Current and Emerging Issues in Lending Compliance

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1 Current and Emerging Issues in Lending Compliance Amy Avitable, JD, CPA Compliance Manager, BancVue Introduction Amy Avitable is a nationally known compliance expert through both her frequent speaking engagements for state bankers associations, state mortgage associations and the American Bankers Association, and articles in banking and compliance publications. Amy is the Compliance Manager at BancVue, a provider of innovative products and marketing for community financial institutions. She began her career at Deloitte & Touche, LLP and has served financial institutions and other organizations as legal counsel at Lowndes, Drosdick, Doster, Kantor & Reed, PA. Most recently, she was the National Director of Compliance Services at Sheshunoff Consulting + Solutions, where she managed a team of compliance professionals who performed compliance audits and consulting for financial institutions of all sizes. Before joining Sheshunoff, she was the Director of FIS Regulatory Advisory Services (formerly Kirchman/Metavante Regulatory Service), where she was the Editor-In-Chief for the renowned Big Orange Book compliance manual and served hundreds of financial institutions throughout the country as well as the FDIC, Federal Reserve and OCC. 2 1

2 Agenda Final Rules and Clarifications Notice Address Changes Lender Compensation Compliance Litigation Regulation Z RESPA Fair Lending Servicemembers Civil Relief Act UDAAP Mortgage Origination Expectations Other Upcoming Changes Under Dodd-Frank 3 Notice Address Changes Agencies and addresses have been updated for: Risk-based pricing notices Credit score disclosures Must be updated by January 1,

3 Lender Compensation FDIC s February 2012 teleconference on lender compensation reiterated Federal Reserve s previous position that compensation based on profits or profitability are impermissible because profit calculations are proxies of loan terms or conditions Prohibited compensation included: Profit sharing Bonuses based on profits 401(k) contributions based on profits Income goal ESOP plan Retirement plan contributions based on profits 5 CFPB s Lender Compensation Clarification [T]he Compensation Rules permit employers to contribute to Qualified Plans out of a profit pool derived from loan originations. That is, financial institutions may make contributions to Qualified Plans for loan originators out of a pool of profits derived from loans originated by employees under the Compensation Rules. Applies to qualified profit sharing, 401(k) and employee stock ownership plans CFPB would not advise on arrangements that are not qualified plans FDIC revised position in FIL

4 Upcoming Proposed Lender Compensation Regulations Dodd-Frank also prohibits: Steering a consumer to a mortgage loan that the consumer lacks a reasonable ability to repay or has predatory characteristics or effects (e.g., equity stripping, excessive fees, or abusive terms) Steering a consumer from a qualified mortgage (QM) that they qualify for to a mortgage loan that is not a QM Abusive or unfair lending practices that promote disparities based on race, ethnicity, gender, or age Mischaracterizing the credit history of a consumer or the mortgage loans available to a consumer Mischaracterizing inducing the mischaracterization of the appraised value of collateral If unable to suggest, offer, or recommend a loan that is not more expensive than a loan for which the consumer qualifies, discouraging the consumer from seeking a mortgage loan from another mortgage originator Final rules are required by January 21, 2013 Non-qualified plans are expected to be addressed in those regulations 7 Compliance Litigation 8 4

5 CFPB Litigation Authority CFPB may bring civil actions without participation of FTC or attorney general CFPB can win legal fees The CFPB is committed to filing amicus briefs in litigation involving the federal consumer financial protection laws that it oversees and in which the CFPB determines its views will assist the courts in correctly resolving the matters. Amicus briefs are an important way for the CFPB to ensure that the statutes it oversees are correctly and consistently interpreted by the courts, even in cases in which the CFPB is not itself a named party. March 27, 2012 CFPB Press Release 9 Regulation Z Litigation Rosenfield v. HSBC Bank, USA Bank did not properly start the 3-day clock for right of rescission Borrower notified that bank of rescission within the 3 year statute of limitations period Bank did not respond Borrower sued after the 3 year period expired In March, CFPB filed amicus brief with 10 th Circuit Court of Appeals arguing that the borrower is required to notify the bank within 3 years but not file the lawsuit in that time Appears to be trying to reverse the Supreme Court s previous position in Beach v. Ocwen Federal Bank 10 5

