NORTHWEST CONFERENCE - Washington Bankers … Hamilton PPTs COMBI… · Loan has a term of no...

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1Compliance Services© 2016 Temenos USA. All rights reserved.

NORTHWEST COMPLIANCE CONFERENCEOctober 6, 2016 ~ Seattle, WA

Leah M. Hamilton | Chief Compliance Officer

2Compliance Services

About the Speaker

Leah M. Hamilton, JD

Chief Compliance Officer for Temenos Compliance Services

Director of Compliance Education and Training

20 years of experience in the financial services industry

Advises almost 1,000 institutions on federal banking compliance

Nationally recognized speaker on Compliance and BSA/AML matters

TRID expert panelist for ABA’s TRID Workshop Series

Lead compliance consultant and advisor on consent order remediation engagements and management responses to examiner concerns

Juris Doctorate from Northern Illinois University College of Law Bachelor of Arts in General Studies degree from the University of Texas at

Dallas, major in law with minor in business management

Faculty member for SW Graduate School of Banking at SMU in Dallas2

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Flood: Cry me a river



What you will learn

2016 Mandatory escrow requirements

Examiner trends

Emerging risks

An ounce of prevention

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2016 Mandatory escrow for flood insurance premiums

Mandatory escrow for flood insurance premiums for loans made, increased, renewed or extended on or after January 1, 2016 Property in an SFHA Secured by residential improved real estate or mobile home Applies to consumer loans only

Two Exceptions to Mandatory Escrow Loan Exception Small Lender Exception

Optional escrow on loans outstanding on January 1, 2016 with escrow notice provided by June 30, 2016 unless exceptions apply

6Compliance Services 6Compliance Services

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Loan exemption

A loan is exempt from mandatory escrow if Loan is an extension of credit primarily for business, commercial, or

agricultural purposes Loan is in a subordinate position to senior lien

secured by same residential improved real estate or mobile home

for which borrower has obtained flood insurance coverage meeting flood insurance requirements

Loan is a home equity line of credit (HELOC) Loan has a term of no longer than 12 months Loan is nonperforming (90 or more days past due) and remains

nonperforming until permanently modified or until entire amount past due, including principal, accrued interest, and penalty interest incurred is collected or otherwise discharged in full

Residential improved real estate or mobile home already has flood insurance policy provided for by condominium, cooperative, homeowner’s association, or other applicable group and premium

paid by association or other applicable group as common expense

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Exceptions to Mandatory Flood Escrow Requirements

If loan loses its exception

Must comply “as soon as reasonably practical” with

mandatory escrow requirements

You must monitor loans to see if they continue to meet the exception


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Small Lender Exception

Qualifications: Must have total asset size less than $1 billion as of

December 31 of either of the two prior calendar years and On July 6, 2012:

was not required to escrow for taxes, insurance, fees or any other charges in escrow for the entire term of the loan

and did not have a policy of consistently and uniformly

requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home

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Exceptions to Mandatory Flood Escrow Requirements

If an institution loses its small lender exception status (asset size change)

Must begin requiring escrow of flood premiums and fees for any loan made, increased, renewed or extended on or after July 1 of the first calendar year of changed status “as soon as reasonably practical”

Lose exemption if have assets of $1 billion or more for two consecutive calendar year ends


Small Lender Exception Asset Threshold Examples

12/31/14Year 1

Less than $1B

12/31/15Year 2

Less than $1B

1/1/2016Year 3


12/31/14Year 1

Less than $1B

12/31/15Year 2

More than $1B

1/1/16Year 3


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Small Lender Exception not Available

12/31/15

Year 1More than $1B

12/31/16

Year 2More than $1B

1/1/17

Year 3Mandatory

Escrow on Loans made on or after

7/1/17

1/1/17

Year 3Option to escrow

outstanding loans as of

1/1/2017 with notice by 6/30/17


Takeaways

Mandatory escrow for new loans and optional escrow for outstanding loans unless loan exception or small lender exceptions apply

Loan and small lender exceptions can be lost triggering mandatory escrow of flood insurance premiums

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Key

exa

min

er fi

ndin

gs One community bank Sums up key

examiner issues

$123,000 CMP


Flood emerging risks

Mandatory escrows

Option to escrow notices

UD(A)AP

Coverage amount

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How much coverage is required

Interagency Questions and Answers Regarding Flood Insurance

13. How much insurance is required on a building located in an SFHA in a participating community?

Answer: The amount of insurance required by the Act and Regulation is the lesser of:

The outstanding principal balance of the loan(s); or The maximum amount of insurance available under the NFIP, which is the

lesser of:• The maximum limit available for the type of structure; or• The ‘‘insurable value’’ of the structure.


