Thursday, November 16, 2017

Adverse Action Obligations

We were cited for not fulfilling the requirements for adverse action. This came as a real shock to us because we relied on our LOS for the information from the credit bureau and our own compliance attorney to provide the procedures. This is really unusual for us, as we are a bank and have never previously been cited for this infraction. We conferenced about it and decided to ask for your guidance. We want to know what are our obligations in adverse action circumstances?

When a creditor takes any adverse action with respect to a consumer in connection with a credit transaction that is based, in whole or in part, on any information contained in a consumer report from a consumer reporting agency, it is incumbent on the creditor to implement certain procedures.

Below, I set forth the three primary obligations. 
1. Provide the consumer oral, written, or electronic notice of the adverse action;
2. Provide the consumer, orally, in writing, or electronically, with:
a. The name, address, and telephone number of the consumer reporting agency that furnished the report. If the agency compiles and maintains files on consumers on a nationwide basis, a toll-free number established by the agency must be provided and
b. A statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to comment on the specific reasons why the creditor took the adverse action; and
3. Provide the consumer, orally, in writing, or electronically, with a notice of the consumer’s right to:
a. Obtain a free copy of his or her consumer report from the consumer reporting agency that furnished the report, and the notice must indicate the sixty-day period under the Fair Credit Reporting Act (FCRA) within which the consumer may obtain the free consumer report as a result of the adverse action; and
b. Dispute with the consumer reporting agency the accuracy or completeness of any information in a consumer report furnished by the agency. [15 USC § 1681m(a)]

Please note that the disclosure requirement addressed in the response to this question applies to an adverse action taken, in whole or in part, based on consumer report information obtained from a consumer reporting agency. But there are many variations, such as where there is a denial or increase in the cost of credit that is not based on a consumer reporting agency, or where the adverse action is based on an affiliated party that is not a consumer reporting agency.

Procedures for properly implementing adverse action should take into consideration the full range of possibilities and variations.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, November 9, 2017

Recording Calls

We are a lender with a home office in the state of Virginia. We had thought that anyone could record a conversation with a borrower without notice or consent at any point in time. Recently, we heard that there are laws, either state or Federal, that do speak to this sort of thing.

There was an incident where one of our loan officers recorded a borrower call unbeknownst to the borrower, a call that became somewhat unfavorable in nature, containing some harsh language, and now we are concerned that we may have done something that we should not have done.

Do you have any basic information that might help us, particularly referencing the state of Virginia, where we are located?    

Although you did not state which party may have used the “harsh language,” we would always caution anyone on staff in your own organization to use the utmost care and respect when conversing with any actual or potential borrower. There are many laws, both state and Federal, that prohibit the use of certain language or the use of language that could be construed by a borrower or applicant as “threatening” or “abusive.”
Thinking in broadest terms regarding the recording of calls, there are state-specific laws that apply here, states being where the majority of such laws apply. There are also some Federal laws, regulations, and rules that can apply too.

With the understanding that the majority of governing laws are state-specific for recording calls, many states have what is known as a “One Party Consent Law,” which means that if one party consents to the recording of the conversation, it is permissible. So, if the borrower was a party to the conversation, he or she can record the conversation without the loan officer’s consent, and the opposite is true as well.  

Other states have what is known as a “Two Party Consent Law,” in which all parties must be made aware of and consent to the call recording. An exception to this law is generally where there is no expectation of privacy, such as in a restaurant or a store. 

Some examples of Federal laws, regulations, and rules that would be applicable have more to do with the content of the conversation within the recorded calls, ensuring that there are no violations of certain regulations, rules, and Acts, such as:

  • Graham-Leach-Bliley Act (GLBA);
  • Unfair, Deceptive, or Abusive Acts or Practices (UDAAP);
  • Fair Lending rules and the Equal Credit Opportunity “ECOA,” or the Unfair, Deceptive Treatment & Practices Act “UDTPA” (i.e., anything that may be construed as potentially discriminatory in nature or disparate treatment to a consumer).

