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Thursday, September 21, 2017

Human Resources Strategies

QUESTION
How should Human Resources strategies relate to today’s challenges for financial services companies?

ANSWER
Over the past ten years of recovering from the financial crisis, companies still face challenges that can be supported with their HR policies and strategies. One of the challenges is damage to reputation and brand. 

Financial Services took a reputational hit during the financial crisis and is no longer an employer of choice. Consequently, employee engagement can be critical in retaining and attracting employees. Employee engagement is an important Human Resources strategy!

Reviews on sites such as Glass Door are explored, particularly by millennials, which is the fastest growing population in the workforce today. Millennials are now becoming the supervisors and managers in companies. Current employees who are engaged are more likely to post positive reviews, spread positive reputation by word of mouth or refer qualified applicants.

Employee disengagement happens over time and is often subtle. However, the signs are not subtle and must be recognized. Disengaged employees don’t perform their jobs well, are a negative influence on other staff, and often create conflicts in the work environment. Disengagement is often caused by a marked difference between employer and employee expectations. Surveys have shown that overall employee satisfaction is the lowest in two decades.

Some areas where employees communicate dissatisfaction are time wasted in unnecessary meetings; conflicts with other work teams; confusion regarding duties and responsibilities; inefficient processes and poor communication; and a marked difference between leadership’s perception and employees’ reality.

What does employee engagement look like?
  • Employees take pride in their work, evidenced in the quality performance that enhances productivity and provides exceptional customer service.
  • Employees view the company goal as a common goal and work together to accomplish the goals. They believe “We’re all in this together.”
  • Employees are loyal and have no plans to leave the company.
  • Employees understand and support the company’s mission during good and bad times.

What can an employer do to increase employee engagement?
  • Clearly communicate the company's mission and vision.
  • Employees are engaged when they understand the goals of the organization and their part in fulfilling the mission and vision. In this way, they feel they are part of the company’s success.
  • Provide clear expectations for employee behavior and results. 
  • This includes holding employees accountable for results and behavior.
  • Provide open and honest communication
  • Both good news and bad news should be communicated. Lack of communication can create fear and uncertainty and can lead to turnover. In times of uncertainty, it is often high performers who leave because they realize their market value.
  • Reward and Recognize
  • Ensure employees understand they are valued. Incentive plans are not the only way to reward employees.
  • Involve employees
  • When it is possible, engage the employees in decision making. This can be especially important to millennials who value a collaborative approach to work.
  • Provide work and life balance
  • Current workforces highly value having time for other pursuits besides work. Most employees no longer wish to continue working in an environment of continuous long hours and sustained feelings of overwhelming work responsibilities.
  • Understand the role of leadership
  • There is a direct correlation between engagement and leadership behaviors. Leaders who lead by example, openly communicate, and focus on employee well-being make a positive impact on employee morale, which increases employee engagement. The gap needs to close between leadership perceptions and employee realities. Leaders must have a vehicle for hearing employee concerns and recognizing when changes or improvement could be made. Skill development and training for managers to improve leadership behaviors should be available to every level of manager.

Employee engagement can be improved by incremental steps. The first step is embracing the concept of employee engagement and understanding the important role it plays in a company’s bottom line.

Kimberly Braman
Director/Human Resources Compliance 
Lenders Compliance Group

Thursday, September 14, 2017

Restricting Contact with Consumers

QUESTION
I have heard that there are only certain times of the day or evenings when a lender or servicer can contact a borrower. Additionally, I have also heard that there are certain things that must be communicated and certain things that cannot be communicated. This is confusing because I do not know what those things are and why they are necessary. Can you help me to understand this better? Also, can you tell me if this applies to anyone that is not a borrower, and who may just be loan shopping?

