Tuesday, June 18, 2024

April 2013 Legal Briefs

  • Traps for the Unwary
  • FFIEC Social Media Guidance – Proposed
  • A World of Two Names
  • Extended Escrows Under Reg Z

Traps for the Unwary

By Mary Beth Guard

expanded appraisal requirements in Reg Z), so the fact that it was a flip was irrelevant. The new requirements would not be applicable.
On the other hand, Regulation B is being revised effective January 18, 2014 to require copies of appraisals and evaluations to be automatically provided (if you have them) in connection with any application for a loan that would be secured by a first lien on a 1-As the various Dodd-Frank regulations are finalized by the Consumer Financial Protection Bureau and the effective dates loom in the distance, you need to be prepared to grapple with the fact that there will be some important differences from one regulation to another, just as there have been in the past.
Three pieces of advice are timely and pertinent, whether the new regulation at issue is on the lending side or the operations side:
1. Always, always consider context.
2. Don’t assume anything – specifically, don’t expect consistency.
3. Adjust your record retention arrangements.
When I say consider the context, I’m talking about looking at all the facets of a transaction before you start to determine what compliance requirements are applicable. For example, I’ve had many calls where a banker will say “We are making a loan to Joe Blow to help expand his business. He is giving us his home as collateral and because of the rate, it’s going to be a Higher-priced Mortgage Loan and we’re going to have to do an escrow.” I stop them right there. It’s not an HPML, regardless of the rate, and escrow is not mandatory. Why? Because they said it was a loan to expand a business. The HPML requirements are part of the Truth in Lending Act and Regulation Z. They apply only to loans to a consumer that are primarily for a personal, family, or household purpose. If you have a business purpose loan, it is exempt from Reg Z, which means that it won’t be subject to the particulars of Reg Z, such as the provisions on Higher-Priced Mortgage Loans.
Another banker recently had a question regarding the Reg Z revisions taking effect in January, 2014 that will require a second appraisal to be done in a situation where it’s a flip loan. From the facts given, it was clear that the loan wasn’t going to be covered by Reg Z, and even if it was, it wasn’t likely to trip the higher-risk mortgage loan rate triggers, and even if it did trip those rate triggers, the banker had mentioned the bank’s intention to make only Qualified Mortgages (which are exempt from the to 4-family dwelling, regardless of whether the loan is approved or denied, or the application is withdrawn or incomplete. Where you can get in trouble with this one is by not realizing that Regulation B applies to all types of credit. It isn’t just a consumer protection regulation, so whether your loan is to an individual or a business doesn’t matter. Whether your loan is for a business or consumer purpose doesn’t matter. Your collateral matters and, under the narrowing of the scope of the requirement to first liens, your collateral position matters. By considering context and understanding the scope of coverage of the different laws and rules, you can save yourself a lot of wrong moves.
The other major factor to consider is the potential applicability of an exception or exemption from a requirement. For example, there are certain types of disclosures and notices that you don’t have to provide if you make a decision to deny a loan within three days after you receive an application. Don’t universalize that practice. It applies only where a law or regulation specifically states. So, for example, with respect to the new requirement that you must automatically (not just upon request) provide a copy of any appraisal or valuation used in connection with an application for a loan to be secured by a first lien on a dwelling, there’s no “out” if you deny the loan within the first three days. If you did an evaluation or got an appraisal, you must provide it.
One of the most frustrating things that we, as compliance people, must endure is a lack of consistency. Because of it, you cannot assume that terms are defined the same from one regulation to another. For example, the term “loan originator” under Regulation Z is defined in a wholly different way than the term “mortgage loan originator” under the SAFE Act. There’s overlap, to be sure, but the scope of coverage is not identical. [As an aside, that is one reason I was quite unhappy when they placed SAFE Act-related amendments into Reg Z within the same rulemaking where they addressed loan originator compensation amendments to Reg Z. The test for whether someone is a “loan originator” for compensation purposes and for purposes of the anti-steering rules under the regulation is a completely different test from the SAFE Act test used to determine if an individual is required to be registered as a “Mortgage Loan Originator” under the SAFE Act. No wonder people get so confused!]
Perhaps the most confusing part of the lending-related Dodd-Frank rules will be keeping straight what applies only when the loan involves principal dwellings and when there must be a mortgage on real estate vs. when it is sufficient for it to be a lien on a principal dwelling even if it’s just the mobile home without real estate. Plus, some of the new requirements apply only to closed end consumer credit, while there are a few that affect open end. You must keep straight whether a requirement is confined to first lien loans or all lien loans. Some of the rules apply to dwelling-secured loans (not just principal dwelling-secured). My head hurts just thinking about it! Of course, when it comes to loans secured by a time share, it’s easy – almost none of the new requirements apply! Many of the new rules also exempt reverse mortgage loans. Those two exemptions are small consolation to most lenders, however, who don’t make either type of extension of credit.
The bottom line is that you can’t assume anything about scope of coverage, exemptions, exceptions, definitions. You must KNOW for sure.

