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Tag: Consumer Financial Protection Bureau (CFPB)

Don’t Let UDAAP Spook You, Take Control

Written by admin on . Posted in Uncategorized.

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.

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.

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.

SAFE Act a Decade On

Written by admin on . 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.

Managing Compliance

Written by admin on . Posted in Compliance & Regulations.

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

We have been told repeatedly over the years that we need to manage compliance, just like all aspects of our business. This maxim is particularly true in today’s escalating compliance environment. There are so many new and changed rules that have been added to the mix over the past decade that we could easily be 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 been quick to point out that there is no one “right” way to manage compliance, but that there are certain basic needs that must be met by any such program.

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
  • Ensures that responsibilities for meeting legal requirements and internal policies are incorporated into business processes
  • Reviews operations to ensure responsibilities are carried out and legal requirements are met
  • Takes corrective action, and
  • 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.

The independent compliance audit is a review of all operations impacted by consumer laws. An audit is performed on a less frequent basis, usually annually, to ensure that compliance is ongoing, that the CMS as a whole is operating properly, and that the board is aware of consumer compliance issues noted as part of these independent reviews. Audits are best performed by an independent party – usually either an internal auditor or an outside consultant.

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, or
  • 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. Financial service providers are expected to be responsive 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 provides a board of directors or its designated committees with a determination of whether policies and standards are being implemented to provide for the level of compliance and consumer protection established by the board. As noted above, these audits should be conducted by a party independent of both the compliance program and the business functions. The audit results should be reported 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, and 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.

To learn more about Young & Associates, Inc. and how we can assist your organization in developing a strong Compliance Management System, visit our website, or contact Dave Reno, Director – Lending and Business Development.

www.younginc.com
Email: dreno@younginc.com
Phone: 330.422. 3455

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.

 

 

Assessing your Compliance Training

Written by admin on . Posted in Compliance & Regulations.

By: Bill Elliott, CRCM, Director of Compliance Education

Last fall, the Consumer Financial Protection Bureau (CFPB) updated their Regulatory Agenda for the next few months. As has been the reality for a while, there does not seem to be any particular rush to accomplish many final rules. The Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCP Act) was signed into law in May 2018. In that law, there are a number of required changes that should be fairly easy to implement – if the CFPB would just do so. But in the short term, there appears little likelihood that the changes dictated by the law (or many other changes) will be placed into regulation. But change is still in our future – it is just a question of the timing.

Part of the problem is the regulatory process. Although all banks are not subject to the Home Mortgage Disclosure Act, it is an excellent example. The “new version” of Regulation C was published as a final rule, effective January 2018. Before the 2018 date, the CFPB changed the regulation. With the passage of the EFRRCP Act, many of the new required fields were eliminated for smaller reporters. Although a fairly simple series of changes were necessary, many months passed before the regulation was updated (October 2019). And when those changes were made final, there were still some outstanding issues in HMDA that needed to be addressed, and remain open at this writing. So even with all the changes, it is not “final” yet. The latest Small Entity Guide for HMDA (which will have to be modified again) is Version 4.

This complicates the life of any bank, regardless of size. When the regulatory process is poor and disjointed, it makes training and implementation more difficult. But the reality is that regardless of how confusing the regulatory process is, banks still have to comply.
Training is a necessary expense, as a failure to train, especially when things are in flux, opens the bank to regulatory scrutiny and/or fines for non-compliance. And keeping your policies and procedures current with the latest changes is always a challenge.

Banks should assess how information is disseminated throughout the bank as these changes occur to assure that training dollars are spent effectively. And the time to assess is now, while things are relatively “calm.” Many banks have delegated training to electronic or web-based systems, and there are many good choices available. But, because of the nature of this type of training, they focus on the facts and requirements, but usually do not include information on what to expect of your employees, or the implementation strategies of your bank. Be wary of buying a training system and then assuming all your training needs are met.

