"Review Your Junior Lien Portfolio for Allowance for Loan and Lease Loss"

Contributed by Blair Rugh, Trinovus

On January 31, the regulatory agencies issued an Interagency Supervisory Guidance on Allowance for Loan and Lease Loss Estimation Practices for Loans and Lines of Credit Secured by Junior Liens on 1-4 Family Residential Properties. When the agencies issue an interagency guidance such as this, it generally means three things. First the agencies detect a significant risk that the institutions they are examining are not sufficiently addressing; second, they detect a weakness in the process that institutions are utilizing in monitoring the risk; and third, this is an area that they will stress in future exams with the expectation that financial institutions will pay serious attention to the guidance. 

For many community banks, junior 1-4 family secured loans, whether closed end or HELOCs, are a significant portion of their loan portfolio and because of current economic times, a significant part of their risk profile. Every community bank that has a significant residential junior lien exposure should have a rigorous ALLL review process following the interagency guidance. 

The guidance places fundamentally three responsibilities on institutions and their management. The first is to gather sufficient information to make a reasoned determination about the status of a borrower and the collateral property.  In most cases, the community bank that holds a second mortgage on a residential property does not hold the first mortgage. Accordingly, the financial institution should determine the delinquency status of the senior lien either by reviewing the borrower’s credit report or by the use of a third party monitoring source. An institution should review the credit quality of the borrower by obtaining the borrower’s current credit score or using other methods. Finally, the institution should determine the combined loan-to-value ratio, which is the unpaid balance of the first mortgage plus the outstanding balance of the second mortgage divided by the value of the property.  Finally, to the extent useful, apply general economic indicators.  In our local newspaper recently, there was an analysis of the change in home values over the last year.  In some zip codes, properties had appreciated by as much as 20%. In others, property values were continuing to drop significantly.  If you have home valuation information available to you, use it in your ALLL determinations. 

The second direction of the guidance is to segment your portfolio based on the risk characteristics of your individual loans. Most ALLL calculations are done by applying a percentage to a portfolio of loans. The examiners warn that if you apply a percentage to your entire second mortgage portfolio, the ALLL you calculate may not be sufficient.  To obtain a more accurate calculation the guidance suggests that you segregate your portfolio based on some or all of the following criteria and then apply a separate percentage to each segregated portion:

• delinquency and modification status of your loan,
• delinquency and modification status of the senior lien,
• borrowerʼs credit score,
• combined loan to value ratio,
• origination channel, 
• property type (investor vs. owner occupied/ condominium vs. single unit, etc.),
• location of collateral,
• age of loan,
• HELOC with history of minimum payments, and
• HELOC with potential of payment shock. 

Finally, the guidance suggests that each institution review its charge-off and non-accrual policies. Generally accepted accounting principles (GAAP) require that an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: 

• information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements; and
• the amount of the loan can be reasonably estimated.

In general, there is nothing in the guidance that is new.  Primarily, it is a rehash of present rules with a dose of common sense. The issuance of the guidance, however, should be a wake-up call to institutions to review their overall ALLL calculation policies and procedures and for those with a significant portfolio of residential junior mortgage loans to review their procedures for calculating the ALLL for that portfolio.

"Changing the Risk Management Status Quo"

While in a meeting with a potential client last week we were discussing all the various methods in which the risk management team was retrieving data to produce reports for the senior management team.  Between the data from their core system, reports from 3rd party vendors, risk assessments done internally, risk assessments done by outside consulting firms, internal audit reports, and other spreadsheets and word documents used to track various risk and compliance related functions it's not surprising managers go home at night wanting to throw down a few glasses of wine. 

Although I don't work in a bank or credit union, I can certainly relate to what this prospective client was going through.  As a past Vice-President of a twenty-five million dollar business unit, I was constantly bombarded with data from many different sources. Consolidating the data was a challenge and if it wasn't for the supportive admin team that organized and consolidated the information I would have struggled presenting to the executive team. 

However, the reality facing many smaller banks and credit unions is the lack of resources and subsequently they are left with one of two options: maintain the status quo or seek outside vendors for assistance. Personally, I prefer to look beyond the status quo because if you're not constantly searching for ways to improve your business model and streamline operations you will either become a takeover target or go out of business. The larger goal should always focus on forward progress. The problem most managers face with bucking the status quo trend is senior management. Senior management is trying to limit expenses while you are caught in the middle trying to do more with less. They realize it's not just an investment of dollars, but also time. Does that sound familiar?  

As I was finishing writing this week's article I learned that this potential client is now a customer. I shared this story because I'm sure many of you reading it can relate. Changing the status quo is not an easy task, especially in today's business environment.  

If your institution is contemplating changing the status quo for your ERM program, consider FI Compliance Solutions. Let our team share with you how our solution, ERM 365 can change the status quo by combining Software, Services, and Support - Progress for your institution starts at just $250 per month.