In speaking specifically to the state in question, which is Virginia, there is guidance found within the state itself. Under Virginia law, an individual who is a party to either an in-person conversation or electronic communication, or an individual who has the consent of one of the parties to the communication, can lawfully record it or disclose its contents. Please see the guidance below:

In a section of the Code of Virginia, entitled “Interception, disclosure, etc., of wire, electronic or oral communications unlawful; penalties; exceptions,” the following requirements are set forth:
A. Except as otherwise specifically provided in this chapter any person who:
1. Intentionally intercepts, endeavors to intercept or procures any other person to intercept or endeavor to intercept, any wire, electronic or oral communication;
2. Intentionally uses, endeavors to use, or procures any other person to use or endeavor to use any electronic, mechanical or other device to intercept any oral communication;
3. Intentionally discloses, or endeavors to disclose, to any other person the contents of any wire, electronic or oral communication knowing or having reason to know that the information was obtained through the interception of a wire, electronic or oral communication; or
4. Intentionally uses, or endeavors to use, the contents of any wire, electronic or oral communication, knowing or having reason to know that the information was obtained through the interception of a wire, electronic or oral communication; shall be guilty of a Class 6 felony.
[Code of Virginia, Title 19.2. Criminal Procedure, Chapter 6. Interception of Wire, Electronic or Oral Communications, § 19.2-62, A.1-4.]

Note, also, that the subject section states:

It shall not be a criminal offense under this chapter for a person to intercept a wire, electronic or oral communication, where such person is a party to the communication or one of the parties to the communication has given prior consent to such interception. [§ 19.2-62. Interception, disclosure, etc., of wire, electronic or oral communications unlawful; penalties; exceptions. B.2. Emphasis added.]

Michelle Leigh
Director/Internal Audits and Controls
Lenders Compliance Group
Executive Director/Servicers Compliance Group

Thursday, November 2, 2017

Payment Shock Notice

Our federal regulator recently advised us to issue a payment shock notice to our borrowers. Actually, we never even knew such a notice existed. What is a payment shock notice? What are the format and procedures?

The Payment Shock Notice is a voluntary notice that a lender or servicer provides to a borrower in order to alert the borrower about the potential increase in the property taxes for a home.

The disclosure is often used in new construction financing. For instance, with a newly constructed home the property taxes for the first year may be based on the unimproved value or only partially on the improved value. If this is the case, there can be a substantial increase in the property taxes once the taxes are fully based on the improved value.

There are Best Practice solutions associated with the Payment Shock Notice, as follows:
  • Notify borrowers in advance and provide an opportunity to make voluntary payments ahead of schedule to avoid payment shock.
  • Offer consumers extended repayment plans, even beyond those required under the Real Estate Settlement Procedures Act (RESPA), to make up substantial shortages associated with payment shock. [63 Federal Register (1998) 3214, 3233, 3237-3238] 

Many of our clients, both lenders and servicers, implement the foregoing Best Practices – even without a regulatory recommendation to do so.

The Payment Shock Notice can be a relatively simple form, which was adopted as a public guidance document. [See 63 Federal Register (1998) 3214, 3237-3238, Appendix G]

The notice should contain some basic elements, such as advising the borrower of the potential for a substantial increase in bills paid out of the escrow or impound account because of property taxes (or another applicable item) after the first year, as well as a statement that the borrower could elect to voluntarily make higher payments into the account during the first year to help offset the payment shock.

The rule of thumb for a timeline to issue the Payment Shock Notice would be when a lender or servicer anticipates a substantial increase in the bills paid out of the escrow or impound account after the first year. It could be delivered with, or separate from, an initial escrow account statement. 

With respect to the method of delivery, although the Payment Shock Notice is a Best Practice and not specifically required by RESPA, nor is it a mandate under RESPA’s implementing regulation, Regulation X, there is general recognition in Regulation X that ESIGN (Electronic Signatures in Global and National Commerce Act) can be used for RESPA-related documents, as Regulation X provides that ESIGN applies to Regulation X. 

The Payment Shock Notice is a type of notice covered by ESIGN. Consequently, the notice may be provided by facsimile, email or other electronic means if the consumer consents and the other requirements of ESIGN are met. [24 CFR § 3500-23]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, October 26, 2017

Unfair Debt Collection Practices

We were examined by our state banking department and they accused us of violations in the way we attempted to collect a debt. Our internal counsel seems to not have been aware of all the possible ways we could violate the collection of debt. This is very frustrating, as we try our best to avoid such accusations, especially since it can also affect our reputation. So, we ask, what are the prohibited practices associated with the collection of a debt?

