November 2014 Legal Briefs

  • Privacy notice — final rule
  • QM cures
  • Servicing guidance
  • Reg O — alive and being violated
  • Flood insurance proposed rule
  • Counties — rural or underserved
  • Get it right the first time
  • RESPA Sec. 8 kickbacks
  • Redlining
  • When "free checking" isn’t
  • Wells Fargo’s maternity leave fiasco

Privacy Notice – Final Rule

By Andy Zavoina

On October 20 the Consumer Financial Protection Bureau (CFPB) published the final rule updating Reg P and one method your bank may use to meet alternative delivery requirements of the annual privacy notice. The rule is specific to financial institutions and does not apply to non-banks or credit unions.

This alternative delivery method allows your institution to post the annual privacy notice on your website if certain conditions are met, however, first you must meet criteria related to your privacy policy. The four requirements related to your privacy policy are:

  1. There are no opt-out rights triggered by the your information sharing practices under GLBA or section 603 of the FCRA;
  2. Opt-out notices required by section 624 of FCRA (also referred to as the Affiliate Marketing Rule) have previously been provided, or the annual privacy notice is not the only notice provided to meet these requirements;
  3. The information in the privacy notice has not changed since the previous notice; and
  4. The model from provided in Reg P is used as the annual privacy notice. (This may be a sticking point for any institution that doesn’t use the model notice in an exact form.)

Under item 3, if your institution’s change was to eliminate a category of information shared or you stopped sharing with a third party, these changes will not cause a disqualification from using the alternative delivery method.

If all of the four conditions are met, and you may opt to use the alternative delivery method, and would also have to comply with three additional requirements:

  1. You will continuously post the annual privacy notice in a clear and conspicuous manner on a page of your website, without requiring any login or similar steps. You may not condition access to the notice based on any separate agreement. This could require “tweaking” your site if, to enter, the user agrees to certain things like using a browser of a certain level, to use standard fonts, have virus protection active and updated, etc. Some institutions may require such an agreement to protect itself when the customer uses the website and internet banking and the intent is information security. The privacy notice would have to be separate from any part where there are conditions to enter. A link to this separate page is acceptable. The privacy notice must be the only content on the webpage.
  2. You would also have to mail annual privacy notices to those who request them by telephone, within 10 days of receiving their request. This is intended to assist those customers with limited or no access to the internet.
  3. At least once annually you would have to send a clear and conspicuous statement on an account statement, coupon book, or another notice or disclosure required by any provision of law that informs customers of three things:

a) That the annual privacy notice is available on your website,
b) That you will mail the notice to customer who request it by calling a specific telephone number, and
c) That the notice has not changed since your last delivery.

The proposal required a toll-free telephone number for item “b” but that requirement was removed. Your designated number may but is not required to be toll-free.

If the institution has changed its privacy practices or engages in information-sharing activities for which customers have a right to opt out, the institution is still required to use one of the standard delivery methods rather than the new alternative method.

Reg P allowed electronic delivery of the annual privacy notice before this revision. Neither the old nor new rules require your institution to go through the E-SIGN requirements with consumers to facilitate this alternative delivery method. The additional conditions do increase the work you must do, but ultimately are directed toward protecting the consumer. This method can certainly be cost effective and easier than sending annual notices.

The final rule became effective upon publication in the Federal Register, October 28, 2014.

QM cures

By Andy Zavoina

The Bureau has finalized the April 2014 proposed rule that made changes to Reg Z to help nonprofit entities and introduced a cure mechanism for Qualified Mortgages (QMs). Don’t stop because you read “nonprofits:” while that was a focal point for this rule, the cure mechanism for “refunding” excess costs can apply to your institution.

The points and fees that are charged on a QM generally cannot exceed 3% of the loan principal at consummation. Under the final rule, if a lender that discovers the points and fees cap has been exceeded after closing of the loan, he may refund the excess amount and avoid a being cited for a violation. Certain circumstances must be met, but when done, the loan will continue to be considered a QM. Below is the final cure process plus how it differs from the proposal:

