Thursday, July 20, 2017

Record Retention: Evidence of Compliance under TILA

We are going paperless, but we are unsure about retaining documents under the Truth in Lending Act, since we know that regulatory enforcement requirements may cause us to hold on to evidence. That goes along with our concerns about retaining paper copies, too. You may have answered a question like this one before, but we are still unsure of what evidence we need to retain to show compliance. So, we want to know what is the timeline for retaining documents beyond the required time required in case of regulatory enforcement against us? Also, must we keep paper copies as evidence of compliance?

You have asked a complicated question about regulatory enforcement parameters, with respect to record retention. Because you have framed your question in the context of the Truth in Lending Act (TILA), this response will be narrowed to Regulation Z, the implementing regulation of TILA.

Except with respect to advertising, creditors must retain evidence of compliance with Regulation Z for a period of two years after the date the disclosures are required to be made or action is required to be taken. Enforcement of TILA, however, may require the creditor to retain records for longer periods necessary to carry out enforcement responsibilities and administrative actions.

In effect, this means that administrative agencies responsible for enforcing a subject regulation may require creditors under their jurisdictions to retain records for a longer period, if necessary to perform their enforcement responsibilities. [12 CFR § 226.25(a)]

As to paper retention, in terms of adequate evidence of compliance, actual paper copies of disclosures or other business records are not absolutely necessary to be retained. Evidence may be retained on microfilm, microfiche, computer programs, or by any other method that reproduces records accurately.

As a matter of fact, the creditor needs to retain only enough information to reconstruct the required disclosures or other records. By way of example, the creditor does not need to retain each open-end, periodic statement for purposes of complying with record retention of a home-equity plan's periodic statement, as long as the specific information on each statement can be retrieved. In other words, written procedures for compliance with the disclosure requirements and a sample periodic statement represent adequate evidence of compliance. [12 CFR Supplement I to 226, Official Staff Interpretations, § 226.25(a)-2]

Jonathan Foxx 
Managing Director

Thursday, July 13, 2017

Credit Reporting Agency Investigations

We received a notice from Transunion that our reported information is being disputed by the consumer. Transunion has contacted us to obtain information about the disputed reference. But we are not sure what steps Transunion is taking in its investigation. What are the procedures Transunion follows if a consumer disputes the information? What are the procedures we should be following in response to Transunion’s investigation?

Transunion is one of several consumer reporting agencies (“CRA”). If you furnished information about a consumer to a CRA and the consumer disputes the accuracy or integrity of the information contained therein, the following procedures should be followed in response to the CRA’s investigation.
  1. Conduct an investigation with respect to the disputed information;
  2. Review all relevant information provided by the CRA;
  3. Report the results of the investigation to the CRA;
  4.  If the investigation finds that the information is incomplete or inaccurate, report the results to all other CRAs to which you furnished the information and that compile and maintain files on consumers on a nationwide basis; and
  5. If an item of information disputed by the consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation, for purposes of reporting to a CRA only, as appropriate, promptly:

a.       Modify the item of information;

b.       Delete the item of information; or

c.       Permanently block the reporting of the item of information. [15 USC § 1681s-2(b)(1)]

It is important to note that there is a timeline requirement. You must complete the required investigations, reviews, and reports before the expiration of the time period applicable for the CRA to complete actions required under the Fair Credit Reporting Act (FCRA) with respect to the information. [15 USC § 1681s-2(b)(2)]

This process is called a “reinvestigation” and the timeline is incumbent on the CRA, which conducts it free of charge, in order to determine whether the disputed information is inaccurate and records the current status of the disputed information, or deletes the item from the file, before the end of a 30-day period beginning on the date on which the CRA receives the notice of the dispute from the consumer or reseller.

As to extensions to the reinvestigation timeline, the 30-day period may be extended for not more than 15 additional days if the CRA receives information from the consumer during the 30-day period that is relevant to the reinvestigation, except this would not apply where, during the 30-day period, any reinvestigation of the information is found to be inaccurate or incomplete or the CRA determines that the information cannot be verified. [15 USC § 1681i (a)(1); 15 USC § 1681i(a)(2); FCRA § 611(a)(1)]

I strongly recommend that you have policies and procedures in place that set forth your obligations regarding how best to respond to a CRA investigation regarding a consumer dispute of information contained in the credit report. If you need assistance, please let us know.

Jonathan Foxx
Managing Director

Thursday, July 6, 2017

Affiliate Marketing: Eligibility Information

One thing we have always been confused about is how we can use eligibility information from affiliates. The part about affiliate marketing that particularly confuses me is if we do not use eligibility information from an affiliate, but the affiliate uses its own eligibility information to market on our behalf. So, our question is, if we do not use eligibility information from an affiliate, but the affiliate uses its own eligibility information to market on our behalf, is the marketing that the affiliate does on our behalf covered by affiliate marketing provisions?