Sincerely, 

Eric Strohl
President & CEO
FI Compliance Solutions

"The Over Regulation of Private Education Loans"

Contributed by Blair Rugh, Trinovus

My youngest daughter is a school teacher in the Atlanta area.  She recently got her master’s degree and is now working on her doctorate. Obviously she got her intellect from her mother.  Last summer she called and asked to borrow a reasonably small amount of money.  She had a grant for her tuition to graduate school, but the grant would not be paid to her until a couple of months after her tuition was due, therefore she needed to borrow the tuition for about 90 days. She had been to the teacher’s credit union where she banks, but they told her that, because it was an education loan they could not make it to her, as they did not have the systems necessary to generate the proper disclosures. Imagine that. A teacher’s credit union cannot make an education loan to a teacher.  If she wanted to borrow the money to go to Las Vegas or to squander it in some other way, the loan would not have been a problem, but if she wants to borrow the money to improve her education, she needs to be protected. In any event, I charged her a five percent origination fee and twenty percent interest, took her two children and husband as collateral, and made her the loan. 

I did not think much of it at the time, but this week I received a copy of a letter that a good friend of mine, one of our subscribers, who is the compliance officer in his bank, sent to the CFPB in response to its request for comments on student loans. With the letter he enclosed a letter he had written in 2009 in response to the Fedʼs request for comments on the student loan proposals. The following are some excerpts from his letters: 

“On behalf of ..., a community bank serving the credit needs of its community for over a century we would respectfully request a thorough re-visitation to this proposal regarding private education loans. As proposed, we feel that unintended consequences would result in community banks not being able to adequately serve the personal needs of consumer customers regarding education related needs or desires due to the cumbersome disclosure requirements. 

Our understanding is that numerous basic, simple, closed-end, personal loans that are routinely and quickly made would fall into the proposed requirements. Here are just a few of many examples:

• A student working his or her way through a local college may need small education loans for books, tuition increases, and the like from time to time
• Personal loans that may range from $500 to $1000
• A working mother may borrow $1200 to take a course offered at a local technical college to better her position in the workplace
• A typical, normal bank customer in good standing may want to borrow $3000 - $5000 short-term for post-education needs for a child 

All of the examples would be character loans which may be unsecured or secured by various types of non-real estate collateral.” 

These examples illustrate that, while there may be problems regarding long-term education loans from non-regulated lenders that need to be addressed, the short-term education loans that most community banks make are a totally different product.  To lump them together under the same onerous regulatory burden will force community banks to cease making education loans that enable their customers to try to better their position in society and could force them to go to lenders that could be abusive. 

Congress and the agencies have to realize that there is a cost of regulation on the person being regulated. Initially that cost will either be absorbed or passed on to the person that the regulation is trying to protect. But, when the cost of regulation becomes too oppressive, then the business being regulated ceases to offer the product.  This represents the zenith of regulatory success. The way to avoid anyone being harmed by an education loan is to make education loans illegal. 

"UDAP is Becoming a Pain in the Rear"

Contributed by Blair Rugh, Trinovus

In the almost 40 years that I have been involved in banking and compliance with banking regulations, until recently, one topic I was never concerned with was unfair and deceptive acts and practices. I have taught four and five day schools on banking regulations during which the only time this topic arose was relative to Regulation AA and the few practices that it defines as unfair and deceptive in the making of a loan, such as an assignment of wages or a confession of judgment.  In the last year, however, UDAP has become the buzz word of the regulators, particularly the FDIC, and consequently the hot topic among banks that it regulates. Section 1013 of Dodd Frank gives the Consumer Financial Protection Bureau the rule making authority to define acts that are unfair, deceptive or abusive.  So far, it has not exercised this authority and declared any act unfair, deceptive or abusive; however, that has not been an impediment to the examiners from the FDIC.

Historically, when the regulators have exercised their UDAP authority, they have advised the banking industry in advance that they were doing so. The Fedʼs expansion of Regulation Z relative to higher priced mortgages was done under its UDAP authority, but a proposed rule was published far in advance of the rule becoming mandatory. Most of the new rules regarding overdraft protection programs were issued under UDAP authority; again, the rules were published far in advance of the mandatory compliance date. Now, we find that even if you follow the agencies’ rules to the letter, you may have an unfair or deceptive act or practice.

Consider this situation. Your financial institution does not have a courtesy overdraft protection program, but you pay items into overdraft on an ad hoc basis. Under the VISA and MasterCard rules, under certain situations you are required to honor a debit card transaction even though you did not pre-authorize the transaction or the amount. For example, if a customer swipes his or her debit card at gas station and is preapproved for one dollar, the final charge may be $50. If the customer does not have that amount in his or her account at the time of settlement, under the network rules you are required to force pay the transaction into an overdraft in the customer’s account. Your policy has long been to charge a fee for the overdraft, and you typically have done so.

