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Credit Union Compliance Hot Topics

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  • Introduction: The Consumer Finance Protection Bureau perodically issues Supervisory Highlights to communicate areas of concern, which generally mean that these areas will become subject to greater scrutinization. Even though most credit unions are not regulated by the CFPB, prudential regulators take cues from the CFPB and frequently CFPB concerns become concerns for all participants in the industry. In Supervisory Highlights: Fall 2012, the CFPB calls out the importance of an effective Compliance Management System (CMS) as well as the importance to managing affiliates.An effective CMS has four key ingredients. Failing to incorporate all the components can lead to systemic violations of federal regulatory policies. In addition to looking for all the required components, a typical exam evaluates both the application and understanding by managers and employees.
  • Important considerations to ensure an effective CMS include:
  • Depending on the circumstances, you could be held responsible for a service provider’s legal violations. Make sure that you understand an affiliate’s business practices and monitor the services provided to ensure that they are in compliance.
  • From prepared remarks at a meeting with the Credit Union National Association, February 27, 2013.As we review the new regulations, you will note several exemptions have been made for community lenders like yourselves, to help lessen the compliance burden these rules bring.
  • Ability to Repay Criteria: current or reasonably expected income or assets; current employment status; the monthly payment on the mortgage transaction - guidance to calculate monthly mortgage payments is provided for adjustable rate mortgages, interest only loans, negative amortization loans and balloon loans; the monthly payment on any simultaneous loan; the monthly payment for mortgage-related obligations; current debt obligations, alimony, and child support; the monthly debt-to-income ratio or residual income; and credit history.Product Features: • substantially equal periodic payments that do not allow for negative amortization, principal deferral or result in balloon payments; loan terms that does not exceed thirty years; points and fees that do not exceed 3 percent of the loan amount for loans greater than or equal to $100,000. (Thresholds for smaller loans apply); proper calculation of the mortgage payment, using the maximum rate that will apply in the first five years of the transaction; and overall debt ratio (back-end ratio) that does not exceed 43 percent
  • Ability to Repay Criteria: current or reasonably expected income or assets; current employment status; the monthly payment on the mortgage transaction - guidance to calculate monthly mortgage payments is provided for adjustable rate mortgages, interest only loans, negative amortization loans and balloon loans; the monthly payment on any simultaneous loan; the monthly payment for mortgage-related obligations; current debt obligations, alimony, and child support; the monthly debt-to-income ratio or residual income; and credit history.Product Features: • substantially equal periodic payments that do not allow for negative amortization, principal deferral or result in balloon payments; loan terms that does not exceed thirty years; points and fees that do not exceed 3 percent of the loan amount for loans greater than or equal to $100,000. (Thresholds for smaller loans apply); proper calculation of the mortgage payment, using the maximum rate that will apply in the first five years of the transaction; and overall debt ratio (back-end ratio) that does not exceed 43 percent
  • Points and fees - Thresholds for smaller loans apply; proper calculation of the mortgage payment, using the maximum rate that will apply in the first five years of the transaction;
  • Due to the tight credit market and the fact that the CFPB believes that there are many instances in which borrowers can afford a debt-to-income ratio greater than 43%, a secondary set of temporary QM loans was created.Presumption of Compliance:There are differing levels of compliance depending on the APR. First lien qualified mortgages with APRs less than or equal to the average prime rate plus 1.5 percentage points or second lien qualified mortgages with APRs less than or equal to the average prime rate plus 3.5 percentage points have a conclusive presumption of compliance or a “safe harbor”. Other qualified mortgages with APRs above the defined thresholds are presumed to comply with the ability to repay rules, but a consumer could rebut that presumption under certain circumstances.Temporary set of QM: This temporary provision will phase out over time as the various agencies develop their own QM rules or as long as Fannie Mae and Freddie Mac are under conservatorship, but not to exceed 7 years.
  • Rural Balloon Criteria: a property in a designated, rural or underserved area; originated by an institution which has less than $2 billion in assets; originates at least 50 percent of their mortgages in rural or underserved areas; originates no more than 500 first mortgages per year; and holds the respective loan in its portfolio for at least three years; fixed rate; amortization term no more than30 years; minimum five year term; andmeet certain standard underwriting criteria, not including the 43 percent debt to income ratio.Community Lendersdefined as: institutions with less than $2 billion in assets, originate no more than 500 first mortgage loans per year; and would hold the loans in their portfolio. In addition, all the standard qualified mortgage guidelines, except the 43 debt to income ratio would apply. Proposal also is seeking comment on allowing a higher threshold for the APR on first lien QM originated by smaller community lenders
  • When finalizing the ability to repay rules, the CFPB also simultaneously proposed new rulesCommunity lender has the same definition as used for rural balloon qualified mortgages:eligible institutions will have less than $2 billion in assets, originate no more than 500 first mortgage loans per year and would hold the loans in their portfolio.
