Anti-Money Laundering Program – Some Key Questions

QUESTION

We are unsure of a few anti-money laundering issues. We know that you probably come across some of these issues all the time in your AML testing. Please enlighten us on how to deal with these questions.

1. After the filing of one or more SARs, what do we do if law enforcement contacts us requesting more specific information about the suspicious activity or requesting supporting documentation, and also if a law enforcement agency tells us that it does not intend to investigate the matter reported on the SAR?
2. Do we file the SAR on activity deemed to be suspicious even when a portion of the activity occurs outside of the United States or the funds involved in the activity originated from outside the United States?
3. Should we close an account (i.e., a loan application), if we identify suspicious activity?
4. How do we decide to extend the SAR filing period passed the 30-day rule requirement?
5. What should be done during an AML Program test?

ANSWER

Over the years our AML tests and risk assessments have given us considerable insight into the FinCEN requirements for residential mortgage lenders and originators. 

Your questions are good and reflect the concerns of many financial institutions. Here follows some guidance responsive to your questions.

1. If conduct continues for which a SAR has been filed, companies should report continuing suspicious activity with a SAR being filed at least every 90 days, even if a law enforcement agency has declined to investigate or there is the knowledge that an investigation has begun. Moreover, the information contained in a SAR that one law enforcement agency has declined to investigate may be of interest to other law enforcement agencies, as well as supervisory agencies.
2. Although foreign-located operations of U.S. companies are not required to file SARs, a financial institution may wish to file a SAR with regard to suspicious activity that occurs outside the United States that is so egregious that it has the potential to cause harm to the entire organization.
3. Closing a customer account as the result of the suspicious activity is a determination to make in light of the information available. Filing a SAR, on its own, should not necessarily be the basis for terminating a customer relationship. Rather, a determination should be made with the knowledge of the facts and circumstances giving rise to the SAR filing, as well as other available information that could tend to impact on such a decision. When faced with this decision, it may be advisable to include the organization's counsel, as well as other senior staff, in such determinations.
4. SAR rules require that a SAR is filed no later than 30 calendar days from the date of the initial detection of the suspicious activity, unless no suspect can be identified, in which case, the time period for filing a SAR is extended to 60 days. The fact that a review of customer activity or transactions is determined to be needed is not necessarily indicative of the need to file a SAR, even if a reasonable review of the activity or transactions might take an extended period of time. The time to file a SAR starts when the financial institution, in the course of its review or on account of other factors, reaches the position in which it knows, or has reason to suspect, that the activity and/or transactions under review meet one or more definitions of suspicious activity.
5. The AML Program test should provide a fair and unbiased appraisal of each of the required elements of the anti-money laundering program, including its Bank Secrecy Act (“BSA”) policies, procedures, internal controls, recordkeeping and reporting functions, and training. The test should consider internal controls and transactional systems and procedures to identify problems and weaknesses and, if necessary, recommend to management appropriate corrective actions. The test also should cover all anti-money laundering program actions taken by – or defined as part of the responsibility of – the designated compliance officer, including a determination of the level of money laundering risks faced by the business, the frequency of BSA anti-money laundering training for employees, and the adoption of procedures for implementation and oversight of program-related controls and transactional systems. A risk rating should be provided to assess continuity over time.

Jonathan Foxx

Managing Director

Lenders Compliance Group

List of Settlement Service Providers

QUESTION

We are a lender with a question about the list of settlement service providers. We permit our borrowers to shop for settlement services. Since we permit shopping for settlement service providers, do we have to provide any written list for these companies?

ANSWER

A creditor is required to provide a written list of the settlement service providers for which the creditor permits the consumer to shop for providers. Furthermore, a creditor may permit a consumer to shop for a settlement service provider if it permits the consumer to select the provider of the service, subject to reasonable requirements.

But, the written list requirement does not apply if the creditor does not permit the consumer to shop for any of the settlement services.