I know this may seem somewhat complicated, but it is more straightforward than you think. If certain conditions are satisfied, the affiliate marketing provisions would not apply. But the details, like so much else, are important to consider.

So long as a financial institution does not use eligibility information in a manner that would constitute the making of a solicitation for marketing purposes, such solicitation is not covered by the affiliate marketing provisions where:

1.   The affiliate of an institution uses its own eligibility information that the affiliate obtained in connection with a pre-existing business relationship it has or had with the consumer to market the institution’s products or services to the consumer; or,
2.   The affiliate of the institution directs its service provider to use the affiliate’s own eligibility information that the affiliate obtained in connection with a pre-existing business relationship it has or had with the consumer to market the institution’s products or services to the consumer, and the institution does not communicate directly with the service provider regarding that use of the information. [12 CFR § 334.21(b)(4); 16 CFR § 680.21(b)(4); 12 CFR § 222.21(b)(4); 12 CFR § 41.21(b)(4); 12 CFR § 717.21(b)(4)]

One observation is worth considering: the ability of a financial institution to have an affiliate use the affiliate’s own eligibility information, as described above, to market the products or services of the financial institution provides a significant alternative to certain standard notice and opt out procedures.

Affiliate marketing rules of the federal financial institutions regulators and the FTC specify additional requirements regarding the involvement of service providers in a solicitation in order to avoid having the solicitation be subject to the affiliate marketing provisions. Refer to the FTC’s affiliate marketing rules for more details. [12 CFR § 334.21(b)(5); 16 CFR § 680.21(b)(5); 12 CFR § 222.21(b)(5); 12 CFR § 41.21(b)(5); 12 CFR § 717.21(b)(5)]

Jonathan Foxx
Managing Director 
Lenders Compliance Group

Thursday, June 29, 2017

Consumer Incentive Campaigns

As a lender, we would like to run a promotion whereby we offer to reimburse the borrower the cost of the appraisal at closing. We would like to know if this is permissible and if there are any parameters that should be considered with respect to such a promotion. If the program is permissible, is it possible to deduct the cost of the appraisal from the individual loan officer’s compensation?

With respect to your first question, neither the Real Estate Settlement Procedures Act and its implementing regulation, Regulation X, nor any other regulation prohibits a lender from “incenting” a consumer to do business with the lender, so long as the “thing of value” (in the case the lender credit for the appraisal charge) is not in exchange for referrals. [12 CFR § 1024.14(g)(1)] 

As to who pays for it (company vs. loan officer), with respect to a forward mortgage or a fixed rate reverse loan, the lender must pay for it as otherwise it would be a reduction in the compensation due to the loan officer which is not permissible. [12 CFR § 1026.36(d)(1)] As the Truth-In-Lending Act’s loan originator compensation rule does not apply to reverses structured as open-end credit, in those instances, it is permissible for the loan officer to reduce his compensation to cover the credit. [12 CFR § 1026.36(b)]

In discussing the parameters of promoting such a program, consideration should be given to whether the program will be offered to all potential applicants or whether it is limited to a certain group of applicants.  If the latter and the program results in a disproportionate number of applicants in non-protected classes receiving the credit as opposed to those in protected classes, the lender may be facing a fair lending issue.

Listed below are additional items to consider in setting forth the parameters of such a promotion:
  • Ensure it is clear that the offer is for a closing credit only. If the loan does not close and fund, there is no credit or refund to the applicant for the appraisal fee. 
  • Is the amount of the credit limited in any manner? For example, credit for appraisal fee not to exceed $500, with the borrower being responsible for any amount in excess of $500.  Also, ensure that it is clear the credit is only for the actual cost of the appraisal; if the appraisal charge is less than $500, the borrower does not receive the difference between $500 and the appraisal charge.
  • Set forth the term of the promotion, including whether the consumer must apply by a certain date or close the loan by a certain date. 
  • If there is a certificate that must be physically presented in order to obtain the credit, that requirement should be stated.
  • Consider the loan programs to which the offer applies. Does it only apply to purchase money mortgages? Refinances?
  • Set forth limitations as to the availability of the program to only new customers, if applicable.
  • Consider whether the offer can be used in conjunction with any other loan offer.
  • Be clear that the offer is not redeemable for cash. 

Of course, in advertising the promotion a lender needs to include the lender’s NMLS # and state licensing information, and give consideration to the following “typical” general disclosures:
  • Programs, rates, terms, and conditions are subject to change without notice.
  • Certain restrictions may apply.
  • All approvals subject to underwriting guidelines.
  • Not all applicants will qualify. 

