June 2018 OBA Legal Briefs

• Deregulation is a reality
• Consumer loan dollar amounts adjust July 1

Deregulation is a reality

By Andy Zavoina

On May 24, 2018, President Trump signed into law, the “Economic Growth, Regulatory Relief and Consumer Protection Act” (the “Regulatory Relief Act,” P. Law 115-174, formerly S. 2155). It eases some of the regulatory restrictions imposed since the financial crisis and by the Dodd-Frank Act. It was written to assist small and medium sized banks, but it’s not all news of deregulation as it also brings back and makes permanent some other requirements. This article will provide an overview of what the Regulatory Relief Act will do for compliance and why it should be reviewed for your compliance management planning.

The Act is broken into six sections, or Titles, dedicated to separate topics — mortgage credit, access to credit, protections for veterans, consumers and homeowners, holding companies, capital, and student borrowers. This article will highlight changes important to compliance and generally discuss other areas so that for change management it can more easily be determined who in the bank needs to provide attention to them. Several sections not relating to banks are omitted in this overview.

Different sections will have different implementation dates. Some changes were effective upon enactment while others have scheduled dates and still others will require action from regulatory agencies and new rules. Of the sections with effective dates, the delays range from 30 days to 18 months or more. It’s important to note that just because a change is effective now, it may not be necessary (or even possible) to change a policy or procedure until the regulatory agencies publish new rules or modify existing ones.

Title I comprises nine sections designed to amend laws that are believed to have hampered mortgage loan production and reduced the availability of mortgages to consumers.

Section 101 effectively creates a new qualified mortgage option for banks with assets of less than $10 billion that originate and hold the mortgage in its portfolio, and consider and document the borrower’s qualifications including income, debts, and other financial resources available. The Ability to Repay analysis need not include Reg Z’s Appendix Q. Terms of the mortgage must comply with requirements pertaining to prepayment penalties and fees, and there could be no negative amortization or interest-only terms.  Such a mortgage, if later sold, must be transferred to a similarly qualified lender or it will lose its status under this qualified mortgage option.

Section 102 — [Omitted]

Section 103 amends FIRREA to exempt loans under $400,000 from general requirements for independent home appraisals in rural areas where the bank has contacted three state-licensed or -certified appraisers who could not complete an appraisal in a reasonable amount of time. Without an appraisal, the ability to sell a loan would be restricted.

Section 104 amends HMDA so that banks originating fewer than 500 closed-end mortgages and fewer than 500 open-end mortgages in each of the last two years and Satisfactory or better CRA ratings will submit data under something similar to pre-2018 rules. This section is effective immediately but will still require CFPB action because we don’t know if the reporting change is retroactive to the first of the year, or how the change will be implemented.

Section 105 –allows a credit union to extend a member business loan with respect to a one- to four-family dwelling, regardless of whether the dwelling is the member’s primary residence. The NCUA has already amended its rules to implement this change.

Section 106 amends the SAFE Act to allow certain state-licensed mortgage loan originators licensed in one state to temporarily work in another state while waiting for approval in that new state.  MLOs who move from a bank where licensing was not required to a nondepository institution (where they do need to be state licensed) get a grace period to complete the necessary licensing. This section is effective in November 2019, 18 months after enactment.

Section 107 — [Omitted]

Section 108 – Banks with assets of less than $10 billion and which made 1,000 or fewer first lien mortgages annually on principal dwellings will be exempt from TILAs escrow requirements. This change requires a Bureau Regulation Z amendment before it’s effective.

Section 109 – Current TRID rules require a three-day waiting period between the delivery of the Closing Disclosures and the actual closing. If a redisclosure is required, the three-day period may have to restart. Reg Z will be amended to  allow a waiver of this period if the APR is decreasing due to a second offer of credit from the lender.

Title II has 17 sections and focuses on regulatory relief for community banks and increasing access to credit for their customers. Many of these provisions are based on reducing or creating thresholds that are favorable to smaller banks.

Section 201 will provide community banks a less complex capital and leverage regime.

Section 202 amends the Federal Deposit Insurance Act to exclude reciprocal deposits of an insured depository institution from certain limitations on prohibited broker deposits within specified limits. This change will allow smaller banks previously hampered by FDIC premiums to compete with larger banks for larger deposit accounts.

Section 203 amends the Bank Holding Company Act to exempt community banks from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. The exemption is for banks with less than $10 billion in assets, and trading assets and liabilities of not more than 5% of total assets.

Section 204 eases Volcker Rule restrictions on entity name sharing in specified circumstances.

Section 205 will allow depository institutions with less than $5 billion in assets to satisfy reporting requirements with a shorter or simplified Call Report for the first and third quarters of each year.

Section 206 will permit federal savings associations with assets under $20 billion to operate under the OCC with the same rights and duties as national banks, without requiring a change in charter. OCC regulations will be required to complete this change.