We do not market electronic or web-based systems. But Young & Associates, Inc. offers a wide variety of personalized training opportunities, including:

  • Live seminars with some of our state association partners
  • Live in-bank training
  • Conference calls
  • Private webinars
  • Virtual Compliance Consultant program, which includes a monthly telephone call that can be used for compliance support and/or training sessions as well as policy support, and any other personalized training that you may need

In this period of relative quiet, take this time to assess your training methods and your training needs for the future. Eventually the regulators will begin to issue more regulation, and Young & Associates, Inc. stands ready to assist. To discuss how we can help, please contact Karen Clower at 330.422.3444 or kclower@younginc.com.

HMDA Data for 2018 Released

Written by admin on . Posted in Uncategorized.

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

The Federal Financial Institutions Examination Council (FFIEC) recently announced the availability of data for the year 2018 regarding mortgage lending transactions at 5,683 financial institutions covered by the Home Mortgage Disclosure Act (HMDA) in metropolitan statistical areas (MSA) throughout the nation.

The newly available HMDA data include disclosure statements for each covered financial institution, aggregate data for each MSA, nationwide summary statistics regarding lending patterns, and the Loan Application Register (LAR) submitted by each institution to its supervisory agency by March 1, 2019, modified for borrower privacy. This release includes loan-level HMDA data covering 2018 lending activity that were submitted on or before August 7, 2019.

The FFIEC prepares and distributes these data products on behalf of its member agencies – the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and Consumer Financial Protection Bureau (CFPB) – and the Department of Housing and Urban Development (HUD).

The HMDA loan-level data available to the public will be updated, on an ongoing basis, to reflect late submissions and resubmissions. Accordingly, loan-level data downloaded from https://ffiec.cfpb.gov/ at a later date will include any such updated data. An August 7, 2019 static dataset used to develop the observations in this statement about the 2018 HMDA data is available at https://ffiec.cfpb.gov/data-publication/. In addition, beginning in late March 2019, Loan/Application Registers (LARs) for each HMDA filer of 2018 data, modified to protect borrower privacy, became available at https://ffiec.cfpb.gov/data-publication/.

Data Overview
The 2018 HMDA data use the census tract delineations, population, and housing characteristic data from the 2011-2015 American Community Surveys. In addition, the data reflect metropolitan statistical area (MSA) definitions released by the Office of Management and Budget in 2017 that became effective for HMDA purposes in 2018.

For 2018, the number of reporting institutions declined by about 2.9 percent from the previous year to 5,683, continuing a downward trend since 2006, when HMDA coverage included just over 8,900 lenders. The decline reflects mergers, acquisitions, and the failure of some institutions.

The 2018 data include information on 12.9 million home loan applications. Among them, 10.3 million were closed-end, 2.3 million were open-end, and, for another 378,000 records, pursuant to partial exemptions in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), financial institutions did not indicate whether the records were closed-end or open-end.

A total of 7.7 million applications resulted in loan originations. Among them, 6.3 million were closed-end mortgage originations, 1.1 million were open-end line of credit originations, and, pursuant to the EGRRCPA’s partial exemptions, 283,000 were originations for which financial institutions did not indicate whether they were closed-end or open-end. The 2018 data include 2.0 million purchased loans, for a total of 15.1 million records. The data also include information on approximately 177,000 requests for preapprovals for home purchase loans.

The total number of originated loans decreased by about 924,000 between 2017 and 2018, or 12.6 percent. Refinance originations decreased by 23.1 percent from 2.5 million, and home purchase lending increased by 0.3 percent from 4.3 million.

A total of 2,251 reporters made use of the EGRRCPA’s partial exemptions for at least one of the 26 data points eligible for the exemptions. In all, they account for about 425,000 records and 298,000 originations.

Demographic Data
From 2017 to 2018, the share of home purchase loans for first lien, one- to four-family, site-built, owner-occupied properties (one- to four-family, owner-occupied properties) made to low- and moderate-income borrowers (those with income of less than 80 percent of area median income) rose slightly from 26.3 percent to 28.1 percent, and the share of refinance loans to low- and moderate-income borrowers for one- to four-family, owner-occupied properties increased from 22.9 percent to 30.0 percent.