And, if the advertisement discloses the amount or percentage of down payment for a credit sales transaction, the number of payments, the period of repayment, the amount of any payment or amount of any finance charge, then the lender must also disclose the following [12 CFR § 1026.24(d)]:
  • The total down payment as a dollar amount of percentage.
  • Terms of repayment.
  • The “annual percentage rate” using that term.
  • If a variable rate loan, a statement that the rate may change. 

As in all advertising, in promoting a lender closing credit offer, the lender must also ensure that the advertisement meets not only federal regulatory requirements but any additional state laws and regulations. 

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, June 22, 2017

Builder Incentives

We have an Affiliated Business Arrangement (AfBA) with a homebuilder. The builder currently discounts the purchase price of its homes if the buyer uses our company to finance the purchase. If the buyer chooses to use another mortgage company, there is still a discount, but it is lower. The builder, who is the majority owner of our company, now wants to offer discounts only to those buyers who use our company to finance the purchase. Is this a compliance problem? 

The issue of builder incentives and preferred and/or affiliate lenders continues to be a controversial one. There are two sides (at least) to the argument. On the pro-builder side is the assertion that a preferred lender or affiliated lender allows for better coordination between lender and builder, and thus a smoother, more predictable financing process, thereby improving the overall experience for the consumer. 

The counter to this argument is that, even if there is no express “requirement” for the buyer to use the builder’s lender affiliate, as a practical matter the buyer is being “required” to do so, in violation of the AfBA exception to RESPA Section 8 (12 U.S.C. §1024.15), one of the conditions of which is that, with limited exceptions:  “No person making a referral has required (as defined in 12 U.S.C. § 1024.2) any person to use any particular provider of settlement services or business incident thereto…” (Emphasis added.) (12 U.S.C. §1024.15(B)(2)). Critics also argue that the builder is “steering” the consumer to the builder’s preferred or affiliate lender, thus preventing the consumer from shopping in violation of anti-steering provisions.

Much depends on the definition of “required use,” which is found in 12 U.S.C. §1024.2 is as follows:

“Required use means a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.” (Emphasis added.)

Some builders try to address this issue by having a list of preferred lenders. To one degree or another, however, that may still thwart the consumer from shopping outside that list. By excluding other mortgage companies from the builder incentive, the risk of a RESPA violation increases because it could be argued that such exclusivity of the incentive is a de facto “requirement.” 

Friday, June 16, 2017

Threatening Legal Action to Collect a Debt

We were recently collecting a debt from a consumer on behalf of a creditor. We threatened the consumer with legal action if the debt wasn’t paid. Our client, the creditor, told us to stop doing this immediately. But all we did was to threaten legal action if the consumer did not pay the debt. Are there restrictions on threatening legal action when we are trying to collect a debt?

In the Fair Debt Collection Practices Act (FDCPA), there is a section entitled “false or misleading representations.” [15 U.S. Code § 1692e] Under this section, asserting that actions will be taken that are not legally permitted or not intended are barred from communications with consumers to collect a debt. [15 U.S. Code § 1692e(5)]

This prohibition actually overlaps somewhat with another prohibition in this same section, which states:

"The representation or implication that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action." [15 U.S. Code § 1692e(4)]

Threats of legal action are prohibited by the FDCPA in collecting a debt. Even the mere implication of legal action can be a violation. This prohibition includes any such threats that are (1) beyond the debt collector’s legal or contractual authority; (2) not intended by the debt collector when the statement is made; (3) not imminent as stated by the debt collector; or (4) not likely based on particular circumstances known to the debt collector. [FTC Staff Commentary on FDCPA § 807(5)]

From the statutory point of view, examples of actions that are beyond the debt collector’s legal or contractual authority include threatening a suit that is time-barred or threatening a suit that may only be brought by the creditor or other third party. [Idem, et sequi]

It should be noted that the prohibition also applies to threats or implications of legal action by a third party, such as the creditor. A threat or implication that a creditor will take action would violate the FDCPA unless the debt collector has reason to believe, at the time the statement is made, that such action will be taken.

Do not assume that the threat is just meant to instigate the payment with no consequences to the creditor for such statements. The FDCPA is interpreted under the “least sophisticated consumer” standard, which means that the consumer is expected to interpret the threat as implying the legal action is intended, imminent, or being pursued. The debt collector should not state or imply remarks such as (1) garnishment of wages is available upon obtaining judgement, (2) the debt collector has the right to sue, or (3) further legal action has been recommended. These types of statements can lead to violations of the FDCPA’s prohibition against false and misleading representations.