ANSWER
The questions posed here are directly part of multiple Consumer Protection Laws. Historically, consumers have dealt with much abuse in these areas, where some lenders and servicers have contacted them by telephone, unauthorized at times, calling at inappropriate hours, and the callers not truthfully identifying themselves, making serious threats to consumers or speaking to them in an abusive and/or profane manner. Through the years, there have been a tremendous number of lawsuits against lenders and servicers because of these abuses.

Many states have written laws which prohibit lenders and servicers from violating consumers in these ways. Federal laws have been written by all of the regulating entities, GSE’s and HUD to further afford protection to consumers in the areas where these abuses have taken place. Some of the regulating entities would include the Federal Reserve (FRB), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC), and the Federal Deposit Insurance Corporation (FDIC). There are other agencies who concur with protecting the consumers in this same manner, and the specific laws usually contain verbiage stating “the consumer;” therefore, this would apply to all consumers, whether or not they are your company’s borrower or a consumer who happens to be shopping for a loan.  

While an exhaustive list would be difficult to compile in its entirety, please find a short list of the highest risk areas and the most commonly cited in lawsuits and regulatory examination results. I am providing a list, not meant to be comprehensive, based on the following topics: Restrictions on Communications; Abuse/Harassment; False, Deceptive, or Misleading; and Unfair and Unconscionable Actions.       

RESTRICTIONS ON COMMUNICATIONS
  • Prohibits the making of any calls being made prior to 8:00 a.m. or after 9:00 p.m. in Potential Customers Time Zone, or at other inconvenient times to a consumer;
  • Prohibits repeated calls to third parties in connection to a consumer regarding any loan product;
  • Prohibits repeated calls to consumers;
  • Prohibits improper calls to a consumer at their place of business, if applicable;
  • Prohibits revealing a consumer’s personal information to any third parties;
  • Prohibits the continued calling of a consumer after receiving a “Cease Communication” Notice from Potential Customer, either verbally or in writing;
  • Prohibits contacting a consumer directly if known to be represented by any Attorney in any connection with the financial institution;
  • Prohibits making telemarketing calls using an artificial or prerecorded voice to residential telephones without prior express consent.
  • Prohibits making any non-emergency call to a consumer, using an automatic telephone dialing system (“auto-dialer”), or an artificial or prerecorded voice to a wireless telephone number without prior express consent.  (If the call to a consumer includes or introduces an advertisement or constitutes telemarketing, consent must be in writing. If an auto-dialed or prerecorded call to a wireless number is not for such purposes, consent may be oral or written. The FCC has concluded that the Telephone Consumer Protection Act (TCPA), which restricts telephone solicitations (i.e., telemarketing) and the use of automated telephone equipment, includes protections against unwanted calls to wireless numbers, thus encompassing both voice calls and text messages, including short message service (SMS) texts, if the call is made to a telephone number assigned to such service.
  • Prohibits the sending of unsolicited advertisements to telephone facsimile machines. The requirement for prior express consent and the facsimile must contain specific “opt out” instructions.

ABUSE/HARASSMENT
  • Prohibits falsely threatening illegal or unintended acts to a consumer;
  • Prohibits the use of any harassing, abusive and/or oppressive conduct to a consumer;
  • Prohibits utilizing obscene, profane, or abusive language to a consumer;
  • Prohibits any threats or violence to a consumer under any circumstance;
  • Prohibits the use of any language or action that materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; and
  • Prohibits the use of language or action that takes unreasonable advantage of:
  • a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service; 
  • a consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service; and 
  • a consumer’s reasonable reliance on a covered person (i.e., the consumer, themselves”) to act in his or her own and best interests.

FALSE, DECEPTIVE OR MISLEADING
  • Prohibits failing to Identify yourselves to a consumer as company employees;
  • Prohibits misrepresentation of loan character, amount, or status to a consumer;
  • Prohibits falsifying any information of any kind to a consumer;
  • Prohibits the act or practice which Misleads or is likely to mislead a consumer;
  • Prohibits the use of any language or action that may cause a consumer’s interpretation that is reasonable under the circumstances to become confusing and/or unclear; and
  • Prohibits the use of language or action that is misleading to a consumer, and results in a practice that is material. 