  • Proposed Loan Exemptions: Fannie Mae, Freddie Mac, VA, FHA streamline loans; Non-profit loans; Homeownership stabilization programsComment period on new proposals ended on February 25. The assumption is that these new proposals would be finalized and effective at the same time as the rest of the QM Rules – January 10, 2014
  • The changes in the Truth in Lending Act relating to loan originator compensation were largely to clarify or codify existing rules. The Truth in Lending Act already prohibited basing loan originator compensation on “any of the transaction’s terms or conditions. The new rules defined Term of a Transactions : “Any right or obligation of the parties to a credit transaction.” Examples: interest rate, annual percentage rate, collateral type, prepayment penalties. To prevent evasion, the final rule also prohibits compensation based on a “proxy”.Definition of a proxy: A factor that itself is not a term of the transaction is a proxy for a term of a transaction if the factor consistently varies with a term or terms of the transaction over a significant number of transactions, and the loan originator has the ability to directly or indirectly add, drop or change. Example: A loan originator is paid a higher commission for loans held in portfolio than those sold on the secondary market. Loans with a fixed rate and five year term are held in portfolio. Loans with a fixed rate and 30 year term are sold. In this scenario, the factor, which is whether or not a loan is held in portfolio, varies with the interest rate and the loan term, which are the terms of the transaction, over a significant number of transactions. The loan originator has the ability to change the factor by advising the consumer to choose a five year term. In this example, whether or not a loans will be held in portfolio is a proxy for a term of the transaction.Pricing concessions – does allow compensation to be reduced for certain unexpected increases in settlement costsProfitability prohibition – rule does clarify that under certain conditions, profitability can be used as a basis in retirement and profit sharing plans
  • Upfront points and fees – the initial proposal would allow charging upfront points and fees as long as borrowers were also given information about an alternate loan that did not include upfront points and fees. The final regulations did not include this restriction. Qualified means licensed or registered as applicable under the SAFE Act (Secure and Fair Enforcement for Mortgage Licensing). For institutions exempt from the SAFE Act, the rule requires them to ensure that their originators meet the character, fitness and criminal background standards similar to the SAFE Act and to provide appropriate training.Single premium credit insurance – products like credit life, disability etcCreditor and loan officer names and identifiers must be on the Credit Application; Note, Security Insturment;
  • Small Servicers - service 5,000 or fewer loans and only service mortgage loans that they or an affiliate originated or owned. If the loan is a fixed rate loan, a coupon book can be used as long as the applicable information from the regulation is contained in the payment book.Model billing statements are supplied in the regulation. Statements must contain, among other things, information on payments currently due and previously made, fees imposed, transaction actvity, application of past payments, contact information regarding delinquencies.
  • Model forms are given for interest rate adjustment notices. Notice is required at 210-240 days prior to the first adjustment change and thereafter required 60-120 days prior to rate adjustment. The current annual notice that must be provided for ARMs when the interest rate changed, but the payment did not, is no longer required.Payments must be credited on the day of receipt unless there will not be any harm to the consumer, including charges or negative information reported to the credit bureaus.
  • In general, servicers are prohibited from charging a borrower of force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain coverage and the required notices have been provided to the consumer. Model forms for the notices are provided in the regulation.
  • Example of exceptions: Errors on payoffs must be corrected within 7 business days; Requests for information regarding the identity of and address or other relevant contact information for the owner or assignee of a mortgage loan must be provided in 7 days.
  • Continuity of contact: At minimum, personnel should be assigned to borrowers by the 45th day of delinquency. Personnel must be able to assist borrowers through the entire loss mitigation process, including providing accurate information to borrowers, status updates, and working with borrowers to collect all needed information. Personnel must continue to work with borrower until the borrower has made, without incurring a late charge, two consecutive mortgage payments in accordance with the terms of a permanent loss mitigation agreement or information for the foreclosure process.Loss Mitigation Procedures: Time frames: acknowledgment of loss mitigation application; time documents must be received for consideration; approval times; appeals timeframe
  • List is applicable to both open and closed end mortgages.CFPB or HUD will make the list available
  • Believing that our audience does not typically originate high cost mortgage, we did not discuss changes in these regulations.