This an instance where comprehensive policies and procedures should be ratified prior to collection of debts. The Fair Debt Collection Practices Act (FDCPA) has had an “unfair practices” section promulgated since 1977. In my view, there really is no excuse for not knowing a section of the FDCPA that is forty years old. [15 USC § 1692f. Section effective upon the expiration of six months after Sept. 20, 1977, see section 819 of Pub. L. 90–321, as added by Pub. L. 95–109, set out as a note under section 1692 of this title.]

Let’s start with the basic rule that protects the consumer against unfair practices: A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.

The legal and regulatory risks to financial institutions involved in debt collecting are considerable. Courts have long placed extreme caution on handling interactions with consumers in connection with the collection of a debt. For instance, in Midland v Johnson, the court “recogniz[ed] the ‘abundant evidence of the use of abusive, deceptive, and unfair debt collection practices [which] contribute to the number of personal bankruptcies’”. [Midland Funding, LLC v. Johnson, No. 16-348, US, 5.15.17] Another court specifically noted the purpose of the FDCPA is “to eliminate abusive debt collection practices”. [Hoo-Chong v. CitiMortgage, Inc., 15-CV-4051(JS)(AKT), EDNY 3.31.17]

Here's a broad, but viable working definition of “debt,” for the sake of identifying the basis of a policy document that accords with the FDCPA. Debt is “any obligation to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” [Harper v. MFR’s Trust Co, Civil No. PJM 10-00593, D. MD. 2.285.11; also see In Re Westberry, 215 F.3d 589, 6th Cir. 2000]

The following conduct is a violation of the unfair practices section of the FDCPA:

   1.The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.
   2.The acceptance by a debt collector from any person of a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector’s intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit.
   3.The solicitation by a debt collector of any post- dated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution.
   4.Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument.
   5.Causing charges to be made to any person for communications by concealment of the true purpose of the communication. Such charges include, but are not limited to, collect telephone calls and telegram fees.
   6.Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if –
a.There is no present right to possession of the property claimed as collateral through an enforceable security interest;
b.there is no present intention to take possession of the property; or
c.the property is exempt by law from such dispossession or disablement.
   7.Communicating with a consumer regarding a debt by postcard.
   8.Using any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business. [15 USC § 1692f]

Obviously, non-abusive collection methods are means other than misrepresentation or other abusive debt collection practices that are available for the effective collection of debts. But it is critical to know those non-abusive collection methods!

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, October 19, 2017

Construction-Permanent Loan – Disclosing Increase in Payment

With respect to a construction-permanent loan, with respect to the Loan Estimate and Closing Disclosure, under “Loan Terms”, with respect to the monthly principal and interest payment, how should a creditor respond to the statement “Can this amount increase after closing"? 

If, during the construction period, interest is payable only on the amount advanced for the time it is outstanding, the creditor should disclose “YES” in response to the question “Can this amount increase after closing?”  

Effective October 10, 2017, the Bureau adopted Amendment to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (the “Final Rule”).  [82 Fed Reg 37656]   A creditor may use the methods set forth in Regulation Z, Appendix D to estimate interest and make disclosures for construction loans if the actual schedule of advances is not known.   

The proposed rule initially addressed the “Can this amount increase after closing” disclosure in the context of a separately disclosed fixed rate construction loan. In the Section by Section analysis, the Bureau acknowledges that using those methods for the calculation of the periodic payments in a fixed-rate construction loan results in interest-only periodic payments that are equal in amount. 

The preamble of the proposed rule explained that “although the actual interest-only payments will increase over the term of the construction financing as the amounts advanced increase, because the methods provided by appendix D to estimate interest may be used to make disclosures, a technically correct and compliant answer to “Can this amount increase after closing?” is “NO.” 

The periodic payments for fixed-rate construction financing, as calculated under appendix D, do not increase but are equal.” The Bureau discussed creditor’s concerns over providing a “NO” answer as the disclosure may not reflect the actual increase in payments that will occur during the construction financing.  

Thus, the Bureau initially proposed adopting a comment to Appendix D which gave the creditor an option of answering “YES”, although a technically correct answer is “NO” and stated that the “proposed comment is consistent with informal guidance provided by the Bureau”.