6 Rosenfield v. HSBC Bank On May 3, 2012, ABA, Consumer Bankers Association and Consumer Mortgage Coalition filed amicus brief supporting the bank The Truth in Lending Act gives certain borrowers a right to rescind their mortgage loans. Although that right typically lasts for three days from the time the loan is made it can extend to three years if the lender fails to make certain disclosures required by TILA... But Congress was unequivocal in saying that, once those three years pass, the rescission right shall expire. Id. The Supreme Court later found these terms so straightforward as to render any limitation on the time for seeking a remedy superfluous. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 417 (1998). Despite Congress manifest intent to put rescission to rest after three years Plaintiff and the Consumer Financial Protection Bureau ( CFPB ) (as amicus curiae) seek to create confusion over the very issue deemed superfluous by the Court. 11 More Regulation Z Litigation First Premier Bank and Premier Bankcard, LLC v. Consumer Financial Protection Bureau Credit CARD Act prohibits fee in excess of 25% of the available credit limit to be charged during the first year in which the account is opened Federal Reserve revised Regulation Z to reflect the requirement 12 CFR

7 First Premier Bank v. CFPB Fed s Regulations In 2010, Federal Reserve published Regulation Z revisions to adopt the prohibition In 2011, it amended the provision to prohibit fees prior to account opening and during first year after account opening In March, a district court in South Dakota issued a preliminary injunction against the CFPB to prevent the amendment from going into effect Court held that Federal Reserve appeared to have exceeded its authority 13 RESPA Litigation Freeman v. Quicken Loans, Inc. Borrowers sued Quicken under Section 2607(b) for collecting a discount fee but not discounting the interest rate Supreme Court ruled for the lender on May 24, 2012 Section 2607(a) - No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. Section 2607(b) - 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 real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. 14 7

8 Freeman vs. Quicken Loans, Inc. Court held that Section 2607(b) was limited to circumstances where two or more parties share a fee Consequence? As long as the unearned fee is not shared, it can be charged May be limited by state law Will CFPB try to impose limits on unearned or excessive fees under its abusive authority? 15 Freeman v. Quicken Loans, Inc. Nor is there any merit to petitioners related contention that 2607(b) should not be given its natural meaning because doing so leads to the allegedly absurd result of permitting a provider to charge and keep the entirety of a $1,000 unearned fee, while imposing liability if the provider shares even a nickel of a $10 charge with someone else. That result does not strike us as particularly anomalous. Congress may well have concluded that existing remedies, such as state-law fraud actions, were sufficient to deal with the problem of entirely fictitious fees, whereas legislative action was required to deal with the problems posed by kickbacks and fee splitting. 16 8

9 More RESPA Litigation First American Financial Corp. v. Edwards Expected to be decided by the Supreme Court this month Borrower sued lender claiming a Section 8 violation for having an exclusivity agreement with a title company Borrower was not charged more because state law requires all title companies to charge the same fees Ninth Circuit found for the borrower, claiming that statutory damages are provided regardless if the borrower was overcharged According to the Federal Reserve, [t]he Supreme Court's opinion in this matter could have wide-ranging implications because many consumer protection laws provide statutory damages for violations, including RESPA, the Truth in Lending Act, the Fair Credit Reporting Act, and the Electronic Fund Transfer Act. Federal Reserve Consumer Compliance Outlook, Third Quarter Fair Lending Enforcement Many different government agencies are taking action Your prudential regulator Department of Justice CFPB s Office of Fair Lending and Equal Opportunity HUD Charged Bank of America in February of 2012 for discriminating against disabled applicants Federal Financial Fraud Enforcement Task Force s non-discrimination working group President Obama established the interagency FFETF to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. Department of Justice Press Release, December 21,

10 Fair Lending Litigation Department of Justice settled race, ethnicity and marital status discrimination case against Countrywide Financial Corporation for $335 million in December 2011 Largest residential fair lending settlement in history Some of the most significant issues were lender discrimination in setting loan pricing, and unrestrained processes around obtaining underwriting exceptions Several cases have been escalated to the Supreme Court to determine if disparate impact is a viable theory of discrimination Magner v. Gallagher was expected to be decided in 2012 but was dismissed in February Disparate Impact Discrimination HUD proposed guidelines for applying the discriminatory effects test for Fair Housing Act discrimination Comment period ended in January 2012 CFPB announced in April 2012 that it would use all available legal avenues, including disparate impact, to pursue lenders who discriminate against consumers Silent pickpocket 20 10

