Author: admin

The purpose of quality control − Loan origination volume

Written by admin on March 23, 2022. Posted in Mortgage Quality Control.

Fannie Mae predicts $2.72 trillion in mortgage originations in 2021 and $2.47 trillion in 2022. They anticipate purchase volume to go from $1.53 trillion in 2020 to $1.6 trillion in 2021 and $1.64 trillion in 2022.

The U.S. mortgage industry earned an average profit of $4,202 per loan on its way to record volume and a record $4.4 trillion in new loans originated in 2020, according to the Mortgage Bankers Association — and the perfect storm of low interest rates and high home values has kept the gold rush going in 2021. In other words, high volumes of mortgage loans are a big profit for banks, credit unions, etc.

Contrary to popular thought, most of the time when a bank originates a mortgage loan, it is sold on what is called the “secondary market” to provide the banks with instant profits/liquidity (cash). This is done simply because smaller banks/credit unions, which are the main players in the secondary market, incur costs associated with servicing or managing the loans on their books. This is where Fannie Mae, Freddie Mac, Mortgage Partnership Finance, and many other companies come into play.

Fannie and Freddie purchase home loans made by private firms, banks, and credit unions (provided the loans meet strict size, credit, and underwriting standards), package those loans into mortgage-backed securities, and guarantee the timely payment of principal and interest on those securities to outside investors. Fannie and Freddie also hold some home loans and mortgage securities in their own investment portfolios.

How can Young & Associates assist with quality control?

Loans eligible for purchase by Fannie Mae and Freddie Mac must adhere to strict size, credit, and underwriting standards. Fannie Mae and Freddie Mac require that all loans meet these standards. They then require a certain randomized sample to undergo a “Quality Control” review ̶ which is what Young & Associates does.

We are an industry leader and provider of QC services for over 44 years and provide mortgage quality control services to meet government-sponsored enterprise and agency requirements. As a high-level definition, our QC consultants review a 10% sample of all loans originated in a period for a client (month/quarter) and reassure that it adheres to Fannie Mae and Freddie Mac Guidelines.

There are also other investors and Guarantors (two different terms), such as the Federal Department of Housing and Urban Development (HUD). HUD consists of FHA and VA loans. Fannie Mae and Freddie Mac require the reviews to be done within 90 days of the prior period-end. HUD requires the reviews to be done in 60 days.

Superior results at a lower cost

Maintaining the mortgage QC function in-house can be difficult given the time, staffing, and expertise required. Control the risks of noncompliance and reduce your costs by outsourcing your quality control to Young & Associates.

Our mortgage quality control services include:

Quality Control Plan Development
Quality Control Reviews − approved, denied, and defaulted file reviews
FHA Branch Audits
Early Payment Default Review
FHA/VA Denied Loan Review
Pre-closing QC Reviews
Reverse Audits

Organizations with a commitment to quality control recognize that quality begins before an application is taken. It then continues throughout the entire mortgage origination process.

Young & Associates is committed to your organization’s future success. We look forward to assisting you to ensure or enhance that success. Please visit our website, www.younginc.com, to learn more about us or contact Dave Reno at 330.442.3455 or dreno@younginc.com.

Don’t let UDAAP spook you, take control

Written by admin on March 23, 2022. Posted in Compliance & Regulations.

The Consumer Financial Protection Bureau (CFPB) celebrated Halloween in 2012 by releasing its updated Supervision and Examination Manual (version 2.0). The manual includes updated examination procedures for assessing compliance with Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) rules. The updated examination procedures give bankers a guide for what their examiners will be looking for in terms of UDAAP compliance, including the then-new “abusive” standard.

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.

It was not until the year 2000 that banks saw significant enforcement of UDAP 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.

Then, Title X of the Dodd-Frank Act (DFA) codified UDAP law specifically for financial institutions, eliminated the FRB’s rule-writing authority, added the “abusive” standard, and moved rule-writing authority to the CFPB.

What is UDAAP?

All of 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.

In brief, these standards are:

Unfair. To be unfair, an act or practice must cause or be likely to cause substantial injury to consumers, harm 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.
Deceptive. 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 representation, omission, act, or practice 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.
Abusive. 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 banker (or other “covered person”) to act in the interests of the consumer.

How to handle UDAAP

Banks and thrifts need to make sure their consumer compliance programs are proactive in addressing areas prone to UDAAP issues. Anticipate potential problems; do not wait for problems to arise because by then it may be too late to prevent serious consequences.

A few steps that can help establish a proactive compliance regime are:

Establish a positive compliance culture. Senior management and the board need to make it clear that compliance is a fundamental element of the institution’s business – both compliance with the technical requirements (disclosures, computations, etc.) and, at least equally important, with the underlying spirit or fundamental principles of the consumer protection laws.
Enforce compliance performance. To succeed, the bank needs to make compliance important to its officers and staff – by not only ensuring overt support from the top, but also by making it an integral part of how employees’ performance is measured and rewarded (or not). For example, an officer with high loan production with high compliance error rates or fairness issues, should not be rewarded for one (production) without being penalized for the other (compliance failures).
Involve compliance early. Compliance cannot be an exercise in looking for violations and other problems after the fact. To be truly effective and efficient, compliance must be integrated into the business processes – involved in product design, marketing planning, etc., at the ground level.
Focus on vulnerable customers. An important way to avoid UDAAP problems is to pay particular attention to those customers, or potential customers, who might be more vulnerable to unfair, deceptive, or abusive acts or practices. Examples of such potentially vulnerable populations might include the young, less educated, immigrants, elderly, and so forth. The bank should be particularly sensitive to how it couches its marketing, product recommendations, disclosures, etc., to such populations.

Benefits of a regime

Such a positive, proactive compliance regime can help the bank prevent most UDAAP (and other compliance) problems before they even arise. This approach is much more cost-efficient than running what a compliance officer I knew years ago called a “fix-it shop,” having to try to fix compliance problems after they have occurred. Years ago, such an approach was not desirable, but might have been survivable. However, today, it could prove disastrous – especially with the rise of UDAAP.