FFIEC Social Media Guidance – Proposed

By Andy Zavoina

Compliance and Risk Management

On January 23, 2013 the FFIEC published guidance for banks on the use of social media. (Vol. 78, No. 15) Comments are being accepted through March 25, 2013. There are several interesting aspects of thisproposed guidance that banks need to consider whether they are involved in the use of social media or not. Some believe you open an account under the bank’s name and start throwing up posts about how great a product is, or how the newest customer, John Smith, will save money with the banks new debit card. Banks need to realize there are risks when using social media, compliance rules apply, and these come with a cost. Controls are needed and they can be driven by strong policies and procedures. Here are some highlights from the proposal (and these actually apply regardless of the outcome of this proposal):
Social media includes:
• micro-blogging sites such as Facebook, Google Plus, MySpace, and Twitter);
• forums, blogs, customer review Web sites and bulletin boards (e.g., Yelp);
• photo and video sites (e.g., Flickr and YouTube);
• sites that enable professional networking (e.g., LinkedIn);
• virtual worlds (e.g., Second Life); and
• social games (e.g., FarmVille and CityVille).
These sites may be used by a bank for marketing, incentivising readers to come to the bank or visit the website, gain loan and deposit applications, invite feedback on the bank’s products and services, or improve communication regarding complaints, suggestions, and rates on loans and deposit products.
Often social media is used as an informal means of communication. This “relaxed” environment may increase the risks identified here. The risks can include the risk of harm to consumers, compliance and legal risk, operational risk, and reputation risk. Increased risk includes poor due diligence, oversight, or control on the part of the bank. The bank must therefore identify risks and then mitigate them as much as possible with policies, procedures and controls to the level commensurate with the banks use of social media.
The bank’s risk management program should be designed by a group of the bank’s key areas, including compliance, technology, information security, legal, human resources, and marketing. Each of these areas is touched when the bank is involved with social media. An important point in this guidance is that even if a bank has decided not to use any form of social media should it must still be prepared to “address the potential for negative comments or complaints that may arise within the many social media platforms and provide guidance for employee use of social media.”
The recommendations on the application of risk management are fairly standard:
• The board and senior management should include it in the strategic plan and allow for proper controls.
• Policies and procedures need to be in place and address unique issues such as addressing the risks of online posts, edits, replies and retention.
• Managing vendors who may host, manage content or otherwise be involved in the process is important.
• Employee training is critical and human resources should be involved as there are distinctions that must be observed in what employees do for the bank, and for their personal social networking.
• Oversight, controls and reporting are key elements to maintain a sound process.
Areas of risk which must be addressed include compliance, legal risks, operational, and reputation.
Compliance and legal risk are present when laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards are not followed. These issues can change rapidly, especially with social media and users have the added rules of the social media site – which can also change. There is also the potential for defamation or libel.
Applicable rules and regulations that can apply, depending on the content posted, include Reg DD, B (including Fair Lending and Fair Housing), E, Z, BB, CC, Fair Debt Collection Practices Act, Unfair, Deceptive, or Abusive Acts or Practices, FDIC deposit advertising rules, Nondeposit Investment Product rules, UCC Article 4, Bank Secrecy Act, Privacy and complaints.
Reputation risk is affected when your bank’s brand is damaged either by what the bank posts, or what others post. This needs to be reviewed periodically and ties with the review for fraud or brand identity theft which can occur when phishers are using the bank’s name, as one example.
The bank also needs to manage, to an extent, what employees say on social media. While the bank has to observe certain rights the employee has, the employee also has to recognize the privacy needs of customers and corporate secrets and plans.
As you can see above, there should never be the attitude that social media is an informal means of communication and it has no risk because of that. There are lessons to be learned in this proposal, but it is just a proposal. The final publication may include more restrictions and risks.
The guidance request not only identifies risks, but also wants responses on three questions:
1. Are there other types of social media, or means of communicating with customers that should be included here?
2. Are there other laws, regulations, policies or concerns that should be included here?
3. Are there any technological or other impediments the Agencies should be aware which impact the bank’s ability to conform to the guidance proposed?
Comments were due by March 25, 2013. We expect final guidance will be issued soon, due to the importance of this area.

