Issue # 1 March 2010

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Our clients are seeking assistance in the practical application of recent regulatory changes...

In This Issue

Tackling RESPA Compliance

Regulatory Hot Issues

 

Compliance Calendar (March - May 2010)

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March 1
HMDA filing deadline

March 26
Deadline to provide notification to consumer transaction account holders of the Bank's change in its Funds Availability Policy (Note: Do not forget to update lobby notices, training materials, "cheat sheets," system parameters, etc.)


March 31
Make the Bank's modified HMDA LAR available to the public (for HMDA filers)


April 1
Ensure that the Bank's CRA Public File is up to date


April 30
Ensure that the Bank's YTD 2010 HMDA LAR contains all HMDA reportable applications/loans through March 31, 2010. (Hint: Re-review the Bank's HMDA LAR for accuracy on a quarterly basis so it is not such a daunting task in January/February);


May "slow month"
Use May to prepare for and schedule compliance training (required by Regulation (e.g., BSA, Regulation CC) and/or Bank Policy (e.g., Fair Lending).



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In the ever changing world of regulatory compliance, Bankers continue to seek clear guidance and interpretation of banking regulations. In many cases, regulatory interpretation of written rules and regulations is not clear until the new/updated regulation has gone through an examination cycle. Although we at Campbell & Associates do not have, nor do we claim to have, all of the answers, we do get the opportunity to see how new regulatory changes are being implemented through servicing our banking clients during the audit process; reviewing regulatory examinations and discussing issues and questions with the regulatory agencies and banking institutions.  Accordingly, as many of our clients seek that guidance by utilizing us as an important resource, we will be providing our best insights for regulatory compliance through this quarterly communication of questions/issues that have been raised and will provide some tips for demonstrating compliance with the changing regulatory framework.

From the Staff at Campbell & Associates

Tackling RESPA Compliance

It is likely by now that everyone in the Bank, well, certainly everyonemortgage application remotely connected to originating mortgage loans, is aware that RESPA changed significantly on January 1 of this year. HUD has done a good job of providing guidance on the changes through its "New RESPA Rules FAQs"

www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf

However, as many of you are discovering, it does not answer all your questions nor does it provide meaningful guidance for demonstrating compliance when your friendly auditors and examiners are reviewing files for compliance.

Based on our recent reviews and discussions with clients, here are some tips for compliance:
Define and communicate to all applicable personnel the Bank's definition of application under RESPA:

Within the Bank's Policy/procedures, the Bank's definition of an application under RESPA should be clearly defined. Per RESPA, "application" means the submission of a borrower's financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include:

  • The borrower's name,
  • The Borrower's monthly income,
  • The borrower's SSN (to obtain a credit report);
  • The property address;
  • An estimate of the value of the property;
  • The mortgage loan amount sought; and
  • Any other information deemed necessary by the originator.

The last bullet is the doozy as it is a broad statement. However, REPSA specifically indicates though that the Bank cannot require, for example, information/items that confirm the first six required items as "other information deemed necessary". For example, to consider a request for credit an "application", the Bank cannot require the submission of W-2, tax returns, etc. However, examples of other information that the Bank may require for a credit request to be considered an application are: the purpose and amount of the credit request, the applicant's mailing address, the name/address of the applicant's employer, or, even completion of the application form (e.g., the Uniform Residential Loan Application, Form 1003).

We recommend the following:

In addition to clearly defining what constitutes an application at the Bank for RESPA purposes, we recommend that the Bank ensure that all applicable personnel understand the Bank's definition of an "application" and the importance of obtaining and documenting all "application information" received (i.e., the six required items and "any other information deemed necessary"), as well as the Bank's other RESPA specific policies and practices. This most likely will require "live" training sessions. While "pre-set" training sessions offered (e.g., online training modules) are helpful for employees to gain a general understanding of RESPA, the benefits of providing focused training on the Bank's specific policies and practices is essential for compliance.

Also, do not forget that some rules of RESPA have not changed! That is, upon receipt of an application, the Bank still must provide a GFE within three business days of receiving the application.