Ultimately, the Bureau declined to adopt the proposed rule giving the creditor an option to answer either “YES” or “NO” to the question “Can this amount increase after closing?”. Rather, the Final Rule only permits a disclosure of “YES” in response to the question “Can this amount increase after closing?” in instances where there will be an increase in the periodic payment when the amounts or timing of advances is unknown at or before consummation and the Appendix D assumption that applies if interest is payable only on the amount advanced for the time it is outstanding is used to calculate the periodic payment.  The Bureau noted that this change addresses the concern that the disclosure should reflect the fact that the payments actually increase over the term of the construction financing, even though the amount of such increase is not known at or before consummation. 

With respect to separate disclosures for fixed rate construction loans, the Bureau stated that during the optional compliance period before October 1, 2018, a creditor may continue to disclose “NO” based on the informal guidance by the Bureau discussed above.

In an effort to provide further clarify and simplify the disclosures and their implementation, the Bureau stated that the scope of the new comments to Appendix D, is not limited to circumstances when separate disclosures are provided for fixed rate construction financing as they were in the proposed rule. 

The Bureau stated, “as a practical matter, if “YES” is the answer to “Can this amount increase after closing?” when separate disclosures are provided for either fixed-rate or adjustable-rate construction financing, “YES” will necessarily be the answer when a combined disclosure for that financing is provided.  This is generally the result whenever a combined disclosure is used because the interest-only payment of the construction financing increases to the principle and interest payment of the permanent financing. Comment app. D-7.v therefore applies to both separate construction disclosures and combined construction-permanent disclosures because, in either case, the § 1026.37(b)(6) disclosures would reflect the construction phase during which there may be an increase in the periodic payment.”
[Emphasis added.]

For Section by Section analysis, see 82 Fed. Reg. 37758-37760. The Amendment to Appendix D-7 is set forth below.

Amendment to Appendix D-7
iv. Increase in periodic payment. If the amounts or timing of advances is unknown at or before consummation and the appendix D assumption that applies if interest is payable only on the amount advanced for the time it is outstanding is used to calculate the periodic payment: 
A. A creditor discloses “YES” as the answer to “Can this amount increase after closing?” pursuant to § 1026.37(b)(6)(iii) whether the creditor provides separate construction disclosures or combined construction-permanent disclosures, even though calculation of the construction financing periodic payments using the assumptions in appendix D produces interest-only periodic payments that are equal in amount.
B. A creditor that discloses “YES” as the answer to “Can this amount increase after closing?” pursuant to § 1026.37(b)(6)(iii) may use months or years for the § 1026.37(b)(6)(iii) disclosures, consistent with comment 37(b)(6)-1.  For example, for a 10-month construction loan, the first § 1026.37(b)(6)(iii) disclosure bullet may disclose, “Adjusts every mo. starting in mo. 1” and the second § 1026.37(b)(6)(iii) disclosure bullet may disclose, “Can go as high as $[insert maximum possible periodic principal and interest payment] in year 1”.  The calculation of the maximum possible periodic principal and interest payment disclosed is based on the maximum principal balance that could be outstanding during the construction phase.  As part of the “First Change/Amount” disclosure in the “Adjustable Payment (AP) Table” pursuant to § 1026.37(i)(5)(i), the creditor may omit and leave blank the amount or range corresponding to the first periodic principal and interest payment that may change.  In such cases, the creditor must still disclose the timing of the first change, which is the number of the earliest possible payment (e.g., 1st payment) that may change under the terms of the legal obligation.  
C. When separate construction disclosures or the combined construction-permanent disclosures are provided for adjustable-rate construction financing, a creditor provides the § 1026.37(b)(6)(iii) disclosures reflecting changes that are due to changes in the interest rate and changes that are due to changes in the total amount advanced.  Such a creditor discloses “YES” as the answer to “Can this amount increase after closing?” pursuant  to § 1026.37(b)(6), because the initial periodic payment may increase based upon an increase in the interest rate in addition to a change based on the total amount advanced.  Such a creditor also discloses a reference to the adjustable payment table required by § 1026.37(i), disclosed as provided in comment app. D7.iv.B, because that disclosure reflects both a change due to a change in the total amount advanced, which is a change to the periodic principal and interest payment that is not based on an adjustment to the interest rate, as well as the fact that there are interest-only payments.  Such a creditor also includes a reference to the adjustable interest rate table required by § 1026.37(j) because that disclosure reflects a change due to a change in the interest rate.