UNFAIR AND UNCONSCIONABLE ACTIONS
  • Prohibits any discussion involving unauthorized fees, interest and expenses to a consumer;
  • Prohibits the use of any language that would pressure or steer a consumer into a loan. 
  • Prohibits any unfair language or action to a consumer that causes, or is likely to cause, substantial injury to him/her;
  • Prohibits any unfair language or action to a consumer that results in the Injury that is not reasonably avoidable by him/her; and
  • Prohibits any unfair language or action where injury to a consumer has been sustained and is not outweighed by countervailing benefits to them.  

Michelle Leigh, CRCM, MBA
Director/Internal Audits and Controls
Executive Director/Servicers Compliance Group

Friday, September 8, 2017

Charging for an “Opt Out”

QUESTION
This is probably a strange question, but it came up in our review of the opt out procedures involving our CAN-SPAM policy. We would like to charge a fee when somebody does an opt out. We want certain requirements in place that a customer has to take, step by step, in order to opt out. So, can a customer be required to pay a fee? Can we require the customer to provide certain information or take some other steps in order to opt out? And what should we do once a customer makes a request to opt out?

ANSWER
The question is not as strange as you think! We actually come across this question sometimes when conducting website and marketing reviews.

To put it succinctly, a sender or any person acting on behalf of a sender may not require that any recipient, in order to exercise an “opt out” request pursuant to the Controlling the Assault of Non-Solicited Pornography and Marketing Act, known as CAN-SPAM, or have the request honored, (1) pay any fee, (2) provide any information other than the recipient’s electronic mail address and “opt out” preferences, or (3) take any other steps except sending a reply electronic message or visiting a single website page. [16 CFR § 316.5]

Once a recipient makes a request using the applicable “opt out” mechanism not to receive some or any commercial electronic mail messages from a sender, the sender may not initiate transmission to the recipient of a commercial electronic mail message covered by the request more than ten business days after receipt of the “opt out” request. [15 USC § 7704(a)(4)(i)]

Jonathan Foxx 
Managing Director 
Lenders Compliance Group

Thursday, August 31, 2017

Mortgagee Review Board – Notice and Hearing

QUESTION
We have been told by our Executive Management that we are being reviewed by HUD’s Mortgagee Review Board. Based on their description, it all sounds kind of scary! What some of us want to know is what this Board does? What happens there? And what kinds of actions can they take against us?

ANSWER
The Mortgagee Review Board (“MRB” or “Board”) goes all the way back to the 1970s. It was established by the Department of Housing and Urban Development Reform Act of 1989 (“Act”). By statute, the Board has certain powers and procedures. [Pub. L. No. 101-235, 103 Stat. 1987 (1989). Section 142 of the Act made the MRB a statutorily authorized entity.] 

The Board is empowered to initiate the issuance of a letter of reprimand, the probation, suspension or withdrawal of any mortgagee found to be engaging in activities in violation of Federal Housing Administration requirements or the nondiscrimination requirements of the Equal Credit Opportunity Act [15 USC 1691 et seq.], the Fair Housing Act [42 USC 3601 et seq.], or Executive Order 11063.

The MRB consists of the Assistant Secretary of Housing - Federal Housing Commissioner the General Counsel of the Department the President of the Government National Mortgage Association the Assistant Secretary for Administration the Assistant Secretary for Fair Housing Enforcement (in cases involving violations of nondiscrimination requirements) and the Chief Financial Officer of the Department or their designees. [12 USC § 1708(c)(2)]

The Board’s powers are extensive. It can initiate administrative actions against mortgagees and lenders; indeed, it is able to exercise all of HUD’s vast functions with respect to administrative actions against such entities. 