So, as a general proposition, the action stated in a communication to the consumer must be legal and there must be a reasonable likelihood, at the time the statement is made, that such action will be taken. Determining what is a “reasonable likelihood” can be a challenge. A generic proposition would be that an action may be reasonably likely if such action is frequently taken by the debt collector or creditor in similar circumstances – but, if the debt collector is aware of circumstances that would make such action unlikely in the particular case, a threatening statement would violate FDCPA.

As to determining intent or the lack thereof in threats made to a consumer where collecting a debt is taking place, this is a tough area of the law to prove to the satisfaction of a court; however, lack of intent may be established in the following ways:
  1. if the debt collector or creditor has a history of not pursuing the action under the particular circumstances;
  2. if the debt collector made the threat before any required processes for determining whether a lawsuit is appropriate; or
  3. if certain circumstances exist that would make the action unlikely, such as a small amount of debt. 

Over the years, we have encountered certain instances that demonstrate violations derivative of the foregoing communications, such as those caused by falsely threatening to initiate a lawsuit, threatening to report a debt to a credit bureau if the debt collector does not intend to (or is not otherwise permitted to do so), or threatening to assess a collection fee for nonpayment, if such a fee is unlawful.

Jonathan Foxx
Managing Director 
Lenders Compliance Group

Thursday, June 8, 2017

Managing Risk of Non-QM Mortgages to Self-Employed Borrowers

How do I offer Non-QM mortgages to Self-Employed Borrowers in my local market and still manage the risks?

There are two main risks to address. First is the legal/regulatory risk. I am forced to defer into the future the discussion of how to manage this risk. There are no clear answers due to the lack of any state and federal regulatory enforcement actions or case law and judicial precedents with Non-QM loan products designed for the Self-Employed. The issue arises from the subset of Self-Employed Borrowers who are unable or unwilling to submit 2 years of 1040s and sign a 4506T for lenders to verify their income using the traditional methods as outlined in QM Ability to Repay (ATR) regulations.

So that leaves us with the second risk, the one risk we can manage today: the credit risk. Let's begin by defining in our credit policies the benchmark mortgage risk, using the average rate of foreclosure to compare and adjust the risk of foreclosure to keep this product within acceptable risk levels. Your benchmark product is a 30-year fixed rate loan to finance the purchase or rate & term refinance of a single family, detached property with a max 80% LTV/CLTV, a FICO Floor of 700, a max DTI of 43% (or less), full documentation as defined by Ability to Repay (ATR) regulations, and 3 months of cash reserves. This loan will have an average foreclosure rate of 1.3%. [Moody's Analytics, March 11, 2011]

And, speaking of "pricing," use your Fannie/Freddie 30-year fixed rate pricing.

The challenge is how do you manage the risk of loss in foreclosure when you waive the requirement for 2 years 1040s and a signed 4506T? The answer is you manage it by managing the layering of risk for this loan product. This is done by adjusting your credit policy for this product to arrive at an expected foreclosure rate at or below your benchmark loan policy. This Alt Doc product could be called a "24-month Bank Statement Loan" or a "Collateral Loan". When you move to Alt Docs, the incremental foreclosure risk increases 3 times or 300% to 3.9%; a level that is unacceptable. You want to lower this risk to below 1.3%, your benchmark average foreclosure rate.

At 70% LTV/CLTV, the average foreclosure rate is 0.2%. [Moody's Analytics, March 11, 2011] With Alt Docs, the average foreclosure rate increases 3 times that average, to 0.6%, well below the benchmark product risk profile defined in your credit policy above. An average foreclosure rate of 0.6% vs 1.3% for the benchmark leaves you a good margin for error.

Three additions to this Alt Doc credit policy are: 1) a max 36% DTI, to allow for greater borrower discretionary income to support a higher standard of living, as many of these loans will be Jumbo's, 2) a 6 months cash reserves, and 3) a max 65% LTV/CLTV (viz., I have heard this number cited many times over in my mortgage banking career as "the LTV breakeven at foreclosure").

So, let's recap this new credit policy for your "self-employed alt doc loans": owner-occupied, single family, purchase or rate & term refinance, max 65% LTV/CLTV, 700 FICO Floor, max 36% DTI, and 6 months reserves. You may also want to ask the borrower to sign a well worded "Affidavit of Borrower's Ability to Repay" as part of a future legal defense, if needed.

Market this product to your self-employed customers and in your local lending market(s). It is best to price this product to your benchmark full doc product above. Why? We have managed the risk with credit policy, not pricing. And, hold these loans in your portfolio. Or, as I like to say, "eat your own cooking".

If you do not have a loan portfolio (mortgage banker or broker), you will need to price this loan at 100-200 BP higher interest rate, based on your investor's pricing, and follow that investor's product guidelines (max LTV of 50-60%?). You will need balance sheet $$$ Capital for your 5% "risk retention," as these loans will sooner or later be sold into the Wall Street capital markets in a Private MBS.