  1. The possibility to cure QM points and fees errors sunsets after January 10, 2021. The proposal did not have a sunset provision but systems and procedures should be sound by 2021 and these errors a distant memory.
  2. The opportunity to cure is only available for transactions consummated on or after the effective date of the final rule (November 3, 2014) and on or before the sunset date.
  3. The condition that the creditor originated the loan in “good faith” as a QM was eliminated. Rather than dealing with the challenges of showing “good faith,”, the loan must meet the criteria (other than the points and fees limitations) for a General, Transitional, Small Creditor Portfolio, Temporary Balloon Payment, or Balloon Payment QM.
  4. The time period to make the cure payment is increased from 120 days to 210 days. The cure payment can be made by check without the agreement of the consumer, the payment is considered timely if the check is delivered or placed in the mail within the 210 day cure period. The payment/refund can also be made in any other manner mutually agreeable to the consumer and creditor/assignee.
  5. The ability to cure is extinguished by the occurrence of any of these three events:

    a. the consumer initiates legal action in connection with the loan,
    b. the consumer is 60 days past due on the loan, or
    c. the consumer provides written notice to the creditor, assignee, or servicer that the loan’s points and fees exceeded the QM limit. (“I caught ya!”)

  6. The creditor/assignee must pay interest at the contract rate on the dollar amount the points and fees exceed the QM limit from the date of consummation until the cure payment is made. The proposed rule did not include interest but only the excess points and fees amount.
  7. The requirement that a creditor or assignee must maintain and follow policies and procedures for a post-consummation has been narrowed to require a “review of points and fees” rather than a “review of loans.”
  8. The policies and procedures must include a requirement to make cure payments to consumers in accordance with the requirements of the rule, clarifying the requirement to pay interest on the cure payment for the required time period.
  9. Restructuring of the loan is not required.
  10. The cure payment is not required to include any prepayment penalty that would be associated with applying the cure payment toward the balance of the loan.

Amounts paid to cure points and fees errors can be offset by any amounts paid the consumer under the RESPA tolerance cure to the extent the amount paid was applied to points and fees. This will avoid duplicate refunds.

It is to each institution’s advantage to ensure policies and procedures are amended to add quality controls or audits for a review of closed QM loans to be done in a timely manner to allow for refunding of any excess charges.

Servicing guidance

By Andy Zavoina

October 23, 2014, the Bureau published in the Federal Register Bulletin 2014-01 titled “Compliance Bulletin and Policy Guidance – Mortgage Servicing Transfers.” This publication is directed toward residential mortgage servicers and outlines the CFPB’s expectations for servicers when transferring loans.

The Bulletin is divided into four sections:

  1. Examples of policies and procedures the CFPB considers would meet the requirement in the 2013 servicing rules for servicers to “maintain policies and procedures that are reasonably designed to achieve the objective of facilitating the transfer of information during mortgage servicing transfers.”
  2. Details of sections of the servicing rules not directly related to transfers that may nonetheless arise in servicing transfers. This section covers areas such as Notices of Errors, Information Requests, force-placed insurance, early intervention, continuity of contact, and loss mitigation.A list of other consumer financial laws that may apply during servicing transfers.
  3. Information regarding the content of a plan to manage significant servicing transfers. The Bureau may require this type of written plan in certain situations.

The Bulletin was effective October 23, 2014, but is applicable since it was made available last August 19, 2014.

The information contained in this Bulletin can serve as a roadmap to review your servicing transfer policies and procedures. The points outlined are relevant to all who service loans, regardless of which prudential regulator you have.

As a resource, the Federal Register reference is 79 FR 63295, Pages 63295 -63299, and it is Document Number: 2014-24194. The short URL is

Reg O – Alive and Being Violated

By Andy Zavoina

Reg O has been in the news lately, and it isn’t good. While there haven’t been recent changes to dealing with insider loans, we are seeing more Reg O penalties. Expect your examiners to review these requirements and be proactive in your training, sampling and auditing to avoid the problems we are reading about.

A Consent Order resulted in a $15,000 civil money penalty and a prohibition order against a former director of “Security Bank, NA” of North Lauderdale, Florida. The order alleges that a company, for which the director was a majority owner, was also a loan customer of the bank with several loans totaling approximately $2 million. All of the loans were secured by the inventory of the company and guaranteed by the director. Because of the director’s control over the company, it was a “related interest” of the director and would be considered an “insider” of the bank. In March of 2010, the director allegedly caused the company to sell the inventory securing the loans as well as the company’s name to an associate. Subsequently, the bank’s board allegedly voted to approve the renewal of four of the company’s loans totaling $635,000. The loans were considered problem loans because the company had a negative net worth, substantial year-to-date losses, and had failed to provide requested financial information. The loans violated Reg O because they contained more than normal repayment risk and other unfavorable features. The bank later sustained a loss from the loans when approximately $629,000 was charged off.

