Promotional Rates

QUESTION

In designing our new ad campaign, we have to decide whether to offer a promotional rate or a discounted rate. But we are unsure if these two rates can be one and the same thing. What is the difference between these rates and if they are the both in a transaction, do we need two different disclosures for each one?

ANSWER

This is most certainly not a distinction without a difference! A “promotional rate,” in connection with a variable rate plan, is an APR that is not based on the index and margin that will be used to make rate adjustments under the plan, if that rate is less than a reasonably current APR that would be in effect under the index and margin that will be used to make rate adjustments under the plan. [12 CFR § 226.16(d)(6)(i)(A); 12 CFR Supplement 1 to Part 226 – Official Staff Commentary § 226.16(d)-5.i]

A “Discounted rate” is an initial APR that is not based on the index and margin used to make later rate adjustments in a variable rate plan. [12 CFR § 226.16(d)(2)]

Therefore, a discounted rate encompasses only an initial rate, whereas a promotional rate encompasses a rate that could be in effect any time during the life of a credit transaction.

Thus, a rate can be both a discounted rate and a promotional rate and subject to the disclosure requirements for both types of rates.

Jonathan Foxx

Managing Director

Lenders Compliance Group

NMLS Examinations: Best Practices

QUESTION

As a stateside licensed mortgage lender with multiple state licenses, I have many thoughts about the exam process, but I am hesitant to raise any of these issues with the examiners. I really would like to know some tips on how to handle examinations involving NMLS guidelines. So, what are some Best Practices involving the NMLS examination readiness?

ANSWER

I recently attended the 10th Annual Conference and Training, held in New Orleans, for the Nationwide Multistate Licensing System & Registry (NMLS). One of the breakout sessions was entitled Examination Best Practices: Maximizing Your Resources. The session was moderated by a former senior state regulator and the panel included two senior examiners with multistate examination experience. Rounding out the panel was a prominent legal and regulatory compliance attorney and the head of examinations for a very large multistate lender licensee. While the panel licensee was from a multistate environment, the following commentary relates both to single state and multistate examinations.

Point of Contact

One of the keys to ensuring a successful audit is to establish one point of contact from the licensee to interface with examiners. Doing this will streamline the process by directing examination issues to the right people in your company. Also know that having a single point of contact will eliminate misinterpretations of what is being asked for, since multiple phone calls from more than one person tend to cause problems. Selecting the contact person should focus on individuals who can coordinate the examination tasks. They should have strong business relationships with the parties involved and be an organized multi-tasker.

Stakeholders

It is crucial that the people who talk with the examiners are those people involved in the specific

area of the company under review. Simply put, if financial issues are involved, bring in the financial

person to discuss those issues.

Excessive Legal Reviews

One aggravating factor for examiners is when the company runs all requested documents through their legal team. As one regulator put it, each examiner is getting paid to sit there whether they have documents to review or not. Legal review of all documents in advance can create the image that the files are being scrubbed. The point was made by the attorney on the panel that there are instances when books and records need legal review relating to issues of privilege.

Examiner Selection

One of the suggestions from the mortgage community is for the regulator to carefully consider who is named as the Examiner-in-Charge (EIC). They need to be highly qualified, because sending green, inexperienced people into a large company exam is counterproductive. But, if it must be that way, it is essential to surround the EIC with very experienced examiners. A related pain point is when well-meaning and well-intentioned EIC’s do not read or understand the issues or misinterpret issues.

Responding to the Examiner

It is a good practice for companies to reach out to the examiners within 72 hours of receiving the exam notice. Regulators are generally open to negotiating the information request due date and answering any clarifying questions from the company. A strong EIC will welcome comments from the company so long as it is done in a polite manner. EICs do not want company employees to feel hesitant about speaking out. It is a tricky process to reach out to the regulator. The company needs to consider the relationship that it has with the regulators. Is it warm or cool? The company point person should get to know the EIC and establish a relationship.

Mortgage Call Report (MCR)

The licensee should be certain that the information submitted on Mortgage Call Reports is accurate. The loan list should be reviewed to ensure accuracy in advance of the start of the exam. The company should also establish an examination checklist. Tasks are entered into an Excel spreadsheet as well as additional tasks as the examination proceeds. This is a highly effective tool for effective exam management. If you are unsure of how best to configure and file MCRs, you may want to contact us, as one of our practice areas is Licensing and Mortgage Call Reports. 

Keep Notes

The company should take minutes of all meetings and conversations. This is extremely helpful as it allows you to refer back to topics or to respond to the examiners, in the event an issue escalates.

The company should review its complaint log in detail. What are the major issues that caused the complaints? Hopefully the issues will be training issues rather than legal issues.

Multistate Submissions

A pain point for companies in the area of data submission in a multistate exam is having to send the same data multiple times to participating states. While some of the large examinations are not that way, you should expect some à la carte requests from the participating states. While on the topic of data, the multistate exam process regulators make a conscious effort to use one template and have the EIC review and add state specific requests. This results in a single request for information with state specific items added to it.

Consumer Financial Protection Bureau (CFPB)

Some multistate exams are coordinated with the CFPB. Work is done ahead of time and some of the work is done on site. In most cases, the state work will wrap up and the CFPB will remain on site for a longer period of time.

Manage Expectations

On the first call with the regulators, you need to develop solid expectations for the exam process. Go through the examination request timelines and discuss procedures. Ask simple questions as to regulator expectations and the list of deliverables. Proceeding in this fashion eliminates many obstacles. Not doing this can be detrimental to your exam. Managing expectations is critical. While keeping things on schedule is a challenge, no one likes surprises!

Checking Status

During the engagement, do not be afraid to ask the regulators what they are looking for or what they want. By not asking these questions, you set up a sequence of events resulting in more scrubbing and the appearance that you are hiding information from the examiners. Be certain to provide the information that is being requested.