A World of Two Names

By Braulio E. Gonzalez Mejia

OCU Legal Extern, 2-L

There might be a possibility that I am two different people and don’t even know it. Before we get confused with possible sci-fi movie scenarios or conspiracy theories, let me explain.

I am a native Puerto Rican, which means that I am born an American citizen, but have Hispanic heritage. The Spanish culture is what is known as a matriarchal culture. Matriarchy is a society in which women take central roles, especially in the family. In Spanish culture when a woman gets married she does not generally use the last name of her husband, she gets to keep her own. Because of this, when the couple has children; the children use both last names, the “father” last name followed by the “mother” last name.
The current Spanish last names are a result of unfortunate circumstances. Take my “father” last name, Gonzalez. Gonzalez is a traditional Spanish last name with centuries of history. Gonzalez is said to mean son of Gonzalo, a very popular last name in Imperial Spain. The story of how these last names came to be, as told by my father, is all a result of the Spanish Inquisition. The Spanish Inquisition was a clearing of any non-Catholics in the Iberian Peninsula where Spain and Portugal are located. The Pope, along with the monarchs, began a war against anyone that was not a Catholic, especially Arabs which controlled most of the peninsula. Spanish Catholics felt they had to give children names that would let soldiers know who was and wasn’t Catholic.
Why the history lesson and, more important, why should you care?
When you are opening an account or making a loan to someone who is using this Hispanic name convention, you need to understand that the last name in the sequence may not really be what the customer considers his or her last name, and, as explained below, you should inquire about it so that you know how what the customer wishes to be referred to.
In Puerto Rico I opened a bank account under the name Braulio Gonzalez, which is my legal name and the name on my Puerto Rican driver’s license. When I came to school in the U.S., I needed to open a bank account at a US bank. I used my Texas driver’s license, which I obtained by using my US passport. (Had you forgotten? Puerto Ricans are U.S. Citizens!) To get my U.S. passport I had to use my birth certificate. On that document my name is Braulio Gonzalez Mejia. Mejia is my mother’s last name, so when born I was given it according to tradition. Because of this, on my U.S. passport my name is Braulio Gonzalez-Mejia. Why the hyphen? It is because in the US there is no such thing as a second last name. So, when I use my Texas driver’s license my name is Braulio Gonzalez-Mejia, and it’s also my name on my US bank account.
Why am I writing about this process?
I was fortunate. In my case, very few problems would be faced by a banker trying to open a bank account for me because, being born an American, I have a social security number. When a banker checks for my name on the OFAC list, or any other database, my social security number will be the same and the only difference would be my hyphenated last name. Note, however, that because my identity on my Puerto Rican driver’s license is different than the name shown on my passport and Texas driver’s license, a database search should be done using Gonzalez, which should also turn up any listings that have that name as the root, including the hyphenated version, Gonzalez-Mejia. If I were on the OFAC list as Braulio Gonzalez, and you were looking at my license which says Braulio Gonzalez-Mejia, you would understand that the name on the list could be me. The absence of “Mejia” would not trigger a conclusion that it was necessarily a different person, in other words.
A problem could arise when a citizen of a different country uses his foreign passport to open a bank account. His name on that passport might be different or might be interpreted differently. For example, if I was a Mexican national, my passport would say Braulio Gonzalez Mejia. A banker might assume that Gonzalez is my middle name and that Mejia is my last name. This is a frequent error. If, in that instance, the banker uses Braulio Mejia to perform database searches, they would yield search results that do not correspond with me, but would instead correspond to an individual whose father’s last name was Mejia.
To avoid this type of confusion, a banker should ask the customer, respectfully, which of the two names the customer would like to use as their last name. Many Hispanics would choose their “father” last name, as I would.
With the Hispanic population in the United States growing rapidly, bankers should work to not only educate themselves on possible population trends for marketing reasons, but also to protect themselves against fraud or any other possible problems that would result from failing to get the correct name from customers.
Mary Beth asked me to write this article to provide insight into how Spanish last names are structured and why. She said it helped clear up for her something she had wondered about for some time. I hope it does the same for you.