Documentation, documentation, documentation (ensure documentation exists to support when and how information was requested from/provided to the applicant)

First let's look at some of the specific requirements regarding the issuance of GFEs, and then we'll get to best practices for documentation.

  • Under Section 3500.7(a)(4) of RESPA, the Bank is not permitted to charge, as a condition for providing a GFE, any fee for an appraisal, inspection, or other similar settlement service. The Bank may, at its option, however, charge a fee limited to the cost of a credit report. The Bank may not charge additional fees until after the applicant has received the GFE. If the GFE is mailed to the applicant, the applicant is considered to have received the GFE three (3) calendar days after it is mailed, not including Sundays and legal public holidays.

  • HUD's FAQ to the new RESPA provides even more specific and restrictive interpretations. That is, in this FAQ it states that the loan originator cannot collect a fee, beyond the cost of a credit report, until after a loan applicant receives a GFE and indicates an intention to proceed with the loan covered by the GFE. Now, it does seem that the Bank could incur fees prior to providing the GFE (e.g., order an appraisal, obtain a flood determination, etc.); however, the Bank could not collect the fees from the applicant until after the GFE is issued and the applicant informs the Bank of his/her intent to proceed with the loan. The risk though, would be if the loan does not close (customer withdraws or Bank denies), the Bank may end up absorbing the fees incurred.

  • Under Section 3500.7(a)(5) of RESPA, the Bank is not permitted to require that, as a condition for providing a GFE, an applicant submit supplemental documentation to verify the information provided on the application..

    Okay, now what does this mean? It means that the Bank cannot require an applicant to provide W-2s, tax returns, bank statements, etc. as a condition of providing a GFE. This does not prohibit, however, the Bank from using alternative sources before issuing a GFE to independently verify the information provided by the applicant. For example, the Bank could review internal documentation if the applicant is already a customer of the Bank. Also note, that in providing the GFE, the Bank can inform the applicant as to what types of verification documents will be required if he/she wishes to continue with the transaction, it cannot, however, require those verification documents prior to providing a GFE. For example, in a cover letter accompanying the GFE, the Bank may indicate something to the effect of "If you wish to proceed with your loan request, we will need the following (and then list the verification documents).

  • Under Section 3500.7(c) of RESPA, the charges and terms for all settlement services (that are not interest rate dependent charges and terms) disclosed on the GFE must be available and remain in effect for ten (10) business days from when the GFE is provided. Note, however, that the ten (10) business days is the minimum period allowed by RESPA; the Bank may designate a longer time frame. If the applicant does not indicate his/her intent to go forward with the loan transaction within that 10 business day (or other designated) period, the Bank is not bound by the GFE.


We recommend the following:
  1. Ensure that the date that the GFE is provided is well documented, as is the date the applicant notifies the Bank of his/her intent to proceed with the transaction; and
  2. Ensure that the Bank is consistent in following up with customers regarding their intent.
The reasons for this are two-fold:
  • if fees change and the applicant did not express his/her interest in continuing with the transaction until after 10 business from when the Bank provided the GFE, the Bank is not bound by that GFE; therefore, the Bank could issue a new/updated one; and

  • to help ensure that there are no fair lending implications (e.g., married males received a follow-up call on day 7 to inquire whether the applicant would like to proceed with the transaction, but single females do not receive such courtesy calls).
Further documentation recommendations:

To help ensure compliance and to provide documentary evidence in the process, it is recommended that the Bank have some way of clearly (and consistently) documenting the following:

a.) The date that the GFE was provided;

b.) The method of delivery (e.g., in person, via US Mail, etc.);

c.) The date when the loan applicant indicated his/her intent to proceed with the transaction (Note for Joint Applicants: While under Regulation B, each joint applicant must evidence his/her intent to apply for joint credit, for RESPA purposes, it appears that the Bank may rely on one joint applicant to inform the Bank of his/her intent to proceed with the transaction (on behalf of any other joint applicants);

d.) The date on which fees connected to the applicant's credit request (other than a credit report fee) are charged/collected;

e.) The date on which verification documents (e.g., W-2s, tax returns, etc.) were obtained from the applicant.