Contact Y&A today

For more information on this article or how Young & Associates can assist your organization with UDAAP compliance, contact Dave Reno at 330.422.3455 or dreno@younginc.com.

The value of internal audit through a fresh set of eyes

Written by admin on March 23, 2022. Posted in Compliance & Regulations.

There is risk in every aspect of the banking industry and the regulatory environment seems to continually change. As to the governance and control functions of the industry, it may be refreshing to the board of directors, audit committee, and executive management to have their internal audit function re-assessed and validated through a fresh set of eyes to assure that the controls in place are functioning as intended.

Why consider an internal audit?

A strong internal control system, including an independent and effective internal audit function, is part of sound corporate governance. The board of directors, audit committee, senior management, and supervisors must be satisfied with the effectiveness of the internal audit function, that policies and practices are followed, and that management takes appropriate and timely corrective action in response to internal control weaknesses identified by internal auditors. An internal audit function provides vital assurance to a board of directors (who ultimately remains responsible for the internal audit function, whether in-house or outsourced) as to the quality of the internal control system. In doing so, the function helps reduce the risk of loss, regulatory criticism, and reputational damage to the organization.

All internal auditors (whether in-house or outsourced) must have integrity and professional competence, including the knowledge and experience of each internal auditor and of team members collectively. This is essential to the effectiveness of the internal audit function. We encourage internal auditors to comply with and to contribute to the development of national professional standards, such as those issued by the Institute of Internal Auditors, and to promote due consideration of prudent issues in the development of internal audit standards and practices.

Every activity of the organization (including outsourced activities) should fall within the scope of the internal audit function. The scope of the internal audit function’s activities should ensure adequate coverage of matters of regulatory interest within the audit plan. Regular communication by the audit committee, management, and affected personnel is crucial to identify the weaknesses and risk associated to assure that timely remedial actions are taken.

How Young & Associates can help

Young & Associates can independently assess the effectiveness and efficiency of the organization’s internal control, risk management, and governance systems and processes to provide assurance that the internal control structure in place operates according to sound principles and standards. For more information on how we might provide internal audit services specific to your organization’s needs, whether it is outsourced or co-sourced, please contact Dave Reno at 330.422.3455 or email to dreno@younginc.com.

Focus on Affirmative Action, Equity, Diversity, and Inclusion (ED&I)

Written by admin on March 23, 2022. Posted in Human Resources.

By: Gina Sherock, Senior Consultant, and Rachel Disko, SHRM-CP, Senior HR Business Partner

Over the past several years, there has been an increased and sustained focus on workplace diversity. If this hasn’t been focal to business strategy in the past, leaders are wondering where they should start and why. The answer to this depends on several factors. But the evidence is becoming impossible to ignore − an intentional workplace diversity effort is critical.

Banks and financial institutions covered by FDIC insurance are considered government contractors. Therefore, they must develop a formal Affirmative Action Plan (AAP) to ensure equal employment opportunity for race, gender, disability, and protected veteran status if they have at least 50 employees. These requirements are enforced by the Office of Federal Contract Compliance Programs (OFCCP) to comply with Executive Order 11246 (covers race and gender); Section 503 of the Rehabilitation Act of 1973 (covers individuals with disabilities); and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974, aka VEVRAA (covers protected veterans).

For those organizations that must do so to remain in compliance, the case for developing a formal AAP is clear. However, there is a strong business case for ensuring equal opportunity and embracing diversity and inclusion.

Relevant laws and risk management

Having a workforce that lacks diversity could increase risk from a legal standpoint. Discriminating against a job applicant or an employee because of the person’s race, color, religion, sex (including pregnancy, transgender status, and sexual orientation), national origin, age (40 or older), disability, or genetic information is illegal. Even if discrimination was not intended toward an applicant or employee, poor optics can lead to a complaint being filed with the Equal Employment Opportunity Commission (EEOC) and a potential lawsuit. If that happens, an organization risks a loss of productivity, incurring legal fees (including compensatory damages), and its reputation as an employer. Without strong documentation as evidence that discrimination did not actually occur, intentions are left open to interpretation and the organization could be at a disadvantage.

Lack of workforce exposure to a diverse population can also lead to implicit bias among employees, leaders, and decision makers. Implicit bias occurs when a person holds an unconscious prejudice, attitude, or opinion about others. This type of thinking increases the risk of a discrimination lawsuit, even if harm was not intended.

Benefits of ED&I

Many of us know there should be diversity and inclusion in the workplace. However, we may not necessarily know the benefits associated with a focus on diversity. Here are some reasons why equity, diversity, and inclusion are beneficial to not only businesses but also their employees.

Businesses with more diversity generally thrive when compared to companies that are less diverse. Employees from different demographic groups have different talents, experiences, and skill sets. Therefore, its more beneficial for companies to increase creativity and innovation. Increasing the diversity of leadership teams can help improve financial performance. According to a Boston Consulting group study, “companies with above-average diversity on their leadership teams receive a greater payoff from innovation and higher EBIT (Earnings Before Interest and Taxes) margins.”

Additionally, diversity also helps to attract and retain talent for the organization by promoting that you are an organization that prioritizes ED&I in the workplace. A study from Washington State University states, “by 2025, 75% of the workforce will be millennials, 32% of millennials and Gen Z believe businesses should try to improve their diversity.” Finally, workplace diversity boosts a company’s reputation, brand, and overall morale. This helps the organization to increase employee engagement and ensures a well-rounded culture.

The benefits of diversity do not stop at the employer level. Employees are proven to benefit from a diverse workforce as well. Workplace diversity can lead to better decision-making. According to Washington State University, “a study that analyzed 600 business decisions made by 200 teams found that the decision making of diverse teams outperforms individual decision-making up to 87% of the time.” Along with better decision making, diversity is proven to lead to faster problem-solving. A study published by the Harvard Business Review found that higher comprehensible diversity correlates with better performance. Additionally, diversity in the workplace may increase employee engagement and help employees to feel more included.

