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Thursday, April 28, 2016

Record Retention for Prescreened Credit Solicitations

QUESTION
Last year we had a prescreened credit campaign. Earlier this year, we had a banking examination and were scored down because we did not have all the record retention requirements for prescreened credit solicitations. In the case of the prescreened credit, what are the record retention requirements?

ANSWER
For specific information about prescreened solicitations, please consult the Fair Credit Reporting Act.

Under the Equal Credit Opportunity Act, for a period of twenty-five months after the date on which an offer of credit is made to potential customers in connection with a prescreened credit solicitation, the creditor must retain:
  1. The text of any prescreened solicitation;
  2. The list of criteria the creditor used to select potential recipients of the solicitation; and
  3. Any formal or informal correspondence related to complaints about the solicitation. [12 CFR § 202.12(b)(7); 12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.12(b)(7)-1] 
Regarding the requirement to retain information on any prescreened solicitation, a creditor complies with the record retention requirement if it retains a copy of each solicitation mailing that contains different terms, such as the amount of credit offered, annual percentage rate or annual fee. [12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.12(b)(7)-1]

In order to satisfy the requirement to retain the criteria used to select potential recipients, a creditor must retain the criteria used to determine the potential recipients of the particular solicitation, and the criteria to determine who actually will be offered credit. [12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.12(b)(7)-2]

With respect to the requirement to retain correspondence, a creditor may retain correspondence relating to complaints of consumers about prescreened solicitations in any manner that is reasonably accessible and is understandable to examiners. There is no requirement to establish a separate database or set of files for such correspondence, or to match consumer complaints with specific solicitation programs. [12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.12(b)(7)-3]

Jonathan Foxx
President & Managing Director 
Lenders Compliance Group

Thursday, April 21, 2016

TRID and Rental Property

QUESTION
The CFPB says the TRID rules apply to closed-end consumer transaction secured by real estate. If a customer purchases a 1-4 family dwelling for business investment purposes, does TRID or Regulation Z apply; and, more generally, how does TRID or Regulation Z apply to rental property financing?

ANSWER
Presumably, if this property will not be owner-occupied property, then TRID would likely not apply. Whether this is a TRID or non-TRID transaction, one should keep in mind that any transaction that is for a business/investment purpose is not subject to Regulation Z. [12 CFR 1026.3(a)]

Contrary to some of the guidance we have seen emanating from the CFPB, the Regulation Z Commentary sets forth some clear guidelines for determining loan purpose, where rental property is involved. The guidance turns on whether or not the rental property will be owner-occupied as well as the number of units involved.

Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. [Section 1026.3(a) – Comment 4] This includes, for example, the acquisition of a warehouse that will be leased or a single-family house that will be rented to another person to live in.

If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied and this special rule will not apply. For example, a beach house that the owner will occupy for a month in the coming summer and rent out the rest of the year is owner-occupied and is not governed by this special rule. [See Comment 3(a)-5, however, for rules relating to owner-occupied rental property.]

Section 1026.3(a) – Comment 5 addresses owner occupied rental property and states that if credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:
  • Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units; and
  • Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. 

As this statute defines dwelling to include 1 to 4 housing units, the right of rescission applies to credit extended for purposes other than acquisition. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in comment 3(a)-3.

To make your loan purpose determination, be sure to question the borrower’s occupancy intentions. In addition, be sure to verify whether the loan proceeds will be used to acquire the rental property or to make improvements.

Michael Goldhirsh
Executive Director/Vendors Compliance Group
& Director/Legal & Regulatory Compliance 
Lenders Compliance Group

Thursday, April 14, 2016

Proving Intent to apply for Joint Credit

QUESTION
I am an underwriter for conventional mortgage loan products. Our compliance officer tells me that I can’t use a joint financial statement as an application for joint credit under the ECOA. Is this so? Also, what exactly is a joint applicant and, while you’re at it, how am I supposed to prove the intent to apply for joint credit?

ANSWER
With respect to whether a lender may assume the application is for joint credit if an applicant submits joint financial information, such action would be a violation of the Equal Credit Opportunity Act (ECOA). A creditor may not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit. [12 CFR § 202.7(d)(1)] 

A joint applicant is someone who applies contemporaneously with the applicant for shared or joint credit. It does not refer to someone whose signature is required by the creditor as a condition for granting the credit requested. [12 CFR Supplement I, Part 202; Official Staff Interpretations § 202.7(d)(1)-2]

As to proving intent, indeed it is the case that a person’s intent to be a joint applicant must be evidenced at the time of application. Signatures on a promissory note may not be used to show intent to apply for joint credit. In contrast, signatures or initials on a credit application affirming the applicants’ intent to apply for joint credit may be used to establish intent to apply for joint credit. The method used to establish intent must be distinct from the means used by individuals to affirm the accuracy of information. For example, signatures on a joint financial statement affirming the veracity of information are not sufficient to establish intent to apply for joint credit. [12 CFR Supplement I, Part 202; Official Staff Interpretations § 202.7(d)(1)-3]

It is worth noting that the Uniform Residential Loan Application (URLA) specified by Fannie Mae and Freddie Mac includes a provision for signatures of applicants to ensure evidence of the intent to apply for joint credit.

Jonathan Foxx
President & Managing Director 
Lenders Compliance Group

Thursday, April 7, 2016

Exclusions to Qualified Written Requests

QUESTION
We were recently cited for not responding in a timely manner to a Qualified Written Request. We had thought the transaction was excluded from a response requirement. What are the exclusions to responding to this type of request?

ANSWER
In the context of mortgage servicing, the response request requirements of a Qualified Written Request (“QWR”) do not apply to (1) subordinate lien loans or (2) open-end lines of credit subject to TILA, whether secured by a first or subordinate lien. [24 CFR § 3500.21(a)]

A request does not constitute a QWR if it is delivered to a servicer more than one year after either the date of transfer of servicing or the date that the mortgage servicing loan was paid in full, as applicable. [24 CFR § 3500.21(e)(2)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group