Wednesday, July 24, 2024

September 2011 Legal Update

By Mary Beth Guard

1. Business Continuity Planning
2. Examination Buzz

  • Financial Statements
  • HMDA
  • Flood Insurance
  • FDIC Signage
  • OFAC
  • Debt Collection
  • SCRA
  • Fair Lending
  • Strange Transactions

3. CFPB Action
4. Watch Your Mortgage-Related Fees
5. Major Anti-Steering Case
6. Foreclosure Policies and Procedures
7. Q&As on Recent Changes to Regs B and V


By Mary Beth Guard

1.  Business Continuity Planning

In the most recent email newsletter from the Conference of State Bank Supervisors, the organization noted that its disaster recovery plan called for its staff to assemble across the street in the event of an earthquake – an event which must have seemed highly unlikely to ever affect the D.C.-based entity.  It was only when an earthquake actually occurred that CSBS learned that a safer plan would have involved taking cover under a desk and holding on to immovable objects.
With the bizarre weather events of the past year – earthquakes, floods, fires, tornadoes, hurricanes – you don’t need a crystal ball to predict that business continuity planning will be on the minds of examiners.  This is an opportune time to review your plan to see if tweaks are needed.

2.  Examination Buzz

a.  Financial statements. 

We’re hearing that examiners are looking hard at whether banks have current financial statements on borrowers.  Where a customer gets an extension in order to file tax returns in October, rather than April 15th, you need to make sure you’ve filed a 4506T and nothing comes back, you should get a copy of the extension in the file, and get income/expense, balance sheet, rent rolls and other info in your file that are all less than 1 year old.  Get to the files before the examiners do.  Ensure you have up-to-date financial information and create a form to help you track exceptions.

b.  HMDA. 

If your bank is covered by HMDA, we’ve heard examiners are looking at disbursements of proceeds on loans that you have not included on your HMDA LAR to see if any of the funds were used to pay off a dwelling-secured loan.    If the examiners are doing that, you should be, too, so you can correct any HMDA LAR issues on your own.
Also in HMDA news, we’re seeing more and more civil money penalties for HMDA violations.  Check them out on the BankersOnline HMDA Heaven page.   The HMDA 2011 Edits and File Specifications were revised August 4, 2011, and the FFIEC has updated its Geocoding system with 2011 Census tract changes.

c.  Flood insurance. 

Used to be mostly the FDIC that seemed to be pounding banks with penalties, but that’s not the case anymore, and the FRB has been particularly active in this area recently.   Keep in mind:

 It’s not sufficient to have flood insurance where required, it has to be in the correct AMOUNT as well.
 All buildings securing a loan must be covered by flood insurance if in a flood hazard area in a participating community.
 If you think there is a building on the property being mortgaged that will have a value of under $1,000 (which is the deductible on flood insurance), talk to your appraiser and make sure they identify and place a value on each of the outbuildings. 
 Make sure you’re catching all the outbuildings.  The borrower might easily forget to tell you there’s more than just the main house or main office building. 

d.  FDIC Signage. 

FDIC insurance coverage is a big deal to depositors these days.  And having the Member FDIC signs in the right places (and with the right verbiage) is a big deal to examiners.  Get some exercise.  Go walk around your main office, branches, drive-throughs.  Make sure the signs are everywhere you need for them to be.

e.  OFAC. 

In the early 80s, during the oil boom, the use of letters of credit was extremely common in Oklahoma.  Perhaps you are seeing an uptick in LOC activity now.  If so, exercise caution to avoid suffering the fate one bank recently suffered (to the tune of a negotiated settlement for $111,359) when its letter of credit violated the terms of an OFAC sanctions program.

Not convinced OFAC compliance is a big deal?  Talk to JPMorgan Chase Bank, N.A.  It just agreed to an $88 million settlement relating to apparent violations of the OFAC regulations and sanctions programs.  OFAC alleged certain of the violations were egregious in nature.  On some of the violations, the bank self-reported to OFAC.  On others, it did not.