Everything was fine until the Fed amended Regulation E to require that a consumer opt-in to the assessment of overdraft fees for ATM and POS transactions if they wanted you to overdraw an account. The Fed was explicit that a notice was required for institutions that did not have a courtesy overdraft program as well as those that did. In Appendix A-9 to the regulation, the Fed published the safe harbor, model form for the opt-in notice to be sent to consumers.  In Section 205.17(d) of the regulation, it cautions institutions not to change any of the wording of the notice, except under certain closely defined situations. 

Your institution wanted to protect its revenue stream; you sent the required opt-in notice to your customers, and many did opt-in. When those customers have a forced pay ATM or POS transaction, you pay it as required and charge an overdraft fee just as you did prior to the amendment to Regulation E to those who have opted in.  Per the FDIC, that is now an unfair and deceptive act or practice. 

We don’t exactly know the FDICʼs reasoning, but apparently, the notice that you sent to the customer, if you used the model form provided in the regulation, may have led the customer to believe that you did have a courtesy overdraft program.  And, because you do not, the customer could have had the same overdraft service without incurring a fee.  The FDIC is citing for UDAP despite the Fed’s analysis that such a clarification for distinguishing force pays was unnecessary.  Even the FDIC has issued subsequent guidance and FAQs without mention of an unfair or deceptive act or practice when a consumer, who has opted in, is charged a fee for the payment of overdraft in force pay situations. We are told that, in several instances, the FDIC has required the offending bank to rebate to its customers the overdraft fees that were charged where the only overdraft service provided (and opted-in) was for forced payments.

Because the Consumer Financial Protection Bureau is now the arbiter of all things unfair and deceptive, we called it to see if a ruling or clarification has been made. The person we spoke with said that the CFPB was aware of the issue. We asked if it had made a determination; all they would say was that “it was under discussion.”  We asked what that meant, and the person would not comment further. 

We wish that we could give bankers advice about what to do. If you are an FDIC examined bank in this situation, you should be concerned. As a matter of fact, if you are an FDIC examined bank, you should be concerned that other things that you have done for years without challenge may now be considered unfair, deceptive or abusive, despite the FDIC’s own examination manual in which it states “the fact that a practice is affirmatively allowed by statute may be considered evidence that the practice is not unfair.” 

We beg the CFPB and the other regulatory agencies to please let the industry know when you find something to be unfair, deceptive or abusive.  Equally important, don’t criticize financial institutions for actions that they take consistent with regulatory requirements or that have never been challenged before until there is a public declaration that the act is unfair, deceptive or abusive.

"The Consumer Financial Protection Bureau has a Director, or Does It?"

Contributed by Blair Rugh, Trinovus

On Wednesday, January 4, President Obama appointed Richard Cordray, the former Attorney General of Indiana, as the Director of the Consumer Financial Protection Bureau. In doing so, the President said that he was exercising his right to make recess appointments under the Constitution. Constitutional scholars on both sides of the aisle have weighed in their opinions regarding whether the President’s action was valid. While I took a class in Constitutional Law in law school, I don’t pretend to be a constitutional scholar. Nonetheless, the following is what the Constitution provides and you can make up your own mind about the appropriateness of the President’s action.

Article II, Section 2 of the Constitution defines the presidential power over appointments. What it says, in a nutshell, is that the President shall have the power, by and with the advice and consent of the Senate, provided two-thirds of the Senators present concur, to make various appointments. It goes on to say that the President shall have power to fill up all vacancies that may happen during the recess of the Senate, by granting commissions which shall expire at the end of their next session. The thorn in the ointment is Section 5 of Article I. Article I of the Constitution defines the powers of the Congress. Section 5 provides that neither house, during the Session of Congress, shall, without the consent of the other, adjourn for more than three days. In the instant situation, the House of Representatives did not consent to the adjournment of the Senate.  As such, the Senate could not have adjourned even if it wanted to. Moreover, the Senate did not adjourn; and, at least once every three days during the Christmas period, it was called to order. As a matter of fact, it passed legislation during the period - specifically the bill to extend the reduction of social security taxes and the extension of unemployment benefits, and the President signed the legislation into law.

Whether you think the President’s action was constitutional and if it was not, whether again you care probably depends on which side of the political aisle that you sit. Most Republican pundits that I have heard claim that the action was grossly in violation of the constitution and was a terrible overreaching of power by the President. Most Democrat spokesmen say that it was probably constitutional. Even if it was not, the President was only trying to protect the consumers. My guess is that the question will end up before the Supreme Court, and it will provide a definitive decision.