Your Affirmative Action Plan or other ED&I initiatives

Whether through a formal Affirmative Action Plan or other ED&I initiatives, employers are seeing the benefits both in meeting compliance obligations and increasing the overall bottom line with a more diverse workforce. We are seeing more businesses become aware of ED&I in the workplace. Candidates often wonder how they will fit in, if they will receive equal opportunity, and if they will feel welcomed.

Developing an Affirmative Action Plan or ED&I initiative may be difficult to navigate. Young and Associates is here to help. We offer a wide range of HR services for banks and financial institutions to take the guess work away. For more information on how we can assist with your HR efforts, contact Dave Reno at 330.422.3455 or dreno@younginc.com.

Annual reviews of commercial credits

Written by admin on March 23, 2022. Posted in Lending & Loan Review.

What is the overall condition of your commercial loan portfolio? Do you focus on net charge-offs? Delinquencies? Financial statement exceptions to policy? Number and level of TDRs and non-accruals? The percent of the ALLL to total loans? While all of these broad measures can be helpful, the number and nature of grade changes coming from internal annual reviews are likely to be timelier and more accurate than all of the other measures combined.

Questions to consider

Does your credit policy contain specific criteria describing relationships which must receive annual reviews? If so, have you recently evaluated whether that level remains appropriate for your portfolio today? The commercial annual review threshold should be set at a level where the required reviews will cover at least 50 percent of commercial exposures. Each bank should do a sort of the commercial portfolio and determine what level of exposure will yield the desired coverage ratio. The annual review requirements should differ from the Watch List or Special Asset requirements as the annual reviews should be separate from those assets already identified with some level of weakness.

Now that you have set an annual review requirement, what elements of a credit analysis should be completed? Although the ultimate goal is to determine the accuracy of the risk rating, regulators will be looking for the robustness of the annual review in order to “sign off” or accept the annual review results. In addition to providing executive management and the board with timely and accurate results, a solid and meaningful annual review process can help to build confidence in your systems with the regulators and potentially allow for a more efficient third-party loan review.

Minimum requirements for annual review activities should be built into the loan or credit policies so that management and the board can demonstrate to regulators that they are determined to ensure risk ratings and, therefore, that the ALLL and criticized and classified reporting is accurate.

The annual review procedures should include the following:

Detail of the relationship being reviewed including borrower, guarantors, SBA or other guarantees, and note numbers included.
Update of all borrower/co-borrower financial information used in the original approval or the latest renewal which would include spreads, debt coverage calculations, loan-to-value calculations, borrowing base analysis, etc.
Update of all guarantor financial information including a new complete and signed personal financial statement, most recent tax returns and, for individuals, an updated credit report.
A statement of how the account has been handled since the previous annual review (or approval) including any delinquency of payment, financial information, or supporting information such as insurance, borrowing base reporting, etc.
In most cases, site visits by the loan officer or relationship manager or other representative of the company should have occurred since the previous annual review or approval. For CRE loans, the documentation of the visit should include perceptions by the representative of the condition of the property, occupancy trends, whether or not any deferred maintenance was noted, and if there were any changes in the neighborhood. For all credits, the representative should also use this visit to become updated on any material changes in the customer base, management, operating personnel, market conditions, condition of equipment or other fixed assets, and any other information that would help to understand the customer.
An update of any approval conditions and whether the borrower is maintaining those conditions, including any promises of deposit accounts, financial reporting, property improvements, and compliance with any financial or other covenants.
A confirmation that the existing risk rating is accurate or recommendations to change the risk rating, up or down, and the factors that the change is based on.

The financial institution that is covering 50 percent of its commercial portfolio with robust and timely annual reviews every year should provide executive management and the board with sufficient information to understand the level and direction of credit risk and whether these are in accordance with the desired risk appetite.

For more information on how Young & Associates, Inc. can assist your institution in this area, please contact Dave Reno. Reno is the Director of Lending and Business Development, at 330.422.3455 or dreno@younginc.com.

ADA website compliance, 5 key tips

Written by admin on November 10, 2021. Posted in Information Technology, Management & Planning.

By: Mike Lehr, Human Resources and Sales Consultant

Banks must make their websites accessible to individuals with disabilities. That is how federal courts have interpreted the Americans with Disabilities Act (ADA). We have found five key tips go a long way to doing that. Ironically, software scans measuring accessibility don’t do this successfully.

That’s a key, key lesson: do not rely on scanning software to determine whether your site is accessible. Again, do not rely on this software for determining accessibility. In our audits and discussions with attorneys who have defended clients in lawsuits, these results are almost useless. What holds up best is the testimony and tests of sight-impaired users (SIUs) who have used the website. Nothing compares to observing a SIU running through a site. That’s because the WCAG 2.1 and Section 508 guidelines – used as the basis for compliance – have many interpretive elements to them. Yes, some we can quantify and code. About half we can’t. Images make the simplest examples. Scans state whether an alt-text exists. They can’t tell though whether the alt-text is necessary or even useful.

This doesn’t mean scans don’t help. They do. They look at the entire site. A human audit is just that, an audit, meaning it looks at a sample. Scans give one input to developing the site’s audit plan.

The Five Tips

We can summarize the five tips that go a long way to ensuring a site’s accessibility as easy navigation, useful alt-tags, and proper coding practices. The tips focus on SIUs rather than other disabilities because not seeing the site – or seeing it well – is the most difficult challenge to overcome even with good hardware.

1. Navigation Menu – Only One

Websites have many ways to navigate them. In addition to the traditional horizontal menu, mobile menus (hamburger menus) also exist. Sites also employ vertical menus on the left and right sides of the page. They also use fly-in menus that come in on certain pages. The tip refers to silencing all but the most comprehensive or dominant menu.

That means the site should be coded to do this when it detects a screen reader (SRs ̶ software that allows a SIU to read a site). It should be the most comprehensive and dominant menu. Remember, SIUs can’t see the screen well. They only hear it. Most times they won’t even know how big the window is on the screen.

Yet, SIUs often program SRs to prioritize links. That means SRs will read all menus. For the SIU, that becomes confusing as to which link to click. They hear too many duplicates. Imagine now going to a site where you see double of everything.