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

Thursday, October 12, 2017

Advertisements – Concerns about Charitable Donations

What is our mortgage company’s compliance policy on offering a “lender credit” to a group of individuals?

Can we use fliers like the one I saw a real estate broker hand out at a recent parent-teacher night?

The flier said: 
“Attention fellow parents and faculty: Are you looking to buy or sell your next home? Please allow me to offer my real estate services on your next home adventure. Like you, I feel our children’s education is vitally important to our society. If you purchase or sell a home with me I will donate $300 back to our classrooms!”

There are at least two major areas of compliance concern that arise in a mortgage context from this type of marketing activity: (1) Fair Lending; and (2) RESPA.  I will address each of these issues in order.              


In a mortgage context, the flier in question would offer a significant inducement to a limited subset of the general population (“teachers” and “fellow parents”) based on criteria largely unrelated to the prospective borrower’s financial qualifications to obtain the loans. That means that some people are excluded from the offer. Whether the persons excluded are members of a protected class is not immediately apparent from the face of the ad, because the categories identified do not inherently exclude such class members. However, as a practical matter, by excluding from the offer non-teachers and people without children, such a program could easily have a “disparate impact” on one or more protected classes of prospective borrowers. This could result in a violation of one or more fair lending statutes.[1]  

As explained by Jonathan Foxx, Managing Director of Lenders Compliance Group, at pages 8-9 of his article entitled Advertising Compliance: Getting Ready for the Banking Examination published in the June 2016 edition of National Mortgage Professional Magazine:

“Advertisements are a minefield of potential fair lending violations. …Importantly, an allegation of a fair lending violation does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself. …When a company applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a Disparate Impact. The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. According to the interagency examination procedures set forth by Federal Financial Institutions Council (FFIEC), ‘when an examiner finds that a lender’s policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by business necessity. The justification must be manifest and may not be hypothetical or speculative. … Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect. …”

Based on the information given, it is not possible to say with certainty whether a donation program similar to that described in the flier would actually constitute a fair lending violation. However, any time you extend inducements to only a subset of the population based on criteria other than their financial qualifications---even if the exclusionary criteria is not overtly directed at a protected class and even if it has a laudable charitable purpose---there is an increased risk of disparate impact on such a protected class and, hence, a potential fair lending violation.  

2.       RESPA

The “lender credit” offered in the flier described is directed at “Fellow Parents and Faculty” and promises that “If you purchase or sell a home with me I will donate $300 back to our classrooms.” This offer could constitute a violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), which reads in pertinent part:

“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

There are three elements to an illegal kickback under RESPA: (1) a “thing of value,” (2) an “agreement or understanding,” and (3) a “referral” of a real estate settlement service [2] (mortgage origination is a “settlement service”).  If any of these three essential elements is missing, the activity is not illegal under RESPA. Here, however, a donation of $300 “back to our classrooms” is clearly a “thing of value,” at least for the teachers and parents of the children whose classrooms would receive the donation.

On its face, the donation is offered to the persons who actually “purchase or sell a home with [the broker].” That supports an argument that the offer is only a type of “lender credit.” However, the funds are going to other parties in addition to the borrower --- “our classrooms” --- as the result of which the parents and teachers of children in those classrooms presumably benefit. The flier is apparently distributed to those same persons, such that there is a built-in inducement for them to “refer” other persons to the broker in order to increase the donations to “their” classrooms, thus satisfying the second and third requirements of Section 8.  For these kinds of “donation” arrangements to work under RESPA Section 8, the beneficiary of the donation should not also be the person from whom referral of business is sought, no matter how salutary the charitable purpose of the donation.  