Too often, bankers think that OFAC compliance simply involves blocking transactions involving individuals, entities and organizations on the Specially Designated Nationals (SDN) list.  That is certainly a major part of what is required, but there are also various sanctions programs which must be understood, above and beyond the SDN list requirements.  Review what Chase did and examine whether your OFAC compliance program would have prevented similar violations.

Over a period of nearly 6 years, Chase allegedly violated the Cuban Assets Control Regulations ("CACR"), 31 C.F.R. part 515; the Weapons of Mass Destruction Proliferators Sanctions Regulations ("WMDPSR"), 31 C.F.R. part 544; Executive Order 13382, "Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters;" the Global Terrorism Sanctions Regulations ("GTSR"), 31 C.F.R. part 594; the Iranian Transactions Regulations ("ITR"), 31 C.F.R. part 560; the Sudanese Sanctions Regulations ("SSR"), 31 C.F.R. part 538; the Former Liberian Regime of Charles Taylor Sanctions Regulations ("FLRCTSR"), 31 C.F.R. part 593; and the Reporting, Procedures, and Penalties Regulations ("RPPR"), 31 C.F.R. part 501.

JPMC processed 1,711 wire transfers totaling approximately $178.5 million between December 12, 2005, and March 31, 2006, involving Cuban persons in apparent violation of the CACR.  In November 2005, another U.S. financial institution alerted JPMC that JPMC might be processing wire transfers involving a Cuban national through one of its correspondent accounts.  After the notification, JPMC conducted an investigation into the wire transfers it had processed through the correspondent account.  The results of the investigation were reported to JPMC management and supervisory personnel, confirming that transfers of funds in which Cuba or a Cuban national had an interest were being made through the correspondent account at JPMC.  Nevertheless, the bank failed to take adequate steps to prevent further transfers.  JPMC did not voluntarily self-disclose these apparent violations of the CACR to OFAC.  As a result of these apparent violations, considerable economic benefit was conferred to sanctioned persons.  The base penalty for this set of apparent violations was $111,215,000.

Where there’s smoke, there might be fire.  When the notification was received, the bank should have done more than investigate – it should have taken action when the investigation confirmed the problem existed.
On December 22, 2009, in apparent violation of the WMDPSR, JPMC made a trade loan valued at approximately $2.9 million to the bank issuer of a letter of credit in which the underlying transaction involved a vessel that had been identified as blocked pursuant to the WMDPSR due to its affiliation with the Islamic Republic of Iran Shipping Lines ("IRISL").  Although JPMC supervisors and managers determined that this trade loan was likely an apparent violation of the WMDPSR and, in late December 2009, decided to submit a voluntary self-disclosure to OFAC,

JPMC did not mail its voluntary self-disclosure until March 2010, three days prior to the date on which JPMC received repayment for the loan without OFAC guidance or authorization.  JPMC also failed to respond promptly and completely to an OFAC administrative subpoena seeking information on this transaction.  OFAC determined that JPMC made a voluntary self-disclosure of this apparent violation.  The base penalty for this apparent violation was $2,941,838.

Yes, there are vessels on the OFAC list.  This part of the violations report certainly points out the need to have an intimate knowledge of your customer’s dealings.

The apparent violation of the RPPR occurred between November 8, 2010, and March 1, 2011.  On October 13, 2010, OFAC issued JPMC an administrative subpoena pursuant to section 501.602 of the RPPR directing JPMC to provide certain specified documents related to a specific wire transfer referencing "Khartoum."  In response to this subpoena and a subsequent communication, JPMC compliance management failed to produce several responsive documents in JPMC’s possession, and repeatedly stated that JPMC had no additional responsive documents.  OFAC ultimately provided JPMC with a list of multiple responsive documents that OFAC had reason to believe were in JPMC’s possession based on communications with a third-party financial institution.  This prompted JPMC to correct its prior statements that the bank possessed no additional responsive documents and to produce more than 20 responsive documents.  JPMC did not voluntarily self-disclose the apparent violation of the RPPR to OFAC.  The base penalty for this apparent violation was $250,000.