Credit Union Compliance Hot Topics Credit Union Compliance Hot Topics Presentation Transcript

  • Click to edit Master title styleCompliance Hot Topics March 13, 2013 Presented by: Robin D. Hoag, CPA, CGMA, CMC Lindsey Becker, BA Kia Hekneby 1 Michigan l Texas l Florida Insight. Oversight. Foresight. SM
  • Overview Financial Institutions Group Click to edit Master title style • Top Compliance Concerns • New Regulations 2
  • Click to edit Master title style Top Compliance Concerns3
  • Regulation C: Home Mortgage Financial Institutions GroupDisclosure to edit Master Click Act (HMDA) title style• Exam findings around HMDA LAR (Loan Application Register) filing • Greater regulatory focus on financial institutions completing their HMDA LAR correctly • CMP (Civil Money Penalties) are being assessed for incorrect HMDA LAR filing/ LAR errors • Focus on including all reportable loans on the HMDA LAR and ensuring all fields are properly completed 4
  • Regulation C: Home Mortgage Financial Institutions GroupDisclosure to edit Master Click Act (HMDA) title style• Implement a quarterly scrub process of HMDA LAR before filing annually to eliminate errors• Most common errors reported are: • Application Date: Have a consistent process in place to determine the application date • Action Type: Implement a process on what is considered a denial, withdrawal, incomplete, approved not accepted, and approval • Purchaser Type: Record type of sale during the calendar year. Be cautious of 4th quarter reporting; if loan was not actually sold in the same year, it is considered not sold at year end for HMDA purposes 5
  • Compliance Management Financial Institutions GroupSystem (CMS)edit Master Click to title style• Four interdependent components of a compliance program • Board management and oversight: active involvement from Board and Senior Management with the CMS • Compliance program • Policy: create strong compliance policy and procedures • Training: creation of compliance training plan and schedule with additional monitoring to ensure training is given with regulatory change • Monitoring: implement monitoring to address exam/audit findings • Consumer complaints: develop consumer complaint handing procedures • Compliance audit: develop aggressive audit plan to ensure CMS 6
  • Compliance Management Financial Institutions GroupSystem (CMS)edit Master Click to title style• Implementation, development, and maintenance of a sound compliance management system that is integrated into the institution’s overall risk management strategy• Allocate appropriate resources to the compliance function• Keep abreast of regulatory changes and properly train staff to avoid regulatory violations 7
  • Affiliate Due Diligence Financial Institutions Group Click to edit Master title style• Monitor third-party relationships • Credit reporting • Appraisers • Call centers• Implement policy and procedures for third-party relationships to include (annually): • Due diligence • Creating approved lists • Annual auditing of third parties 8
  • Bank Secrecy Act (BSA) Financial Institutions Group Click to edit Master title style• Regulatory focus on BSA High risk members • Risk rate all members • Develop enhanced due diligence (EDD) monitoring for all “high risk” members • Transaction volume, suspicious activity, purpose of account • Create system parameters to monitor high risk members and suspicious activity Money Service Businesses (MSBs) • Identify any MSBs • Complete due diligence annually to include onsite visits, monitoring business activity, verifying registration with FinCEN 9
  • Bank Secrecy Act (BSA) Financial Institutions Group Click to edit Master title style• Non-filed Suspicious Activity Reports (SARs) • Decision when and when not to file SAR • Retain all documentation for unfiled SARs in a “non-filed” SAR folder for examiner review• Risk Assessment • Provide accurate and comprehensive risk assessment for BSA and OFAC compliance that fully takes into account the nature of the credit union’s operations 10
  • Unfair or Deceptive Acts or Financial Institutions Group Click to edit MasterPractices (UDAP) title styleFocus• Monitor member’s overdraft activities to ensure daily limits on fees are assessed• Implement approval process for waiving overdraft fees and maintain a tracking report• Document and track all communications with members regarding offered alternatives and all other member correspondence 11
  • Unfair or Deceptive Acts or Financial Institutions Group Click to edit MasterPractices (UDAP) title style• Implement policy and procedures to include overdraft presentment of debit items • Include in member disclosures; items should clear in order according to credit union’s policy and disclosure• Full disclosure of all fees • No underlying fees charged to member• Direct advertising • Not to include misleading information, rates, fees, promotions• UDAP covers full product line (deposit/lending) 12
  • Click to edit Master title style New Regulations13