2. Alt-tags as Signposts

As mentioned above, SRs often prioritize links. That includes non-menu links such as those imbedded in text, images, and other elements. Links tend to take users to one of four places: another page, another place on the same page, another site, or a file such as a PDF. In doing so, one of two things happen: the user remains in the same window or opens a new one.

This tip refers to using alt-tags as signposts. Two sides of this exist. The first involves telling SIUs where they are going. Otherwise, they primarily think they go to another page. The site needs to tell them even if the image’s caption or surrounding text clearly states this. That’s because SIUs can program the SR to read only the links on a page, meaning the SR won’t read context clues.

The other side of this involves making each link distinct. For instance, “click here” often appears after descriptive text such as, “To go to our checking account page click here.” It tells SIUs nothing when they program the SR to read links only. This compounds if many links say “click here.” So, choose to make the whole phrase a link or add more description to the alt-tag.

3. Alt-tags as Additional Descriptors

Many misread the guidelines when they come to alt-tags for non-links such as images. They think it says – and scanning software reinforces this – that alt-tags can’t be blank. So, sites duplicate the caption in the alt-tag or add text to a purely aesthetic design element such as a color block, shape, or filler that communicates nothing.

Imagine a great, beautiful well-designed home. However, when you enter there’s clutter everywhere. You have to move things around. You even trip over some. This is “death by a thousand cuts.” Sites do the same to SIUs when they have duplicate, nonsensical, and useless alt-tags.

In such cases, code the alt-tag with the left double quotes followed by the right double quotes (“”). This tells the SR to skip the alt-tag and tells the scanning software an alt-tag exists (so it won’t flag it as an issue).

4. H-tags and TITLE Attributes

SRs assume sites use generally accepted coding practices. That means SRs will have problems with sites that don’t. Two of the more common ones that sites overlook are the h-tag and the TITLE attribute. The first identifies headers. The second identifies the page.

Sites can prioritize headers. Headers using an h1 tag is the most important. H2 tags are second, h3 third and so on. Most web managers know these headers as ways to change the look of a header. Their use can automatically enlarge, bold, italicize, color, or underline headers.

While h-tags allow designers to quickly add design enhancements to headers, they also serve to prioritize content. In this role, they help SIUs much. Just as SIUs can program SRs to read only the links on a page, they can also have them read just the headers. Some even allow them to program what level header to read, such as “read h1 – h3 headers” only. This means that headers must accurately reflect the relative importance of the website page’s content.

Unfortunately, content managers often only look at h-tags as design elements. So, rather than code a header using an h-tag, it might be quicker and easier just to bold and color text. After all, it will just look the same. However, this just relegates a header to common text. SRs will miss it.

TITLE attributes serve no real purpose for non-SIUs. Since they appear at the top of a page’s code, they can serve to further describe the page and reassure SIUs that they arrived on the page they wanted. Again, many sites just throw something similar to the page’s visible title in this or something abbreviated. More description often helps SIUs.

5. Help Desk Phone Number

Companies increasingly employ more automated forms of problem resolution. So, they aren’t likely to list a phone number prominently on their sites. Yet, such a number can go a long way to helping SIUs work through a site. Including the phone number near the top in the page’s coding will make it invisible to non-SIUs but accessible to SIUs with their SRs.

For instance, the site could include the number (along with times of availability) in the alt-text of the company’s logo in the upper left which often includes a link to the home page. Sites often include this number before or after input elements such as account logins.

Of course, this does necessitate that the bank supports the number. That might mean changing voicemail prompts and other protocols if the number has other uses. It also means training staff to handle such calls with sensitivity and patience.

Going a Long Way

Except for the first tip regarding menus, a reasonably experienced website content manager can perform these tasks. Even then, with less than an hour’s training, others can learn. Time and discipline remain the real challenge. It can begin though with ensuring that any new content incorporates these tips.

As for policy decisions, we recommend that banks purchase scanning and screen reading software. They make a world of difference. Also, and finally, we encourage banks to contact their local society for the sight impaired and ask for their help. Most members already have SRs. See if you can observe them using your site. It’s not only good community outreach, but I guarantee you will find it an eye-opening experience. We did.

For more information on this article and how Young & Associates can assist your bank in this area, contact Dave Reno, Director – Lending and Business Development at dreno@younginc.com and 330.422.3445.

SAFE Act a decade on

Written by admin on November 2, 2021. Posted in Compliance & Regulations, Lending & Loan Review.

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

We have been dealing with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) since 2010, and yet questions surface or confusion still exists over SAFE Act requirements.

“A loan clerk quotes loan rates from a non-public rate schedule, along with payment amounts for inquiring consumers. Should she be registered?” (Maybe, she is performing a function of a mortgage loan originator, MLO.)

“Our head of lending is our SAFE Act Officer. He also handles some mortgage loans, with his name on loan documents. However, his background is in commercial lending and he has never been registered with the NMLSR. Do we have a problem?” (Yes, if he is involved in more than five mortgage loans per year, he must be registered.)

“How often do we have to get criminal background checks for our MLOs? How about when their fingerprints expire?” (Criminal background checks are required only on initial registration. The fingerprint expiration date is only relevant for existing MLOs who are coming into the bank as new employees. No updating of fingerprints for ongoing MLOs is required.)

These queries reveal that confusion still exists over what the requirements are and how they impact banks and thrifts.

A little background

Congress enacted the SAFE Act in July 2008 to require states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators, and to provide for the establishment of a nationwide mortgage licensing system and registry for the residential mortgage industry.

The SAFE Act required all states to provide for a licensing and registration regime for mortgage loan originators who are not employed by federal agency-regulated institutions within one year of enactment (or two years for states whose legislatures meet biennially).

In addition, the SAFE Act required the federal banking agencies, through the Federal Financial Institutions Examination Council (FFIEC), and the Farm Credit Administration (FCA) to develop and maintain a system for registering mortgage loan originators employed by agency-regulated institutions.