Section 207 Increases the threshold separating small bank and savings and loan holding companies for supervisory purposes from $1 billion to $3 billion in the Fed’s “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement.”

Section 208 will include American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam in the definition of “State” in the Expedited Funds Availability Act. Reg CC’s one-day extension for certain deposits in noncontiguous states or territories will also apply to these territories. Effective 30 days after enactment, or June 23, 2018.

Section 209 — [Omitted]

Section 210 raises the asset threshold from $1 billion to $3 billion allowing more banks to be eligible for an 18-month examination cycle. Regulators will have to determine if qualified banks already scheduled for an exam under the 12-month cycle will be rescheduled for the longer 18 months.

Section 211 — [Omitted]

Section 212 — [Omitted]

Section 213 permits banks to use a scan of, make a copy of, or receive the image of a driver’s license or identification card in connection with new accounts established via the Internet. (It is not immediately clear if this authority allows a military identification card to be copied.)

Section 214 allows a bank to classify certain commercial credit facilities that finance the acquisition, development, or construction of commercial properties as regular commercial real estate exposures instead of high volatility commercial real estate (HVCRE) exposures for risk-weighted capital requirement calculations, and limits the federal banking agencies’ ability to impose higher capital standards with respect to HVCRE exposure.

Section 215 requires the Social Security Administration (SSA) to develop a database for verification of consumer information upon request by a certified financial institution.  Verifications will be provided only with the consumer’s consent (electronic signatures permitted) and in connection with a credit transaction or other circumstance under FCRA § 604. Users of the database shall pay system costs as determined by the SSA.

Section 216 – Treasury will report on the risks of cyber threats to banks and capital markets.

Section 217 – The Federal Reserve Act will be amended to lower the maximum allowable amount of surplus funds of the Federal Reserve banks.

Title III will impact the credit reporting industry and access to credit especially by servicemembers, veterans, students and those borrowing for energy efficiency projects.

Section 301 will increase the length of time a consumer reporting agency must (under FCRA) include a fraud alert in a credit file from the current 90 days to at least one year.

It will also require consumer reporting agencies to provide a consumer with free credit freezes and to notify them of this availability. Also creates requirements related to the protection of the credit records of minors.  This section is effective 120 days after enactment, or September 21, 2018.

Section 302 will require that medical debt may not be included in a veteran’s credit report until one year has passed from when the medical service was provided. It also provides enhanced abilities for veterans to dispute medical debts to be covered by VA. It also requires credit reporting agencies to provide free credit monitoring to active duty military members that would alert them to material changes in their credit scores. This section is effective one year after enactment, or May 24, 2019.

Section 303 will provide immunity from liability to appropriately trained individuals at banks who, in good faith and with reasonable care, disclose suspected financial exploitation of a senior citizen to a regulatory or law-enforcement agency. The bank will not be liable with respect to the disclosures made. Training is required before immunity is provided; the bank may provide that training.

Section 304 repeals the sunset provision of the Protecting Tenants at Foreclosure Act (which expired 12/31/2014), restoring notification requirements and other protections related to the eviction of renters in certain foreclosed properties. Effective 30 days after enactment, or June 23, 2018.

Section 305 — [Omitted]

Section 306 – [Omitted]

Section 307 – The CFPB must extend ability-to-repay regulations to Property Assessed Clean Energy (PACE) loans, which retrofit homes for energy efficiency but are often financed at high interest rates.

Section 308 – [Omitted]

Section 309 is intended to enhance consumer protections for veterans. The VA may not guarantee a refinanced home loan, unless a specified minimum time period has passed (210 days after the existing loan’s first payment, and the date the sixth payment is made) between the original loan and the refinancing. The borrower must to be able to “recoup” upfront fees in the form of lower monthly payments within 36 months. The new interest rate must be a certain minimum level below the rate of the original loan and the lender would have to provide the borrower with a net tangible benefit test showing how that the borrower would benefit from the refinancing. This section is effective as of enactment although the VA has 180 days to write implementing regulations.

Section 310 affects the use by FNMA and Freddie Mac of credit scores as a condition for purchase of a mortgage. This section is effective 180 days after enactment, or November 20, 2018.

Section 311 – The GAO is directed to report on foreclosures, homeownership, and mortgage defaults in Puerto Rico before and after Hurricane Maria.

Section 312 – [Omitted].

Section 313 – The one-year grace period during which a servicemember is protected from foreclosure after leaving military service is made permanent in the Servicemembers Civil Relief Act (SCRA).

Title IV is targeted at large banks and addresses changes in Bank Holding Company (BHC) rules.