Extended Escrows Under Reg Z

By Mary Beth Guard

New amendments to Regulation Z dealing with the establishment and maintenance of escrow accounts on HPMLs take effect June 1, 2013. The changes will apply to covered transactions for which creditors receive applications on or after the effective date. We offer quick look at what the changes entail, and we’ll detail the requirements for qualifying for the rural/underserved exemption.
These amendments affect the section of Reg Z that deals with requirements for higher-priced mortgage loans (HPMLs). That means the only types of loans that are covered are closed end consumer credit transactions secured by the consumer’s principal dwelling that trip the rate triggers to be considered higher-priced mortgage loans.
Generally, only first lien HPMLs trigger the escrow requirement.
The existing exemptions have not changed. Escrows will still NOT be required for:
• A transaction secured by shares in a cooperative;
• A transaction to finance the initial construction of a dwelling;
• A temporary or “bridge” loan with a loan term of twelve months or less; or
• A reverse mortgage transaction.
This final rule lengthens the period of time the required escrows must remain in effect to five years, as described below. It also expands upon an exemption for escrowing insurance premiums in situations where a consumer’s property is covered by a master insurance policy.
For escrow accounts required to be maintained by the rule, cancellation cannot occur until the earlier of termination of the underlying debt obligation; or receipt no earlier than five years after consummation of a consumer’s request to cancel the escrow account. In other words, the escrow account can’t be cancelled until the loan is paid off, foreclosed upon, or is at least five years old. Plus, the cancellation must be triggered by borrower request.
Even if a consumer makes a timely request for cancellation, an escrow account cannot be cancelled unless the unpaid principal balance is less than 80 percent of the original value of the property securing the underlying debt obligation and the consumer currently is not delinquent or in default on the underlying debt obligation.
The rule also makes an important clarification. Insurance premiums for mortgage-related insurance required by the creditor under the rule (such as hazard insurance) need not be included in escrow accounts for loans secured by dwellings in condominiums, planned unit developments, or other common interest communities in which dwelling ownership requires participation in a governing association, where the governing association has an obligation to the dwelling owners to maintain a master policy insuring all dwellings. This is an expansion of an existing exemption from escrowing for insurance premiums (not for property taxes) for condominium units to extend the partial exemption to other situations in which an individual consumer’s property is covered by a master insurance policy.
Loans you received applications for prior to June 1, 2013 remain subject to the one year time period for escrows, rather than the new longer period.The good news is that you may be able to avoid these HPML escrows altogether under an exemption built into the final rules.
The new exemption hinges not on the characteristics of the loan, but on the characteristics of the creditor. In order to escape the escrow requirement for HPMLs, you, as the creditor, must satisfy all four of the following tests.
As the creditor, you:
l) must make more than half of your total first-lien mortgages covered transactions under 1026.43(b)(1) in rural or underserved areas. (The rule contains tests for determining if a county is rural or underserved.) ;
2) must have an asset size less than $2 billion. (That asset threshold will adjust each year);
3) must, together with your affiliates, have originated 500 or fewer first lien mortgages (of the type that are considered covered transactions under 1026.43(b)(1)) during the preceding calendar year; and
4) together with your affiliates, you don’t escrow for any mortgage you or your affiliates currently services, except in limited circumstances.
So, what are those “limited circumstances”? More specifically, the test for (limited circumstances) is as follows:
Neither you nor your affiliate maintain an escrow account of the type described in paragraph (b)(1) of this section for any extension of consumer credit secured by real property or a dwelling that you or your affiliate currently services.
