High-Risk Areas, Common Compliance Violations, and CMPs: Solutions and Tips. FDIC Compliance Examiner John George April 25, 2013

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1 High-Risk Areas, Common Compliance Violations, and CMPs: Solutions and Tips FDIC Compliance Examiner John George April 25, 2013

2 Overview HMDA Errors and Mitigating Strategies Fair Lending Issues Other Common Errors and Issues Violation Classifications Civil Money Penalties Scope of Regulatory Compliance Examinations

3 HMDA Reporting Why is it so important? What is reviewed at examinations? Common Errors Violations and CMPs Strategies to Ensure Compliance Pre-validations Future Changes? Resources

4 Omissions Application Date Preapprovals Action Date Census Tracts GMI Income Purchaser Rate Spread Common Errors

5 Violations and CMPs The volume and severity of violations is increasing substantially May have adverse effect on ratings, i.e. weaknesses in training, monitoring, audit When repeat errors are discovered, examiners must consider CMPs 10% line error accuracy rates trigger CMPs

6 Strategies to Ensure Compliance Training Internal Processes Secondary review (or third) is key Monitoring Audit Be consistent! Not sure how to handle an entry? Ask us!

7 Pre-Validations Depending on bank s size and number of entries, we may perform a pre-validation prior to scheduled examinations If substantive errors are noted during prevalidation, errors must be corrected and resubmitted to FFIEC If red flags are indicated by Washington Office review, a dedicated Fair Lending review may occur

during prevalidation, errors must be corrected and resubmitted to FFIEC If red

8 Future Changes? Given heightened focus on fair lending, consideration to expanding number of HMDA LAR fields is being discussed Additional fields that are expected to added to the LAR are: Total points and fees Credit Score(s) Loan-to-Value Ratio Debt-to-Income Ratio Appraised Amount

number of HMDA LAR fields is being discussed Additional fields that

9 Future Changes (cont d) It is anticipated that these changes will take effect in 2014 with initial reporting in March 2015 Expansion of banks required to report? Initial discussions have occurred with the CFPB regarding the requirement that all banks may be required to report HMDA information in the future

10 Resources HMDA Getting it Right! (2013 edition now available) FFIEC HMDA FAQs If unsure how to handle a unique situation, you may contact our office for guidance

htm (2013 edition now available) FFIEC HMDA FAQs

11 Fair Lending Types of Unfair Treatment Scope of FDIC Reviews Common Errors and Issues Common Violations Strategies to Ensure Compliance Resources

12 Types of Unfair Treatment The courts have recognized three methods of proof of lending discrimination under the ECOA and the FHAct: Overt evidence of disparate treatment; Comparative evidence of disparate treatment; and Evidence of disparate impact.

the FHAct: Overt evidence of disparate treatment; Comparative

13 Scope of FDIC Reviews A fair lending review will be conducted at each compliance examination. This will include a formal Fair Lending Interview Will concentrate on review of ECOA and FHA provisions. Any unequal treatment to protected classes? (underwriting, pricing, etc.) Will closely review denials, exceptions, and adverse action notices

This will include a formal Fair Lending Interview Will concentrate on review of ECOA

14 Common Errors and Issues Granting of different pricing and terms to different applicants with no apparent explanation Failure to establish board-approved underwriting and pricing standards Multiple decision centers with inadequate oversight Failure to ensure secondary reviews are conducted on denials and approved loans Overt statements in lending policies REDLINING STEERING (Wells Fargo settlement)

decision centers with inadequate oversight Failure to ensure secondary reviews are conducted on

15 Other Common Errors Failure to collect government monitoring information (GMI) for credit secured by the applicant s residence (a)(2) Requesting GMI when it is not required 202.5(b) Requesting information about the applicant s spouse when not applying for joint credit 202.5(c) Failure to include alimony, child support, public assistance, and other separate maintenance when calculating applicant income 202.6(b)(5) Failure to provide adverse action notices in a timely manner 202.9(a)(1) Consistency in consistently grossing up non-taxable income

5(b) Requesting information about the applicant s spouse when not applying for joint credit 202.