Flood emerging risk: UD(A)AP

No insurer will pay out more than the covered replacement cost value

Requiring greater coverage could be a potential unfair, deceptive or abusive act or practice Additional premium with no benefit = financial harm to consumer/customer

Example: Single Family Residence (SFR)

Loan Amount / Outstanding PR balance $260,000 $260,000

Available NFIP $250,000

Replacement Cost Value (similar materials, etc.) $240,000 $240,000

Compliance Minimum Requirement $240,000

Typical Safety & Soundness $260,000

Generally, lenders will cover either the minimum compliance amount or the outstanding loan balance. The additional premium here to cover the loan balance offers no additional benefit as the insurer will not pay more than the

applicable RCV.

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Flood insurance tracking

Key tracking information Loan amount/balance Determination date Notice and receipt dates Policy dates Action dates (MIRE) Sufficient coverage Force placement actions and dates

Additional considerations

HPML status

Escrow status

Life of loan coverage / notices

Exempt status

Place tracking form at front of loan file for quick reference


Questions?

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RESPA Section 8: Is your Marketing Service Agreement Compliant?



What you will learn

RESPA Section 8

The basics

Marketing Service Agreements (MSAs)

RESPA and unearned fees

Key to successful relationships

Resources

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RESPA Section 8 (12 CFR 1024.14)


RESPA Section 8: The basics

No referral fees

No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person

Any referral of a settlement service is not a compensable service, unless otherwise excepted

A company may not pay any other company or the employees of any other company for the referral of settlement service business

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Referral A referral includes

any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in

whole or in part to such settlement service or business

A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto



Thing of value Broadly defined

The term “payment” is used throughout is synonymous with the giving or receiving of any “thing of value” and does not require transfer of money

Includes, without limitation, monies things discounts salaries commissions fees duplicate payments of a charge stock

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dividends

distributions of partnership profits

franchise royalties

credits representing monies that may be paid at a future date

the opportunity to participate in a money-making program

retained or increased earnings

increased equity in a parent or subsidiary entity

More things of value you may not have realized

special bank deposits or accounts special or unusual banking terms services of all types at special or

free rates sales or rentals at special prices or

rates lease or rental payments based in

whole or in part on the amount of business referred

trips and payment of another person's expenses

reduction in credit against an existing obligation



Agreement or understanding

An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct

Thing of value received repeatedly and connected in any way with volume or value of business referred Receipt is evidence that it is made pursuant to an agreement or

understanding for the referral of business

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Usually framed as payments for advertising or promotional services Oral or written Disguised as compensation

for referrals Quid pro quo for the referral

of business

Review facts and circumstances Each case may be unique

Marketing Service Agreements

“MSAs appear to create

opportunities for parties to pay or accept illegal compensation for making referrals of settlement service business.”

~ CFPB, Bulletin 2015-05


Impact of MSAs

Steering of business Consumers pay higher prices Indirectly undermines consumer’s ability to shop

Disguise or hide affiliate relationships Creates tangible legal and regulatory risks for the monitoring and

administration of MSAs

Failure to provide services Consumer pays for services not actually performed Reasonable inference can be drawn that MSA is referral

arrangement in exchange for kickbacks

Marketing expenses in exchange for referrals

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Impact of MSAs

Compliance risks

Individual, creditor Financial fines, penalties Injunctive relief Could be subject to imprisonment

Regulator efforts Bans on entering into MSAs Ban from working in mortgage industry More than $75 million in penalties

Plus individual penalties


RESPA Section 8 and unearned fees

No split of charges except for actual services performed No person shall give and no person shall accept

any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed

A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates RESPA Section 8

The source of the payment does not determine whether or not a service is compensable

Nor may the prohibitions be avoided by creating an arrangement wherein the purchaser of services splits the fee

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RESPA and unearned fees

Payments Must Be for Goods, Facilities or Services

In the determination of whether payments from lenders to mortgage brokers are permissible under Section 8 of RESPA, the threshold question is

whether there were goods or facilities actually furnished or services actually performed for the total compensation paid to the mortgage broker.