There are two exceptions to that. If you have escrow accounts that you established for first-lien higher-priced mortgage loans on or after April 1, 2010, and before June 1, 2013; or if you have escrow accounts that you established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure, having either or both of those two types of escrow accounts don’t disqualify you from the exemption. In other words, even if you have those types of escrow accounts, if you meet all the other criteria for being exempt, you will be exempt.
If you are eligible for the exemption, you won’t need to establish escrow accounts for mortgages intended at consummation to be held in portfolio, but you must establish accounts at consummation for mortgages that are subject to a forward commitment to be purchased by an investor that does not itself qualify for the exemption.
Exemption triggers can be tricky. This HPML escrow rule builds in an exemption for creditors who primarily operate in rural or underserved communities (and meet other criteria). As we discussed in the last edition, there’s also special provision in the Ability to Repay rule for Qualified Mortgages made by a creditor whose covered loans are primarily in rural or underserved communities (if other criteria are met).
Unfortunately, you can’t assume you’re on a roll and think that every time the test involves a lender whose loans are predominantly in a rural community that it also includes those with loans in primarily underserved communities. You can’t cross-pollinate triggers, definitions, tests from one part of a reg to another.
So, don’t be surprised when I tell you there are inconsistent tests among various Dodd-Frank rules! Section 1026.35(c) is being adopted separately by the CFPB jointly with other Federal agencies, to implement the new appraisal requirements in TILA section 129H, in the 2013 Interagency Appraisals Final Rule. That new section provides an exemption for creditors operating in rural, but not underserved, areas. Consequently, the single, combined list of all counties that are either rural or underserved that the Bureau will publish annually for purposes of the exemption from this final rule’s escrow requirement is inadequate for the analogous purpose under the new appraisal requirements in § 1026.35(c). And, unlike the ATR rule, this escrow exemption for small creditors in rural or underserved communities does not apply only where the creditor retains its mortgage loan originations in its portfolio, so keep that important distinction in mind as well.
It’s a numbers game. Count the number of first lien covered transactions you did in the preceding calendar year, then map them by county, then count the number that were made in rural or underserved counties. If more than 50% were made in rural or underserved counties, the HPML escrow rules will not apply to you – but remember that each year, you’ll need to make a new determination. And also remember that all the other facets of the HPML rules will still be fully applicable.
Let’s use an example to demonstrate the math. For example, if a creditor originated 90 first-lien covered transactions, as defined by § 1026.43(b)(1), during 2013, the creditor meets this condition for an exemption in 2014 if at least 46 of those transactions are secured by first liens on properties that are located in counties that are on the Bureau’s lists of rural or underserved counties for 2013.
For purposes of satisfying part of the test for the rural/underserved exemption from the escrow requirements on HPMLs:
(A) A county is “rural” during a calendar year if it is neither in a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget and applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture’s Economic Research Service (USDA-ERS). A creditor may rely as a safe harbor on the list of counties published by the Bureau to determine whether a county qualifies as “rural” for a particular calendar year.
(B) A county is “underserved” during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for that year, no more than two creditors extend covered transactions, as defined in §1026.43(b)(1), secured by a first lien five or more times in the county.
A creditor may rely as a safe harbor on the list of counties published by the Bureau to determine whether a county qualifies as “underserved” for a particular calendar year. The CFPB published its preliminary list of rural and underserved counties for 2013. Before the effective date, the CFPB plans to publish some minor technical changes to the rule and publish a final, official list. On the preliminary list, more than 50 of Oklahoma’s 77 counties appear as rural or underserved. You will want to click over to the CFPB’s website to examine the list so you can start making your preliminary determination of whether more than 50% of the total of your first lien covered transactions in rural or underserved communities, so you can see if you qualify for the exemption from the escrow requirements for HPMLs.