Section 401 – The Financial Stability Act of 2010, is amended with respect to nonbank financial companies supervised by the FRB and certain bank holding companies, to:

  • increase the asset threshold at which certain enhanced prudential standards shall apply, from $50 billion to $250 billion, while allowing the FRB discretion in determining whether a financial institution with assets equal or greater than $100 billion must be subject to such standards;
  • increase the asset threshold at which company-run stress tests are required, from $10 billion to $250 billion;
  • and increase the asset threshold for mandatory risk committees, from $10 billion to $50 billion.

This section is effective 18 months after enactment, or November 2019.

Section 402 requires the appropriate federal banking agencies to exclude, for purposes of calculating a custodial bank’s supplementary leverage ratio, funds of a custodial bank that are deposited with a central bank. The amount of such funds may not exceed the total value of deposits of the custodial bank linked to fiduciary or custodial and safekeeping accounts.

Section 403 – The Federal Deposit Insurance Act will now require certain municipal obligations to be treated as level 2B liquid assets if they are investment grade, liquid, and readily marketable. Under current law, corporate debt securities and publicly traded common-equity shares, but not municipal obligations, may be treated as level 2B liquid assets (which are considered to be high-quality assets).

Title V addresses capital formation. It is omitted from this overview.

Title VI provides protections for student borrowers.

Section 601 amends TILA (and Reg Z) to revise provisions relating to cosigners of private student loans. Specifically, this prohibits a creditor from declaring a default or accelerating the debt of a private student loan on the sole basis of the death or bankruptcy of a cosigner to such a loan and directs loan holders to release cosigners from any obligation upon the death of the student borrower. (This makes private student loans more like federal student loans.) Affects loan agreements entered into on or after November 20, 2018.

Section 602 – The FCRA will allow a person to request the removal of a previously reported default regarding a private education loan from a consumer report if the lender chooses to offer a loan-rehabilitation program that requires a number of consecutive on-time monthly payments demonstrating renewed ability and willingness to repay the loan, and the consumer meets those requirements. A consumer may obtain such rehabilitation benefits only once per loan.

Section 603 – The Financial Literacy and Education Commission will establish best practices for teaching financial literacy skills at institutions of higher education.

Consumer loan dollar amounts adjust July 1

By Pauli D. Loeffler

Sec. 1-106 of the Oklahoma Uniform Consumer Credit Code  in Title 14A (the “U3C”) makes certain dollar limits subject to change when there are changes in the U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers.   You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here.  You will also be able to access it on the OBA’s Legal Links page under Resources once you create an account with the OBA. In fact, you can access the Oklahoma Consumer Credit Code as well as the changes in dollar amounts for prior years from that webpage.

Increased Late Fee

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to § 1-106. As of July 1, 2018, the amount provided under (b) will increase by $.50 to $25.50.

Late fees for consumer loans must be disclosed under both the UC3 and Reg Z. In order for a bank to be able to impose any late fee, the consumer must agree to it in writing. Any time a loan is originated, deferred or renewed, the bank is given the opportunity to obtain the borrower’s consent in writing to the new $25.50 portion of the late-fee formula.  However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to increase the amount of late fee that the consumer has previously agreed to pay a set amount in the loan agreement.

On the other hand, the bank may take advantage of an increase in the dollar amount for late fees if the late-fee disclosure is worded properly, such as:

“If any installment is not paid in full within ten (10) days after its scheduled due date, a late fee in an amount which is the greater of five percent (5%) of the unpaid amount of the payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time may be imposed.”

3-508B Loans

Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” rather than using the provisions of § 3-508A with regard to maximum annual percentage rate. Section 3-508A contains provisions for a “blended” rate by tier amounts under (1)(a) as well as the alternative of using a flat 25% APR under (1)(b). § 3-508A is NOT subject to annual adjustment without statutory amendment.

The permitted principal amounts for § 3-508B was $1,500.00 but is adjusting to $1,530.00 for loans consummated on and after July 1, 2018.

Section 3-508B provides an alternative method of imposing a finance charge to that provided for § 3-508A loans. NOTE: The section prohibits the imposition of additional fees. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, or any other kind of fee is allowed  other than late or deferral fees. Further, no credit insurance can be sold in connection with in § 3-508B loans.  If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3-508A instead.  The bank must also take into consideration that existing loans made under § 3-508B cannot be refinanced as or consolidated with § 3-508A loans, or vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding a certain dollar amount which will be $1,530.00 on July 1. Further, substantially equal monthly payments are required. § 3-508B is a difficult statute to parse and understand, and I hope to make it understandable, but I have to re-educate myself annually.