In making the determination of whether compensable services are performed, HUD’s letter to the Independent Bankers Association of

America, dated February 14, 1995 (IBAA letter) may be useful. http://www.fdic.gov/news/news/financial/1999/FIL9921b.pdf

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Une

arne

d fe

es

In IBAA Letter, HUD identified the following services normally performed in the origination of a loan:

(a) Taking information from the borrower and filling out the application;

(b) Analyzing the prospective borrower’s income and

debt and prequalifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford;

(c) Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product;

(d) Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process;

(e) Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit);

(f) Initiating/ordering requests for mortgage and other loan verifications;

(g) Initiating/ordering appraisals;

(h) Initiating/ordering inspections or engineering reports;

(i) Providing disclosures (truth in lending, good faith estimate, others) to the borrower;

(j) Assisting the borrower in understanding and clearing credit problems;

(k) Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed;

(l) Ordering legal documents;

(m) Determining whether the property was located in a flood zone or ordering such service; and

(n) Participating in the loan closing

http://www.fdic.gov/news/news/financial/1999/FIL9921b.pdf

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Unearned fees

If only provide counseling services (b), (c), (d), (j), and (k)

Then, must also take the application and

No steering Counseling gave borrower opportunity to consider products from at

least three different lenders; Entity performing counseling would receive the same compensation

regardless of which lender’s products were ultimately selected; and Any payment made for ‘‘counseling-type’’ services is reasonably

related to services performed and not based on the amount of loan business referred to a particular lender

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“Respondent, and its officers, agents, servants, employees, and attorneys who have actual notice of this Consent Order, whether acting directly or indirectly, may not violate Section 8 of RESPA, including by providing a thing of value to a third party pursuant to an agreement or understanding to refer real estate settlement service business, including, but not limited to, providing a thing of value in exchange for an endorsement of Respondent that is directed to a person.”

NewDay Financial Consent Order, February 2015

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Keys to successful relationships

No favors Deposit accounts, interest rates Preferred loan interest rates Quid pro quo

Monitor and verify Ensure controls in place to prevent existence of formal or informal referral

arrangements with counterparties to your MSAs and their employees Develop a defensible estimate of each service’s fair market value

Document how arrived at that value

Ensure any and all services are actually performed Do not pay for services not performed Do not perform services for which you are not paid

Report issues – promptly Terminate relationship


Keys to successful relationships

Word choices

Preferably expressly written agreement Detail requirements for services

Do not call it a ‘referral agreement’ or a ‘referral fee’

Call it what it is … payment for ____ services rendered

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Resources

RESPA implementing regulation: 12 CFR 1024.14

CPFB Compliance Bulletin 2015-05http://files.consumerfinance.gov/f/201510_cfpb_compliance-bulletin-2015-05-respa-compliance-and-marketing-services-agreements1.pdf

In the Matter of NewDay Financial consent orderhttp://files.consumerfinance.gov/f/201502_cfpb_consent-order_newday-financial.pdf

HUD’s Real Estate Settlement Procedures Act (RESPA) Statement of Policy 1999–1 Regarding Lender Payments to Mortgage Brokers; Final Rule

HUD’s RESPA Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees Under Section 8(b)


Questions?

http://files.consumerfinance.gov/f/201510_cfpb_compliance-bulletin-2015-05-respa-compliance-and-marketing-services-agreements1.pdf

http://files.consumerfinance.gov/f/201502_cfpb_consent-order_newday-financial.pdf

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Fair Lending: A mixed bag of concerns



What you will learn

The Basic Premise

Is it “Fair”?

Risk Analysis

Data Review

What Now?

Exam Preparation

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What’s Fair About Fair Lending?

And the answer is…41


Fair lending laws

Fair Lending laws all work together to achieve a common goal

Think of them like a jigsaw puzzle

Pieces are added at different times, but all fit together to form the big picture to Prevent illegal discrimination and unfair treatment Ensure access to credit for all creditworthy applicants

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Fair Lending: CFPB Definition

Dodd-Frank has put a definition on fair lending

“fair, equitable, and nondiscriminatory access to credit for

consumers”

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Regulatory changes

2009: Interagency Fair Lending Exam Procedures revised to reflect credit market, product and practices changes

2010: Dodd-Frank authorizes CFPB and its oversight of Regulation B (ECOA) and C (HMDA)

April 2012: CFPB issues Bulleting 2012-04 reaffirming legal doctrine of disparate impact

December 2012: CFPB and DOJ sign MOU to strengthen coordination of fair lending enforcement

February 2013: HUD legislation confirms use of disparate impact theory under Fair Housing Act (FHAct)

October 2015: HMDA rule finalized; Effective January 1, 2017/2018/2019/2020

http://www.consumerfinance.gov/

http://www.consumerfinance.gov/

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Fair Lending Foundation

REGULATIONS SCOPE FORMS OF DISCRIMINATION

ECOA HMDA FCRA/FACT Act Fair Housing Act American Disabilities Act CRA UD(A)AP

All types of loans All aspects of

transaction All Staff

Remember, overdraft is credit!