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style “The Consumer Bureau is well aware that credit unions were not one of the causes of the recent financial crisis. You were not underwriting the bad loans that brought down the housing market. Instead you were upholding sound underwriting standards…” Remarks by Richard Cordray, Director, CFPB, to CUNA (February 27, 2013) 14
  • Click to edit Master title style I know that [the qualified mortgage rule] probably sounds quite foreign to credit unions,” he said. “You typically pay close attention to whether your members can repay the money you lend them.” Remarks by Richard Cordray, Director, Consumer Financial Protection Bureau (CFPB), to CUNA (February 27, 2013)15
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style• Effective January 10, 2014• Requires creditors to determine and document ability to repay for mortgages against primary residences• Establishes eight criteria that must be used in determining ability to repay• Defines product features and underwriting criteria for Qualified Mortgages (QM) 16
  • Financial Institutions GroupAbility to Repay Criteria Click to edit Master title style• Current or reasonably expected income or assets• Current employment status• Monthly payment on the mortgage transaction• Monthly payment on any simultaneous loan• Monthly payment for mortgage-related obligations• Current debt obligations, alimony, and child support• Monthly debt-to-income ratio or residual income• Credit history 17
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style• Product and underwriting features • No balloon, interest-only, or negative amortization loans • Loan terms do not exceed thirty years • Points and fees do not exceed 3% of the loan amount for loans greater than or equal to $100,000 • Calculation of the mortgage payment using the maximum rate that will apply in the first five years of the transaction • Overall debt ratio does not exceed 43% 18
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style• Establishes a presumption of compliance for QM with Ability to Repay Rules • Based on APR • Safe harbor versus rebuttable presumption• Provides for a temporary secondary set of QM • Have the general product features of QM • Are eligible for purchase by Fannie Mae, Freddie Mac, HUD, Veterans Affairs, or Rural Housing 19
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style• Allows for rural balloon QM under certain circumstances • Designated rural or underserved area • Community bank lender • Less than $2 billion in assets • Originates at least 50% of loans in rural or underserved areas • Originates no more than 500 first mortgage per year • Holds loan in portfolio for a minimum of three years • Product features • Amortization term of no more than 30 years • Minimum five year term • Meet QM underwriting criteria, not including 43% debt to income ratio 20
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style• New proposals for small community lenders • Create new set of QM mortgages having same criteria as existing set, but not include the 43% debt to income ratio • Allow higher threshold APR on first lien QM which would still provide a safe harbor instead of a rebuttable presumption 21
  • Ability to Repay & Qualified Financial Institutions GroupMortgages to edit Master Click (TIL) title style• New proposal to exempt certain types of loans from QM requirements • Agency and government streamline loans • Non-profit loans • Homeownership stabilization program loans 22
  • Loan Originator Compensation Financial Institutions Group Click to edit Master(TIL) title style• Amendments restricting mandatory arbitration and financing single premium credit insurance effective June 1, 2013• All other provisions effective January 10, 2014• Clarifies existing rules for loan officer compensation • Defines “term of a transaction” • Restricts use of a proxy for a term of a transaction • Generally prohibits pricing concessions • Prohibits compensation based on profitability of a transaction or pool of transactions 23
  • Loan Originator Compensation Financial Institutions Group Click to edit Master(TIL) title style• Allows for charges of upfront points or fees• Imposes a duty on institutions to ensure loan originators are qualified.• Requires creditor and loan officer names and identifiers on notes, security instruments and credit application• Prohibits mandatory arbitration in residential mortgage transactions• Prohibits financing of single premium credit insurance including credit life products 24
  • Click to edit Master title style "Once again, for these servicing rules, we have recognized that credit unions and other smaller servicers typically operate according to a verydifferent business model based on strong customer service. In their own way, each offers the kind ofhigh-touch service that their members have come to expect, making extensive efforts to avoid foreclosures." Remarks by Richard Cordray, Director, CFPB, to CUNA (February 27, 2013)25
  • Mortgage Servicing Financial Institutions Group Click to edit(TIL) Master title style• Effective January 10, 2014• Defines small servicers and exempts them from many of the servicing requirements • An institution which services 5,000 or fewer loans and only services mortgage loans the institution or affiliate originated or owned• Requires periodic billing statements which must meet timing, form, and content requirements • Small servicers are exempt • Fixed rate loans may be exempt 26