The Reg O violation occurred because the director knowingly received, or allowed his related interest to receive, an extension of credit that violated Reg O. In this case, the director’s situation was made worse because of two additional violations of law:

  1. First, the director voted to appoint an individual to the position of Secretary of the Bank’s Board of Directors when he knew the individual had been previously convicted of a criminal offense involving dishonesty; and
  2. The director failed to ensure that the bank’s management developed and implemented an effective BSA compliance and suspicious activity monitoring and reporting system.

Another Consent Order involved the president and senior loan officer of a New Jersey bank, and resulted in a civil money penalty of $2,000. In that order, the OCC alleges that the president originated and approved a demand consumer loan in the amount of $50,000 for another director, the terms of which represented preferential treatment because:

  1. The amount of the loan exceeded the bank’s policy of a maximum loan amount of $10,000;
  2. The amortization of the loan was about 4 ½ years which was longer than the bank’s maximum 3 year term, per policy; and
  3. No financial analysis was done to ensure the director was able to service the debt in addition to his existing obligations.

These are the second round of Reg O violations resulting in Consent Orders since July. At that time the OCC published enforcement actions and five personal civil money penalty orders against directors, four of them apparently members of the same family, of the First National Bank of Manchester, Manchester, Kentucky.

In that order there was a $40,000 CMP and Order of Prohibition against the former president and chairman, found to have used bank credit card and accounts for personal expenses, and to have failed to establish and enforce adequate internal controls over the use of the bank’s credit cards and accounts. This order also included restitution.

There were three $10,000 CMPs issued against current directors for failing to implement and enforce adequate internal controls over the use of the bank’s credit cards and accounts, and for violations of Regulations O and W.

The July order also included one $5,000 CMP issued against a former director for failing to implement and enforce adequate internal controls over the use of the bank’s credit cards and accounts, for violations of Regulations O, and for voting to approve loans on which he had performed evaluations of the collateral.

Based on these actions over the last three months, this is a good time for refresher training for all executive officers, directors and principal shareholders. Point out the possibility of personal civil money penalties like these which may help to grab their attention. It is recommended you review your presentation with senior management to prepare them to discuss personal liability with the directors. Many do not grasp the idea of “personal liability” as a director, but more and more these types of enforcement actions preclude the bank from paying for or reimbursing the directors for fines or expenses incurred in their defense.

Flood insurance proposed rule

By Andy Zavoina

The OCC, Federal Reserve, FDIC, Farm Credit Administration and NCUA issued a joint notice of proposed rulemaking to implement the Homeowner Flood Insurance Affordability Act (HFIAA) regarding escrowing flood insurance payments and insurance for certain detached structures.

Structures located on residential property, but detached from the primary residential structure and do not serve as a residence will be exempt from the mandatory flood insurance purchase requirement. To clear up an issue that came to light with regulators, the proposal allows lenders to use discretion and require the purchase of flood insurance on these detached structures for safety and soundness to protect collateral securing the loan. The agencies are seeking specific comments in this area regarding the definition of residence, residential structure, and when a detached structure that is not a residence becomes a residence.

The proposal requires institutions to escrow premiums and fees for flood insurance on loans secured by residential improved real estate or mobile homes for any loan that is made, increased, renewed or extended after January 1, 2016, unless the lender or the loan qualifies for one of seven exemptions. The option to escrow flood insurance premiums and fees must also be made available to borrowers with loans outstanding as of January 1, 2016, and to borrowers of exempt institutions after the institution is no longer exempt. Exemptions from required escrows include:

  1. Institutions with total assets of less than $1 billion as of December 31st of either of the two preceding calendar years; and that, as of July 6, 2012 (the date of enactment of Biggert-Waters), was not required by Federal or State law to escrow taxes or insurance, and did not have a policy to require the escrow of taxes and insurance.
  2. Loans primarily for a business, commercial or agricultural purpose. (Loans exempt from Reg Z and RESPA are likewise exempt from escrow).
  3. Loans in a subordinate position to a senior lien that is secured by the same residential improved real estate or mobile home and for which flood insurance is being provided at the time of the origination of the loan.
  4. Loans secured by residential improved real estate or a mobile home that is part of a condo, cooperative, or other project development if the property is covered by a flood insurance policy provided by the condo or homeowners association or other group that is paid for as a common expense, and that meets the mandatory flood insurance purchase requirement.
  5. HELOCs.
  6. Nonperforming loans, which are defined as loans more than 90 days past due.
  7. A loan that has a term of 12 months or less.