Sounds like a case of the right hand not knowing what the left hand is doing.  It also highlights the need for sound information management policies within your institution to help you know what you have and to be able to retrieve it when you need it.

In reaching its determination that the above-referenced apparent violations were egregious because of reckless acts or omissions by JPMC, OFAC considered all of the information in its possession related to these apparent violations, as well as the General Factors Affecting Administrative Action set forth in OFAC’s Economic Sanctions Enforcement Guidelines.  OFAC determined that JPMC is a very large, commercially sophisticated financial institution, and that JPMC managers and supervisors acted with knowledge of the conduct constituting the apparent violations and recklessly failed to exercise a minimal degree of caution or care with respect to JPMC’s U.S. sanctions obligations.

With OFAC compliance, the starting point is an analysis of the risk.  Consult the risk matrix that OFAC put out in the last few years.

The settlement also covers other apparent violations which OFAC determined were not egregious, as follows:

 Apparent violations of the ITR, GTSR, SSR, FLRCTSR, WMDPSR, and Executive Order 13382 arising out of its failure to appropriately block or reject nine wire transfers between April 27, 2006 and November 28, 2008, which totaled $609,308.  JPMC voluntarily self-disclosed five of these apparent violations to OFAC.

 Apparent violations of the WMDPSR and SSR in which JPMC advised and confirmed a $2,707,432 letter of credit on April 24, 2009, in which the underlying transaction involved a vessel identified by OFAC as blocked due to its affiliation with IRISL, and a $79,308 letter of credit on January 29, 2008, involving goods destined for Sudan.  JPMC voluntarily self-disclosed these apparent violations to OFAC.

 An apparent violation of the ITR consisting of a May 24, 2006 transfer of 32,000 ounces of gold bullion valued at approximately $20,560,000 to the benefit of a bank in Iran.  JPMC did not voluntarily self-disclose this matter to OFAC.

OFAC mitigated the total potential penalty based on JPMC’s substantial cooperation.

What this makes clear is that OFAC compliance can touch many different areas of the bank, from your wire transfer room to your correspondent banking department (if you are a large institution), to your lending area.  A comprehensive compliance program for OFAC that includes training and awareness bankwide, is essential, both to avoid violations and to mitigate penalties.

f.  Debt collection. 

While the Fair Debt Collection Practices Act does not directly apply to a lender when the lender is collecting its own debts in its own name, be aware of two things:  l)  You should always take steps to emphasize to anyone performing collection work on your bank’s behalf that they must thoroughly understand and abide by the FDCPA; and 2) some examiners are taking the position that while the letter of the law isn’t directly applicable to bank personnel collecting debts owed to the bank, they believe that bank employees should work to comply with the spirit and intent of the law.  If you haven’t read it in a while, take the time to do so, then review your internal collection practices, form letters, notices, calling procedures, etc.

g.  SCRA. 

Wanna know what the examiners will be looking at, in terms of compliance by your bank with the Servicemembers Civil Relief Act?  An examiner for the Federal Reserve Bank of Boston authored an article that is published under Consumer Compliance Outlook on the Philly Fed’s site.  It provides an excellent summary.

h.  Fair Lending. 

The Justice Department has been touting its increased efforts to combat lending discrimination on its blog.  DOJ has established a new Fair Lending Unit and is reporting a record number of fair lending enforcement actions.   Learn what NOT to do from the experiences of the enforcement targets.  Here is a summary of some of the recent allegations and settlements:

Citizens Republic Bancorp Inc. and Citizens Bank of Flint, Michigan.  DOJ alleged that the bank failed to offer credit in African-American communities in the Detroit area on an equal basis with white communities. The bank agreed to open a loan production office in an African-American neighborhood in Detroit and invest approximately $3.6 million in Wayne County, Michigan.