If a creditor permits a consumer to shop for a settlement service it requires, the written list must identify at least one available provider of that service and must state that the consumer may choose a different provider for that service. [TRID Rule under RESPA Regulation X; see TILA Regulation Z § 1026.19(e)(1)(vi)]

The CFPB has clarified that the creditor who permits a consumer to shop for settlement services must identify the settlement services required by the creditor for which the consumer is permitted to shop. The purpose of this revision was to clarify that the disclosure need not include all settlement services that may be charged to the consumer, but must include at least those settlement services required by the creditor for which the consumer may shop. [Revised Comment 19(e)(1)(vi)-2, July 7, 2017]

The CFPB also clarified that the creditor must identify settlement service providers, available to the consumer, for the settlement services required by the creditor for which a consumer is permitted to shop. For instance, if a creditor requires a consumer to purchase lender’s title insurance and the creditor permits the consumer to shop for lender’s title insurance, the creditor must disclose the lender’s title insurance on the Loan Estimate and at least one provider of the required settlement service, on the written list, capable of coordinating or performing the services necessary to provide the required lender’s title insurance. The list must include sufficient information to allow the consumer to contact the provider, such as the name under which the provider does business and the provider’s address and telephone number. [Revised Comment 19(e)(1)(vi)-4, July 7, 2017]

The creditor may identify on the list providers of services for which the consumer is not permitted to shop, provided the creditor clearly and conspicuously distinguishes those services from the services for which the consumer is permitted to shop. The list may accomplish this by placing the services under different headings.

It is worth noting that the Federal Register preamble to the July 2017 (supra) amendments states that a creditor is not required to provide a detailed breakdown of all related fees that are not themselves required by the creditor but that may be charged to the consumer, such as a notary fee, title search fee, or other ancillary and administrative service needed to perform or provide the settlement service required by the creditor. The same principle applies to the disclosure of services on the Loan Estimate.

The CFPB believes that a complete breakdown could lead to information overload and hinder the consumer’s ability to shop. However, a creditor must be sure that these fees, if excluded from the Loan Estimate, do not cause the sum of all charges subject to exceed the 10 percent threshold. [See § 1026.19(e)(3(ii)]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Rationale for Anti-Steering Prohibition

QUESTION

We are a wholesale lender with offices throughout the United States. Our third-party originators, all mortgage brokers, are required to meet the non-steering guidelines to prevent steering. But our debate is about what is in the interest of the borrower. Some brokers are telling us that the anti-steering rules may not be in their borrowers’ interest. We need a rationale to respond to them. What does it mean when a loan is in the interest of the borrower?

ANSWER

In order to determine whether a transaction is in the consumer’s interest, it must be compared to other possible loan offers available through the originator, if any, for which the consumer was likely to qualify at the time that the transaction was offered to the consumer. In effect, the applicable regulation clearly requires that the originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36I(e)(1)-2.i)]

The steering prohibition does not require a loan originator to direct a consumer to the transaction that will result in a creditor paying the least amount of compensation to the originator. However, if the loan originator reviews possible loan offers available from a significant number of creditors with which the originator regularly does business, and the originator directs the consumer to the transaction that will result in the least amount of creditor-paid compensation for the loan originator, the requirements of steering prohibition are deemed to be satisfied. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36(e)(1)-2.ii)]

For instance, when an originator determines that a consumer likely qualifies for a loan from Creditor A that has a fixed rate of 4%, but the originator instead directs the consumer to a loan from Creditor B that has a fixed rate of 4.5%, if the originator receives more in compensation from Creditor B than the amount that would have been paid by Creditor A, the steering prohibition is violated unless the higher rate loan is in the consumer’s interest. 

What constitutes the determination of being in the consumer’s interest is a dispositive factor. For example, a higher rate loan might be in the consumer’s interest if the lower rate loan has a prepayment penalty or if the lower rate loan requires the consumer to pay more in up-front charges that the consumer is unable or unwilling to pay or finance as part of the loan amount. [75 FR 58509, 58537 (codified at 12 CFR Supplement I to Part 226, Official Staff Commentary § 226.36(e)(1)-3)]

Jonathan Foxx

Managing Director

Lenders Compliance Group

Quit Claim and Closing Disclosures

QUESTION

We have a loan where the husband is buying the property as his sole and separate property. His wife is signing the Deed of Trust as to her homestead interest, but she is not on the loan and she will quit claim all other interest in the property. I have two questions: (1) Does it matter if her name is on the purchase contract? (2) Do we have to have her sign the Closing Disclosure?

ANSWER

First, since ownership of property means that a person holds a “bundle of rights,” a spouse who is not a “party” to the loan can sign a deed of trust encumbering less than all of the rights they may have in the property, including their homestead interest, and can also quit claim to the other spouse any and all other rights they may have in the property. The spouse who is not a “party” to the loan need not, and should not, sign the promissory note.

Likewise, since the property is being purchased by only the husband as his sole and separate property, his wife need not sign the purchase contract.