Make sure your warehouse bank is on board, unless the loan is approved, closed, and funded by the investor (including the LE & CD). Set up a loan loss reserve (min. 20 BP of the UPB?). Lastly, negotiate the R&W in the Purchase and Sale Agreement limiting your fraud/misrepresentation liability to only the documents you verify. Otherwise you are making a 30-year R&W and will be liable for legal costs and any foreclosure losses (as we have seen, property values can rise and fall over time, changing your risk profile). This product will be a huge challenge for non-depositories.

Remember, you still have a yet-to-be-quantified regulatory and legal risk. Happy lending!

Ben Niles
Director/Client Relations
Lenders Compliance Group

Thursday, June 1, 2017

Home Equity Plans – Credit Limits

We offer home equity plans in our loan product selection. In some instances, we want to prohibit the consumer from increasing credit. We may also want to reduce the credit limit. When are we allowed to prohibit a consumer from increasing the credit limit under a home equity plan? When can we reduce the credit limit? Can we specify the default requirement to prohibit credit extensions?

This question has some complicated factors that impact a comprehensive answer. 

However, it is possible to outline six bases where a creditor may prohibit the consumer from increasing the credit limit or the creditor may reduce the credit limit in any given period where:
  1. The value of the dwelling securing the plan declines significantly below the dwelling’s appraised value for purposes of the plan;
  2. The creditor reasonably believes the consumer will be unable to fulfill the repayment obligations of the plan due to a material change in the consumer’s financial situation;
  3. The consumer is in default of any material obligation under the agreement;
  4. The creditor is precluded by government action from imposing the APR provided for in the agreement;
  5. The priority of the creditor’s security interest is adversely affected by government action so that the value of the security interest is less than 120% of the credit line; or
  6. The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice. [12 CFR § 226.5b(f)(3)(vi)]
With respect to a default, a creditor may specify events that would qualify as a default of a material obligation for purposes of the ability to prohibit additional extensions of credit or reduce the credit limit applicable to an agreement for a home equity plan. [12 CFR Supplement I to 226, Official Staff Commentary § 226.5b(f)(3)(vi)-8]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Friday, May 26, 2017

Self-Test Privilege

We have a question about self-testing involving compliance with the Equal Credit Opportunity Act. In a recent compliance meeting, we raised some questions about the nature of the self-test. These are the questions. What is a self-test and is it voluntary? What is the self-test privilege?

A self-test is designed and used specifically to determine the extent or effectiveness of a creditor's compliance with the Equal Credit Opportunity Act (“ECOA”). To qualify for the self-test privilege, a self-test must be sufficient to constitute a determination of the extent or effectiveness of the creditor's compliance with the ECOA and Regulation B, its implementing regulation.

The results of a self-test that a creditor voluntarily conducts (or authorizes) are entitled to the self-test privilege under certain circumstances. Data collection required by law or by any governmental authority is not a voluntary self-test. [12 CFR Part 1002.15(a)(1)]

Because the self-test privilege may only be asserted if the review procedures are designed and performed in accordance with appropriate review criteria, many financial institutions retain auditors, such as Lenders Compliance Group, to conduct them.

The self-test privilege applies to the report or results of the self-test, data or factual information created by the self-test, and any analysis, opinions, and conclusions pertaining to the self-test report or results. It also covers workpapers or draft documents as well as final documents. But the self-test privilege does not apply to information about whether a creditor conducted a self-test, the methodology used or the scope of the self-test, the time period covered by the self-test, or the dates it was conducted; or, loan and application files or other business records related to credit transactions, and information derived from such files and records, even if the information has been aggregated, summarized, or reorganized to facilitate analysis. [12 CFR Part 1002.15(b)(2) and (3)]

A self-test is only permitted the privilege if it was designed and used for a specific purpose. A self-test that is designed or used to determine compliance with other laws or regulations or for other purposes is not privileged. If a self-test is designed for multiple purposes, only the portion designed to determine compliance with the ECOA is eligible for the self-test privilege.

Under Regulation B, the self-test privilege applies only if the creditor has taken or is taking appropriate corrective action. To qualify for the self-test privilege, appropriate corrective action is required when the results of a self-test show that it is more likely than not that there has been a violation of the ECOA. The self-test privilege also is available when the self-test identifies no violations.

In some cases, the issue of whether certain information is entitled to the privilege may arise before the self-test is complete or corrective actions are fully under way. This would not necessarily prevent a creditor from asserting the self-test privilege. In situations where the self-test is not complete, for the privilege to apply the lender must satisfy the regulation's requirements within a reasonable period of time. To assert the self-test privilege where the self-test shows a likely violation, the rule requires, at a minimum, that the creditor establish a plan for corrective action and a method to demonstrate progress in implementing the plan. In effect, creditors must take appropriate corrective action on a timely basis after the results of the self-test are known.