Midwest BankCentre of St. Louis County, Missouri.  DOJ alleged that the bank failed to offer credit in African-American communities of the St. Louis area on an equal basis with white communities. The bank agreed to open a branch in an African-American neighborhood in St. Louis and invest approximately $1.45 million in those neighborhoods.

Nixon State Bank in Nixon, Texas.  DOJ alleged the lender charged higher prices on unsecured consumer loans made to Hispanic borrowers through the bank’s branch offices.  As part of the settlement agreement, the bank agreed to establish uniform pricing policies to ensure non-discrimination, and to pay nearly $100,000 to Hispanic victims of discrimination.

Mortgage Guaranty Insurance Corporation (MGIC).  This one is still pending and it involves a mortgage insurance company, rather than a lender, but it is a doozy.  On July 5, DOJ filed suit against the Mortgage Guaranty Insurance Corporation (MGIC), the nation’s largest mortgage insurance company, and two of its underwriters, alleging that MGIC required women on paid maternity leave to return to work before the company would insure their mortgages. Most mortgage lenders require applicants seeking to borrow more than 80 percent of their home’s value to obtain mortgage insurance, meaning MGIC’s denials to women on maternity leave could cost those women the opportunity to obtain a home loan.  [We have heard of other cases where lenders were taking other discriminatory action against pregnant applicants and/or borrowers or against those who had recently had babies.]

Bank of America/Countrywide.  In the largest DOJ settlement involving alleged violations of the Servicemembers Civil Relief Act, Bank of America/Countrywide  agreed to pay a minimum of $20 million to resolve allegations that it unlawfully foreclosed on approximately 160 servicemembers.
Saxon Mortgage Services Inc., a subsidiary of Morgan Stanley.   DOJ alleged Saxon unlawfully foreclosed on approximately 17 servicemembers, in violation of the SCRA.  Saxon will pay a minimum of $2.35 million to settle the matter.

Bank of America.  No amount is reported, but DOJ says it resolved allegations that Bank of America charged servicemembers interest in excess of 6 percent on credit card debt, in violation of the SCRA.

Besides reviewing your physical locations for possible redlining, here are some actions we recommend to stay on the right side of the Justice Department and the fair lending laws:

• Have rate sheets for each of your established loan products.  Minimize loan officer discretion to set rates with clear guidelines about what factors should affect pricing.   Yes, it is permissible to have different rate sheets for different markets in which you do business.
• When deviations from the rate sheets are made, they should be reviewed and the reasons documented.  Be ready to explain variances.
• Review the Servicemembers Civil Relief Act.  Make sure you understand the benefits it gives to servicemembers.  Before taking any collection action – whether repossession or foreclosure, determine whether any of the affected parties is protected under the SCRA.
• Study the issuances regarding how to handle the 6% cap under the SCRA.  Re-amortize the debt and lower the payments.  Interest lost is forgiven – not regained after military service expires.
• Remember that HERA amended the SCRA and lengthened the time period certain protections apply.  For example, the 6% cap now applies to during the period of during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage.  For all other types of obligations, the 6% cap only applies during the period of military service.  (And in all cases, it only applies to pre-service obligations.)
• Chat with your loan officers about they are handling loan applications where the applicant is pregnant or on maternity leave to ensure they are not discriminating. 

i.  Strange Transactions

Customer landed on the overdraft list.  Oddly, it indicated the transaction was an ATM withdrawal.  Problem was, the customer didn’t have (and had never had) an ATM card or a debit card.  Something wasn’t quite right.
We’ve received several similar calls, many of which trace back to casinos and transactions which may or may not have been initiated via check, then been converted to an ACH debit and coded in a way that makes them appear to have taken place at an ATM or a point of sale terminal. 