The proposal also includes detailed provisions for revised and new notices as a result of both the escrow and detached structure requirements; transition rules for changes in status of small lenders; and timing requirements for the implementation of escrows for existing borrowers that elect to have flood insurance premiums and fees escrowed.

The proposal does not address the acceptance of private flood insurance or the force placement of flood insurance. The agencies have indicated that these topics will be included in separate rulemaking. The proposal will not supersede current Biggert-Waters escrow provisions effective July 5, 2012, which will continue to be enforced until December 31, 2015.

This is your chance to comment, but be sure to do so by December 29th.

Counties – Rural or Underserved

By Andy Zavoina

The Consumer Financial Protection Bureau (CFPB) has posted the lists for “Rural or Underserved Counties” and “Rural Counties” for 2015. These lists are important in determining various exemptions in Reg Z. The lists are referred to in various rules such as the ability-to-repay and qualified mortgage standards, escrow requirements, high-cost mortgages and homeownership counseling, and appraisals for HPMLs.

In case you were wondering how counties make the list: Rural counties are generally defined by using the USDA Economic Research Service’s urban influence codes, and underserved counties are defined by reference to data collected under HMDA.

The lists are available in CSV, Excel, and PDF formats. You can find links to these formatted lists on the CFPB website by searching on “Final lists of rural or underserved counties” and look for the October 27, 2014 publication date or use this link:

Get it right the first time

By John S. Burnett

As series of enforcement orders and legal settlements in recent weeks has made it all too clear that it “pays to do it right the first time.” Banks and others caught up in these orders and settlements have been guilty of misrepresentation, deception or simple wrong-headedness. Whether their motives were pure or less than that we won’t say, but can you imagine your bank doing some of the things that put the targets of the orders or lawsuits in the swamp? Let’s take a look at some of the cases in that on-going effort to “learn from the other guy’s mistakes.”

RESPA Sec. 8 kickbacks

By John S. Burnett

Lighthouse Title, located in Holland, Michigan, entered into a number of “marketing services agreements” (MSA’s) with real estate brokers and other companies providing real estate settlement services, with the understanding that the companies would refer mortgage closings and title insurance business to Lighthouse. Under the agreement, Lighthouse paid fees based on the amount of business each party referred or anticipated would be referred. The problem with those agreements was that a payment of the fair market value for a “thing of value” is acceptable under the Real Estate Settlement Procedures Act (RESPA) and Regulation X, but a fair market value cannot include a consideration for the value of referrals of business.

An exemption in Regulation X exists for “payments of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” However the payments by Lighthouse did not fall within the exception. And payments to non-employees for referrals are prohibited by RESPA section 8(a): “A company may not pay any other company or the employees of any other company for the referral of settlement service business.”

Lighthouse was ordered by the CFPB to cease and desist from its practice of entering into such agreements, to document all exchanges of things of value worth more than $5 with persons able to refer business related to real estate settlement services (this requirement isn’t in the regulation; it’s to ensure Lighthouse doesn’t slip up), terminate all of its current marketing services agreements, and pay a $200,000 civil money penalty to the Bureau.

The lesson: It may be acceptable to pay for referrals of some types of business, but when real estate transactions are involved and payments are made to anyone who’s not one of your employees, you’re looking for trouble.


By John S. Burnett

A housing discrimination complaint lodged with HUD by the Metropolitan St. Louis Equal Housing and Opportunity Council (EHOC) got Midland States Bancorp into hot water. EHOC alleged that Midland had designated its service area or assessment area in a discriminatory manner, excluding areas with high minority concentration, locating its branches and services in a manner that failed to provide equal access based on race or national origin, and failing to market residential mortgage lending to African-Americans and Hispanics, all in violation of the Fair Housing Act.