In terms of borrower race and ethnicity, the share of home purchase loans for one- to four-family, owner-occupied properties made to Black borrowers rose from 6.4 percent in 2017 to 6.7 percent in 2018, the share made to Hispanic-White borrowers increased slightly from 8.8 percent to 8.9 percent, and those made to Asian borrowers rose from 5.8 percent to 5.9 percent. From 2017 to 2018, the share of refinance loans for one- to four-family, owner-occupied properties made to Black borrowers increased from 5.9 percent to 6.2 percent, the share made to Hispanic-White borrowers remained unchanged at 6.8 percent, and the share made to Asian borrowers fell from 4.0 percent to 3.7 percent.

In 2018, Black and Hispanic-White applicants experienced higher denial rates for one- to four-family, owner-occupied conventional home purchase loans than non-Hispanic-White applicants. The denial rate for Asian applicants is more comparable to the denial rate for non-Hispanic-White applicants. These relationships are similar to those found in earlier years and, due to the limitations of the HMDA data, cannot take into account all legitimate credit risk considerations for loan approval and loan pricing.

Government-backed Lending
The Federal Housing Administration (FHA)-insured share of first-lien home purchase loans for one- to four-family, owner-occupied properties declined from 22.0 percent in 2017 to 19.3 percent in 2018. The Department of Veterans Affairs (VA)-guaranteed share of such loans remained at approximately 10 percent in 2018. The overall government-backed share of such purchase loans, including FHA, VA, Rural Housing Service, and Farm Service Agency loans, was 32.0 percent in 2018, down slightly from 35.4 percent in 2017.

The FHA-insured share of refinance mortgages for one- to four-family, owner-occupied properties decreased slightly to 12.8 percent in 2018 from 13.0 percent in 2017, while the VA-guaranteed share of such refinance loans decreased from 11.3 percent in 2017 to 10.2 percent in 2018.

New Data
The 2018 HMDA data contains a variety of information reported for the first time. For example, the data indicated that approximately 424,000 applications were for commercial purpose loans and approximately 57,000 applications were for reverse mortgages.

In addition, among the 12.9 million applications reported, 1.3 million included at least one disaggregate racial or ethnic category. For approximately 6.3 percent of applications, race and ethnicity of the applicant were collected on the basis of visual observation or surname. The percentage was slightly higher for sex at 6.5 percent.

For the newly-reported age data point, the two most commonly reported age groups for applicants were 35-44 and 45-54, with 22.7 and 22.4 percent of total applications, respectively. Just under 3.0 percent of applicants were under 25 and just under 4.0 percent of applicants were over 74.

Credit score information was reported for 73.1 percent of all applications. Equifax Beacon 5.0, Experian Fair Isaac, and FICO Risk Score Classic 04 were the three most commonly reported credit scoring models at 22.8 percent, 18.8 percent, and 18.2 percent of total applications, respectively. For originated loans, the median primary applicant scores for these three models were between 738 and 746. This compares to medians ranging from 682 to 686 for denied applications.

Debt-to-income ratio (DTI) was reported for 75.3 percent of total applications. Approximately 45.1 percent of applications had DTIs between 36.0 percent and 50 percent, with 7.0 percent of applications with less than 20 percent, and 7.1 percent with greater than 60 percent.

Loan Pricing Data
The 2018 HMDA also contains additional pricing information. For example, the median total loan costs for originated closed-end loans was $3,949. For about 42.5 percent of originated closed-end loans, borrowers paid no discount points and received no lender credits. The median interest rate for these originated loans was 4.8 percent. The median interest rate for originated open-end lines of credit excluding reverse mortgages was 5.0 percent.

The HMDA data also identify loans that are covered by the Home Ownership and Equity Protection Act (HOEPA). Under HOEPA, certain types of mortgage loans that have interest rates or total points and fees above specified levels are subject to certain requirements, such as additional disclosures to consumers, and also are subject to various restrictions on loan terms. For 2018, 6,681 loan originations covered by HOEPA were reported: 3,654 home purchase loans for one- to four-family properties; 448 home improvement loans for one- to four-family properties; and 2,579 refinance loans for one- to four-family properties.