For the first bank that called, all kinds of issues came up.  Could they charge a fee for honoring the “ATM” transaction that exceeded the customer’s balance?  The customer had not been given disclosures relating to the Reg E opt-in, and thus had not opted in, because the customer didn’t have an ATM card or debit card.  What a nightmare.

We are trying to get an idea of:
 How widespread the problem is;
 What you may have learned in dealing with these transactions;
 Whether you have suffered losses from these transactions;
 Whether you have developed an effective strategy for dealing with them.

Please drop us a quick email at to tell us what you know.

3.  CFPB Action

We’re sure you’ve noticed, too.  No new rules or proposed rules from the Consumer Financial Protection Bureau since the July 21, 2011 transfer date.  The last press release from the Bureau was dated July 26, and it was about leadership transition.  What gives?

Well, some legal analysts believe the Bureau lacks the authority to issue new regulations or to exercise its authority to pursue UDAAP (unfair or deceptive or abusive acts or practices) until it has a Senate-confirmed director.
Richard Cordray has been nominated as director.  He has not been confirmed by the Senate.  So here we sit in a state of uncertainty.  As Roger has chronicled in his writings, various initiatives are afoot in Congress to change the leadership structure of the Bureau, so it’s impossible to estimate when it will all be straightened out.

In the meantime, it appears clear the CFPB can prescribe rules, issue orders, and produce guidance related to federal consumer financial laws that were, prior to the designated transfer date, within the authority of Fed, OCC, OTS, FDIC, and NCUA, but with the exception of the Reg D action on alternative mortgage transaction parity, nothing has emerged.  I’d say we should be thankful, but the fact is that Dodd-Frank mandates many things (such as the small business data collection), so we aren’t going to escape the new requirements unless the law is actually changed.

4.  Watch Your Mortgage-Related Fees

A recent settlement entered into between the Federal Trade Commission and two Countrywide mortgage servicing companies shines a spotlight on some abusive tactics the servicing companies allegedly employed with cash-strapped customers.  The two servicing companies have agreed to pay $108 million to reimburse affected homeowners to settle the charges, making it one of the largest judgments ever imposed in an FTC case. 

Review what the FTC says these companies were doing to ensure your institution avoids engaging in similar practices.  According to the FTC complaint:
Countrywide’s loan-servicing operation deceived homeowners who were behind on their mortgage payments into paying inflated fees that could add up to hundreds or even thousands of dollars.

When homeowners fell behind on their payments and were in default on their loans, Countrywide ordered property inspections, lawn mowing, and other services meant to protect the lender’s interest in the property, and rather than simply hiring third-party vendors to perform the services, Countrywide created subsidiaries to hire the vendors. The subsidiaries marked up the price of the services charged by the vendors – often by 100% or more – and Countrywide then charged the homeowners the marked-up fees.    Countrywide earned substantial profits by funneling default-related services through subsidiaries that it created solely to generate revenue.

In servicing loans for borrowers trying to save their homes in Chapter 13 bankruptcy proceedings, Countrywide made false or unsupported claims to borrowers about amounts owed or the status of their loans.

Countrywide also failed to tell borrowers in bankruptcy when new fees and escrow charges were being added to their loan accounts. The FTC alleges that after the bankruptcy case closed and borrowers no longer had bankruptcy court protection, Countrywide unfairly tried to collect those amounts, including in some cases via foreclosure.

The actions that the settlement bars the servicers from engaging in should be used as a guidepost for actions to avoid by any lender or servicer.  Avoid:

 Making false or unsubstantiated representations about loan accounts, such as amounts owed.
 Charging any fee for a service unless it is authorized by the loan instruments, by law, or by the consumer for a specific service requested by the consumer.
 Charging any fee for a default-related service unless it is a reasonable fee charged by a third party for work actually performed. If the service is provided by an affiliate, the fee must be within limits set by state law, investor guidelines, and market rates.  Obtain annual, independent market reviews of affiliates’ fees to ensure that they are not excessive.