Midland is a community bank primarily located in rural areas of Illinois. It had never received a Fair Housing Act complaint before receiving the EHOC complaint. HUD negotiated an agreement between the parties that Midland will not engage in act or practice that discriminates unlawfully in any aspect of residential real estate transactions, including the selection of branch sites, marketing, establishment of its CRA assessment areas, and the selection of geographic areas in which it solicits or funds loan applications.

The bank also agreed to pay EHOC $200,000; engage in remedial training of its staff; open a full-service office in a majority-minority tract in the city of Joliet, Illinois and keep it open for at least five years; open a loan production office with an ATM in a majority-minority tract in St. Louis, and maintain it for at least five years; open a full service to be open for at least five years in a majority-minority tract of St. Louis as a condition of completing a planned acquisition of another bank

Also agreed to was the funding of a $550,000 subsidy to provide discounted home purchase or refinancing loans within majority-minority census tracts in three designated metropolitan markets, and to originate $8 million in affordable mortgage loans for single-family, owner-occupied properties in majority-minority tracts over three years in those markets An additional $400,000 fund was committed to subsidize affordable home repair loans in minority tracts in the same markets. The bank also agreed to originate $4 million in multi-family housing loans in majority-minority tracts in St. Louis and Illinois, and to spend $100,000 a year for the three years for affirmative marketing and outreach.

There’s much more to the details of the agreement that was exacted from the bank by EOHC, but the message is clear: Restricting the availability of housing-related credit in any way that can be interpreted as illegal discrimination is serious business. Midland has been forced to redefine itself and its business as the result of allegedly avoiding the making of loans in areas with higher concentrations of minority residents.

When “free checking” isn’t

By John S. Burnett

The Manufacturers and Traders Trust Company (M&T), Buffalo, New York, made a strategic error when it decided to play fast and loose with the word “free” in its ads for checking accounts. The bank described its “free” accounts as having “no strings attached.” What it didn’t disclose was the eligibility requirements standing in the way of a truly free account. To be eligible for M&T’s “Free” or “Totally Free” account, a customer had to maintain a minimum level of account activity. And, if there was no activity for 90 consecutive days, M&T converted the accounts to M&T First checking accounts, which were not free (although fees were waived if certain minimum balance requirements were met).

M&T did disclose its activity requirements for free accounts, but only after an account was opened. Customers received no warning of an account conversion for inactivity other than the change in account type appearing on a bank statement or online account pages. Over four years beginning January 1, 2009, the bank converted over 80,000 accounts to First Checking, impacting over 59,000 customers, collecting over $2 million in fees from the First Checking accounts.

The Bureau found M&T to have violated Regulation DD in its use of the word “free” in advertising accounts requiring an activity fee or maintenance charge, and to have engaged in unfair, deceptive or abusive acts or practices in its marketing and treatment of the affected customers. In addition to ordering M&T to cease and desist from its violations, the Bureau ordered the bank to set aside $2.045 million for redress to affected consumers; complete and submit an acceptable plan for that redress; and pay the Bureau a civil money penalty of $200,000.

The obvious lesson: When you say something will be “free,” you had better mean it. There can’t be any “buts” or conditions or “strings” attached.

Wells Fargo’s maternity leave fiasco

By John S. Burnett

In another HUD announcement last month, we learned that Wells Fargo Home Mortgage, the largest provider of home mortgage loans in the country, had agreed to a $5 million settlement in a HUD complaint for violations of the Fair Housing Act in which it was alleged that the lender had discriminated in its making of housing-related loans on the basis of sex and/or familial status. It appears from the complaint that one or more Wells Fargo Home Mortgage employees took it upon themselves to encourage several women then on temporary maternity leave to return to work early in order to have a pending loan application approved or otherwise discriminate against persons on temporary parenting leave. The bank now has to undertake development of a policy addressing the handling of such parenting leaves in the context of evaluating loan applications and training or retraining of all its appropriate personnel concerning that new policy. It also has to set aside up to $5 million for the payment of qualified claims by persons affected by Wells Fargo Mortgage discrimination when parenting leave was a factor.

Lesson: Denying credit with the excuse that the applicant is on parenting leave is clearly misguided. We’ll say it plainer: It’s just plain stupid. Of course you can and should ensure that there is sufficient income or other assets to make payments on the requested loan, and you can verify that a current employer is, in fact, planning on the applicant’s return to work at the same pay rate. But assuming that a parenting leave signals no intention to return to work, or conditioning loan approval on an early return to work is not something you’ll want any of your lenders even considering.