Using the Data
The FFIEC states that HMDA data can facilitate the fair lending examination and enforcement process and promote market transparency. When federal banking agency examiners evaluate an institution’s fair lending risk, they analyze HMDA data in conjunction with other information and risk factors, in accordance with the Interagency Fair Lending Examination Procedures. Risk factors for pricing discrimination include, but are not limited to, the relationship between loan pricing and compensation of loan officers or mortgage brokers, the presence of broad pricing discretion, and consumer complaints.

The HMDA data alone, according to the FFIEC, cannot be used to determine whether a lender is complying with fair lending laws. While they now include many potential determinants of creditworthiness and loan pricing, such as the borrower’s credit history, debt-to-income ratio, and the loan-to-value ratio, the HMDA data may not account for all factors considered in underwriting.

Therefore, when the federal banking agencies conduct fair lending examinations, including ones involving loan pricing, they analyze additional information before reaching a determination regarding institutions’ compliance with fair lending laws.

Obtaining and Disclosing HMDA Data
In the past, HMDA-covered lenders had to make the HMDA disclosure statements available at their home and certain branch offices after receiving the statements. Now, lenders have only to post at their home offices, and other offices in MSAs a written notice that clearly informs those interested that the lender’s HMDA disclosure statement may be obtained on the Consumer Financial Protection Bureau’s website at www.consumerfinance.gov/hmda.

In addition, financial institution disclosure statements, MSA and nationwide aggregate reports for 2018 HMDA data, and tools to search and analyze the HMDA data are available at https://ffiec.cfpb.gov/data-publication/. More information about HMDA data reporting requirements is also available at https://ffiec.cfpb.gov/.

More information about HMDA data reporting requirements is available in the Frequently Asked Questions on the FFIEC website at www.ffiec.gov/hmda/faq.htm. Questions about a HMDA report for a specific lender should be directed to the lender’s supervisory agency.

The CFPB in the Future

Written by admin on . Posted in Compliance & Regulations.

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

With the change in management of the CFPB, we are seeing changes in how they operate. When they published their Regulatory Agenda for Fall 2017 (late as usual – it appeared in January 2018), they restated what Section 1021 of the Dodd-Frank Act specified as the objectives of the Bureau, including:

  • Providing consumers with timely and understandable information to make responsible decisions about financial transactions
  • Protecting consumers from unfair, deceptive, or abusive acts and practices and from discrimination
  • Addressing outdated, unnecessary, or unduly burdensome regulations
  • Enforcing federal consumer financial law consistently in order to promote fair competition, without regard to the status of a covered person as a depository institution
  • Promoting the transparent and efficient operation of markets for consumer financial products and services to facilitate access and innovation

They stated that their work in pursuit of those objectives can be grouped into three main categories:

  1. Implementating statutory directives
  2. Other efforts to address market failures, facilitate fair competition among financial services providers, and improve consumer understanding
  3. Modernizing, clarifying, and streamlining consumer financial regulations to reduce unwarranted regulatory burdens

Implementing Statutory Directives

In this area, the CFPB is continuing efforts to facilitate implementation of critical consumer protections under the Dodd-Frank Act. They listed three efforts under way. They include:

  • Regulation C (Home Mortgage Disclosure Act)
  • Mortgage servicing changes
  • Continuing to improve the TRID portion of Regulation Z

The CFPB also listed other projects that are “in the works,” but probably nowhere near completion.

Other Efforts To Address Market Failures, Facilitate Fair Competition among Financial Services Providers, and Improve Consumer Understanding

In this area, the CFPB said they were considering rules, such as:

  • Payday loans, auto title loans, and other similar credit products
  • Debt collection
  • Overdraft programs on checking accounts
  • Prepaid financial products
  • Modernizing, streamlining, and clarifying consumer financial regulations

Many of the regulations are approaching 50 years old and are out of date with the current world. For instance, Regulation B allows you to turn down a customer for not having a land line phone in the home. That was fine in the 1970s, but probably not relevant now. Updating this and many other regulations is overdue, including looking at the effectiveness of some of the more recent changes, which they say they will be doing.

