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Friday, May 26, 2017

Self-Test Privilege

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

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

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

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

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

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

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

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

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

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

Jonathan Foxx 
Managing Director 
Lenders Compliance Group

Thursday, May 18, 2017

Loan Officer Compensation Plans – Some Basic Concepts

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

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

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

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

Jonathan Foxx
Managing Director 
Lenders Compliance Group

Thursday, May 11, 2017

Appraiser Selection and Management

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

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

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

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

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

Thursday, May 4, 2017

Obligation to Transfer Appraisal

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

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

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

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

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

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

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

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

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

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

Freddie Mac:  Appraiser Independence Requirements FAQs
November 2010

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

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

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

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

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

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