The first scheduled payment cannot be due less than one calendar month after the loan is made, and subsequent installments due at not less than 30 day intervals thereafter. The minimum term for loans is 60 days (so far, so good). The maximum number of installments allowed is 18 months calculated based on the loan amount as 1 month for each $10.00 for loan amounts between $152.64 and $357.00 and $20 for loan amounts $357.01 – $1,530.00. Here is a slightly modified version of the statute that you may enable a better understanding of these math intensive loans:

(1) On loans having a principal of $1,530.00 or less, a supervised lender (banks and licensed lenders) may charge in lieu of the loan finance charges specified in Section 3-508A, the following amounts:

(a) on any amount up to and including 152.95, a charge may be added at the ratio of $5.10 for each $25.50 of principal;

(b) on any loan in an amount in excess of $152.96 up to and including the amount of $178.50, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $15.30 per month;

(c) on any loan of an amount in excess of $178.51 but not more than $375.00, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $17.85 per month;

(d) on any loan of an amount in excess of $375.01 but not in excess of $510.00, there shall be allowed an acquisition charge for making the loan, not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $20.40 per month.

(e) on any loan in an amount in excess $510.01 of up to and including the amount of $765.00, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $22.95 per month;

(f) on any loan of an amount in excess of $750.01 but not more than $1,530.00, there shall be allowed an acquisition charge for making the loan not in excess of one-tenth (1/10) of the amount of the principal. In addition thereto, an installment account handling charge shall be allowed not to exceed $25.50;

(2) The maximum term of any loan made under the terms of this section shall be one (1) month for each Ten Dollars ($10.00) of principal up to a maximum term of eighteen (18) months. Provided, however, that under subsections (e) and (f) the maximum terms shall be one (1) month for each Twenty Dollars ($20.00) of principal up to a maximum term of eighteen (18) months.

(3) The minimum term of any loan made under the terms of subsections (b) through (f) of this section shall be no less than sixty (60) days. Any loan made under the terms of this section shall be scheduled to be payable in substantially equal installments at not less than thirty-day intervals, with the first installment to be scheduled to be due not less than one (1) calendar month after the date such loan is made.

(4) Loans made under this section may be refinanced or consolidated according to the provisions of this section, notwithstanding anything in this act to the contrary. When a loan made under this section is refinanced or consolidated, installment account handling charges on the loans being refinanced or consolidated must be rebated pursuant to the provisions regarding rebate on prepayment (Section 3-210 of this title) as of the date of refinancing or consolidation. For the purpose of determining the amount of acquisition and installment account handling charges permitted in relation to the refinancing or the consolidation of loans made under this section, the principal resulting from the refinancing or consolidation is the total of the unpaid balances of the principal of the loans being refinanced or consolidated, plus any new money advanced, and any delinquency or deferral charges if due and unpaid, less any unearned acquisition and installment account handling charges imposed in connection with loans being refinanced or consolidated.

(5) On such loans under this section, no insurance charges or any other charges of any nature whatsoever shall be permitted.

(6) Except as otherwise provided, the acquisition charge authorized herein shall be deemed to be earned at the time a loan is made and shall not be subject to refund. Provided, however, in a loan made under this section which is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge under this section will not be fully earned at the time the loan is made, but must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. On the prepayment of any loan under this section, the installment account handling charge shall be subject to the provisions of Section 3-210 of this title as it relates to refunds. Provisions of Section 3-203 of this title as it relates to delinquency charges and Section 3-204 of this title as it relates to deferral charges shall apply to loans made under the section.

Lenders making “508B” loans should be careful and promptly change to the new dollar amount brackets, and the new permissible fees within each bracket on July 1st. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 (without shifting to a revised chart) might result in excess charges for certain small loans and violations of the U3C provisions. The Department of Consumer Credit has provided a 3-508B Loan Chart including Refunds in prior years, and there will be a link on the OBA’s “Oklahoma law-related links” page when it is provided.

American Bank Systems (“ABS”) used to annually update its § 3-508B pricing calculator but hasn’t done so since 2015, but since there were no changes in dollar amounts for 2016, it was accurate until July 1, 2017. However, ABS did provide a § 3-508B “Loan Pricing Matrix” for 2017, (link on OBA Legal Link webpage) and hopefully will do so again for 2018. ABS also has provided a § 3-508A “Maximum Annual Percentage Rate Chart” for many years including 2017, and once it is out for 2018, a link will be provided on the OBA Legal Links page for this handy Matrix.

3-511 Loans

I get calls when lenders get a warning from their loan origination systems that a loan may exceed the maximum interest rate, but invariably the banker says the interest rate does not exceed the alternative non-blended 25% rate allowed under 3-508A according to their calculations. Usually, the cause for the red flag on the system is § 3-511, for which loan amounts also adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2018, in bold type. The italicized portion of the statute is nearly always the reason for the notification:

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $5,100.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more $1,530.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1530.00 or less.

Dealer Paper “No Deficiency” Amount

If dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This is covered in Section 5-103(2) of the U3C. This dollar amount was previously $5,000.00 and increases to $5,100.00 on July 1.