In addition to a host of such actions, the MRB can also impose civil monetary penalties. [24 CFR § 25.2(b); 12 USC § 1735f-14] 

The Board issues a written notice to the mortgagee at least 30 days prior to taking any action against the mortgagee. The mortgagee must reply in writing to the Board within 30 days. But if the mortgagee fails to reply during such period, the Board may make a determination without considering any comments of the mortgagee. So, timing is crucial and every day counts! [12 USC § 1708(c)(4)(A)] Within 30 days of receiving the notice, if the mortgagee requests a hearing, the Board holds a hearing on the record regarding the violations within 30 days of receiving the request. But if a mortgagee fails to request a hearing within that 30-day period, the right of the mortgagee to a hearing is considered waived. [12 USC § 1708(c)(4)(B)]

In any case in which the notification of the Board does not result in a hearing (including any settlement by the Board and a mortgagee), any information regarding the nature of the violation and the resolution of the action is available to the public. [12 USC § 1708(c)(4)(C)]

The MRB can take swift action, even pre-emptive action. For instance, it can issue a Cease and Desist Order. Upon the Board’s requests, if HUD determines that there is reasonable cause to believe that a mortgagee is violating, has violated, or is about to violate, a law, rule or regulation or any condition imposed in writing by HUD or the Board, and that such violation could result in significant cost to the Federal Government or the public, HUD’s Secretary may issue a temporary order requiring the mortgagee to cease and desist from any such violation and to take affirmative action to prevent such violation or a continuation of such violation pending completion of proceedings of the Board with respect to such violation. [12 USC § 1708(c)(6)]

Administrative actions run the gamut from a letter of reprimand, to probation, to suspension, or withdrawal – the last of which means total termination of FHA-approved mortgagee or lender status. Even the effects of a letter of reprimand or probation can be devastating to a financial institution’s relationships with investors, warehouse banks, many other third parties, and various service providers. 

Suspension in itself is often a precursor to a doomed outcome because it prohibits a mortgagee or lender from originating any FHA-insured mortgage loans during the period of the suspension. Under such circumstances as a suspension, many financial institutions lose their loan originators to competitors. A withdrawal is difficult to overcome because it terminates a lender’s approved status. Only after complying with a very extensive set of reapplication procedures can a lender be reinstated. [12 USC § 1708(c)(3)(A-D)]

Often, settlement agreements are entered into involving the kinds of issues that are dispositive in a potential change of status. [12 USC § 1735f-14(f); 12 USC § 1708(c)(3)(E)] However, the MRB can also impose civil monetary penalties, which is currently set to $9,468 per violation/per day – and each day that a violation continues constitutes a separate violation! [24 CFR § 30.35(c)(1); 24 CFR § 30.35(b)] 

At present, civil monetary penalties are limited to $1,893,610 for all violations committed during any one-year period. And if the violation involves a failure to engage in certain loss mitigation requirements, the penalty is three times (sic) the amount of the total mortgage insurance benefits claimed by the mortgagee with respect to any mortgage for which the mortgagee failed to engage in such loss mitigation actions.

Most financial institutions could not weather such a financial beating! It is possible to appeal an administrative action or civil monetary penalty within HUD, by means of the mortgagee requesting a hearing before an Administrative Law Judge. 

There is a list of violations that create grounds for administrative actions. This list is set forth at 24 CFR 25.6 ("Violations creating grounds for Administrative Action"). It is an extensive list, covering many violations, too many to mention in this answer. But suffice it to say that the list covers numerous violations of any statute, regulation, or other requirement pertaining to the FHA-insured mortgage loan program. HUD publishes its Administrative Actions periodically in the Federal Register.

Hopefully, your Executive Management has retained competent risk management support, such as we provide at Lenders Compliance Group, as well as experienced legal counsel familiar with how to handle such engagements. The appropriate and responsible managerial response to receiving a notice from the Mortgagee Review Board should be a triune strategy, involving the collaborative efforts of the financial institution, the risk management firm, and the legal team.