Conclusion

We will have to wait and see what happens. As with all bureaucracies, and based on their past performance, changes are likely to appear slowly. In general, it appears that “new regulations” may slow down a bit, giving us in the industry a chance to catch up.

Young & Associates, Inc. offers a wide variety of compliance services to help your bank satisfy these compliance requirements. If we can help you “catch up” or improve your response to any of the regulations, we stand ready to assist. Please contact Karen Clower, Compliance Operations Manager, at kclower@younginc.com or 330.422.3444 and she will be happy to discuss our services with you.

Compliance Outlook: 2018

Written by admin on . Posted in Compliance & Regulations.

By: Bill Elliott, CRCM, Manager of Compliance Services

For those of us who are news junkies, the current environment is interesting. Unfortunately, the environment is also so toxic that it is difficult to determine what actually may or may not happen during 2018.

We do know that some items that are being considered. For instance, bills are pending regarding issues like HMDA, flood, qualified mortgages, and call reports for smaller institutions. It remains to be seen whether any of these bills (or any of the other bills pending) actually will become law, or whether Congress will continue the infighting that has resulted in a haphazard and uncertain regulatory and law environment.

Home Mortgage Disclosure Act (HMDA)
Based on the questions we have received at Young and Associates, Inc., it would appear that that the 2018 HMDA implementation (so far) is going fairly well. However, we have received numerous questions regarding issues that were not addressed directly in the “HMDA Instructions.” This is not new or surprising, as not every situation can be covered in a rule as massive as HMDA.

For HMDA, as with every other new/updated regulation, preparation was the key. The regulatory world is getting so complicated that it is necessary for banks to really consider all processes and procedures to avoid either duplication of work or unnecessary work.

Customer Due Diligence
Speaking of duplication and unnecessary work, one of the items that must be addressed quickly is the new Customer Due Diligence rule under the Bank Secrecy Act, effective May 11, 2018. While many regulations can be handled by only one division of the bank, this regulation will impact almost everyone, as it requires updates regarding the ownership of a business every time a new account is opened. Accounts can be loans, deposits, safe deposit boxes, or any other kind of account that you may offer. It will require the customer to inform you of all individuals who own at least 25% of the business, as well as indicating a control person for the business.

For new loans, this will most likely be an inconvenience, although driver’s licenses and/or other methods of identification will be required every time a new commercial loan to a business with at least one 25% or more owner (LLC, partnership, corporation, etc.) is opened.

For deposits or other account types, this may mean what is now a 30-minute procedure to open a new account will become a multi-day ordeal, as the person opening the account may well not be the only owner, and certainly will not have identification information for all 25% owners and control persons with them (including identification). The only saving grace is that every financial institution will have to deal with this issue, so there will be no competitive advantage or disadvantage. With a May time limit, if your institution has not started the implementation process, time is running short.

Consumer Protection
As you well know, there has been a change in the administration of the Consumer Financial Protection Bureau (CFPB). With Mr. Cordray’s recent exit from the agency, it is likely that’s the CFPB will consider new approaches to the issue of consumer protection. To this end, the CFPB has announced steps to request information from the public and review how things are done, how they actually impact or help the consumer, and how they impact and create costs for the industry.

Some of the requests will be more useful than others. The first request to be issued by the CFPB will seek public comment on Civil Investigative Demands (CIDs), which are issued during an enforcement investigation. Comments received in response to this RFI and all others that follow will help the Bureau evaluate the existing framework and determine whether any changes are warranted. Make sure you are part of the process by commenting or otherwise making your voice heard.

Conclusion
If we can offer you training, implementation assistance, or any other compliance related service, please contact Karen Clower, Compliance Operations Manager, at kclower@younginc.com or 330.422.3444.

CFPB Amends HMDA Rule

Written by admin on . Posted in Compliance & Regulations.

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

The Consumer Financial Protection Bureau (CFPB) issued a final rule making several technical corrections and clarifications to the expanded data collection under Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). The regulation is also being amended to temporarily raise the threshold at which banks are required to report data on home equity lines of credit (HELOC).