However, the better practice would be for the respective roles in the transaction of each of the spouses to be spelled out clearly in the purchase contract and to have both of them sign the contract; for instance, reciting the fact that they are husband and wife, but specifying that the property is being purchased only by the husband as his sole and separate property and that this is all acceptable and agreed to by the wife. That way, it is clear what the parties’ intentions are. This is particularly important in community property states, such as California, where property acquired during marriage is legally presumed to be held jointly by husband and wife unless the parties clearly express a contrary intention.

In the transaction you describe, depending on the laws of the state in which the transaction takes place, and the requirements of the title company, this may also eliminate the need for the wife to sign a deed of trust encumbering her “homestead interest,” since the contract would make it clear that she has no interest whatsoever in the property being acquired and, hence, no interest to encumber by a deed of trust.   

Second, with respect to your question about the Closing Disclosure, if a person encumbers all or part of any interest they may have in a parcel of real property by signing a deed of trust, that person is usually deemed by the laws of most states to be a “guarantor” or “surety” of the loan obligation, even if they do not sign the promissory note.  Thus, for example, California Civil Code §2787 provides in pertinent part:

“The distinction between sureties and guarantors is hereby abolished. The terms and their derivatives, wherever used in this code or in any other statute or law of this state now in force or hereafter enacted, shall have the same meaning as defined in this section. A surety or guarantor is one who promises to answer for the debt, default, or miscarriage of another, or hypothecates property as security therefor. …” (Emphasis added.)

Here, on the facts given, the wife is not supposed to be an “obligor” on the loan and title is supposed to be held only by the husband as his sole and separate property. But the facts also specify that the wife will be signing a deed of trust encumbering her homestead interest. To the extent that makes her a “guarantor” or “surety,” the determination of whether or not she is entitled to receive a Closing Disclosure depends on whether the transaction is or is not “rescindable.”

In that regard, Section 1026.17(d) of Regulation Z provides in pertinent part:

“…If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. If the transaction is rescindable under § 1026.23, however, the disclosures shall be made to each consumer who has the right to rescind.” (Emphasis added.)

Section 1026.23 of Regulation Z provides in pertinent part:

“In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. …”

The official interpretation § 1026.23 states:

“Multiple consumers. When two consumers are joint obligors with primary liability on an obligation, the disclosures may be given to either one of them. If one consumer is merely a surety or guarantor, the disclosures must be given to the principal debtor. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under § 1026.23, although the disclosures required under § 1026.19(b) need only be provided to the consumer who expresses an interest in a variable rate loan program. When two consumers are joint obligors with primary liability on an obligation, the early disclosures required by § 1026.19(a), (e), or (g), as applicable, may be provided to any one of them. In rescindable transactions, the disclosures required by § 1026.19(f) must be given separately to each consumer who has the right to rescind under § 1026.23. In transactions that are not rescindable, the disclosures required by § 1026.19(f) may be provided to any consumer with primary liability on the obligation. See §§ 1026.2(a)(11), 1026.17(b), 1026.19(a), 1026.19(f), and 1026.23(b).” (Emphasis added.)

Here, since only the husband is acquiring title as his sole and separate property, and the wife is not “on the loan,” but at most a surety or guarantor, and since this is not a “rescindable” transaction under §1026.23 because it is a purchase money loan, which is exempt as a “residential mortgage transaction” under §1026.23(f)(1) and 1026.2(a)(24), the Closing Disclosure need only be given to the husband, who is the consumer “primarily liable” on the loan and the “principal debtor.”

Michael R. Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Sexual Harassment in the Workplace

QUESTION

Sexual Harassment issues are in the news. How can I ensure that my company is creating an environment of support for victims and following all legal requirements?

ANSWER

Handling complaints of sexual harassment the right way may keep employees from filing a case with the Equal Employment Opportunity Commission (EEOC) that investigates these types of complaints.

Best Practices on the proper handling of complaints are outlined below.