Jonathan Foxx
Managing Director
Lenders Compliance Group


Thursday, August 24, 2017

Promoting a Charity Event

QUESTION
We are a mortgage lender with several branch offices. 

One of our branch managers would like to send an email promoting a local charity event to all of her current and past clients, as well as the charity’s flyer promoting the event. 

The event is a 5k run/walk to raise awareness and funds for cystic fibrosis research and has nothing to do with company business. 

Are such mailings permissible? 

ANSWER
Essentially, the lender would be sending the charity’s marketing materials to the lender’s customers, which is not prohibited by the Gramm Leach Bliley Act and its implementing regulation, Regulation P. 

However, if an individual’s response to the flyer would reveal to the charity that the individual is a customer of the lender, there would be an inadvertent disclosure by the lender of non-public personal information (NPI) in violation of the Act. 

For example, let’s assume the charity wanted to track the effectiveness of its marketing efforts and includes a reference code only attributable to the lender on the flyer, which also served as the event registration form. 

Thus, when an individual uses the form to register, the lender has disclosed NPI to the charity, that is, the individual is the lender’s customer. In order to comply with the Act, the lender would have had to either disclose in its initial and annual privacy statement that it shares customer’s NPI with "nonfinancial institutions, such as charitable organizations" and provide the customer with a reasonable opportunity to opt out of such sharing or obtain the customer’s consent to such arrangements.

Joyce Wilkins Pollison, Esq.
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Friday, August 18, 2017

Recording Fees under Know Before You Owe

QUESTION
We had a loan where the borrower shopped for the title company and did not use the company we had listed on the service provider list. Our provider does not charge us a separate recording fee, it is included in the “settlement fee” they charge. 

In this instance, however, the title company selected by the borrower separately added to their charges the “recording fee” from the county recorder’s office. We were not notified of this within 3 days of receiving their contract and did not redisclose. We now have a tolerance cure that we are having to pay at closing.

Do you have any suggestions about how to avoid this in the future? 

ANSWER
There are several parts of your question and part of the problem arises from the fact that your usual settlement service provider does not separately break out the fees paid to the county recorder’s office – fees that are assessed by and paid to a government authority to record and index the mortgage or deed of trust (rather than a fee payable to the title company for facilitating the recordation of documents).

The Integrated RESPA/TILA Disclosure Rule (“Know Before You Owe”) requires that these fees be broken out and separately disclosed. The pertinent part of Reg. Z (12 CFR 1026.37) provides:

“For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section…” (Emphasis added.)  12 CFR 1026.19(e) provides in pertinent part: “In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.” (Emphasis added.) 

Section 1026.37(g) provides:

“(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g) (1) through (6) of this section.
(1) Taxes and other government fees. Under the subheading “Taxes and Other Government Fees, “the amounts to be paid to State and local governments for taxes and other government fees, and the subtotal of all such amounts, as follows:
(i) On the first line, the sum of all recording fees and other government fees and taxes, except for transfer taxes paid by the consumer and disclosed pursuant to paragraph (g)(1)(ii) of this section, labeled “Recording Fees and Other Taxes.” [In the CFPB Guidebook, the illustration used for the type of “government fees” referred to in this section is “recording fees.” (See section E of illustration below)] (Emphasis added.)

Thus, the “recording fee” should not be lumped into the title settlement fee, but rather listed separately in Section E of the Loan Estimate. Recognizing this requirement will alert you to clarify the charges of any settlement service provider when a separate “recording fee” is not identified in their charges.