If the Supreme Court decides in favor of the President there will not be a great deal of upheaval. On the other hand, if the Court rules against the President, there could be a really messy situation. Most of the power of the Consumer Financial Protection Bureau is vested in the Chairman. If Mr. Cordray is the Chairman, then, the actions that he takes in the interim are valid. But what if his appointment was faulty and he is not the Chairman? What happens to the actions and rulings that the CFBP takes in his name? For example, recently in an interview Peggy Twohig, the associate director for nonbank supervision, said that now that the new director has made the required appointments the CFPB can begin its regulation of nonbank lenders. This same story is unfolding in every agency of the bureau. Are the rules that they will make and the enforcement actions that they will take of any force? I am not sure that anyone knows the answer to that question, but the unfolding of the story will be interesting.

In a similar vein, several of the Republican candidates for President are talking about repealing Dodd Frank. That will be a lot easier said than done. When you review all of the things that Dodd Frank did, you realize that sometimes you cannot put the tooth paste back into the tube. For example, the Office of Thrift Supervision has been eliminated. It would be impossible to recreate it. And there are a multitude of similar situations. If nothing else, this political year will be interesting, and its results will have a huge impact on the banking industry. 

"Nobody Gives the Compliance Officer a Christmas Present"

Contributed by Blair Rugh, Trinovus

Christmas is a great time of joy and goodwill. Loyal customers bring cookies that they have baked to the tellers and the customer service personnel. Borrowers bring bottles of wine and whiskey to their loan officers. But nobody brings presents to the compliance officer, not even a Christmas card.  When was the last time a loan officer even thanked you for all the work that you do cleaning up the messes that they have made and for keeping them out of jail? But, if you change your frame of reference, things may be better than you think. 

In Dodd-Frank, Congress gave compliance people the biggest present they could ever get. The Consumer Financial Protection Bureau and all of the other new regulations that it will spawn is the greatest job security anyone could hope for.  In these times of high unemployment, there are virtually no unemployed financial institution compliance people. All of a sudden, compliance has been elevated to a new plateau. Hopefully, raises are soon to follow. 

The FDIC recently did give one small present. A few weeks ago in this column I wrote that the FDIC had criticized senior deposit programs that were not based on age 62 that had a lower fee structure than the institution’s normal accounts, as the fact that a check might be paid into overdraft was a credit product and it was being provided to seniors in a discriminatory manner because of the lower fee on the deposit account. Apparently the FDIC has gotten a lot of heat on the issue, because they have issued a “Whoops”. They now say that they will not deem such programs to be illegally discriminatory.  I would like to take credit for the change in heart, but I don’t know that is the case at all. The FDIC has not answered the open letter that I wrote. 

Some good news is that the Consumer Financial Protection Bureau seems to be spending a great deal of its time reaching out to the distressed and oppressed rather than exercising its new regulatory authority.  If you have a student loan or a credit card, if you are a veteran or a senior citizen, or if you feel that you have been illegally discriminated against, the CFPB is confident that you have been abused, and they want to hear your story and give you advice. The good or bad news, depending on how you look at it, probably not one consumer in 10,000 knows that there is a Consumer Financial Protection Bureau or that it has a website or that if you send it an email detailing your travails, some bleeding heart may come to your rescue. I wrote them an email telling them that at midnight on Black Friday I went to a local merchant and stood in line until the doors opened. I told the store personnel that I was a senior citizen and that I was not as fast or agile as the younger people and that I should be allowed to go to the front of the crowd or be given a head start. They wouldn’t let me do it. By the time I got to the electronics department, the item that I wanted to buy was sold out. Next year, I am going to lobby for special lines for seniors and for compliance officers who will be so busy with January 1, 2013 compliance dates. I hope the CFPB will help me and, of course, you the compliance officer. 

The rest of their time, the CFPB has been working on wrapping a special gift for compliance officers. The CFPB is in the process of republishing the regulations implementing those laws with technical and conforming changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act.  In all its giving mood, it has elected to republish the week of Christmas.  Despite its attempt to make no substantive changes, many of the republished regulations do have some ‘tweaks’ that are indeed substantive or at least appear to be so.  For example, under Regulation V, where identity theft and address discrepancy regulations did not transfer to the CFPB, they are omitted from the CFPB’s version of Regulation V. Another example, the FCRA notices that currently reside under Regulation B ECOA, now have also found a home in the CFPB version of Regulation V.  

Without additional guidance, the compliance officer must once again scramble through the holidays trying to decipher what is and what is not substantive.  And, for those areas not under the guise of the CFPB, that seemingly have gone poof up the chimney along with Santa, where does one look come December 31, 2011?

Finally, the TriComply Services team wishes all of the readers of this column a very Merry Christmas and a great, great New Year.  For those of you who are subscribers to our TriComply compliance service, a special thank you for placing your confidence in us and for giving us an opportunity to serve you. Like you, we have a lot on our plate. We are working hard at expanding our service and looking for ways that we can better serve you.  And to all, a good night.