Transparency

One of the suggestions from regulators is to bring to their attention anything that you find which may be a violation of statutes or regulations. The regulator will likely clear the item at the end of the examination. Additionally, doing so creates a trustworthy relationship. The regulator is not doing the examination to create a fine. In fact, it is their goal to not impose fines and penalties. The goal is to reimburse the consumer while getting the attention of the licensee. The licensee should not be hearing about something for the first time during the exit interview! The process works both ways in that the company needs to be responsive to requests the first time. The exit interview is a two-way street. Both the company and the regulator should exchange information in this process. The regulator will inform the licensee of the findings of the exam during the exit interview. 

It is my hope that you have come away with some useful ideas and tools that you can implement on future examinations. We can assist you with NMLS examination readiness, licensing, and MCR filings, please contact us for a free consultation.

Alan Cicchetti

Director/Agency Relations

Lenders Compliance Group

Executive Director

Brokers Compliance Group

Medical Leave and Time-Off

QUESTION

An employee has requested time off for a medical reason, but this individual has not disclosed the details. It is a critical time for our company and we cannot afford for the employee to take time off. Are we obligated to allow time off?

ANSWER

Your employee may qualify for medical leave under the Family and Medical Leave Act (FMLA), and, if so, the company may be required to allow the time off. Below are some basic facts to help you assess your obligations under FMLA. 

• FMLA applies to all private businesses that employ 50 or more employees for at least 20 weeks per year.
• To qualify, an employee must work for the company for at least 12 consecutive months and work at least 1250 hours in those 12 months. An employee need not be full-time to qualify; the minimal qualification of 1250 hours is about 24 hours per week. In 2008 FMLA expanded coverage for military leaves for purposes of exigency leave (when a family member is deployed) and leave to care for an injured service member.
• FMLA cannot be denied if the employee meets the qualifications and has a documented medical reason for the leave. The employee does not have to disclose the nature of their medical condition; however, the condition needs to be verified by a medical professional. Inconvenience for the employer is not an acceptable reason to deny a qualified employee their leave request.
• The 12 weeks of available leave does not have to be taken consecutively. An employee could work an intermittent or reduced hours schedule.
• The company is required to restore the employee to their original position upon return from the leave of absence. FMLA also allows for an employee to be placed in the same or equivalent position. An equivalent position must have the same or substantially similar duties authority and responsibility as the pre-leave position. 

Leave laws are very complex. Violating FMLA can result in costly fines or penalties, third-party complaints, or attorney letters demanding compensation for the denied employee. I’ve outlined below some situations caused by uninformed managers that will place the company at risk. 

• Denying leave to a qualified employee. If your company has an HR department, it’s always a good practice to consult the professionals when working with a request for FMLA. If your company does not have an HR department, it is even more imperative that managers are aware of their obligations under FMLA. They should never dismiss a request before reviewing the facts to verify employee qualifications and need for leave. An employee does not need to use the words “FMLA” in order to be approved for leave. Managers need to understand that any request for time off could be approved under FMLA. An employee may say, “I need surgery” or “I need some medical tests”, as an example.
• Pressing an employee for details of their medical condition. An employee does not have to reveal the nature of their medical condition in order to be approved for leave under FMLA. A medical certification is all that is necessary. (Note: if an employee is requesting an accommodation, it will probably be necessary to understand the medical condition in order to consider appropriate accommodations).
• Disclosing an employee’s medical condition. If an employee voluntarily discloses the nature of their medical condition (or has disclosed it as part of a request for accommodation), the manager is not authorized to discuss that information with others. The law allows for sharing information on a “need to know” basis, which may include their immediate supervisor or manager, first aid or safety personnel in the event the employee needs emergency medical treatment and their condition is relevant.
• Failure to return an employee to their previous or equivalent position could be considered retaliation. Even if an employee is rightfully provided with the requested leave, any retaliation or perceived retaliation will be considered a violation of FMLA laws. 

The clear remedy for a manager’s mistakes is to provide a comprehensive FMLA training program to all supervisors and managers. Even if your HR department manages the details of employee leaves, uninformed managers can leave the company vulnerable to complaints.

Additionally, many states have existing leave laws that must be followed in addition to the federal FMLA. These should be included in any training provided to supervisors and managers.

Kimberly Braman

Director/Human Resources Compliance

Lenders Compliance Group

Address Discrepancies

QUESTION

We implement the Red Flags Rules in accordance with the Identity Theft Prevention Program requirements. The subject of address discrepancies comes up from time to time and we are not sure about the policies and procedures needed to handle these situations. What are the procedures we should use for instances of address discrepancy?

ANSWER

There are essentially two features of the procedures to implement address discrepancies: comparative analysis and verification. The underlying premise is the need to form a reasonable belief that a consumer report relates to the consumer who is the subject of the report.

Here are the two ways to implement address discrepancies.

1. Comparing the information in the consumer report provided by the Consumer Reporting Agency (“CRA”) with the information that your firm:

a. Obtains and uses to verify the consumer’s identity in accordance with the requirements of the Customer Identification Program (“CIP”) rules [see 31 USC § 5318(i); for depositories, see 31 CFR § 103.121];

b. Maintains in its own records, such as applications, change of address notifications, other customer account records, or retained CIP records; or

c. Obtains from third-party sources; or

2. Verifying with the consumer the information in the consumer report provided by the CRA. [12 CFR § 334.82(d)(1)-FDIC; 16 CFR § 641.1(c)-FTC; 12 CFR § 222.82(c)-FRB; CFR § 81.82(c)-OCC; 12 CFR §717.82(c)-NCUA]

Jonathan Foxx

Managing Director

Lenders Compliance Group