A creditor's own determination about the type of corrective action needed, or a finding that no corrective action is required, is not conclusive in determining whether regulatory requirements have been satisfied. If a creditor's claim of the self-test privilege is challenged, an assessment of the need for corrective action or the type of corrective action that is appropriate must be based on a review of the self-testing results, which may require an in camera inspection of the privileged documents. [12 CFR Part 1002.15(a)(2), Official Interpretation]

Still, an assertion of any other privilege that may also apply is not necessarily precluded. A creditor may assert the privilege established under Regulation B for self-tests, but may also assert any other privilege that may apply, such as the attorney-client privilege or the work-product privilege. Self-testing data may be privileged for self-tests whether or not the creditor's assertion of another privilege is upheld. [12 CFR Part 1002.15(a)(3), Official Interpretation]

Jonathan Foxx 
Managing Director 
Lenders Compliance Group

Thursday, May 18, 2017

Loan Officer Compensation Plans – Some Basic Concepts

We are in the process of reviewing our loan officer compensation plans, which means we are also looking closely at the employment agreements. I realize that the details in this area are very complicated, but would it be possible to offer some basic concepts that should be considered in our review analysis for the employment agreements?

Under the Truth in Lending act and its implementing Regulation Z, the Fair Labor Standards Act and the Interagency Guidance on Incentive Compensation Plans, there are many factors that must be considered in such a review. These regulations, in particular, have all contributed to complicating the employment contract for a mortgage loan officer (“MLO”). State employment law also applies. In developing compensation plan guidelines for employment agreements, it is helpful to work with a risk management professional.

Here are some concepts every financial institution should consider when structuring an MLO employment agreement:
  • Do not impose a monetary penalty on an MLO for failing to follow policy (i.e., collecting all required fees) on a per loan basis. That amounts to varying compensation based upon a term of the transaction. Instead, use a semi-annual review to adjust commission rates positively or negatively.
  • If the commission rates paid to MLOs vary, make certain those differences in compensation are not reflected in the rates the borrowers are charged.
  • Make sure that each MLO receives at least the minimum wage and that each MLO is paid for overtime appropriately. Require MLOs to submit records for hours worked. Maintain the records.
  • Protect the institution’s financial records and intellectual property by incorporating strict confidentiality requirements and non-solicitation provisions into the employment agreement.
  • Consider the inclusion of an arbitration clause to settle disputes, and in so doing minimize the potential for class action litigation.
  • Incorporate qualitative factors into the employment agreement so that compensation is not tied exclusively to volume. Incentive compensation based exclusively on quantitative factors is subject to regulatory criticism. 

In the review process, it is critically important not only to consider the applicable federal and state regulations but also conduct a thorough review of their commentaries and supplementary information.

Jonathan Foxx
Managing Director 
Lenders Compliance Group

Thursday, May 11, 2017

Appraiser Selection and Management

If a lender utilizes an Appraisal Management Company (AMC) for the selection of an appraiser, is the lender still responsible for ensuring the appraiser holds an active state license or certification?

Yes. Lenders must ensure the state license or certification is active as of the date of the appraisal. The alignment with an AMC does not absolve the lender of the responsibility of ensuring that the AMC, a vendor and service provider, is operating within the confines of the lender’s vendor management policies.

Whether you instruct the processors and underwriters to check the status of the appraisers on a loan level basis or you institute a master list of appraisers with their respective license or certification expiration dates, this re-certification is required.

The lender should review the AMC annually, the requirements for which would be in the vendor management policy. More information about vendor compliance is available at our affiliate website, Vendors Compliance Group.

Brandy George
Director/Underwriting Operations Compliance
Executive Director/LCG Quality Control

Thursday, May 4, 2017

Obligation to Transfer Appraisal

In a situation where a borrower switched from Lender A to Lender B and an appraisal was previously performed for Lender A, can Lender B accept that appraisal? Is Lender A under any obligation to transfer the appraisal to Lender B? 

If the situation involves an FHA/VA/FHA/Federal Housing Authority loan, Lender A must, at the borrower’s request, transfer the case to the Lender B. Note that FHA does not require that the client name on the appraisal be changed when it is transferred to another lender.

If the situation involves a conventional loan, Lender A would have to release the appraisal (which it is under no obligation to do), and certify compliance with the Appraiser Independence Requirements.   

Note that in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP), a lender is not permitted to request that the appraiser change the name of the client within the appraisal report unless it is a new appraisal assignment. 

To effect a client name change, the Lender B and the original appraiser may engage in a new appraisal assignment wherein the scope of work is limited to the client name change. A new client name should include the name of the client (lender). As it is a new assignment, the appraiser is entitled to charge another fee.