"The Ins and Outs of Rescission for Closed End Loans"

Contributed by Blair Rugh, Trinovus

The customer’s right to rescind a mortgage loan is one of the most financially dangerous parts of any of the regulations. With the increase in foreclosures and bankruptcies, understanding rescission has become increasingly critical to ensure an institution’s interests are protected.  Generally, a borrower has the right to rescind a loan if the lender is taking a mortgage on the borrower’s principal residence as security for a consumer loan and the purpose of the loan is not to either purchase the residence or to refinance an existing loan secured by the residence without advancing new money, that is the new loan amount does not exceed the amount of the existing loan plus any costs to close the loan. The refinance exception applies only to the lender who made the original loan that is being refinanced. If the refinance is by a lender other than the lender that made the original loan, the refinance is rescindable even if no new money is being advanced. Whenever a lender is making a consumer purpose loan secured by the borrower’s principal residence, the first thing that the lender must do is determine whether or not the loan is rescindable. 

If a loan is one where the borrower does have the right to rescind, the lender must deliver to the borrower an accurate disclosure under Regulation Z, and two copies of the notice of right to rescind. If there are multiple borrowers who have the right to rescind a transaction, each borrower must be provided his or her Regulation Z disclosure and two copies of the notice. It is not a requirement of the regulation that the borrower signs a receipt for the notice but it is an industry standard and a good practice to obtain a signed receipt. 

A form of the notice is in the Appendix to Regulation Z.  As always when a model form is provided, we suggest that it be followed exactly.  The borrower has until midnight of the third business day following the day of closing, which is the day that the borrower signed the note and mortgage, to provide the lender notice that the borrower elects to rescind the loan. The borrower must provide the notice to the lender in writing either by telegram, mail “or other means of written communication.” The regulation and the commentary to this part of the regulation were written before the days of the internet and email. I am not aware of any ruling whether a notice of rescission from the borrower by email is effective or not.  If I was a borrower and that is the way I provided notice I would sure claim that it was, and if I was a lender and my customers had a method of sending me emails, I would certainly be on the lookout for an email notice of rescission. 

If the borrower does not elect to rescind the loan, the lender may fund the loan on the fourth business day after the day of closing. For the purpose of rescission, Saturday is a business day regardless of whether or not you are open substantially for business.  Accordingly, if a customer signs the note and mortgage on Thursday, Friday is the first business day after the day of closing; Saturday is the second; and Monday (provided it is not a designated federal holiday) is the third. The lender may fund the loan on Tuesday.  

Before funding, the regulation requires that the lender obtain evidence that the borrower did not exercise the right of rescission timely.  A lender must be reasonably satisfied that the consumer has not rescinded.  The lender may either require the borrower sign a statement prior to the funding (but not prior to the end of the waiting period) that the borrower did not exercise the right to rescind, or the lender can wait a further reasonable time before funding to allow for delivery of a mailed notice that would have been mailed at midnight of the third business day following the closing. 

Failure to obtain the evidence that the borrower did not rescind is a violation of the regulation, but it does not affect the rescission.  If the borrower did not rescind, the failure to obtain the evidence or otherwise be reasonably satisfied that the borrower did not rescind does not give the borrower any additional rights, nor does it extend the rescission period. On the other hand, if the borrower did mail the notice of right to rescind at midnight on the third business day and on the next day signs a statement to the lender that he or she did not exercise the right to rescind, and based on that the lender funds the loan, the loan was still rescinded. The borrower may have committed fraud and several other things, but the loan was rescinded. Once a loan is rescinded, it is terminated and may not be resuscitated. The borrower cannot change his mind and pick up where he or she left off.  If the borrower does change his or her mind, everything has to begin again, starting with the early disclosures.

If an inaccurate disclosure is given, or the two copies of the notice of right to rescind are not provided, the rescission period never begins and the customer has three years from the date of closing to rescind the loan. If a customer does rescind a loan, the lender must return to the customer all costs that the customer paid to obtain the loan and close the loan and all finance charges that the customer has paid. Also, the rescission voids the mortgage, so the lender must provide the borrower a release of the mortgage. Having done that, the lender may attempt to collect the then unsecured loan. In actuality, it is normally not as draconian as that. Courts have held that rescission is an equitable right; therefore, the borrower must do equity, that is return title to the property to the lender simultaneously with the release of the mortgage. If you are ever in a case of rescission after a loan has been funded make sure that you get the attorney for your institution involved immediately. 