Overt Blatant discrimination

Disparate Treatment Less favorable treatment

Disparate Impact Discriminatory impact,

even if incidental


Dis

crim

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Prohibited Basis

ECOA FHAct

Race or color Race or color

Religion Religion

National origin National origin

Sex Sex

Marital status Familial status

Age Handicap

Receipt of public assistance income

Exercising, in good faith, any right under the

Consumer Credit Protection Act

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Fair lending risk is the likelihood that a financial institution discourages or treats applicants & borrowers:

differently on a prohibited basis;

in an unfair or deceptive manner; or

in a predatory or abusive manner

What is Fair Lending risk?

Key risk factors

Pricing

Steering

Disparate impact

Redlining / Greenlining


Prohibited practices

A lender may not, because of a prohibited factor: Fail to provide information or services or provide different information or services

regarding any aspect of the lending process, including credit availability, application procedures, or lending standards

Discourage or selectively encourage applicants with respect to inquiries about or applications for credit

Refuse to extend credit or use different standards in determining whether to extend credit

Vary the terms of credit offered, including the amount, interest rate, duration, or type of loan

Use different standards to evaluate collateral Treat a borrower differently in servicing a loan or invoking default remedies Use different standards for pooling or packaging a loan in the secondary market

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Characteristics

It is a violation of fair lending laws to express, orally or in writing, a preference based on prohibited factors or to indicate that the lender will treat applicants differently on a prohibited basis, even if the lender treats applicants equally

A lender may not discriminate on a prohibited basis because of the characteristics of:

An applicant, prospective applicant, or borrower

A person associated with an applicant, prospective applicant, or borrower A co-applicant, spouse, business partner, or live-in aide

The present or prospective residents of the property to be financed

The neighborhood or other area where property to be financed is located (e.g., on the basis of the area’s racial or ethnic composition)

Redlining


Overt Discrimination

Open discrimination on a prohibited basis

Can also occur when a lender expresses but does not act on a discriminatory preference

Example # 1: A lender offers a credit card with a limit of $750 for applicants aged 21- 30

and $1,500 for applicants over 30.

Example # 2: A loan officer tells a customer “We do not like to make home mortgages to

Native Americans, but the law says we cannot discriminate so we have to comply with the law.”

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Example: Overt Discrimination

A lender sends an adverse action notice and includes a friendly little note to the customer (on personal stationary):

“Dear Suzie,

I am sorry, but no bank will lend you money with your credit score of 620.”

Love,John Doe

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Example: Overt Discrimination

Lender made note in file that:

“Divorced customer’s elderly mother is willing to co-sign, but be advised that her mother is in failing health.”

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Disparate Treatment

When applicants or borrowers are treated differently on a prohibited basis and the difference in treatment can not be explained by legitimate nondiscriminatory factors

Example: A Male applicant applies for an auto loan. The lender finds adverse

information in the credit report. The lender discusses the credit report with applicant and determines that the judgment was incorrect since it had been vacated. The applicant is granted the loan.

A Female applicant applies for a similar auto loan with the same lender. Upon discovering adverse information in the credit report, the lender denies the loan on the basis of the adverse information without discussing it with the applicant.


Example: Disparate Treatment

Lender sends an email to senior lender for approval on a borderline file. He includes a side note to help him make his decision:

“Please notice that this customer is a minority.”

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Disparate Impact

When a neutral policy or practice that is applied to all applicants or borrowers disproportionately excludes or burdens certain persons on a prohibited basis

Example: A lender has a $60,000 minimum loan amount policy for single-family

residences. This minimum loan amount policy may be shown to disproportionately

exclude potential minority or elderly applicants from consideration because of their income levels or the value of the houses in the areas in which they live.


Lenders are given broad discretion to vary from the rate chart

Bank has significant Hispanic customer base that speaks little English

English speaking customers get lower rates because they negotiate

Hispanic customers are not familiar with the small town culture and take the quoted rate

Example: Disparate Impact

Result:

Pricing discrepancy of 0.5%

Enforcement Action

Lowered CRA and Compliance Rating

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ECOA Mandatory referral to DOJ

whenever there is a reason to believe there is a pattern or practice of discouraging or denying applications for credit on a prohibited basis.

FHA Mandatory referral to HUD

whenever there is a pattern or practice of discrimination in violation of the FHA.