11 CFPB Brochure on Discrimination Look for warning signs, such as: You are treated differently in person than on the phone. You are discouraged from applying for credit. You hear the lender make negative comments about race, national origin, sex, and other protected groups. You are refused credit even though you qualify for it. You are offered credit with a higher rate than the one you applied for, even though you qualify for the lower rate. You are denied credit, but not given a reason why or told how to find out why. Your deal sounds too good to be true. You feel pushed or pressured to sign Servicemembers Civil Relief Act Veterans Benefits Act of 2010 Provides private cause of action for servicemembers to enforce their rights 4 th Circuit has already held that it can be applied retroactively Expands civil penalties to cover all provisions of SCRA Consequential and punitive damages Civil penalties of $55,000 for the first violation and $110,000 for subsequent violations 22 11

12 CFPB s Office of Servicemembers Affairs CFPB and JAG issued Joint Statement of Principles in July 2011 Work together to identify potential violations and provide single point of contact for sharing information about servicemember complaints Concerned about a number of practices aimed at members of the military Military members inability to pay mortgage or modify/refinance it Abusive auto lending Coercive and abusive debt collection practices 23 Unfair, Deceptive or Abusive Acts or Practices (UDAAP) 24 12

13 CFPB Rulemaking Authority Unlimited authority to write rules on unfair, abusive or deceptive practices relating to consumer financial products Electronic Funds Transfer Act Regulation E Equal Credit Opportunity Act Regulation B FCRA/FACTA Home Owners Protection Act (PMI) Gramm-Leach Bliley HMDA HOEPA RESPA SAFE Act Truth in Lending Regulation Z Truth in Savings Regulation DD 25 CFPB Expectations CFPB Supervision and Examination Manual Issued in October 2011 Updated in early 2012 for examination procedures on: Mortgage origination SAFE Act Short-term, small dollar (payday) loans Can be found at Other chapters of interest UDAAP ECOA / Regulation B Mortgage servicing 26 13

14 UDAAP in Lending Unfairness It causes or is likely to cause substantial injury to consumers, The injury is not reasonably avoidable by consumers, and The injury is not outweighed by countervailing benefits to consumers or to competition. Examples Refusing to release lien after consumer makes final payment on a mortgage.the FTC brought an enforcement action against a mortgage company based on allegations that it repeatedly failed to release liens after consumers fully paid the amount due on their mortgages. Dishonoring credit card convenience checks without notice. The OTS and FDIC brought enforcement actions against a credit card issuer that sent convenience checks with stated credit limits and expiration dates to customers. For a significant percentage of consumers, the issuer reduced credit lines after the checks were presented, and then the issuer dishonored the consumers checks. 27 UDAAP in Lending Deception The representation, omission, act, or practice misleads or is likely to mislead the consumer, The consumer s interpretation of the representation, omission, act, or practice is reasonable under the circumstances, and The misleading representation, omission, act, or practice is material. Example Misrepresentation about loan terms. In 2004, the FTC sued a mortgage broker advertising mortgage refinance loans at 3.5% fixed payment 30-year loan or 3.5% fixed payment for 30 years, implying that the offer was for a 30-year loan with a 3.5% fixed interest rate. Instead, the FTC claimed that the broker offered adjustable rate mortgages (ARMs) with an option to pay various amounts, including a minimum monthly payment that represented only a portion of the required interest. As a result, unpaid interest was added to the principal of the loan, resulting in negative amortization

15 UDAAP in Lending Abusive Interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service Takes unreasonable advantage of: A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or The reasonable reliance by the consumer on a covered person to act in the interests of the consumer. Don t forget to keep a close eye on your complaints! Include complaints lodged against subsidiaries, affiliates, and third parties regarding your products and services Don t monitor them? You re expected to! Pay particularly close attention to: Multiple complaints about the same issue Any complaints about misleading or false statements, or missing disclosure information 29 CFPB s Mortgage Origination Procedures Specific loan products to be reviewed: Hybrid ARMs (defined as having a fixed period prior to adjusting) Interest-only loans Payment option ARMs Simultaneous second liens Alt-A loans Subprime loans Reverse mortgages (including HECMs) HOEPA and higher-priced mortgage loans Loans with an introductory rate that is 200 basis points or more below the fully indexed rate 30 15