The disclosure that is provided to the borrower at closing must accurately state what are termed the “material disclosures”. They are the annual percentage rate, the finance charge, the amount financed, the total of payments, and the payment schedule.  Additional material disclosures are required if the loan is subject to Section 226.32, which is a high cost (HOEPA) loan, (for example, the “You are not required to complete this loan… statement, the APR, balloon payment, etc.).  If the loan is subject to HOEPA and/or subject to Section 226.35 (HPML), it is the omission of certain penalties that are part of the ‘material disclosures’.

In rescission, the tolerance for the finance charge is higher than for restitution. In the normal case, it is 1/2 of 1% of the loan amount. In the case of a refinance by a new creditor without advancing new money, it is 1% of the loan amount. However, in a foreclosure action the tolerance drops to $35. Accordingly, you may have a disclosure that is well within the tolerance under normal circumstances but not within tolerance in a foreclosure. If you have a rescindable loan that becomes delinquent during the first three years after it was made, check the disclosures carefully.  In many cases, it is more prudent to attempt to collect the loan without foreclosure until the three year period has run and then file for foreclosure. 

Finally, the borrower may waive the right to rescind in a “personal financial emergency.”  To do so, the borrower must provide the lender a hand written statement of the personal financial emergency and the waiver request. No pre-typed or other form letter may be used.

A personal financial emergency means first, it is personal; and second, it could not have been foreseen. Examples normally given are that a tornado has taken the roof off of a house, or the furnace has quit working and freezing weather is on the way.  The fact that a person has a hot tip on the third horse in the fifth race doesn’t qualify.  One ruling that I thought was a little restrictive but demonstrates the limits on the waiver, was a situation of a husband and wife that were purchasing a new home and were using their existing home as well as the new home as collateral for the loan. Because they were using their existing home, the loan was rescindable. The purchase contract was about to expire and if they did not close by the expiration date, they would lose the purchase. The court held that was not a personal financial emergency as the expiration date had been known for some time. To me, that would have been an emergency because if I had allowed that to happen, my wife would kill me. 

I hope this description of the right to rescind has been helpful. If you have any questions about rescission that I did not answer please let us know.

"If You Don't Tell Santa What You Want For Christmas, How Will He Know?"

Contributed by Blair Rugh, Trinovus

The Dodd-Frank Act transferred to the Consumer Financial Protection Bureau rule making authority under fourteen separate laws. As part of the transfer, Dodd-Frank authorized the Bureau to "reduce unwarranted regulatory burden" by regularly identifying and addressing "outdated, unnecessary, or unduly burdensome regulations." The Bureau is in the process of republishing the regulations over which it has been granted authority and in doing so has requested comment on changes that could be made to the existing regulations that would reduce the regulatory burden but not cause undue harm to the consumer.  

No one is going to confuse the Consumer Financial Protection Bureau with Santa Claus, but let's give it the benefit of the doubt. If enough bankers respond, maybe some good things will come of it. Anyone that wants to respond has 90 days to do so.  (Comments must be submitted by March 5, 2012. Commenters will have 30 additional days, until April 3, 2012, to respond to other comments.)

Financial institutions are in a better position than anyone to know which portions of the regulations are the most costly to comply with and which appear to have the least value to consumers. If you don't take a few minutes to think about it and respond, do not complain when the changes that you would like are not made. 

The principal laws and regulations that the Consumer Financial Protection Bureau now has rule making authority over are:

• The Consumer Leasing Act, Regulation M

• The Electronic Fund Transfer Act, Regulation E

• The Equal Credit Opportunity Act, Regulation B

• The Fair Credit Reporting Act, Regulation V

• The Fair Debt Collection Practices Act 

• The Gramm-Leach-Bliley Act, Regulation P

• The Home Mortgage Disclosure Act, Regulation C

• The Real Estate Settlement Procedures Act, HUDʼs Regulation X

• The SAFE Mortgage Licensing Act,

• The Truth in Lending Act, Regulation Z, and

• The Truth in Savings Act, Regulation DD 

In the announcement, the Bureau says that it will spend most of its time over the next year implementing the changes to Regulation Z and the other consumer lending regulations mandated by Dodd-Frank to be in place by January 1, 2013. As they are doing that, they want to look at the streamlining of the regulatory practice. 

The Bureau even came up with a few suggestions on its own. For one, how about doing away with the requirement for an annual privacy notice under Regulation P.  That would have several laudable consequences. In addition to reducing the regulatory cost to institutions, it would save a few trees, reduce the burden on consumers who have to throw the notices away and reduce the burden on the landfill into which it is ultimately deposited. Another Bureau suggestion is what is the purpose of a physical sign on an ATM machine stating that a fee will be imposed for its use when there is a screen that says the same thing and tells the amount of the fee?