Enforcement

Regulator Enforcement Action

DOJ or HUD Prosecution

Monetary Penalties

Downgrade of CRA Rating

Community Activist Group Protest

Hold up or denial of Application

State Attorney General Action

Local Government Action

Negative Publicity


Fai

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ndin

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ncer

ns

Product idea

Marketing

Application

Loan Processing

Under-writing

Approval

Closing

Servicing

Pay off

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Fair Lending Emerging Risks

Redlining/Greenlining

English language proficiency

Receipt of public assistance

Maternity leave


Recent Fair Lending Action

Joint action against BancorpSouth Bank for discriminatory mortgage lending practices that harmed African Americans and other minorities

Alleges that BancorpSouth engaged in numerous discriminatory practices, including: illegally redlining in Memphis; denying certain African Americans mortgage loans more often than similarly situated

non-Hispanic white applicants; charging African-American customers for certain mortgage loans more than non-

Hispanic white borrowers with similar loan qualifications; and implementing an explicitly discriminatory loan denial policy.

A new twist – redlining by branch locations 22 branch locations in the Memphis area; 20 in areas where population was in excess

of 80% non-minority 2 in areas where population was 50% to 80% non-minority; and no branches in areas in excess of 50% minority

Financial institutions should review their branch pattern

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Fair Lending Compliance Program

Every financial institution should establish fair lending policies, procedures and internal controls

Ensure compliance with ECOA and Regulation B

In all of relevant lines of business Don’t forget … Overdraft is credit!



Policy

Training

Monitoring

Analysis

Risk Assessment

Oversight

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Up-to-date fair lending policy statement Review of lending policies for potential fair lending violations, including potential disparate impact Ongoing monitoring for compliance with fair lending policies and procedures Ongoing monitoring for compliance with other policies and procedures that are intended to reduce

fair lending risk (such as controls on loan originator discretion)

Regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and Board members

Statistical analysis Depending on the size and complexity of the institution, conduct regular statistical analysis of loan

data for potential disparities on a prohibited class basis Pricing, underwriting, or other aspects of the credit transaction Include both mortgage and non-mortgage products

Credit cards, auto lending, and student lending;

Regular assessment of the marketing of loan products

Meaningful oversight of fair lending compliance by management and where appropriate, the financial institution’s board of directors



“Four P’s”

Policies

Procedures

Products

Personnel

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Policies

Review and reapprove your policies annually (more often if an issue is found) for any verbiage that could potentially violate a fair lending regulation

The “No Brainers” that you should look for:

Take out any references to gender, marital status and all other protected categories

Only refer to protected classes in your policies is to say that you will not discriminate against them or treat them differently

Get rid of the “wishy washies”

No “may” and “should”



Procedures

Should be clearly written and very detailed Leave little room (if at all) for employee discretion

Remember, Board and Senior Management are responsible for oversight of fair lending program They should make decisions upfront of what your policy is

Procedures should support that policy

After writing procedures, reread them applying scenarios to ensure that they will result in equal treatment for all

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Products

Evaluate your products Should be designed to keep everyone on a level playing field

Be very cognizant of fair lending during the research and development stages of all new products and services Before you roll out a new product, have a strict policy that the product

must be reviewed and approved by the compliance department and the Board of Directors



Personnel Personnel can be your most important asset or your most dangerous

liability Choose your employees wisely

Training is important, but preparedness is not always enough If you have staff members who are potentially volatile, get rid of them or

move them into less risky positions

Once you have your staff in place, relay the proper way to assist customers and guide them towards their best interests without being presumptuous or discriminatory

Another aspect of personnel is to avoid all discriminatory practices in hiring and managing your employees

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Training

Knock out fair lending issues before they begin Accomplished by periodic and meaningful training to all personnel who

could potentially affect fair lending

Training should be heavily focused on your lending staff and management, but Keep in mind that if your deposit accounts contain any overdraft or credit

features, this is also extending credit

Imperative that all applicable employees be trained on a regular basis We recommend that training take place at least annually



Monitoring and Analysis

Know your data HMDA CRA Complaints

Use your data in file comparisons Software Manual/Spreadsheets

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Risk Assessment To determine risk, examiners consider

Size of the institution Credit products it offers Recent changes to its lending patterns or products Credit decision-making standards and process Demographic information about the community

Examiners also review the lender's overall compliance program Review your program to ensure that all customers receive fair treatment Significantly reduces fair lending risk If examiners find that a lender has a thorough fair lending monitoring

program in place, the scope or intensity of their review may be reduced


Fai

r Le

ndin

g R

isk

Ass

essm

ent Availability of credit

and marketing•Review CRA assessment area

•Analyze CRA and HMDA data

•Marketing efforts•Customer Complaints•Steering

Underwriting•Qualified mortgages•Ability to repay•Documentation •Consistency•Non-mortgage loans•Unsecured, indirect auto, credit cards, student lending, overdraft, small business