Adoption of a charitable donation-type marketing program modeled on the realtor ad described carries increased legal and regulatory risk. It is theoretically possible to mitigate, but not entirely eliminate those risks. In the end, whether to go forward with such a program, given those risks, is a business judgment decision for management.    
Michael Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group 

[1] These statutes include: The Fair Housing Act (FHA) 42 USC 3601 et seq.; Equal Credit Opportunity Act (ECOA) 15 USC 1691 et seq; CFPB Supervision and Examination Manual, Ver. 2, Part II(C), Equal Credit Opportunity Act; Home Mortgage Disclosure Act (HMDA) 12 USC 2801 et seq.
[2] A settlement service includes any service provided in connection with a prospective or actual real estate settlement. (12 C.F.R. §1024.2(b).) The making of a mortgage loan is a “settlement service” (Ibid.)

Thursday, October 5, 2017

Exemption from Periodic Statements

We are mortgage servicers and are considering having your Servicers Compliance Group conduct an audit of our policies and procedures. It is our understanding that the CFPB has revised the bankruptcy exemption to exempt a mortgage loan from the periodic statement requirements. Could you let us know when this exemption goes into effect? Also, exactly what does this exemption cover?

Thank you for considering our compliance support services for mortgage servicing!

As a general proposition, when there is a bankruptcy declared by a mortgage borrower, certain unique requirements are immediately mandated on the part of mortgage servicers. This is because, upon the filing of a bankruptcy petition, all collection efforts by a creditor are automatically stayed.

Most servicers recognized that Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), and the Fair Debt Collection Practices Act (FDCPA) actually requires servicers to engage in certain communications with borrowers, even if the borrower is in bankruptcy, and despite the argument that some of these communications might appear to relate to debt collection. So, obviously, only a broad response can be provided here.

In specific reply to your question, in October 2016 the Consumer Financial Protection Bureau (CFPB) revised the bankruptcy exemption, with the compliance effective of April 19, 2018. The revised rule exempts a mortgage loan from the periodic statement requirements if any consumer on the loan is a debtor in bankruptcy under Title 11 of the U.S. Code or has discharged liability for the mortgage loan (pursuant to 11 U.S.C. § 717, 1141, 1228, or 1328).

With respect to any consumer on the mortgage loan, the exemption applies where:
(1) the consumer requests in writing that the servicer cease providing a periodic statement or coupon book;

(2) the consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due;

(3) a court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay regarding the dwelling that secures the loan, or requiring the servicer to cease providing a periodic statement or coupon book; or

(4) the consumer files with the court overseeing the bankruptcy case a statement of intention to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after commencement of the bankruptcy case.

It should be noted that the exemption ceases if the consumer affirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.

Under the revised exemption, during the time any consumer on a mortgage loan is a debtor in bankruptcy or if the consumer has discharged personal liability for the mortgage loan (pursuant to 11 U.S.C. § 727, 1141, 1228, or 1328), a servicer must provide a modified periodic statement. The modified statement may omit the normally required information regarding late fees, length of delinquency, risks of delinquency, and delinquent account history, and need not show the amount due more prominently than other disclosures.

When the loan ceases to be subject to discharge, the debtor exits bankruptcy, or the bankruptcy exemption no longer applies, a servicer then transitions to providing the normal periodic statement. The periodic statement must include a statement identifying the consumer’s status as a debtor in bankruptcy or the discharged status of the loan, and a statement that the periodic statement is for information purposes only.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, September 28, 2017

The “Carrot and Stick” Disclosure

We were recently told about a “carrot and stick” disclosure for counteroffers under ECOA. Our compliance department wasn’t able to find anything on it, but we would still like to know more. What is this “carrot and stick” disclosure?

The terminology “carrot and stick” for the subject disclosure is rarely used in common compliance parlance. However, there really is a disclosure under the Equal Credit Opportunity Act (ECOA) that old hands at mortgage compliance sometimes still refer to as “carrot and stick.”

This metaphorical term usually refers to the ability of a lender to issue a disclosure that combines a counteroffer with an adverse action notice. A creditor that gives an applicant a combined counteroffer and adverse action notice need not send a second adverse action notice if the applicant does not accept the counteroffer. [12 CFR Supplement I, Part 202, Official Staff Interpretations, § 202.9(a)(1)-6]

Appendix C to Regulation B, the implementing regulation of ECOA, includes a sample of a combined counteroffer and adverse action notice, which is given in form C-4 of Appendix C to the regulation. [12 CFR Part 202, Appendix C-4]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, September 21, 2017

Human Resources Strategies

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

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

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?

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.       

  • 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.

  • 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.

  • 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. 

  • 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