One of the suggestions I would make is to insert in the advertising rules of Regulation Z a dispensation of triggered terms for radio, TV and billboard advertising and for signs in the branch similar to those in Regulation DD. A second suggestion is to do away with the requirement to provide a full account disclosure under Regulation DD prior to the automatic renewal for automatically renewable time deposits with a term of greater than one year.  The short form notice for shorter term time deposits tells the consumer all that he or she really needs to know.  How about this? Under Regulation P, an institution can share consumer information with a non-affiliated financial institution for the joint marketing of a financial product if the institution notifies the customer that it will do so in its privacy notice. On the other hand, if the other financial institution is an affiliate, the customer must be given the right to opt out. What is the purpose in making sharing with a non-affiliated financial institution easier than with an affiliated one over which the financial institution would have a greater degree of control? 

You will find the notice on the CFPBʼs website. I strongly suggest that you go there, read it and respond. If we are honest with ourselves, many of the regulations that we have to live with today are the result of a few financial institutions taking advantage of their customers. However, when laws are written to correct an abuse, normally, there is a lot of overkill. Hopefully, this is an opportunity to get rid of some of or at least bring it to the surface.

"Bank Security"

Contributed by Blair Rugh, Trinovus

Willie Sutton, the iconic bank robber, replied when asked why he robbed banks, “Because that is where the money is.”  Also, when asked why he always carried a gun, he responded, “You can’t rob a bank on charm and personality.”  I don’t know what the situation is where you live, but where I live in Orlando, it seems that an institution branch is robbed almost every week. I don’t know whether it is tourists that need money for another day at a famed theme park, but I doubt it.  In any event, bank robbery has been a prevalent crime since before the days of Willie Sutton, and it did not stop when he died. 

The rules on bank security used to compromise Regulation P, but when the privacy rules were enacted the Fed made them Regulation P and moved the bank security rules to Section 208.61 of Regulation H. Many financial institutions and staff are so concerned with the security of customer information and the security of their technology systems that they do not pay enough attention to their own physical security.  Every financial institution needs to review its security procedures and security devices at least annually. 

The first thing that the regulation requires is that the institution’s board of directors appoints a Security Officer to be in charge of the program, including the preparation and implementation of procedures that it requires. The regulation requires that an institution have a procedure for selecting, testing, operating and maintaining its security devices.  At a minimum, the security devices that an institution must have are a means of protecting cash and other liquid assets, such as a vault, a lighting system for the vault if it is visible from outside, tamper resistant locks on all doors and windows, and an alarm system to notify law enforcement in the event of a burglary.  It should also have such other security devices as the Security Officer deems appropriate. Most of the security devices mentioned in the regulation are to protect the financial institution from a burglary that would occur after the institution is closed, which in most cases is probably a pretty remote possibility.  It would seem more important to have security devices that will prevent or deter a robbery during the period the financial institution is open. 

Some banks have security guards, but that is an expensive proposition. My bank has installed bullet proof glass in front of the teller stations. At first, I was disturbed by it. If there is a robbery, the tellers are safe, but I and the other customers are out here in the lobby in the line of fire. Then, I realized that just the presence of the glass was probably a good deterrent. Another bank purchased an old police car and parked it in the front of its parking lot. Most robbers will pick an easier target. In any event, I recommend that banks consider the security devices that will deter robberies while the institution is open and utilize those that are cost effective. 

A financial institution is required to have procedures that will assist in identifying persons committing crimes against the institution and to preserve evidence that may aid in their identification and prosecution. An institution should record the serial numbers of the bills in its bait money, and many use dye packs that explode when the robber leaves the institution’s premises. Security cameras are not required but are a good idea both to assist in identification but also as a prevention tool. If your bank has security cameras don’t hide them, but make them as visible as possible even to the extent of posting signs saying that they are present. 

A financial institution must also have procedures for opening and closing a branch. At a minimum, it takes two employees. One checks to make sure that none of the windows or doors have been damaged and then opens the branch and assures that it is vacant. The other remains remote with a cell phone and waits for a high sign from the employee who opened the branch to assure that all is safe. A similar procedure is used in closing the branch.

The security regulation is one of the few that mandates training for officers and employees. It requires the training initially when a person is hired and then remedial training periodically thereafter.  The training should teach the requirements of your institution’s policy and procedures, how an employee should conduct himself or herself during a robbery and after, how to open and close a branch, and how to use the security and identification devices. We recommend that if an institution does not conduct periodic training at least annually that it at least circulate a memo to all employees reminding them of the more important points in your financial institution’s security policies and procedures. 

Finally, the regulation requires that the Security Officer make an annual report to the board of directors regarding the efficacy of the institution’s security program and any suggested changes that should be made to it.  Don’t let your institution’s security program get lost in the flood of new regulations. Hopefully, you will never need it, but if you do, you want to make sure that your employees know what to do to protect themselves from harm.

"HMDA: Some Suggestions on Getting It Right"

Contributed by Blair Rugh, Trinovus

Regulation C which implements the Home Mortgage Disclosure Act is one of the shortest regulations that compliance personnel generally have to address, but it uniformly causes more work and gray hair (or loss of hair) than any other regulation. The following are some suggestions that hopefully will assist you in determining which loans you must report. 