•Commercial loans•Income calculation, credit scoring, collateral valuation, LTV

Pricing•Deviations•Discretion•Limit or eliminate in price setting and loan terms

•Consistency•Training

Servicing, Collections, Loss Mitigation•Evaluate fees•Processes•Consistency•Property management (e.g., OREOs)

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Han

dout

Quality vs. Quantity



Risk Rating

After you have identified and evaluated your risks, begin rating them Develop a rating system and assign each type of risk a score based on

your institution’s classifications

Regulatory guidance also says that you should risk rate all issues found in your day-to-day account testing

Once you determine your overall risk scores, you can get to work on eliminating the unnecessary risk Follow up the risk rating by frequent monitoring, periodic adjustments to

risk ratings, and external fair lending audits

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Summarize your fair lending review findings and recommendations

Provide the report to management and your Board

Promptly raise any issues identified in the file review so they may be addressed well in advance of the exam

No one should be blind-sided if one of your results is also identified by an examiner


Fai

r Le

ndin

g:K

ey C

onsi

dera

tions

ANY new lending product should be thoroughly vetted for fair lending risk

Monitor on more frequent basis upon initial introduction into market/offering

Review all exceptions

Look for patterns – is the exception becoming the rule

Manipulate your own data

Look for outliers, patterns, one-offs

ALWAYS consider UDAAP

Any discrimination has the potential to be an unfair, deceptive or abusive act or practice

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What it means for you

More data

More work

More assessments

More analysis

Greater potential for risk


Resources

Exam Manual: Interagency Fair Lending Exam Manual

The FDIC’s Side by Side: A Guide

to Fair Lending

HUD’s Fair Housing Protections

for People with Limited English Proficiency (Sept 2016)

Outlook Live: 10/4/2016 2016 Interagency Fair Lending Hot

Topics

Read the Resources!

If you know what your

examiners will look at and for, you can do the

same

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Questions?


Protecting Our Service Members:The Military Lending Act


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What you will learn

Military Lending Act

Effective dates

Purpose

Coverage

Applicability

Identification of Covered Borrower

Mandatory loan disclosures

Additional prohibitions

Penalties for non-compliance


Military Lending Act (32 CFR 232)

Name Confusion

Military Lending Act, Talent Amendment, John Warner

Purpose

Impose limitations on cost and terms of certain extensions of credit to service members and dependents Applies to a broader range of closed-end and open-end credit products

Provide additional protections

Effective date: October 1, 2015

Compliance: October 3, 2016 Exception: For credit cards, October 3, 2017

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Coverage

Provides the maximum allowable amount of all charges, and types of charges, that may be associated with a covered extension of consumer credit;

Requires a creditor to provide to a covered borrower a statement of the Military Annual Percentage Rate (MAPR) before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit; In addition to any disclosures that must be provided to consumers under

the Regulation Z (TILA)

Provides method creditor must use in calculating MAPR; and

Contains such other criteria and limitations as the Secretary of Defense has determined appropriate


Coverage

Much broader definition of what constitutes “consumer credit”

Previously, narrow parameters applied only to payday loans, auto title loans, and tax refund anticipation loans

Now, extends to all credit granted for personal, family, or household purposes that is either: Subject to a finance charge; or Payable by a written agreement in more than four installments

Examples

Vehicle title loans, payday loans, refund anticipation loans, installment loans, unsecured open-end LOCs, credit cards and deposit advance products

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Coverage

Exceptions:

Residential mortgages

Credit extended to finance the purchase of personal property, such as vehicle purchase loans, when secured by such personal property

Does not apply to current loans

Does not impose obligations to monitor the borrower’s covered status

for the life of the loan


Exceptions to “consumer credit”

Consumer credit does not mean:

A residential mortgage = secured by an interest in a dwelling Purchase, construction, refinance, HELOC, reverse mortgage

Credit expressly intended to finance purchase of a motor vehicle when credit is secured by vehicle being purchased

Credit expressly intended to finance purchase of personal property when credit is secured by property being purchased

Credit transaction exempt from Regulation Z (other than a transaction exempt under 12 CFR 1026.29) or otherwise not subject to disclosure requirements under Regulation Z

Credit transaction or account for credit for which creditor determines that consumer is not a covered borrower by using a method prescribed under the regulation and by complying with the recordkeeping requirement

https://www.federalregister.gov/select-citation/2015/07/22/12-CFR-1026.29

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Covered borrower

Covered borrower A consumer who, at the time the consumer becomes obligated

on a consumer credit transaction or establishes an account for consumer credit, is a covered member or a dependent of a covered member But see Applicability slide

Covered member A member of the armed forces who is serving on

Active duty under a call or order that does not specify a period of 30 days or fewer; or

Active Guard and Reserve duty; or

A “dependent” with respect to a covered member means a person described in subparagraph (A), (D), (E), or (I) of 10 U.S.C. 1072(2).