The Dodd-Frank Act moved responsibility for the SAFE Act rules to the Consumer Financial Protection Bureau (CFPB), which rolled these rules into its Regulation G (12 CFR 1007).

Licensing vs. registration

Most of the confusion at the outset seemed to center on the issue of licensing versus registration of mortgage loan originators (MLOs). The issue is really deceptively simple.

MLOs that work for federally supervised banks, thrifts, and credit unions (as well as FCA lenders) must register with the national registry (NMLSR).
MLOs employed by other mortgage lenders (mortgage companies, etc.) must navigate the state licensing and registry system, a much more time consuming, expensive, and burdensome process which also carries a continuing education requirement.

Coverage

A “mortgage loan originator” is an individual who both takes residential mortgage loan applications and offers or negotiates terms of a residential mortgage loan for compensation or gain.

The term “mortgage loan originator” does not include individuals that perform purely “administrative or clerical tasks” (the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the mortgage industry) and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan. Also excluded are individuals that perform only real estate brokerage activities and are duly licensed, individuals or entities solely involved in extensions of credit related to timeshare plans, employees engaged in loan modifications or assumptions, and employees engaged in mortgage loan servicing.

“Compensation or gain” includes salaries, commissions, other incentives, or any combination of these types of payments.

MLO registration

An MLO must be federally registered if the individual is an employee of a depository institution, an employee of any subsidiary owned and controlled by a depository institution and regulated by a federal banking agency, or an employee of an institution regulated by the FCA.

The final rule, as required by the SAFE Act, prohibits an individual who is an employee of an agency-regulated institution from engaging in the business of a loan originator without registering as a loan originator with the national registry, maintaining that registration annually, and obtaining a unique identifier through the registry. Employer financial institutions must require adherence to this rule by their employee MLOs.

MLOs may submit their registration information individually or their employer institution may do it for them (by a non-MLO employee). The decision of which approach to take should be made by management to ensure consistency within the institution, especially since there is prescribed institution information that also must be submitted to the registry.

This MLO information must include financial services-related employment history for the 10 years before the date of registration or renewal, including the date the employee became an employee of the bank – not just the time they have worked for their current employer.

MLOs and their employers need to remember that registrations have to be renewed annually for as long as an individual operates as an MLO. The renewal period opens on November 1 and ends on December 31 each year. If an MLO or bank registration lapses, it may be reinstated during a reinstatement period that opens on January 2 and closes on February 28 each year.

Other requirements

Bank and thrift managers also should remember that there are specific requirements in this rule for the institution to have policies and procedures to implement SAFE Act requirements, as well as regarding the use of a unique identifier (NMLS number) by MLOs.

At a minimum, the bank’s SAFE Act policies and procedures must:

Establish a process for identifying which employees have to be registered MLOs
Require that all employees who are MLOs are informed of the SAFE Act registration requirements and be instructed on how to comply with those requirements and procedures
Establish procedures to comply with the unique identifier requirements
Establish reasonable procedures for confirming the adequacy and accuracy of employee registrations, including updates and renewals, by comparisons with its own records
Establish reasonable procedures and tracking systems for monitoring compliance with registration and renewal requirements and procedures
Provide for independent testing for compliance with this part to be conducted at least annually by covered financial institution personnel or by an outside party
Provide for appropriate action in the case of any employee who fails to comply with SAFE Act registration requirements or the bank’s related policies and procedures, including prohibiting such employees from acting as MLOs or other appropriate disciplinary action
Establish a process for reviewing SAFE Act employee criminal history background reports, taking appropriate action consistent with applicable federal law, and maintaining records of these reports and actions taken with respect to applicable employees, and
Establish procedures designed to ensure that any third party with which the bank has arrangements related to mortgage loan origination has policies and procedures to comply with the SAFE Act, including appropriate licensing and/or registration of individuals acting as MLOs

The bank or thrift also must make the unique identifiers (NMLS numbers) of its registered MLOs available to consumers “in a manner and method practicable to the institution.” The bank has latitude in implementing this requirement.

It may choose to make the identifiers available in one or more of the following ways:

Directing consumers to a listing of registered MLOs and their unique identifiers on its website
Posting this information prominently in a publicly accessible place, such as a branch office lobby or lending office reception area, and/or
Establishing a process to ensure that bank personnel provide the unique identifier of a registered MLO to consumers who request it from employees other than the MLO

In addition, a registered MLO must provide his or her unique identifier to a consumer:

Upon request
Before acting as a mortgage loan originator, and
Through the MLO’s initial written communication with a consumer, if any, whether on paper or electronically (often by incorporating it into the signature information for standard letter and e-mail formats)

Banks, thrifts, and their registered MLOs often also make their NMLS numbers available in other ways – such as including them in advertising or on business cards.

As with any compliance rule, banks and thrifts need to make sure that they have systems in place to ensure compliance with SAFE Act requirements, including appropriate training for employees involved in the mortgage origination process.

For information on how Young & Associates can assist your bank with the SAFE Act requirements, contact Dave Reno at 330.422.3455 and dreno@younginc.com.

Young & Associates positions for growth; unveils new brand and website

Written by admin on July 28, 2021. Posted in News.

(Kent, OH) Thursday, July 28, 2021 — Young & Associates, a nationally recognized consulting, outsourcing and educational service firm for financial institutions, announced today a refreshed brand identity, including a new logo and tagline, “Financial industry expertise. Proven results.”

The rebrand positions the company for accelerated growth opportunities, as it solidifies its position as an industry leader.

“This rebrand marks the start of a new era for our firm,” said Young & Associates President and CEO Jerry Sutherin. “In an ever-changing market, this new brand reflects our progress and reaffirms our commitment to our clients. Rest assured that while our logo has changed, our values and our mission remain the same. We are proud to continue our legacy of excellent service to financial institutions by providing the proven expertise needed to drive results for their organizations.”

Coinciding with the rebrand, the firm launched a new website, which features easy-to-navigate information, improved functionality, and a sleek, modern design. It showcases the firms extensive consulting services, including regulatory compliance services, lending and loan reviews and management consulting. It also includes an online store for users to shop customizable policies and practical, easy-to-use tools for their financial institutions.