16 CFPB s Mortgage Origination Procedures Review your staff Qualifications, experience and training of originators, processors, underwriters, closers, quality control, and audit staff Independence of underwriters and valuation staff Review third parties Training and monitoring policies for employees and third parties, including monitoring outbound calls for compliance Regular evaluations of third party performance Review compensation arrangements with both Make sure you review compensation for cross-sales of associated products, such as credit life Determine whether compensation or incentives for underwriters affect the speed or quality of their underwriting Interview employees to assess the actual compensation practices 31 CFPB s Mortgage Origination Procedures Review loan ads carefully Look for RESPA Section 8 and fair lending violations Be particularly careful about ads with non-traditional mortgage products Check that complaint file! Loan file reviews will be weighted toward branches with more complaints The CFPB will even interview consumers to get their point of view Underwriting will be closely reviewed in a compliance exam Determine whether risk layering was handled appropriately CFPB will use non-hmda data in fair lending examination 32 16

17 CFPB s Mortgage Origination Procedures Review policies and procedures regarding rate locks, and review the loan file to determine whether there are instances where consumers lose their rate locks prior to its expiration, resulting in their being placed in more expensive mortgage products, despite obtaining a rate lock and submitting all required documentation within required time frames. Determine whether the entity s practices obscure or obfuscate key loan terms, fees, or provisions. Compare initial GFEs and TIL disclosures with final HUD-1 settlement statements and final TIL disclosures for any evidence of bait-and-switch tactics with respect to the interest rate, points, closing costs, or the loan product or loan features. Review complaints and closing files for evidence of coercion of or fraud against the borrower at settlement. 33 Other Upcoming Changes Under Dodd-Frank Mortgage Reform Extends civil liability under TILA to mortgage originators Increases penalties, imposes civil liability and adds a 3 year statute of limitations for many of the new TILA revisions made by the Dodd-Frank Act Requires the CFPB to issue rules under TILA for unfair and deceptive acts and practices Requires the CFPB to consolidate the TILA and RESPA disclosures 34 17

18 Mortgage Reform Disclosures Adds disclosure requirements and limitations for certain loan terms, such as prepayment penalties, negative amortization, loans subject to state anti-deficiency laws, and financing credit insurance premiums Adds rate adjustment notice requirements for adjustable rate mortgages Imposes additional disclosure requirements for variable rate and other residential mortgage loans Adds billing cycle statement requirement for residential mortgage loans Periodic statements for closed end loans HUD required to update and simplify RESPA booklet Adds notice requirement relating to borrower responsibilities for taxes and insurance where escrow not required Adds requirement to provide copy of appraisal report at no additional cost and within timing requirements 35 Mortgage Reform Lending Practices Underwriting and income verification Imposes new underwriting and income verification requirements for home loans Adds presumption of compliance for "qualified mortgages Imposes requirement to include escrow payments in underwriting determinations More high cost loan protections Amends the requirements for high cost loans that are currently subject to Section 32 HOEPA requirements Prohibits balloon payments on high cost loans Adds new requirements for high cost loans, including a requirement for borrowers to receive homeownership counseling from HUD-approved organizations Adds appraisal requirements for higher-risk mortgages Procedural requirements Adds error resolution requirements and limitations on forceplacing hazard insurance Adds loan payment crediting and payoff requirements Adds requirement to escrow for taxes and insurance on all closed end, first lien consumer loans on a principal dwelling, and new escrow disclosure requirements 36 18

19 What Can You Do? 1. Update your risk-based pricing notices and credit score disclosures 2. Carefully review for fair lending risks Perform a fair lending risk assessment Review CFPB s brochure on red flags of discrimination 3. Schedule periodic reviews of complaint file 4. Carefully review SCRA procedures, test transactions, and assess risks of any products designed for members of the military 5. Review CFPB examination guidelines for identified UDAAP violations and other high risk issues 6. If you have other compliance issues or are staffing the compliance team, complete the requisite tasks as soon as possible 7. May want to avoid changing lender compensation practices until additional rules are issued 37 Questions? Amy Avitable compliance@bancvue.com 38 19