Does not mean a consumer who no longer is a covered member or a dependent of a covered member


Applicability

Applicability

Must be a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit Consumer initiates the transaction or 30 days prior to that time; Consumer applies to establish the account or 30 days prior to that time; or Consumer responds to firm offer of credit (e.g., prescreened offer) not

later than 60 days after the time creditor provided that offer to the consumer

> 60 days, must re-determine

Does not apply to a credit transaction or account relating to a consumer when the consumer no longer is a covered borrower

http://api.fdsys.gov/link?collection=uscode&title=10&year=mostrecent&section=1072&type=usc&link-type=html

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Applicability

Examples Consumer A is a member of the armed forces but not serving on

active duty, and holds an account for closed-end credit with a financial institution. After establishing the closed-end credit account, Consumer A is ordered to serve on active duty, thereby becoming a covered borrower. Consumer A then establishes an open-end line of credit for personal

purposes (not subject to any exception or temporary exemption) with the financial institution MLA applies to the open-end line of credit; not to the closed-end credit account

One year after establishing the open-end line of credit, Consumer A ceases to serve on active duty MLA never applied to the closed-end credit account MLA no longer applies to the open-end line of credit


Iden

tific

atio

n of

Cov

ered

Bor

row

er No requirement to conduct a covered-borrower check

No restriction on method for covered-borrower check

Permitted to apply own method to assess whether consumer is a covered borrower

Safe harbor

Creditor may conclusively determine whether credit is offered or extended to a covered borrower by: Department database

Verify status of a consumer by using information relating to that consumer, if any, obtained directly or indirectly from the database maintained by the DOD• https://mla.dmdc.osd.mil/

Requires the entry of the consumer's last name, date of birth and Social Security number

Historic lookback prohibited• At any time after a consumer has entered into a transaction or established an account involving an extension of credit,

a creditor (including an assignee) may not, directly or indirectly, obtain any information from any database maintained by the DOD to ascertain whether a consumer had been a covered borrower as of the date of that transaction or as of the date that account was established

Consumer report from a nationwide consumer reporting agency

Verify status of a consumer by using a statement, code, or similar indicator describing that status, if any, contained in a consumer report obtained from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis, or a reseller of such a consumer report

and

Maintaining records in accordance with regulation

https://mla.dmdc.osd.mil/

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Recordkeeping

Covered borrower determination deemed to be conclusive with respect to that transaction or account provided that

Creditor must timely create and thereafter maintain a record of that information A consumer initiates the transaction or 30 days prior to that time; A consumer applies to establish the account or 30 days prior to that time; or If a firm offer of credit (e.g., prescreened offer) includes screening for covered

borrower status and consumer responds within 60 days after creditor provides offer to consumer Response after 60 days, may rely on consumer’s response

• Best practice to ensure safe harbor is to perform new determination


Military Annual Percentage Rate (MAPR)

Cost of consumer credit expressed as annual rate not to exceed 36 percent

In general, any charge that is a “finance

charge” under Regulation Z and certain other

charges that would be covered as “interest”

under 10 U.S.C. 987(i)(3), must be included in the calculation of MAPR

Certain bona fide fees may be excluded

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Charges included in the MAPR

Any credit insurance premium or fee, charge for single premium credit insurance, fee for a debt cancellation contract, or fee for a debt suspension agreement

Any fee for a credit-related ancillary product sold in connection with credit transaction for closed-end credit or an account for open-end credit

Finance charges associated with the consumer credit

Any application fee charged to covered borrower, other than certain application fees charged by a Federal credit union or an insured depository institution (some small amount, short term loans)

Any fee imposed for participation in any plan or arrangement for consumer credit subject to certain limitations


Mandatory loan disclosures

Required information

Before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit: A statement of the MAPR applicable to the extension of consumer credit;

Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure; and

A clear description of the payment obligation of the covered borrower, as applicable

A payment schedule (in the case of closed-end credit) or account-opening disclosure (in the case of open-end credit) under Regulation Z satisfies this requirement

One-time delivery

Refinancing or renewal of covered loan requires new disclosures only when the transaction for that credit would be considered a new transaction that requires disclosures under Regulation Z

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Statement of the MAPR

May be satisfied by description of charges creditor may impose relating consumer credit to calculate MAPR

Not required to describe MAPR as numerical value or describe total dollar amount of all charges in MAPR that apply to extension of consumer credit

Not required in any advertisement

Model statement provided


Model statement

“Federal law provides important protections to members of the Armed Forcesand their dependents relating to extensions of consumer credit. In general,the cost of consumer credit to a member of the Armed Forces and his or herdependent may not exceed an annual percentage rate of 36 percent. Thisrate must include, as applicable to the credit transaction or account: Thecosts associated with credit insurance premiums; fees for ancillary productssold in connection with the credit transaction; any application fee charged(other than certain application fees for specified credit transactions oraccounts); and any participation fee charged (other than certain participationfees for a credit card account).”