In addition, lenders and servicers should:
 Advise consumers if you intend to use affiliates for default-related services and, if so, provide a fee schedule of the amounts charged by the affiliates.
 Send borrowers in Chapter 13 bankruptcy a monthly notice with information about what amounts the borrower owes – including any fees assessed during the prior month.
 Implement a data integrity program to ensure the accuracy and completeness of the data you use to service loans in Chapter 13 bankruptcy.

5.  Major Anti-Steering Case

In $85 million civil money penalty, the largest assessed by the Federal Reserve in a consumer-protection enforcement action, is one heck of a way to demonstrate how serious the regulators are about enforcing anti-steering regulations.  The first formal enforcement action to address alleged steering of borrowers into high-cost, subprime loans was against Wells Fargo & Company of San Francisco and Wells Fargo Finance, Inc. of Des Moines.  (I’ll refer to the companies collectively as WFC.  You can read the C&D for details about which one took which actions, should you care to do so.)

The enforcement action is dissected below to give you a heads-up on the types of activity to avoid.

According to the FRB documents, WFC marketed debt consolidation, cash-out refinance loans at sub-prime rates through its network of offices nationwide, usually by salespersonnel calling individuals who had some existing relationship with WFC.  The salespersonnel typically didn’t require borrowers to fill out and sign applications.  WFC’s underwriting process made the salespersonnel responsible for obtaining income-related documents and sending them to centralized underwriting centers.

Sales people had performance standards and incentive compensation programs.  They were required to meet certain minimum dollar amounts for sales of loans.

Allegedly, although WFC’s written policies and procedures prohibited it, some salespeople marketed the loans to customers by indicating the debt-consolidation home mortgage refinancing loans would improve or repair a consumer’s credit.

Inadequate internal controls failed to detect and prevent instances when some salespersons, who were motivated by the performance standards and incentive compensation, altered or falsified income documents and inflated prospective borrowers’ incomes in order to make those borrowers look qualified for loans that they were actually not qualified for.

Here’s the kicker.  There were some cases where the compliance officers became aware of customer income document alteration or falsification.  When that happened, the compliance officers investigated, and where the allegations were proven or admitted, disciplinary action was taken against the salespersonnel.  By the middle of 2008, the internal controls were strengthened so that it would be harder for a salesperson to falsify or alter income-related documents.

At some point in the mid-2000s, WFC changed its performance standards and comp programs so that it was more advantageous for a salesperson to sell a nonprime loan than a prime loan.  What happened thereafter is that some customers who may have qualified for a prime priced loan were sold loans at nonprime rates.  The salespeople did that primarily by “upselling” the applicants so they requested cash-back loans that were large enough that the transaction would no longer qualify for prime pricing.  Customers weren’t told they might have qualified for prime priced loans.  They also were not told it was generally more advantageous to the salesperson to sell a nonprime loan, rather than a prime loan.

This steering practice was not detected by WFC’s internal controls because the internal controls were inadequate to detect and prevent incidents of evasion of the institution’s process for providing prime pricing to those who qualified for it.

The problem was obviously 3-fold, in my view.  1) You had a compensation and incentive system that provided a motive for screwing customers.  For loans covered by the recent additions to Regulation Z on anti-steering and loan officer compensation, that should no longer be the case in any institution.  (Note, however, that the restrictions don’t apply to HELOCs.)  2) You have some unscrupulous lenders.  3) The internal controls weren’t sufficient to catch the problems and prevent them.