“We’re excited to debut our new website to our clients and industry partners,” said Sutherin. “We’ve always offered a breadth of services and educational opportunities, as well as a robust policy store. But this new website will make those capabilities and resources much easier for our clients to access .”

Visit younginc.com to see the new brand and explore the new website. Contact Young & Associates to learn more about the firm’s consulting services.

About Young & Associates

Young & Associates is a national leader in consulting, outsourcing and educational services for financial institutions. Since 1978, the firm has provided trusted financial expertise to help clients manage risk, stay compliant and achieve their financial objectives. Visit younginc.com to learn more.

Regulation B Interpretive Rule on Sexual Orientation and Gender Identity

Written by admin on June 2, 2021. Posted in Compliance & Regulations, Lending & Loan Review, News.

The Bureau of Consumer Financial Protection (Bureau) issued an interpretive rule to clarify that, with respect to any aspect of a credit transaction, the prohibition against sex discrimination in the Equal Credit Opportunity Act (ECOA) and Regulation B, which implements ECOA, encompasses sexual orientation discrimination and gender identity discrimination, including discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant’s associations.

The interpretive rule became effective upon publication in the Federal Register.

Stay compliant

At Young & Associates, we have been teaching for years that this is the correct approach. The reality is that an applicant’s sexual orientation or gender identity has absolutely nothing to do with whether they will be able to repay the loan. The focus of all bankers should be on the same things that are important in all credit decisions – cash, collateral, and credit. Nothing else really matters.

The Equal Credit Opportunity Act (ECOA) makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction,” on several enumerated bases, including “on the basis of … sex …” Likewise, Regulation B prohibits a creditor from discriminating against an applicant on a prohibited basis (including “sex”) “regarding any aspect of a credit transaction,” and from making “any oral or written statement to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”

Changes your institution needs to know

Before this interpretive rule, twenty states and the District of Columbia prohibited discrimination on the bases of sexual orientation and/or gender identity either in all credit transactions or in certain (e.g., housing-related) credit transactions. This interpretive rule now makes this the new national standard. Financial institutions must recognize sexual orientation and/or gender identity as protected classes and incorporate practices that prohibit discrimination on these bases.

This interpretive rule removes any remaining regulatory uncertainty under ECOA and Regulation B regarding the term “sex” to ensure fair, equitable, and nondiscriminatory access to credit for both individuals and communities and to protect consumers from discrimination. It serves a stated purpose of Regulation B, which is to “promote the availability of credit to all creditworthy applicants without regard to … sex …”

As an interpretive rule, it is exempt from the notice-and-comment rulemaking requirements of the Administrative Procedure Act.

To learn more about how we can assist your organization with your compliance efforts, contact Dave Reno, Director – Lending and Business Development, at dreno@younginc.com or 330.422.3455.

Compliance management

Written by admin on April 29, 2021. Posted in Compliance & Regulations.

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

We have repeatedly heard over the years that we must manage compliance just like all other aspects of our business. This maxim is particularly true in today’s escalating compliance environment. So many new and changed rules have entered the mix over the past decade that we could easily feel overwhelmed if we did not proactively manage the compliance process.

Over the years, supervisory agencies have shared general outlines of compliance management systems with the financial institutions they regulate. They have quickly pointed out that no single “right” way exists to manage compliance, but every program must meet certain basic needs.

Compliance Management Systems

The Consumer Financial Protection Bureau (CFPB) and other agencies view compliance management as vital to the prevention of violations of federal consumer financial laws and the resulting harm to consumers. In its Supervisory Highlights publication, the CFPB spelled out its expectations for an effective compliance management system (CMS) – which mirror those from other supervisory agencies.

The CFPB states that it expects every entity it supervises (large financial institutions and nonbank financial firms) to have an effective CMS adapted to its business strategy and operations.

According to the CFPB, a CMS is how a supervised entity:

Establishes its compliance responsibilities.
Communicates those responsibilities to employees.
The program ensures that business processes incorporate responsibilities for meeting legal requirements and internal policies.
The compliance team reviews operations to ensure they meet legal requirements and carry out assigned responsibilities.
Takes corrective action.
Updates tools, systems, and materials, as necessary.

No agency requires financial institutions to structure their CMS in any particular manner. They recognize the differences inherent in an industry comprised of banking organizations of different sizes, differing compliance profiles, and a wide range of consumer financial products and services. In addition, some financial firms outsource functions with consumer compliance-related responsibilities to service providers, requiring adaptations in their CMS structure.

However compliance is managed, financial entities are expected by all the federal supervisory agencies to structure their CMS in a manner sufficient to comply with federal consumer financial laws and appropriately address associated risks of harm to consumers.

CFPB Findings

The CFPB has found that the majority of banks it has examined have generally had adequate CMS structures. However, several institutions have lacked one or more of the components of an effective CMS, which creates an increased risk of noncompliance with federal consumer financial laws.

The most common weakness identified during CFPB reviews of banks’ CMS is a deficient system of periodic monitoring and independent compliance audits. The CFPB has noted that an effective CMS implements an effective internal compliance review program as an integral part of an overall risk management strategy. Such a program has two components – both periodic monitoring reviews and an independent compliance audit. These two types of controls are not interchangeable. They must be complementary.

The periodic monitoring reviews are more frequent and less intensive than the audits, focusing on areas that carry the most risk – where mistakes should not be allowed to go uncorrected too long. Monitoring is an ongoing process, conducted by either the individual business lines or the compliance officer/department on a relatively frequent basis, and allows the bank to self-check its processes and ensure day-to-day compliance with federal consumer financial laws.

An independent compliance audit reviews all operations impacted by consumer laws. Auditors perform audits less frequently—usually annually—to ensure ongoing compliance, proper operation of the CMS as a whole, and board awareness of consumer compliance issues identified in these independent reviews. An independent party—either an internal auditor or an outside consultant—should perform audits.

The CFPB notes that an entity lacking periodic monitoring increases its risk that violations and weaknesses will go undetected for long periods of time, potentially leading to multiple regulatory violations and increased consumer harm.