Note, there is no prescribed manner for documenting the above. In fact, RESPA does not require that these items be documented, but without adequate documentation, we feel it will be more difficult (if not impossible in some cases) for a Bank to demonstrate its compliance with RESPA. Therefore, the Bank may choose how items will be documented (e.g., document on a checklist, call/customer contact log, etc.)


Stay tuned to our next issue of Compliance Insights as we will keep you updated on the latest nuances of this new world of RESPA and include additional tips for compliance.
FAIR LENDING RISK ASSESSMENTS

Should your Bank be looking for assistance or guidance in performing and documenting its Fair Lending risk, Campbell & Associates has facilitated the fair lending risk assessment process for many of our existing clients.  This process includes interviews with lending personnel and management as well as an analysis of the Bank's loan related products, loan policy, underwriting criteria, etc. and is presented in an Executive Summary with supporting matrices.

Please contact Jon Campbell at jcampbell@joncampbellassoc.com

or Maureen Busch at mbusch@joncampbellassoc.com for further information




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Regulatory Hot Issues


Modifications

Loan modifications are quite prevalent today and more and more consumer loans are being modified. burning bricksWhen modifying (renewing, extending, changing terms, etc.) a loan, ensure proper action is taken (and documented) from a compliance perspective. For example, if a loan term is extended or loan amount increased on a loan secured by improved property located in a special flood hazard area, the Bank may need to obtain a new Standard Flood Hazard Determination; provide a new Notice of Special Flood Hazard Availability; ensure that the amount of flood insurance in effect is sufficient; etc. Another consideration relates to Truth in Lending; for example, if the Bank is converting a HELOC to a closed end loan or introducing a variable rate feature to a fixed rate note, new disclosures may be required.


Fair Lending

Has your Bank performed a Fair Lending Risk Assessment? More and more, the banking regulators are expecting banks to assess and understand their risk in terms of the fair lending regulations. An organized and comprehensive method for documenting and measuring fair lending risk is essential. Often, banks struggle with such an exercise as they may not know where to begin. As with any risk assessment, the goal is to determine the likelihood and significance of an "event" happening and what the impact of that event might be. With Fair Lending, the "event" is discriminating on a prohibited basis (e.g., based on race, national origin, sex, age, etc.). The impact to the bank could be a lawsuit, referral to the Department of Justice by the Bank's primary regulator, etc. The results of the Risk Assessment can be handled in a couple of ways (and these are not mutually exclusive):

  1. The scope for a Fair Lending review could be more effective if its focus is determined based on the results of the Fair Lending Risk Assessment (e.g., the risk assessment showed a high likelihood and significance for discriminating on a prohibited basis in the offering and/or servicing of the Bank's HELOC products) or

  2. additional and/or changes in mitigating controls could be implemented (e.g., ensure that all HELOCs are underwritten centrally rather than running the risk of inconsistencies in applying the Bank's underwriting polices, which may be the case, if, for example, each branch manager and loan officer has authority to approve HELOC applications received or institute mandatory fair lending training for all personnel as well as the Board of Directors). In any case, the performance of a Fair Lending Risk Assessment is a worthwhile exercise at any Bank and is being "recommended" by all regulatory bodies.


Please contact

Jon Campbell at jcampbell@joncampbellassoc.com
or Maureen Busch at mbusch@joncampbellassoc.com




Your Questions And Input Are Welcome:

With all the regulatory changes that have been implemented and are out on the horizon, it’s a seemingly insurmountable goal to keep all the changes and implementation dates straight. We will continue to address some of the nuances and provide tips for compliance in our future updates to Compliance Insights.

We can project and speculate on compliance challenges, but hearing from you on what specific challenges and questions you face is helpful.

Should you have specific questions that you would like addressed and possibly featured in future updates to Compliance Insights, please e-mail them to Maureen Busch at mbusch@joncampbellassoc.com.

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