However, you must still determine whether the “recording fees” being charged are the fees assessed by and paid to a government authority to record and index the mortgage or deed of trust, or a fee payable to the title company for facilitating the recordation of documents. The former are subject to a 10% tolerance, but the latter, if the title company is selected by the borrower, are not: 

Thus, with respect to fees paid to a governmental entity, 12 CFR § 1026.19(e)(3)(i-ii) provides:

(3) Good faith determination for estimates of closing costs—(i) General rule. An estimated closing cost disclosed pursuant to paragraph (e) of this section is in good faith if the charge paid by or imposed on the consumer does not exceed the amount originally disclosed under paragraph (e)(1)(i) of this section, except as otherwise provided in paragraphs (e)(3)(ii) through (iv) of this section.
(ii) Limited increases permitted for certain charges. An estimate of a charge for a third-party service or a recording fee is in good faith if:
(A) The aggregate amount of charges for third-party services and recording fees paid by or imposed on the consumer does not exceed the aggregate amount of such charges disclosed under paragraph (e)(1)(i) of this section by more than 10 percent;
(B) The charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and
(C) The creditor permits the consumer to shop for the third-party service, consistent with paragraph (e)(1)(vi) of this section.
                          (Emphasis added.)

Thursday, August 10, 2017

Determining the Escrow Amount

QUESTION
As a mortgage servicer, we are always making decisions about how the payment amount for escrow account items are determined. So, for us, the question is this: how are payment amount items determined in escrow accounts? Also, how do we determine the escrow amount for new construction?

ANSWER
Determining the payment amount for an escrow account is a critical mortgage servicer function. A servicer must estimate the amount of the escrow account items to be disbursed. If the servicer knows the charge for an escrow item in the next escrow account computation year, the servicer must use that amount.

Furthermore, if a charge for an escrow item is unknown to the servicer, the servicer may base the estimate of the charge on the preceding year’s charge, or the preceding year’s charge as modified by an amount not exceeding the most recent year’s change in the national Consumer Price Index for all urban consumers, which is known as the CPI. [24 CFR § 3500.17(c)(7)]

In cases of unassessed new construction, the servicer may base the estimate of property taxes and assessments on the assessment of comparable residential property in the market area. [24 CFR § 3500.17(c)(7)]

With respect to determining the amounts that will be paid from the escrow account during the escrow account computation year, the servicer must use disbursement dates that will pay items in a timely manner, which is considered to be on or before the deadline to avoid a penalty. [24 CFR § 3500.17(k)(1)]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, August 3, 2017

COPPA Compliance – Website Violations

QUESTION
We were just cited by our regulator for violations of COPPA. The violation stemmed from our online website, which we use for originating mortgages. Really, we were not even aware that this was a problem! I see from your website that you do website reviews and you probably would have picked up on the COPPA violation. Please tell us, what is COPPA? Also, what are some requirements?

ANSWER
“COPPA” stands for Children’s Online Privacy Protection Act. It regulates websites that collect personal information from children under the age of thirteen. COPPA is monitored through the Federal Trade Commission’s regulations. [15 USC § 6501, et sequi; 16 CFR Part 312]

The purpose of COPPA is to increase privacy protection for children’s information obtained online. Subject websites must post privacy notices and adopt procedures to protect the confidentiality and security of the information. There is an element of parental control, too, in that COPPA provides that parents should have control over what kinds of information websites can collect from their children. It follows then, that any website that targets children under age thirteen or, for that matter, any general website that collects personal information from children under age thirteen, is required to comply with COPPA. [15 USC § 6501(1); 16 CFR § 312.2]

Examples of personal information are a child’s name, address, email address, telephone number, Social Security number, or other identifying information. [15 USC § 6501(8)]

One overlooked item often involves getting parental consent, which must be “verifiable” parental consent. This means that a website operator must take steps before personal information is collected from a child under the age of thirteen, such as notifying the parent of the operator’s’ information practices and obtaining the parent’s consent to those practices.

Requirements involving the collecting of personal information from children include (1) providing privacy notices, and (2) obtaining verifiable parental consent before collecting, using or disclosing children’s personal information (with some exceptions).