Additionally, these entities increase the risk that:

Insufficiencies in the periodic monitoring process may not be identified.
The board is not made aware of regulatory violations or program weaknesses.
Practices or conduct by employees within the business lines or compliance department that are unfair, deceptive, abusive, discriminatory, or otherwise unlawful could go undetected.

CMS Elements

Although the CFPB states that it does not require any specific CMS structure, it notes that supervisory experience has found that an effective CMS commonly has four interdependent control components, elements that have been advocated by all regulatory agencies over the years:

Board of directors and management oversight. An effective board of directors communicates clear expectations and adopts clear policy statements about consumer compliance for both the bank itself and its service providers. The board should establish a compliance function, allocating sufficient resources and qualified staffing to that function, commensurate with the entity’s size, organizational complexity, and risk profile. The board should ensure that the compliance function has the authority and accountability necessary to implement the compliance management program, with clear and visible support from senior management, as well. Management should ensure a strong compliance function and provide recurring reports of compliance risks, issues, and resolutions to the board or to a committee of the board.

Compliance program. The CFPB and other federal financial institutions supervisors expect supervised entities to establish a formal, written compliance program, generally administered by a chief compliance officer. A compliance program includes the following elements: policies and procedures, training, monitoring, and corrective action.

The agencies assert that a well-planned, implemented, and maintained compliance program will prevent or reduce regulatory violations, protect consumers from noncompliance and associated harms, decrease the costs and risks of litigation affecting revenues and operational focus, and help align business strategies with outcomes.

Consumer complaint management program. Federal supervisory agencies expect financial service providers to respond to complaints and inquiries received from consumers. In addition, financial institutions should monitor and analyze complaints to understand and correct weaknesses in their programs that could lead to consumer risks and violations of law.

Key elements of a consumer complaint management program include establishment of channels through which to receive consumer complaints and inquiries (e.g., telephone numbers or email addresses dedicated to receiving consumer complaints or inquiries); proper and timely resolution of all complaints; recordation, categorization, and analysis of complaints and inquiries; and reviews for possible violations of federal consumer financial laws.

The agencies expect financial firms to organize, retain, and analyze complaint data to identify trends, isolate areas of risk, and identify program weaknesses in their lines of business and overall CMS.

Independent compliance audit. A compliance audit program allows the board of directors or its designated committees to determine whether the institution is implementing policies and standards that achieve the level of compliance and consumer protection the board has established. As noted above, an independent party — separate from both the compliance program and business functions — should conduct these audits. The auditor should report the audit results directly to the board or a board committee.

The agencies expect that the audit schedule and scope will be appropriate for the entity’s size, its consumer financial product offerings, and structure for offering these products. The compliance audit program should address compliance with all applicable federal consumer financial laws. It should also identify any significant gaps in policies and standards.

When all of these four control components are strong and well-coordinated, the CFPB states that a supervised entity should be successful at managing its compliance responsibilities and risks.

Dealing With Pandemic Disruption

Written by admin on April 16, 2021. Posted in Advice, News.

For years banks have had pandemic policies, but never really thought the day would come when it would represent more than another examiner-required policy. Then came COVID-19, and in a matter of days, our world changed.

Managing Bank Policies and Procedures

When we teach in live seminars, we always ask, How many of you believe that your policies are up to date? That always gets some hands, but not 100 percent of attendees. Then we ask, How many of you believe that your procedures are up to date? Seldom does anyone raise their hand. These two situations are revealing.

Keeping policies current is the easier of the two. But many banks rubber stamp policies that could be much more effective. If it is a Regulation B policy, it usually follows the regulation and indicates that the bank intends to comply. That is fine for that type of policy. But other policies, notably operations and loan policies, need to do more than restate a regulation they need to be a document that can be read and used. And, a pandemic policy needs to cover a wide range of subjects and issues.

It might be time to review these types of policies and add significant language as to how you will address situations such as we have experienced lobbies closed or restricted, limited staff, staff working from home, and the same job to be completed.

At a minimum, these policies should address:

How jobs are done in an off-site world.
How electronic solutions are to be used.
Safeguards that must be used to protect customer data.
What types of paper documents can be used at home by staff working off-site.
Proper disposal and the safekeeping of any documents that are off-site.
Other protections, such as how the computers being used at home are protected from intrusion.

With a little brainstorming, we are sure that you can add to this list.

Procedures are more difficult to maintain. A consultant from our company was recently in a bank and was examining procedures. Most of the procedures could be summed up as Bill takes care of that. As long as Bill is there, things probably work well. But if Bill is out sick, is working from home, on vacation, or no longer there, how does someone accomplish the task?

Procedures are always changing. It is far too easy to tell the three people that need to know about the change and then make a mental note to update the procedures someday. That elusive someday often never materializes. We believe that each bank should have a formal procedures review at least annually, and for some areas, maybe more often. For many banks, the inadequate procedure manuals that they have will not offer sufficient information for anyone to complete a task correctly. And with the staff more scattered, this can really complicate the situation.

The Future

Many banks have switched to imaging all files and documents. The banks that have made that decision generally are in a little better shape for off-site work, as it is easier to send employees home and still get the work done in a timely manner. If your bank has not made the transition to electronic files, this may be your cue to consider the advantages of this technology. We have talked to numerous banks recently that in the past have said NEVER to imaging only to discover that never may not have been the right answer.

As the world becomes more electronic, and the cost of maintaining offices and buildings continues to increase, this may also be a time to reconsider the locations from which employees work. This may be especially critical if your brick and mortar buildings are getting close to capacity. Many tasks, with the right policies, procedures, equipment, and software, can easily be done from home, saving wear and tear on your building, perhaps reducing occupancy costs, and maybe, as a side benefit, resulting in happier and more productive employees.

Of course, everyone working from home is not going to be effective for banks. But it can be a great tool. For instance, you have a long-term excellent employee who does a job that could be done from home. While they are currently working in the office, their spouse gets transferred 300 miles away. In the past, that probably meant a resignation. But, properly managed, there may be no reason why you could not retain that employee by just letting them work from home even if that home is not local.