• Understand what sexual harassment is. Sexual harassment is the unwelcome behavior of a sexual nature that is made a term or feature of an individual’s employment or creates a hostile work environment. A hostile work environment is the most common and can be physical, verbal or visual.
• Create an environment of mutual respect among all employees. Leadership should lead by example and make it clear to all managers and employees that this type of behavior will not be tolerated.
• A confidential process for reporting alleged harassment is critical. Investigators must be prompt and thorough. Even anonymous complaints must be investigated. Results of an investigation are confidential and should be released only on a “need to know” basis.
• If allegations are found to be true, action should be taken in accordance with company policy and federal and state laws. Consequences should be administered fairly and consistently.
• Leadership must make it clear that retaliation of the complainant will not be tolerated. Retaliation is upheld in more cases investigated by the EEOC than the facts of the initial harassment complaint.
• Preventive training is key. Federal law requires managers in companies with 50 or more employees to take two hours of training within six months of becoming a supervisor, and at least once every two years. States may have more stringent guidelines. The company must keep records of all training.
• Although not required by law, training for employees is encouraged. This will ensure a common understanding of prohibited behavior and the company’s commitment to a harassment-free environment.

Lenders Compliance Group® can provide training to managers and employees or assist with sexual harassment policies and investigative procedures. A good place to start would be to have us conduct our HR Tune-up!™, which provides an overview and action plan for remediation.

Kimberly Braman

Director/Human Resources Compliance

Lenders Compliance Group® 

Steps for Responding to Consumer Complaints

QUESTION

In our recent CFPB exam, the examiners noted that we did not have a policy and procedure in place for consumer complaints that took the CFPB's Company Portal into consideration. I know the policy is supposed to provide the procedures, step by step, for handling consumer complaints that originate through the portal. Our compliance attorney asked us to contact you, as she said you provide such policy documents for consumer complaints. So, what are the steps that we should be following when we receive a complaint through the CFPB’s complaint portal?

ANSWER

In the readiness review that we do in anticipation of the examination conducted by the Consumer Financial Protection Bureau (CFPB), one of the important policies to always review is the one relating to consumer complaints. Keep in mind that the CFPB considers the appropriate handling of consumer complaints a foundational pillar of the Compliance Management System.

The policy for handling consumer complaints that are issued via the “Company Portal” (so dubbed by the CFPB) is very extensive and involved. The lender should be particularly careful to include all the elements of the complaint mandates, which, in the case of the CFPB’s requirements, are specifically set forth in its Company Portal Manual. [See Company Portal Manual, Version 3.0, April 2017]

Response time and process flow are critical aspects of the compliance requirements vis-à-vis consumer complaints. The CFPB’s Office of Consumer Response answers consumers’ questions and sends consumers’ complaints directly to financial companies. It expects to work with companies in such a way as to get the consumer a response, generally within 15 days. The CFPB will consider responses to be past due for complaints that have exceeded the 15-day limit by which a company must provide an “in progress” status or the 60-day time limit by which a company must provide a final response to a consumer complaint.

The Consumer Response process requires the following nine steps:

1. Consumer submits a complaint about a consumer financial product or service by web, telephone, mail, fax, email, or another agency refers the complaint to the CFPB. Consumers who submit complaints directly to the CFPB’s website can opt to have their complaint narrative published in the Consumer Complaint Database.
2. Consumer Response screens the complaint for completeness and sends it to the company identified by the consumer via the secure portal for a response or refers it to the appropriate regulator.
3. Company reviews the complaint, communicates with the consumer as appropriate, and determines what action to take in response.
4. Company responds to the consumer and the CFPB via the portal.
5. OPTIONAL: Company selects from a structured list of public company response categories.
6. CFPB invites the consumer to review the company’s response by logging into the secure Consumer Portal or calling the CFPB’s toll-free number.
7. Consumers are given the opportunity to provide feedback to the CFPB about the complaint process.
8. Complaints are published in the Consumer Complaint Database when the company responds to the complaint confirming a commercial relationship with the consumer, or after the company has had the complaint for 15 days, whichever comes first. With consumers’ consent, scrubbed complaint narratives will be published when the company selects an optional public response or after the company has had the complaint for 60 calendar days, whichever comes first. Complaints can be removed if they do not meet all of the publication criteria.
9. Complaint data and information is shared with other offices within the CFPB, including, but not limited to, Enforcement and Supervision, as necessary.

Jonathan Foxx

Managing Director

Lenders Compliance Group

Adverse Action Obligations

QUESTION

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?

ANSWER

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

Recording Calls

QUESTION

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?    

ANSWER

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

Payment Shock Notice

QUESTION

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?

ANSWER

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

Unfair Debt Collection Practices

QUESTION

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?

ANSWER

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

Construction-Permanent Loan – Disclosing Increase in Payment

QUESTION

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"? 

ANSWER

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?”  

Discussion

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

Advertisements – Concerns about Charitable Donations

QUESTION

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!”

ANSWER

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.              

1.       FAIR LENDING

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 

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[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.)