16 Automobile Lending Risks Indirect Lending Dealer Mark-ups Banks engaged in Indirect Lending should closely monitor two items Flat fee vs. Dealer Mark-up Disparities in Dealer Mark-ups Different treatment to protected classes

17 Strategies to Ensure Compliance Training is key Training for all employees, including the directorate, is recommended and expected by the FDIC and other regulatory agencies Secondary Reviews of Denials and If discretion is allowed in pricing or underwriting. MAKE SURE REASONS FOR EXCEPTIONS ARE DOCUMENTED AND MONITORED Periodic fair lending reviews (internal or external) are highly recommended BE CONSISTENT

If discretion is allowed in pricing or underwriting.

18 Resources FDIC Rules and Regulations; ECOA and Fair Housing Act FFIEC Automated Programs FDIC Field Office if you have unique situation Please utilize FFIEC FL Examination Procedures

19 Other Common Compliance Errors and Violations Truth-in-Lending RESPA Flood Servicemembers Civil Relief Act (SCRA) Regulation E

20 UDAP Issues SCRA and the Military Third Party Payment Processors New Products and Services (Add-on Products) Payday Lending Deposit Advance Programs

21 Deposit Advance Products In-bank payday lending An advance on a deposit with a % or flat fee assessed on each advance No analysis on ability to repay Advance amount is based on amount and frequency of direct deposits Expect Regulatory Movement

22 Deposit Advance Products BEST PRACTICES Establish appropriate cooling-off period between the time a payday loan is repaid an another application is made Establish a maximum number of loans per customer that are allowed within one calendar year or other designated time period Ensure that no more than one payday loan is outstanding with the bank at any one time

23 Violation Classifications Level 3/High Severity violations include violations that may result in restitution to consumers in excess of $10,000 and pattern and practice violations of anti-discrimination laws. Level 2/Medium Severity violations include violations resulting in potential restitution to consumers in an amount below the Level 3 threshold and other systemic or recurring violations. Level 1/Low Severity violations involve isolated or sporadic violations. Level 1 violations that are adequately addressed during the examination and that do not indicate weakness in the compliance management system will not be included in the Report of Examination. The new classification system will become effective for examinations started on or after October 1, 2012.

24 Civil Money Penalties Most common areas for community banks are HMDA and Flood Insurance While not nearly as common, CMPs may be assessed for violations of virtually all compliance and consumer protection laws and regulations When are CMPs Considered? How are CMP levels determined?

25 Civil Money Penalties (HMDA) For HMDA, CMPs are considered when repeat significant violations are noted Generally, CMPS are considered with accuracy error rates of 10% for each year reviewed Error rate standard is lower for bank s with very large numbers of HMDA LAR entries Generally, CMPS are considered with omission error rates of 5% for each year reviewed

26 Civil Money Penalties (Flood) For Flood Insurance Violations, CMPS are considered when a pattern or practice of violations is noted does not have to be a repeat violation CMP levels have increased dramatically since enactment of The Biggert-Waters Flood Insurance Reform Act of 2012 (Act) Effective July 2012 Features an increase in the maximum civil money penalty against regulated lenders from $350 to $2,000, and elimination of the $100,000 cap on penalties. Multiple violations can be cited on each loan, so flood violations can result in very large CMPs

27 CMPs (cont d) Factors Considered in CMP Assessments Frequency and Severity of Violations Continuation after Notification Intent? History of Violations? Cooperation by Bank Overall effectiveness of bank s compliance program

28 Scope of Compliance Examinations Please See Attachment A

29 Contact Information Field Supervisor Veronica Sentell (MI & OH) (734) , Ext Supervisory Examiner Steven Durant (734) , Ext Examiner John George (614) , Ext. 8451

Quilty & Associates. May 8, 2013

Quilty & Associates. May 8, 2013 Quilty & Associates May 8, 2013 Discussion Points Significance of HMDA On the Horizon Survival Tips Hot Spots Significance of HMDA HMDA Disclosure Requirements HMDA Poster must be displayed in the lobby