These amendments take effect on January 1, 2018, along with compliance for most other provisions of the newly expanded Regulation C.

Background
Since the mid-1970s, HMDA has provided the public and public officials with information about mortgage lending activity within communities by requiring financial institutions to collect, report, and disclose certain data about their mortgage activities. The Dodd-Frank Act amended HMDA, transferring rule-writing authority to the CFPB and expanding the scope of information that must be collected, reported, and disclosed under HMDA, among other changes.

In October 2015, the CFPB issued the 2015 HMDA Final Rule implementing the Dodd-Frank Act amendments to HMDA. The 2015 HMDA Final Rule modified the types of institutions and transactions subject to Regulation C, the types of data that institutions are required to collect, and the processes for reporting and disclosing the required data. In addition, the 2015 HMDA Final Rule established transactional thresholds that determine whether financial institutions are required to collect data on open-end lines of credit or closed-end mortgage loans.

The CFPB has identified a number of areas in which implementation of the 2015 HMDA Final Rule could be facilitated through clarifications, technical corrections, or minor changes. In April 2017, the agency published a notice of proposed rulemaking that would make certain amendments to Regulation C to address those areas. In addition, since issuing the 2015 HMDA Final Rule, the agency has heard concerns that the open-end threshold at 100 transactions is too low. In July 2017,  the CFPB published a proposal to address the threshold for reporting open-end lines of credit. The agency is now publishing final amendments to Regulation C pursuant to the April and July HMDA proposals.

HELOC Threshold
Under the rule as originally written, banks originating more than 100 HELOCs would have been generally required to report under HMDA, but the final rule temporarily raises that threshold to 500 HELOCS for data collection in calendar years 2018 and 2019, allowing the CFPB time to assess whether to make the adjusted threshold permanent.

In addition, the final rule corrects a drafting error by clarifying both the open-end and closed-end thresholds so that only financial institutions that meet the threshold for two years in a row are required to collect data in the following calendar years. With these amendments, financial institutions that originated between 100 and 499 open-end lines of credit in either of the two preceding calendar years will not be required to begin collecting data on their open-end lending (HELOCs) before January 1, 2020.

Technical Amendments and Clarifications
The final rule establishes transition rules for two data points – loan purpose and the unique identifier for the loan originator. The transition rules require, in the case of loan purpose, or permit, in the case of the unique identifier for the loan originator, financial institutions to report “not applicable” for these data points when reporting certain loans that they purchased and that were originated before certain regulatory requirements took effect. The final rule also makes additional amendments to clarify certain key terms, such as “multifamily dwelling,” “temporary financing,” and “automated underwriting system.” It also creates a new reporting exception for certain transactions associated with New York State consolidation, extension, and modification agreements.

In addition, the 2017 HMDA Final Rule facilitates reporting the census tract of the property securing or, in the case of an application, proposed to secure a covered loan that is required to be reported by Regulation C. The CFPB plans to make available on its website a geocoding tool that financial institutions may use to identify the census tract in which a property is located. The final rule establishes that a financial institution would not violate Regulation C by reporting an incorrect census tract for a particular property if the financial institution obtained the incorrect census tract number from the geocoding tool on the agency’s website, provided that the financial institution entered an accurate property address into the tool and the tool returned a census tract for the address entered.

Finally, the final rule also makes certain technical corrections. These technical corrections include, for example, a change to the calculation of the check digit and replacement of the word “income” with the correct word “age” in one comment.

The HMDA final rule is available at www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/regulation-c-home-mortgage-disclosure-act/.

Updated HMDA Resources
The CFPB also has updated its website to include resources for financial institutions required to file HMDA data. The updated resources include filing instruction guides for HMDA data collected in 2017 and 2018, and HMDA loan scenarios. They are available at www.consumerfinance.gov/data-research/hmda/for-filers.

For More Information
For more information on this article, contact Bill Showalter at 330-422-3473 or
wshowalter@younginc.com.

For information about Young & Associates, Inc.’s newly updated HMDA Reporting
policy, click here. In addition, we are currently updating our HMDA Toolkit.