Conclusion

The authors of this article are most aware of compliance officers. Over the last several years, we have seen more and more situations where compliance officers work from home. Some compliance officers going south for the winter and continue to work remotely, etc. In our company, none of our compliance consultants work in our office, even in normal times.

So we encourage you to reimagine the bank to the extent possible. Face-to-face customer contact employees need to be local. However, many staff members may not need to be in the building, at least not every day. We encourage you to use this mind set for the future and let it help your bank thrive.

For more information, contact Bill Elliott, Director of Compliance Education, at bille@younginc.com or 330.422.3450. You can also contact William Showalter at wshowalter@younginc.com or 330.422.3473.

Mergers & Acquisitions Expected to Rebound in 2021

Written by admin on April 9, 2021. Posted in News.

By Bob Viering, Director of Management

The Covid-19 pandemic brought M&A activity for community banks and credit unions to a halt in 2020. All expectations for 2021 are that M&A activity is likely to pick up significantly. Much of this activity is due to organizations that had planned to sell or start acquiring in 2020 to make up for lost time, but it will also be due to the changes in the industry as a result of the pandemic.

Electronic and mobile banking adoption accelerated as financial institutions closed branches or provided limited access during the pandemic. Today, not having a digital banking platform (internet and mobile apps) is no longer an option. Financial institutions need to re-assess branch networks in light of how customers/members bank today.

Among the reasons that will drive many organizations to sell are:

Long-term impact of low interest rates, today’s compressed margin, and the future impact of rising rates
Cost/Liability of data security
Regulatory compliance costs
Lack of management succession

Conversely, those organizations that have made the technology infrastructure investments, have staffing in place that can succeed in this volatile time, and are comfortable thinking outside the traditional banking box have great opportunities.

How we can assist

Young & Associates, Inc. has been assisting banks and credit unions for over 43 years and have assembled a team of qualified professionals that can assist you in your acquisition or help you prepare to sell your organization and maximize your return.

The industry is fortunate in that we have many excellent investment bankers, law firms, and accounting firms that provide great advice on the pricing, structure, and regulatory requirements. But as anyone who has been through an acquisition or merger can tell you, it is the knowledge you gain during due diligence and post-merger integration that, in the end, will determine if the transaction was successful. Our services will supplement the services acquired from your investment banker, law firm, and accounting firm.

While due diligence and post-merger integration can be done by your staff, our breadth of knowledge, gained from decades of working for hundreds of banks and credit unions, brings a broader perspective. We deal with many of these issues regularly and can often be more efficient. We also understand that time is of the essence for due diligence and will make your engagement a priority to be completed in the time needed.

Due diligence assistance

Loan Due Diligence: We can provide a timely assessment of the underwriting, management, and quality of the target’s loan portfolio. We have experts from all disciplines of lending, including ALLL analysis and credit process. We will help you understand the culture of the organization you are acquiring.
Interest Rate Risk and Liquidity Management Due Diligence: We can assist you in determining the target institution’s level of interest rate and liquidity risk. This can then help you as you consider the combined organization’s level of risk. This will help you answer the following question: “Does the combined organization fit within your risk ‘comfort zone?'”
Compliance Due Diligence: Many aspects of compliance, such as Fair Lending and BSA/AML, will become the acquirer’s problem if there was an issue prior to acquisition. Having the target’s compliance program reviewed prior to closing can help you understand the degree of compliance risk you will be assuming.
IT Due Diligence: This is an often overlooked but critical piece of information to understand how well or what IT-related issues a target bank may have that will need to be addressed post-acquisition.

Planning assistance

Strategic Planning: We can help you assess how the acquisition will fit into your strategic direction. If your strategic plan involves potential acquisitions, have you put a plan/process in place to prepare for it, or will you put it together on the fly if an acquisition comes along? Analyzing how the target fits with your culture and your strategic direction is one of the most important aspects of a successful acquisition.
Succession Planning: While much of the attention in an acquisition analysis is on the financial aspects of the transaction, the quality and depth of the human resources of the target institution are the drivers of the target’s current success or challenges. We can assist you with reviewing the target’s succession plan or help you craft a new one for the combined organization.

Interagency Bank Merger Application Assistance

We can assist you with the delineation of the relevant geographic markets, evaluation of competitive factors in the proposed transaction, CRA assessment area data and mapping, demographic information, business environment data, information on traffic patterns, and other relevant market information.

We can also help you craft your business plan that is a required part of the application.

Post-acquisition integration

Post-acquisition integration is the key to whether your merger/acquisition is successful. You will have just spent many millions of dollars to buy an organization. Buying the organization is not the end result but the beginning of many months and years of hard work to get the return you expect.

There are several ways we can help you achieve the results you expect from the transaction:

Employee and Customer Communications
Strategic, Capital, and Succession Plan Updates,Â based on the combined organization
Re-assessment of your Branch Network.Â Does it make sense to consolidate any branches, especially given the changes that the pandemic has brought along to digital banking adoption?
Periodic Loan Review and Compliance ReviewÂ will allow you to assess the quality of results at both the overall organization and the acquired organization.
Analysis of Workflow and StaffingÂ of the combined organization
Assessment of your Human Resources Management. Retaining key members of the acquired organization’s staff is often the biggest determinant of future success. This is especially true for your frontline commercial/ag/private bankers and key deposit/cash management personnel who are often the day-to-day face of the organization for your largest customers.

These are just some of the ways Young & Associates can work with you to have a long-term successful acquisition, based on your unique needs. Contact us today for more information on how we can assist you with your M&A efforts.

About Young & Associates, Inc.

Young & Associates, Inc. has provided consulting, training, and practical products for community financial institutions for over 43 years. We strive to provide the most up-to-date solutions for our clients’ needs, while remaining true to our founding principles and goals — to ease the management of your organization, reduce the regulatory burden, improve your bottom line, and increase shareholder value.

To learn more about Young & Associates, Inc. and how we can assist your organization, visit our website or contact Dave Reno, Director — Lending and Business Development.