  • Mortgage Servicing Rules Financial Institutions Group Click to edit Master(TIL) title style• Provides for new interest rate adjustment notices for ARMs• Prompt crediting of payment• Requires accurate payoff letters be issued within seven days of receipt of a written request 27
  • Mortgage Servicing Financial Institutions Group(RESPA) to edit Click Master title style• Changes requirements for charges of force-placed insurance • New initial and reminder notices required • When borrower has an escrow account, servicers must try to extend existing coverage • Exemption for small servicers • Insurance may be force-placed when there is an escrow account if the price for the forced-place insurance is less expensive 28
  • Mortgage Servicing Financial Institutions Group Click to edit(TIL and RESPA) Master title style• New error resolution and requests for information requirements • Generally includes any error relating to servicing mortgage loans • Includes Qualified Written Requests when related to servicing • Written acknowledgment of receiving the error within 5 business days • Written response of resolution within 30 business days of receipt (in most cases) 29
  • Mortgage Servicing Financial Institutions Group(RESPA) to edit Click Master title style• Requires developing and maintaining reasonable polices and procedures for the servicing process • Small servicers are exempt• Early intervention for delinquent borrowers • Contact required by 36th day of delinquency • Written notice of loss mitigation options delivered by 45th day of delinquency (model language provided in rule) 30
  • Mortgage Servicing Financial Institutions Group(RESPA) to edit Click Master title style• Continuity of contact • Requires procedures to ensure competent personnel are available to assist borrowers through the loss mitigation process • Small Servicers are exempt• Specifies loss mitigation procedures for primary residences • Establishes timeframes • Enforceable by individuals against creditors • Small servicers exempt from all except • Foreclosure filing cannot begin until 120th day of delinquency • Foreclosure cannot be pursued if borrower is performing under the terms of a loss mitigation agreement 31
  • Appraisal Disclosure and Financial Institutions GroupDelivery Requirements (ECOA) title style Click to edit Master• Effective January 18, 2014• Applies to applications for first lien loans on a dwelling• Requires creditors to notify applicants within three days of receiving an application of their right to receive a copy of the appraisal• Requires creditors to provide copies of appraisals or other written valuations upon completion or within three days before consummation 32
  • Appraisal Disclosure and Financial Institutions GroupDelivery Requirements (ECOA) title style Click to edit Master• Allows for a waiver of timing requirements as long information is provided by consummation• Prohibits creditors from charging for appraisal delivery, but allows charging for appraisal cost 33
  • Homeownership Counseling Financial Institutions Group Click to edit MasterRequirement (RESPA and TIL) title style• List of homeownership counseling organizations must be provided within three days of application on all mortgage loans except reverse mortgages and time shares• First-time buyers must have homeownership counseling before closing a negative amortization loan 34
  • High Priced Mortgages (TIL) Financial Institutions Group Click to edit Master title style• Two other new rules • High-Cost Mortgage and Homeownership Counseling Amendments to the Truth-in Lending Act • Appraisals for Higher-Priced Mortgages 35
  • Click to edit Master title style "All of these exemptions express our recognition and acknowledgement that the traditional credit union lending model is deserving of respect and should be treated differently under our rules. Youare member-focused, and you carefully protect the people you serve. This is just the kind of service- based model that we want to encourage in the consumer financial marketplace." Remarks by Richard Cordray, Director, CFPB, to CUNA (February 27, 2013)36
  • Financial Institutions Group Click to edit Master title style Thank You! Michigan: Texas: Florida:305 W. Big Beaver Rd. One Riverway, Ste. 1200 6750 N. Andrews Ave., Ste. 200 Troy, Michigan 48084 Houston, Texas 77056 Ft. Lauderdale, Florida 3330937
  • Contact Us Financial Institutions Group Click to edit Master title style Today’s Presenters Robin D. Hoag, CPA, CGMA, CMC Lindsey Becker, BA Shareholder Compliance Supervisor Direct: 248-244-3242 Direct: 248-244- 3791 Cell: 248.709.1270 Email: becker@doeren.com Email: hoag@doeren.com Kia Hekneby Senior Compliance Specialist Direct: 248-244-3184 Email: hekenby@doeren.com 38
  • Services Financial Institutions Group Click to edit Master title style • Audit • Commercial loan review • Merger & consolidations • Loan loss & delinquency • IT assurance control • Controls review • Regulatory compliance • Vulnerability assessments • Penetration testing 39