With respect to the privacy notice, it must state the types of information collected from children under the age of thirteen, how the information is used, and the website operator’s information disclosure procedures pertaining to the website. [15 USC § 6502(b)(1)(A)] If a parent requests, the operator must inform the parents of the information collected from the child and give the parents the opportunity to refuse additional collection of the child’s information. [See Industry and Financial Markets Association v Garfield, 469 F. Supplement 2nd 25 (D. CT); also, 15 USC § 6502(b)(1)(B)]

Your best bet is to have your website fully reviewed by competent risk management professionals, such as Lenders Compliance Group. Website compliance is a critical review component of mortgage banking. The exposure of a bank or nonbank to legal and regulatory violations due to website violations is very high and the website needs great care in structure, disclosure, and use in order to reduce such risks.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Friday, July 28, 2017

Distinguishing between AML Compliance and OFAC Compliance

QUESTION
We know that you were among the first to provide anti-money laundering tests, which is required by statute. So, we think you would know the answer to our question. A banking examiner told us that our AML program needs more procedures for OFAC compliance. What is the difference between AML compliance and OFAC compliance?

ANSWER
We were the first to offer AML tests for non-banks and bank mortgage divisions.

This is a good question about AML and OFAC, as it highlights an important component of the AML program itself. Anti-Money Laundering (AML) compliance, often referred to as “AML compliance,” focuses on detecting and deterring money laundering and terrorist abuses in the financial system. AML programs are mandated for certain financial institutions by law under the Bank Secrecy Act (BSA). In fact, it is also suggested for other organizations under the Federal Sentencing Guidelines of the U. S. Sentencing Commission. [FFIEC Exam Manual]

Failure to comply with BSA requirements may result in civil monetary penalties and exposure to criminal liability. Violations of AML caused by non-compliance, as well as not implementing terrorist financing laws, can result in civil and criminal penalties, imprisonment, and asset forfeiture. [18 USC §§ 981, 982, 1956, 1957, 2339A, 2339B, 2339C]

Office of Foreign Assets Control (OFAC) compliance, commonly referred to as “OFAC compliance,” is derived from rules set forth by OFAC, which is part of the U.S. Department of the Treasury. Its purpose is to administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to national security, foreign policy or the economy of the United States.

Under national emergency powers and specific legislation, OFAC can impose controls on transactions and freeze assets subject to the jurisdiction of the United States. OFAC administers programs against targeted foreign countries and regimes, terrorists, international narcotics traffickers, entities involved in proliferation of weapons of mass destruction, and, in effect, other threats to national security, foreign policy or the U.S economy.

OFAC prepares and maintains a unique list, called the Specially Designated Nationals list, which is a compilation of names of persons, entities, and countries that are restricted or prohibited from transacting or dealing with U.S. persons. [U.S. Department of Treasury, Sanctions Programs] Failure to comply with OFAC’s restrictions or prohibitions can result in substantial civil penalties and potential fines. [U.S. Department of Treasure, Civil Penalties and Enforcement Information; also, Economic Sanctions Enforcement Guidelines, 31 CFR, Part 501, Appendix A]

Unlike BSA mandates, which requires an AML compliance program, OFAC does not require an organization to maintain an OFAC compliance program. However, OFAC has indicated that should a violation of law occur, the presence of a program could be a substantial mitigating factor in determining the nature and amount, if any, of a penalty. [31 CFR, Part 501, Appendix A] Consequently, federal financial institution regulators have determined that failure to maintain an OFAC compliance program is considered an unsafe and unsound banking practice.

Although BSA and OFAC requirements are distinct, the requirements are viewed as supporting the common policy goal of national security. Therefore, financial institutions that are subject to the BSA’s AML compliance program requirement are expected to treat OFAC compliance as related, especially with respect to the need to collect and analyze certain customer information.

Jonathan Foxx
Managing Director 
Lenders Compliance Group

Thursday, July 20, 2017

Record Retention: Evidence of Compliance under TILA

QUESTION
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?

ANSWER
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

QUESTION
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?

ANSWER
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

QUESTION
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?

ANSWERS
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

QUESTION
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?

ANSWER
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