Below are some FAQs from Fannie and Freddie on the topic.

Fannie Mae: Appraiser Independence Requirements Frequently Asked Questions
November 2010 (Reposted April 2017 for formatting)

Transfer of the Appraisal
Q37. May an appraisal be transferred to a lender from a correspondent lender and, if so, under what circumstances?
Yes. A lender may accept an appraisal from a correspondent lender that complies with AIR.

Q38. A mortgage broker submits a loan to lender A, which orders an appraisal. The broker later decides to submit the loan to lender B because it is offering better terms, or for another reason. May the appraisal obtained by lender A be used by lender B (assuming the mortgage broker has no control over or involvement in the assignment)?
Yes. A lender may accept an appraisal transfer from a different lender. However, the lender delivering the loan to Fannie Mae makes all representations and warranties that the loan complies with the requirements of the Fannie Mae Selling Guide and related documents. Lender A must be named as client on the appraisal report.

Q39. Lender A (an approved Fannie Mae Seller/Servicer) originates and closes a loan in its name, but sells it to lender B (another Fannie Mae approved Seller/Servicer), which in turn sells that loan to Fannie Mae. Is lender B under any obligation to obtain a new appraisal?
No. Lender B may buy a closed loan from Lender A and sell the loan to Fannie Mae without a new appraisal if Lender B can represent and warrant that any appraisal conducted in connection with the loan conforms to AIR.

Freddie Mac:  Appraiser Independence Requirements FAQs
November 2010

27. Can lenders accept appraisals transferred from another lender? 
A lender may accept an appraisal from a different lender if the appraisal is obtained in a manner consistent with AIR, and the lender receiving the transferred appraisal determines that the appraisal conforms to its own requirements and is otherwise acceptable. 

28. Can lenders accept an appraisal from an AMC specifically authorized by a different lender to act on its behalf?  
Yes. If the lender receiving the transferred appraisal determines the appraisal was obtained in a manner consistent with AIR that the appraisal conforms to the lender's requirements and is otherwise acceptable. 

29. May an appraiser update an appraisal for another lender? 
Yes. An appraiser is permitted to perform an update of an appraisal for another lender. 

30. What documentation is required during an appraisal transfer to demonstrate that the lender transferring the appraisal is complying with AIR? 
Each lender must develop its own documentation requirements to ensure compliance with AIR, based on its business model and processes. 

31. AIR allows Lender B to originate a loan using an appraisal transferred by Lender A if Lender B determines that the appraisal with written assurances that the appraisal was obtained in a manner consistent with AIR, conforms to Lender B's requirements for appraisals and is otherwise acceptable. Will Freddie Mac hold Lender B liable for remedies if it is discovered after the transfer that Lender A did not obtain the appraisal in a manner consistent with AIR?
Yes. As with all other representation and warranties under the Guide, Freddie Mac will hold Lender B, the lender who sold the loan to Freddie Mac, fully responsible for any violations of AIR and our Guide requirements.

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, April 27, 2017

Servicing Transfer Process: Borrower Payments

As part of our company’s efforts to build up the servicing side of our business, and as a hedge against the loss of income from a drop in refinance originations, we just acquired a servicing portfolio from another lender. I am confused about what our reporting obligations are under the Fair Credit Reporting Act (FCRA) with respect to borrower payments that may (or may not) have been made to the previous servicer during the servicing transfer process.  Can you give us any guidance on this issue?

Under FCRA, a “furnisher” of information to credit reporting agencies (1) shall not furnish any information relating to a consumer if the person “knows or has reasonable cause to believe that the information is inaccurate” and (2) has an affirmative duty to “correct” and “update” information it has previously furnished that is “not complete or accurate.” [15 U.S.C. §1681s-2(a)(1) and (2)]  

This can create significant challenges for subservicers or companies acquiring mortgage servicing rights (MSRs) from other lenders or servicers because the transfer of detailed borrower account information from one servicer to another typically does not occur instantaneously on the date that the servicing transfer becomes “effective.” Moreover, borrowers’ payments may be in transit during the transfer process or sent to the former servicer because the borrower has simply failed to process the new servicer’s instructions.  

This issue is addressed in Regulation X of RESPA [12 CFR 1024.21(d)(5)] which provides that, during the 60-day period beginning on the effective date of transfer of the servicing of any mortgage servicing loan, if the transferor servicer (rather than the transferee servicer that should properly receive payment on the loan) receives payment on or before the applicable due date (including any grace period allowed under the loan documents), a late fee may not be imposed on the borrower with respect to that payment and the payment may not be treated as late “for any other purposes.” (Emphasis added.)