6.  Foreclosure Policies and Procedures

In April, 2011, the agencies came out with the “Interagency Review of Foreclosure Policies and Practices.”  In the wake of shocking stories in the press about lenders attempting to foreclose on properties on which they did not have mortgages, robosigning of documents, and other inadequacies in foreclosure processing, the regulators conducted on-site reviews of foreclosure processing at a number of federally regulated mortgage servicers to evaluate the controls and governance over foreclosures processes and to assess servicers’ authority to foreclose. 
Subsequently, in late June, 2011, the OCC issued OCC 2011-29 to clarify expectations for the oversight and management of mortgage foreclosure activities by national banks, as follows:
 National banks must conduct self-assessments of foreclosure management practices to ensure their practices conform to expectations.
 Self-assessments should include testing and file reviews.
 The level of self-assessment should be appropriate in scope to the level and nature of the bank’s mortgage servicing and foreclosure activity.
 The Board needs to make sure management has addressed foreclosure governance processes.
 The foreclosure processes need to be sufficient to control operational, compliance, legal, and reputation risk associated with foreclosure activities.
 Attention should be given to appropriate vendor management (this would include outside law firms and collection agencies, for example), and ensuring that the bank internally has sufficient staff, organizational structure and training, to carry out foreclosure activities properly and legally.
 Affidavits are statements signed under oath before a notary.  It should be no surprise that the OCC wants banks to ensure that attestations in foreclosure-related affidavits are truthful, accurate, and adequately supported by file documentation, that affiants have sufficiently reviewed the documentation and have adequate knowledge to make the attestations, and that notary practices conform to state legal requirements.  Your processes should require employees to think and investigate before they swear to the truthfulness and accuracy of the statements in the affidavit.  All you have to do is imagine how YOU would feel if a lender were to misstate facts in an affidavit concerning your property, initiating a foreclosure action on a loan that is current.  Horrifying to even contemplate!
 For those of you who service your own loans, breathe a sigh of relief.  You undoubtedly have all the documents relating to the loan, from the note to the mortgage and everything in between.  That will make it easy for you to comply with the portion of the guidance document that says you must ensure that all documents required supporting lawful foreclosure actions are maintained and have been properly endorsed or assigned. Further, management should ensure the maintenance of a clear audit trail reconciling foreclosure filings to servicer source systems of record. The accuracy of those records should be verified, including statements of total indebtedness and fees charged.
 As an aside, I will note that I have heard from attorneys over the years that there are a surprising number of errors relating to amounts owed when they get the files.  Typically, that stems from miscalculation of penalty interest.  Not all attorneys undertake their own review of the calculations, and, let’s face it, that isn’t necessarily their strong suit.  You need to get the numbers right before you turn over the loan for collection and/or foreclosure.
 Compliance with all laws and regulations relating to mortgage foreclosures must be observed.  You should have (and use) a checklist to help you with everything from the homeownership counseling notices (and the HUD SCRA notice) to observing bankruptcy protections, SCRA restrictions, and other legal requirements. 
 Know thy lawyer.  Third-party vendor management is the final component to the self assessment, making sure the third parties, such as law firms, who assist you in the foreclosure process, have the expertise and skills necessary to do the job right.

The deadline for national banks to perform this self-assessment is September 30, 2011.  Any deficiencies noted should be corrected promptly.  If it appears borrowers have been harmed due to the weaknesses in your foreclosure management processes, provide remediation where appropriate.
Expect the examiners to ask to see the documentation of your self assessment, any corrective action you deemed necessary, and any determinations of financial harm and related remediation.  In doing your self-assessment, review the April, 2011 Interagency Report.  It explains the types of deficiencies they encountered.  You can determine if you have any similar practices within your institution.