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Delivery

Written disclosures

In writing in a form the covered borrower can keep

Oral disclosures

Must orally provide statement of MAPR and payment schedule

Methods to provide oral disclosures In person; or A toll-free telephone number in order to deliver the oral

disclosures to a covered borrower when the covered borrower contacts the creditor for this purpose Toll-free telephone number must be included on

• Form creditor directs consumer to use to apply for the transaction or account involving consumer credit; or

• A written disclosure the creditor provides to the covered borrower (model statement)

Oral Disclosures

“For example, a creditor couldgenerally describe how minimumpayments are calculated on open-end credit plans issued by thecreditor and then refer thecovered borrower to the writtenmaterials the borrower will receivein connection with opening theplan. Alternatively, a creditor couldchoose to generally describeborrowers' obligations to make amonthly, bi-monthly, or weeklypayment as the case may beunder the borrowers'agreements.”



It is unlawful for any creditor to extend consumer credit to covered borrower where:

Covered borrower is required to waive the right to legal recourse under any otherwise applicable provision of State or Federal law, including any provision of the Servicemembers Civil Relief Act (50 U.S.C. App. 501 et seq.)

Creditor requires covered borrower to submit to arbitration or imposes other onerous legal notice provisions in case of a dispute

Creditor demands unreasonable notice from covered borrower as a condition for legal action

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It is unlawful for any creditor to extend consumer credit to covered borrower where:

Creditor uses check or other method of access to deposit, savings, or other financial account maintained by covered borrower, except creditor may: Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise

prohibited by law; Require direct deposit of consumer's salary as a condition of eligibility for consumer credit,

unless otherwise prohibited by law; or If not otherwise prohibited by applicable law, take a security interest in funds deposited after

extension of credit in an account established in connection with consumer credit transaction

Creditor uses title of a vehicle as security for obligation involving the consumer credit

Creditor requires as a condition for extension of consumer credit the covered borrower establish an allotment to repay the obligation

Covered borrower is prohibited from prepaying consumer credit or is charged a penalty fee for prepaying all or part of consumer credit


Rollover, Vehicle Title, and Allotment Restrictions

For the rollover and vehicle title restrictions, “creditor” does not include

bank, savings association, or credit union chartered or licensed under Federal or State law

Rollover restriction does not apply to transaction when same creditor extends consumer credit to covered borrower to refinance or renew extension of credit not covered by the MLA because consumer was not covered borrower at time of original transaction

For purposes of the allotment restriction, “creditor” does not include

military welfare societies and the relief societies

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Penalties for non-compliance

Voiding the underlying contractual obligation;

Actual damages (of not less than $500);

Appropriate punitive damages;

Appropriate equitable or declaratory relief; and

Costs associated with the action, including reasonable attorney’s fees


Resources

Final Rule: Limitations on Terms of Consumer Credit Extended to Service Members and Dependents,

80 FR 43559, July 22, 2105 https://www.federalregister.gov/articles/2015/07/22/2015-17480/limitations-on-terms-of-consumer-credit-extended-to-service-members-and-dependents

Regulatory Text: 12 CFR Part 232 http://www.ecfr.gov/cgi-bin/text-

idx?SID=b026b3b5f06f6e4bbf16e0726aec429c&mc=true&node=pt32.2.232&rgn=div5

DOD’s Military Lending Act Page: https://mla.dmdc.osd.mil/

DOD Interpretative Letter (issued August 26, 2016): https://www.federalregister.gov/articles/2016/08/26/2016-20486/military-lending-act-limitations-on-

terms-of-consumer-credit-extended-to-service-members-and

https://www.federalregister.gov/articles/2015/07/22/2015-17480/limitations-on-terms-of-consumer-credit-extended-to-service-members-and-dependents

http://www.ecfr.gov/cgi-bin/text-idx?SID=b026b3b5f06f6e4bbf16e0726aec429c&mc=true&node=pt32.2.232&rgn=div5

https://mla.dmdc.osd.mil/

https://www.federalregister.gov/articles/2016/08/26/2016-20486/military-lending-act-limitations-on-terms-of-consumer-credit-extended-to-service-members-and

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