This creates an FCRA reporting issue for the new servicer or subservicer because, during the first 60 days after the servicing transfer becomes effective, the new servicer cannot automatically assume that a loan is delinquent just because the new servicer itself has not received payment. It is not uncommon for servicers to suspend credit reporting during that 60 day period to wait for payments from the former servicer. But what happens after that?

The new servicer’s affirmative duty to “correct” and “update” information it has previously furnished that is “not complete or accurate” [supra] now requires that any previous credit reporting be revised and updated to show any payments actually received (or not received) by the previous servicer during the 60 day period. This is not something the servicer can just ignore. If the “furnisher” (servicer) becomes aware that payments were in fact received during that period by the previous servicer, the furnisher now “knows” or “has reason to believe” that information previously reported (i.e., absence of payment history because reporting was suspended during the servicing transfer) is inaccurate or incomplete because it now has evidence in its files that payments were in fact received. That information must be reported.

In that regard, even though there is no Federal private right of action for violation of these provisions, there can be civil liability to regulatory enforcement authorities for both willful and negligent non-compliance with these requirements. [See 15 U.S.C. §1681n and o, not to mention possible violation of the “Unfair, Deceptive, Abusive Acts or Practices” (UDAAP) provisions of the Dodd-Frank Act [12 U.S.C. §§ 5481, 5531 & 5536(a)].

Moreover, the examination guidelines of the Consumer Financial Protection Bureau (CFPB) now include reviews for compliance with the new Mortgage Servicing Rule (Rule) that went into effect on January 10, 2014 imposing additional obligations on servicers. The provisions of that Rule, and related commentary pertaining to mortgage servicing transfers, can be found at 12 CFR 1024.33, 12 CFR 1024.38, and 12 CFR 1024.41.2 and are summarized in CFPB Compliance Bulletin 2014-01, issued on August 14, 2014 to help servicers with these issues. A copy of this Bulletin and the applicable regulations can be found on the CFPB website ( 

Among other things, the Rule requires servicers to maintain policies and procedures that are “reasonably designed” to achieve the objectives of facilitating the transfer of information during mortgage servicing and of properly evaluating loss mitigation applications. [12 CFR 1024.38(a), (b)(4)]

As you can see, this is a highly technical area. So do not hesitate to call us or your attorney if you need help.

Michael Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group
Servicers Compliance Group

Friday, April 21, 2017

Human Resources Compliance

Our bank is undergoing an internal review of its human resources department. I know you conduct such reviews and would like to know some of the primary regulations involving human resources compliance. There are experts in this kind of compliance; however, they seem to be mostly interested in handling litigation issues, while we are looking for a way to draft policies and procedures. What are some important federal regulations involving human resources? What review issues should we consider in our policy statements?

Human Resources (“HR”) compliance is a specialization that very few risk management firms offer. Ours does! Unfortunately, the legal community tends to focus on the litigation arising from compliance failures involving human resources, rather than providing reasonably-priced, compliance reviews of the HR function. Our firm actually has a Director of Human Resources Compliance, an expert in the regulatory requirements of human resources. We focus on guidance and reviews that seek to prevent litigation!

HR is the term that describes individuals who comprise the workforce of an organization. Human resources compliance, or "HR compliance," or sometimes colloquially referred to as "HR," is the term that applies to the department and functions within an organization, the administrative responsibility of which is charged with implementing strategies and policies relating to the management of individuals associated with the organization.

In many ways, human resources compliance is a central feature of a financial institution’s overall compliance function. This is intuitively obvious, given that local, state, and federal employment laws all play a role in human resources. Indeed, HR must be familiar with a wide array of different statutory and regulatory authorities to effectively and lawfully deal with company personnel.

Here are just two of the many federal regulations that affect HR compliance. Local and state statutes should also be included in any HR policy statement. 
  • Fair Labor Standards Act (FLSA): This is a federal statute that applies to employees engaged in interstate commerce or employed by an enterprise engaged in commerce or in the production of goods for commerce (unless the employer can claim an exemption from coverage).
  • National Labor Relations Act (NLRA), sometimes called the Wagner Act, which, as amended, is known as the Labor Management Relations Act (LMRA).

The foregoing regulations are but two of the vast array of regulations, at all levels of government, that involve HR.

HR compliance takes into consideration virtually all work functions amongst an institution’s rank and file. For instance, HR’s responsibilities in an institution include overseeing and managing duties related to hiring, firing, employee benefits, wages, paychecks, and overtime. 

A compliance review of the HR function should include how its many authorities extend to the oversight of workplace safety, privacy, preventing discrimination, prohibiting harassment, minimizing legal liability in the hiring and firing process, worker complaints, job protection, compensation, benefits, pensions, employee training, and labor relations.

Jonathan Foxx
Managing Director 
Lenders Compliance Group