To be notified when the HMDA Toolkit is available for purchase, contact Bryan
Fetty at bfetty@younginc.com.

HMDA 2018

Written by admin on . Posted in Compliance & Regulations.

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

Beginning in 2018, you will be faced with two major changes to Home Mortgage Disclosure Act (Regulation C 12 CFR § 1003). They are:

  1. Changes to the existing rules
  2. Addition of new rules

While the new rules will be challenging to navigate, the changes to the existing rules could prove to be extremely challenging, as long-established procedures and understandings are going to change. The following are a list of some of the biggest modifications.

Reporting Changes
Loan Volume Test. The new rules have two separate loan volume tests, one for closed-end and one for open-end.
The closed-end test is 25 covered loans. If your bank originates 25 “covered” loans (defined as not excluded closed-end loans or open-end loans), you will then report closed-end loans.

The open-end test is 100 covered loans. If your bank originates 100 open-end covered loans, then you will report open-end loans. There is a regulatory proposal to change this to 500 open-end for a couple of years, and we expect that to occur. The challenge here relates to business purpose loans.

All consumer purpose loans (generally HELOCs) will count, but business purposes loans may also count. Excluded loans will be open-end loans (such as an equity loan for operating expenses) that are not for a purchase, refinance, or home improvement purpose. But open-end loans such as this are refinanced, and will become reportable.

If your financial institution only meets one test, you only report the type of loans for the test you meet. This means some institutions will only report closed-end loans. Some will only report open-end loans. And others will report both.

Dwelling Secured. Under prior HMDA rules, one definition of Home Improvement included loans that were not secured by a dwelling. Under the new rules, only loans secured by a dwelling will be reportable.

Temporary Financing. The rules now only talk about financing that will be replaced by new financing. The old rules specifically excluded construction and bridge loans.

Agricultural Loans. The new rules now exempt all agricultural loans. In the past, the agricultural loan exemption only applied to purchases, which meant that when an agricultural loan was refinanced, it required HMDA reporting. Now, all agricultural purpose loans are exempt.

Preapproval Requests. Preapproval requests that are approved but not accepted are now required reporting rather than optional reporting.

Submission Process. The CFPB is going to use a cloud-based program for HMDA submissions. This means that reporters using the FFIEC software are going to have a much more difficult time. You will want to think about software options. If you are not using third-party software already, you will need to work out logistics of using the new reporting system.

Items to Consider
Our training manual for our live HMDA presentation runs 210 pages, so this is just an overview of some of the items that must be considered. Time is growing short. If your institution is going to be subject to the new rules, then training for everybody involved in the process is necessary. And for most readers, this will include more than one person.

For the future, if you are not subject to the HMDA regulation, be careful of expansion. If you open a branch in an MSA, suddenly HMDA will become part of your life. So beware of a good deal on the land or the lease – the costs of HMDA could easily dwarf the savings. If you are a HMDA reporter already, remember that any compliance requirement only gets paid for one of two ways – the applicants/customers pay for it, or it comes out of the stockholder’s pocket. Fee changes may be in your future.

HMDA Tools – Coming Soon
Young & Associates, Inc. is currently developing a HMDA Toolkit which will be available shortly, as well as a customizable HMDA policy. As there is HMDA text that the CFPB is changing and correcting (due out soon, we hope), we are not ready for release just yet. But we hope to keep the timetable reasonable. The HMDA policy will be available to purchase September 1, 2017.

We will also be offering an off-site HMDA Review beginning in 2018. We will review as many or as few loans as you would like to make sure you are on track. Billing will be based on the number of files reviewed, so you will control your costs.

Detailed information for all of these items will be available soon. If you are interested in the HMDA toolkit, HMDA policy, or HMDA reviews, we will be happy to discuss these products and services with you at any time.

Good luck – we will all need it. For more information on this article or how Young & Associates, Inc. can assist you in this process, contact us at compliance@younginc.com or 330.422.3450.

Regulatory Compliance Update

Written by admin on . Posted in Compliance & Regulations.