7.  Q&As on Recent Changes to Regs B and V

In the last edition of Legal Briefs, we covered the changes to Reg B’s model forms for combined adverse action notices under the FCRA and ECOA, as well as changes to Regulation V’s risk-based pricing notices.  Here are a few Q&As that remained:
Q:  We provide the credit score exception notice under Regulation V, rather than the risk-based pricing notice.   Do the changes to Reg B’s model forms even affect us?
A:  Yes.  If you provide a credit score exception notice instead of a risk-based pricing notice you need both the credit score notice and an adverse action notice because the content and timing rules differ.
The credit score notice must be delivered as soon as reasonably possible (generally within three days) after the credit score has been obtained, whereas the adverse action notice must be provided within 30 days after receipt of a completed application.
A risk-based pricing notice is not needed on a denied application, but because of the timing difference you may have to deliver a risk-based pricing notice as soon as reasonably practicable, and then after the decision to deny is made, provide the adverse action notice within 30 days after receiving a completed application.
Both forms (the revised adverse action notice and the credit score exception notice) contain credit score information (score, range, company, date, and factors). But the credit score notice must contain several paragraphs of additional information related to credit scores and credit reports.
Q:  We obtain a credit score, but only for the purpose of furnishing it to the customer so that we don’t have to do risk-based pricing notices.  When we deny a loan, do we have to use one of the new Reg B model forms with the credit score verbiage?
A.  No.  You are not required to include the credit score information in the adverse action notice unless the score was used in taking the adverse action.   You are not required to include the credit score information in the risk-based pricing notice unless the score was used in setting the material terms of the loan.
If the score did not play any role in the decision it does not need to be disclosed, but if the score was even an insignificant factor it must be disclosed. The burden is on you to “prove” that the score did not play even a minor role in the denial or in setting the terms.
Q:  Who are we supposed to give the adverse action notice to?
A. The Equal Credit Opportunity Act (ECOA) and Regulation B require that the adverse action notice be provided to the primary applicant, generally the “applicant” on the application. The FCRA requires that the notice be provided to any consumer against whom adverse action is taken, if the adverse action is based in whole or in part on information from a consumer report.
Each applicant should receive their own notice, completed with the reasons and information related to their denial.  So, for example, let’s say you have joint applicants, X & Y.  X has a great credit score.  Y’s score is so bad that you deny the loan.
• The notice provided to X should indicate the credit was denied because the co-applicant has unacceptable credit history. The notice should includes X’s credit score information, if the score was a factor in denying the loan.
• Y’s notice should list the specific reasons for the denial, such as “delinquent past or present credit obligations with others.” Credit score information for Y should also be included in the notice.
Each notice should be sent in a separate envelope, even when the applicants live at the same address.
Q.  Are we required to provide an adverse action notice to a guarantor if it’s the guarantor’s credit score that resulted in the denial of the loan?
A.  No.  Neither Regulation B nor the FCRA requires an adverse action notice be provided to a guarantor. The adverse action notice should be provided to the applicant. The notice must state the specific reason for the denial, such “guarantor has unacceptable credit history.”  Do not provide information relating to the guarantor’s actual credit score to the applicant.
Q.  59.   We give the credit score exception notice, rather than the risk based pricing notice.  If we deny a loan, the customer will receive an adverse action notice and a credit score exception notice.  Is it acceptable to mail these together? 
A.   No rule prohibits providing both notices to one individual in a single envelope.
Q.  Do the risk-based pricing notices apply to loans with a business or commercial purpose?
A.  The risk-based pricing notice is not required unless the loan is for personal, family or household purposes.  On the other hand, the adverse action notices under ECOA and FCRA are not limited by purpose.
Q.   I have questions about the Form C-4 Counteroffer form.  Let’s say that a lender makes a counteroffer verbally to a customer after pulling the applicant’s credit report or reviewing the loan application.  At that point, they tell the customer that a co-signer will be required, for example, and that we will proceed with the loan if a qualified co-signer is offered.  If the applicant doesn’t come back with an acceptable co-signer, we deny the loan and send out the adverse action letter.  Typically, in this scenario, the counteroffer and acceptance or rejection happens within the same day, sometimes by telephone.  How do we comply in such a situation?  
A.   If you counteroffer and the customer accepts the counteroffer, no adverse action notice is needed. If the counteroffer is rejected, then an adverse action is needed.
The C-4 form combines a counteroffer with an adverse action notice. It records the counteroffer and the reasons the application could not be approved as submitted. If the customer does not accept the counteroffer, no additional adverse action notice is needed.  You’re done at that point.