Corrective Actions for Understated APR

QUESTION

We are a lender that made a USDA Rural Development loan to a borrower. We provided the borrower with a Truth-in-Lending Act (TILA) disclosure statement that disclosed the RD guarantee fee.

However, we failed to include the RD guarantee fee as a prepaid finance charge in annual percentage rate (APR) calculation. This failure to include resulted in an understated annual percentage rate (APR) in excess of 0.125% of the disclosed APR. We closed on the loan less than 60 days ago and borrower has not yet made any payments with respect to the loan.

What can we do to rectify the situation?

ANSWER

Under the provisions of the TILA, there will be no civil or regulatory liability if, within 60 days of discovering the error, the lender notifies the consumer of the error and “makes adjustments necessary to assure that the person will not be required to pay an amount in excess of the charge disclosed or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower”. [15 U.S.C. § 1640(b)] 

Thus, the consumer is to pay no more than the lesser of the finance charge actually disclosed (which would require the reimbursement of the undisclosed guarantee fee) or the dollar equivalent of the APR actually disclosed. In the scenario outlined above, you must notify the borrower and reimburse the borrower for the RD guarantee fee.

Joyce Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Mortgage Insurance Escrow Cushion at Closing

QUESTION

Our Company offers loans requiring mortgage insurance (MI) but collect the MI premiums with the monthly mortgage payment, with no upfront MI premiums collected at closing. 

May we collect a cushion to avoid an escrow shortage at the end of the year?

ANSWER

Bottom Line Up Front: You would not collect a “cushion” at closing but you may collect an “escrow deposit” to ensure that the consumer’s mortgage insurance premiums are paid in a timely manner, ahead of due dates as applicable, to avoid penalty or harm to the consumer, and to avoid a potential escrow shortage.

A “cushion” or “reserve” should not be confused with the “escrow deposit” collected at closing. Even though these terms are often used and understood interchangeably, Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act (“RESPA”), provides that that in addition to the escrow deposit, the servicer may charge the borrower a cushion that shall be no greater than one-sixth of the estimated total annual payments from the escrow account (i.e., two monthly payments cushion as a maximum allowable reserve). Regulation X defines cushion or reserve as “funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements or disbursements made before the borrower's payments are available in the account”. 

If the escrow deposit is accurately calculated and collected at closing, the borrower’s payments will be available in his or her escrow account to cover the premiums when due.  Mortgage premiums disbursed on a consistent monthly schedule (as described in the question) cannot be considered “unanticipated” and, therefore, would never be a need to collect a “cushion” to cover unknown disbursements as allowed with other categories of escrow payments under Regulation X. 

The prepaid escrow MI deposit would be included on the HUD as with other prepaid escrow items. For example, the mortgage insurance escrow deposit required would be entered on Line 1003 of the HUD to reflect the corresponding amount disclosed on line 9 of the GFE.

The escrow deposit amount should be the least amount possible to ensure that payments can be made when due, and at the same time achieving a target balance of zero dollars remaining at the end of projected escrow year. Of note, the escrow year is defined under Regulation X as twelve consecutive months, not necessarily twelve calendar months. If the escrow deposit is accurate at closing, there should be no need to collect a “cushion” for monthly mortgage insurance premiums.

When MI is collected upfront at closing, the premium is typically added to the total cash settlement and financed into the mortgage. In your scenario, the insurance premium is not a settlement cost to be paid at closing. HUD Line 902 would indicate “zero” as would the disclosed amount of line 3 of the GFE. The consumer should understand the difference between MI escrow deposits and upfront MI premiums.  

Final Note Except for the advance escrow deposit allowable at closing, no pre-accrual deposits can be collected during the servicing life of the loan. Servicers may resolve escrow shortages under annual escrow analysis adjustments. When complying with Regulation X’s escrow requirements, remember that each of the follow require distinct compliance procedures:

·        Initial Escrow Account Analysis [12 CFR 1024.17(c)(2) and (3) and 12 CFR 1024.17(k)]

·        Annual Escrow Account Statement requirements [12 CFR 1024.17(i)]

·        Shortages, Surpluses, and Deficiency requirements [12 CFR 1024.17(f)]

Wendy Bernard

Director/Legal & Regulatory Compliance

Lenders Compliance Group

AML Program for Mortgage Brokers

QUESTION 

I own a small mortgage brokerage and have an Anti-Money Laundering Program in place pursuant to the Bank Secrecy Act (“BSA”) and FinCEN guidelines. We have an AML officer. In addition, in August of 2012, my employees and I completed a training webinar on AML. 

Is there anything more I am required to do to be compliant with the Anti-Money Laundering (“AML”) rules?

ANSWER

Yes.  We previously answered the question (see our FAQ, October 10, 2013). Yet, based upon what we are seeing, many non-banks and mortgage brokers and are still confused with the BSA requirements.

As of August 13, 2012, non-banks and mortgage brokers (regardless of size) have been required to comply with the anti-money laundering and suspicious activity reporting requirements of the BSA. Having a policy in place and completing the initial training are just two of these requirements. 

The following are additional requirements under the BSA:

 1) All entities are required to perform an annual risk assessment (or sooner if circumstances dictate). The risk assessment should determine factors such as the AML vulnerabilities of the non-bank’s or broker’s products and services, the AML risks associated with the geographies in which it operates, and the AML risks of the customers with which it deals. 

[31 CFR 1029.210(b)(1)]

2) All employees of the non-bank and mortgage broker are required to receive training in AML compliance immediately upon commencement of their employment and annually thereafter. Evidence of such training and the training materials must be maintained by the entity and ready to be produced upon request. 

[31 CFR 1029.210(b)(3)]

3) All non-banks and mortgage brokers must perform an independent test (i.e., audit) of their AML program by an outside, independent, qualified third-party or internally by a qualified member of the staff who is completely independent from an entity’s AML compliance team. This test must be performed within 12-18 months of the August of 2012 implementation date and every 12-18 months thereafter.

[31 CFR 1029.210(b)(4)]

Please note that the foregoing is not intended to be a list of all of the requirements under the BSA.

Michael Barone

Director/Legal & Regulatory Compliance

Lenders Compliance Group

NEED ASSISTANCE WITH THE AML PROGRAM?

USA Patriot Act: Information Sharing and Disclosure

QUESTION

As a non-bank residential mortgage lender and originator, I know that our company is now required to file SARs with FinCEN, but are we also subject to the information sharing and disclosure provisions of Sections 314(a) and (b) of the USA PATRIOT Act? 

ANSWER

Yes as to both 314(a) and (b). 

The plain language of the regulation (31 CFR §1029.500) states that “[l]oan or finance companies are subject to the special information sharing procedures to deter money laundering and terrorist activity requirements set forth and cross referenced in [subpart E of part 1029],” which, in turn, makes reference to the general regulations implementing 314(a) and (b) contained in 31 CFR §1010, subpart E. Accordingly, RMLOs are specifically subject to the information sharing provisions of 314(a) and (b).

However, as a practical matter, unless a financial institution receives a 314(a) request from FinCEN requiring it to search for and disclose records, they have no obligation under the 314(a) rule. And, although not required to do so, RMLOs can participate in protected information sharing under 314(b) by completing and submitting the electronic information form on the FinCEN site (http://www.fincen.gov/statutes_regs/patriot/section314b.html) and selecting “Other” for the “Primary Federal Regulator” field.

Brennan T. Holland

Director/Legal & Regulatory Compliance

Lenders Compliance Group