HMDA requires that you report dwelling purchase loans, dwelling improvement loans and dwelling refinance loans. So the most critical definition is that of a dwelling.  For HMDA reporting purposes, the definition of a dwelling is a residential structure, whether or not attached to real property, located in a state of the United States, the District of Columbia or Puerto Rico. It includes condominiums, co-operatives and manufactured homes. There is no limit on the number of dwelling units in the structure; a single family residence and a 100 unit apartment complex are equally reportable. 

The concept of a dwelling contemplates a reasonably permanent residency.  Thus, a boarding house or a college dormitory is not a dwelling for HMDA purposes, although a rental home or apartment is. If the structure has a mixed use, that is part residential and part commercial, you determine which use is predominant based either on the square footage devoted to each use or on the relative value of the commercial portion of the property versus the residential portion. If the predominant use is residential, it is a residential structure. If it is exactly fifty/fifty, we suggest you treat it as residential. 

A home purchase loan is a loan secured by and made for the purpose of purchasing a dwelling. The dwelling that is being purchased and the dwelling that is security for the loan do not have to be the same dwelling. Also, it does not matter whether the lien that the institution is taking is a first mortgage or a junior mortgage. If the proceeds of your loan will be used, in whole or in part, for the purchase of a dwelling and your loan will be secured by a dwelling, the loan is reportable as a home purchase loan. A loan or a series of loans by the same institution for the initial construction and permanent financing of a dwelling is a purchase loan. 

A refinancing is a new obligation that satisfies an existing obligation by the same borrower in which both the existing obligation and the new obligation are secured by liens on dwellings. If an institution makes a loan secured by a dwelling and all or a part of the loan will be used to pay off an existing loan, whether to your institution or to another lender, secured by a dwelling, it is a refinancing. As with a purchase loan, the new loan does not have to be secured by the same dwelling that secures the loan being paid off, and it does not matter whether the lien securing your mortgage is a first or a junior lien or whether the loan being paid off is a first or a junior lien.  

A home improvement loan is a loan where the proceeds will be used, in whole or in part, for repairing, rehabilitating, remodeling or improving a dwelling or the real property on which it is located. If the proceeds of a loan will be used to put a new roof on a home, that is a home improvement loan. If the proceeds of a loan will be used to resurface a driveway, that is a home improvement loan. Even though it does not improve the structure itself, it is an improvement to the land on which the structure stands. 

One quirk with home improvement loans: If the loan is secured by a dwelling, whether or not it is the dwelling being improved, it must be reported. If it is not secured a dwelling, it is reported only if the institution “classifies” it as a home improvement loan. An institution classifies a loan as home improvement if it reports it on its call report as home improvement or if it has coded the loan as home improvement on its books or has done something else such as color-coded the file to show that it is a home improvement loan. Most institutions do not code or identify home improvement loans that are not dwelling secured as home improvement loans and therefore do not report them. 

Now, the exceptions to the rules. If the rules did not have exceptions, compliance would be really easy, and I would probably not have a job. The first exception is that you do not report temporary financings. The normal examples used of a temporary financing are construction and bridge loans. A bridge loan is where a person is purchasing a home and has not yet sold his or her existing home and needs short term financing until the existing home is sold and the person will then obtain permanent financing. A temporary financing is a financing that a person will utilize “temporarily” until some condition is satisfied, such as the completion of construction of a new home, and that person will then obtain permanent financing to repay the temporary financing. 

Just because a loan is short term does not mean it is temporary.  For example, if I borrow $10,000 to re-carpet my home and I will repay the loan in 12 equal monthly payments, even though the loan is fairly short term, it is not temporary.  It is the only financing I will have. The question is, what is the anticipated source of funds to repay the loan? If repayment is a long term financing that will be made to the same borrower, the loan that you are making is temporary.  If an investor purchases a home with the intent of refurbishing it and then quickly reselling it, what the regulators refer to as a splash and dash loan, your loan to accommodate that transaction is not a temporary financing because the source of repayment is anticipated to be the sale of the property.  The investor’s buyer may get a financing that will be used to repay your financing, but the new financing will not be to the same borrower. 

The second exception is what is called the broker rule. You do not report an application that you receive unless either the applicant withdraws the loan before you make a credit decision or if you do not make a credit decision. For example, if you send the application to your secondary market sources and one of them agrees to make the loan, you did not make a credit decision, so you do not report the application. On the other hand, if all of your secondary market sources deny the loan and you deny the loan because you could not find a home for it, you do report the denial. You made a credit decision; you denied the loan. 

I will do another column on HMDA reporting soon to discuss other aspects of the reporting requirements.