPB Order, the Electronic Fund Transfer Act, and the Consumer Financial Protection Act of 2010. The 2015 Order was based on the CFPB’s finding that Discover misstated the minimum amounts due on billing statements as well as tax information consumers needed to get federal income tax benefits. The agency also found that Discover engaged in illegal debt collection practices. The 2015 Order required Discover to refund $16 million to consumers, pay a penalty, and fix its unlawful servicing and collection practices.
    However, more recently the CFPB found that Discover violated the 2015 order’s requirements in several ways – misrepresenting minimum loan payments owed, amount of interest paid, and other material information. Discover also did not provide all the consumer redress the 2015 Order required. In addition, the CFPB found that Discover engaged in unfair acts and practices by withdrawing payments from more than 17,000 consumers’ accounts without valid authorization and by cancelling or not withdrawing payments for more than 14,000 consumers without notifying them. The agency also found that Discover engaged in deceptive acts and practices in violation of the CFPA by misrepresenting to more than 100,000 consumers the minimum payment owed and to more than 8,000 consumers the amount of interest paid. Some consumers ended up paying more than they owed, others became late or delinquent because they could not pay the overstated amount, while others may have filed inaccurate tax returns
  • The Federal Deposit Insurance Corporation (FDIC) issued an order to Umpqua Bank (Roseburg, OR) that the bank pay a CMP of $1,800,000 following the FDIC’s determination that the bank engaged in violations of Section 5 of the Federal Trade Commission Act in the commercial finance and leasing products issued by its wholly owned subsidiary, Financial Pacific Leasing, Inc. According to the FDIC, these violations included engaging in deceptive and/or unfair practices related to certain collection fees and collection practices involving excessive or sequential calling, disclosure of debt information to nonborrowers, and failure to abide by requests to cease and desist continued collection calls.
  • The FDIC also issued an order to pay a CMP of $129,800 to Bank of England (England, AR). The bank consented to the order without admitting or denying the violations of law or regulation.
    The FDIC determined that the bank violated Section 5 of the Federal Trade Commission Act because bank loan officers located in the Bloomfield, MI loan production office (LPO) misrepresented to consumers that certain Veterans Administration (VA) refinance loan terms were available when they were not, and that the bank’s misrepresentations at the Bloomfield LPO regarding terms for VA refinancing loans were deceptive, in violation of Section 5.

How to Deal with These Issues
As we advised in our previous article, banks and thrifts should be proactive in addressing areas prone to UDAAP issues. You can anticipate potential problems by, in part, tracking enforcement actions as indicators of where regulators are looking for issues (and finding them).

The steps we spelled out to help in this proactive approach are:

  • Establish a positive compliance culture by positive words, actions, and attitudes from the top down.
  • Enforce compliance performance which, coupled with the overt support from the top, makes it clear to all that this is a crucial element in the success of the organization and any related individual rewards (bonuses, raises, promotions, etc.)
  • Involve compliance early in product design, marketing planning, and so forth.
  • Focus on vulnerable customers, including the young, less educated, immigrants, elderly, etc., within your community, paying particular attention to how your marketing, product recommendations, and disclosures are directed to such populations

It is much easier – and less expensive – to plan and lay appropriate groundwork to avoid problems than it is to repair damages after inappropriate and illegal actions blow up. The reactive approach can cause the bank immeasurable reputation harm, which is much more costly than any monetary penalties, and much more difficult to recover from.
For more information on how the Young & Associates compliance team can assist with your UDAAP compliance, contact us at mgerbick@younginc.com or 330-422-3482.

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