By: Bill Elliott, Senior Consultant and Manager of Compliance

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

Here is a sampling of where we are today: ƒƒ

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

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

Capital Market Commentary – November 2016

Written by admin on . Posted in Management & Planning.

By: Stephen Clinton, President, Capital Market Securities, Inc.

Market Update
The current expansion began in June 2009 and has now continued for 88 months, making it the fourth longest period of growth since the data has been recorded. The third quarter growth in the U.S. economy was 2.9%. A tight job market, increasing wages, and low oil prices are aiding the economic growth. Additionally, stronger export growth added to the GNP. Corporate profits are expected to grow and businesses are showing interest in business expansion after sitting on the sidelines for some time.

The following summarize certain issues we think are worth watching:

  • Retail sales in September were up 2.7% from the prior year. Consumer spending, the primary driver for the U.S. economy, accounts for two-thirds of GDP.ƒƒ
  • The number of Americans applying for first-time unemployment benefits was reported at a four-decade low in early October. Initial jobless claims have now remained below 300,000 for seven years, the longest streak since 1970. Job growth has been spurred by a hiring streak that surpassed its previous record in March and is now at 70 straight months. Unemployment is now at 5%.
  • Median household incomes have risen, increasing 5% in the last year. This has led to the consumer confidence reading hitting its highest point in nine years.
  • The Fed continues to remain cautious. Despite fueling expectations for rising interest rates, the Fed has boosted rates only once since the last recession.
  • Home-price growth accelerated in August, as a lack of inventory and low interest rates helped push prices to near record levels. The S&P CoreLogic Case-Shiller Indices covering the entire nation rose 5.3% in the 12 months ending in August.
  • Inflation has remained below the Fed’s 2% annual target for more than four years, but has shown signs of firming recently. Now expectations are building that inflation may move above the Fed’s target.
  • Mr. Trump’s November election will usher in a new President who will have party majorities in both the House and Senate. This should help the new Administration enact programs and policies more readily.

Short-term interest rates remain historically low with the 3-month T-Bill ending September at 0.26%. The 10-year T-Note ended September at 1.56%, down 71 basis points from year-end 2015. This has led to a significant reduction in the slope of the yield curve.

The stock market performance in 2016 has been positive. The Dow Jones Industrial Index closed September up 5.07% for the year. The Nasdaq Index closed up 6.08%. The Nasdaq Bank index ended September up 5.15%. Larger U.S. bank pricing struggled, ending the first three quarters of 2016 down 3.05%.

The dichotomy between big bank pricing and smaller bank pricing can be seen by comparing pricing multiples for each. Since 1995, banks in the S&P Bank Index averaged a price-to-earnings multiple of 14.1. Currently they average 12.0. Conversely, smaller banks had a historical average of 15.9 and are now trading at a multiple of 17.8.

Interesting Tid Bitsƒƒ

  • New Competition. Goldman Sachs, the Wall Street giant, recently began offering consumer loans. An online consumer lending platform was rolled out offering personal loans up to $30,000.
  • CFPB. Thanks to a lawsuit brought by nonbank mortgage lender PHH Mortgage, a three-judge panel recently ruled that the single director structure of the CFPB was unconstitutional and limited the CFPB’s ability to ignore statute of limitations governing administrative enforcement actions.
  • The Big Get Bigger. It was recently reported that since Dodd-Frank was passed in 2010, large banks have grown by 30%. The six largest U.S. banks now hold assets of approximately $10 trillion. There are now at least 1,500 fewer banks with assets under $1 billion than prior to the financial crisis.
  • ƒBoom in Global Trade. The S&P 500 is up nearly nine-fold since October 1986. Among factors cited to explain this dramatic growth is the acceleration of global trade spurred by various trade agreements.
  • ƒƒMerger and Acquisition Activity. In the first nine months of the year, there were 185 bank and thrift announced merger transactions. This compares to 195 deals in the first three quarters of 2015. The median price to tangible book for transactions involving bank sellers was 129% which is down from the 141% median recorded in 2015.

New Prepaid Rule

Written by admin on . Posted in Compliance & Regulations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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