Evaluating Borrower’s Other Income

QUESTION

Evaluating income is usually a challenge for our underwriters, when considering part-time employment, alimony, child support, separate maintenance, retirement benefits or public assistance. Are there regulatory guidelines that we should be following for such purposes?

ANSWER

Although it certainly must be considered an underwriting requirement, there are also guidelines set forth in the Equal Credit Opportunity Act (ECOA) for evaluating income from part-time employment, alimony, child support, or separate maintenance, retirement befits or public assistance.

Specifically, a creditor may only consider such income on an individual basis – not on the basis of aggregate statistics. Furthermore, a creditor must assess the reliability or unreliability of the income by analyzing actual circumstances and not by analyzing statistical measures derived from a group. [12 CFR Supplement to Part 202 – Official Staff Interpretations § 202.6(b)(5)-1]

For instance, in determining the likelihood of consistent payments of alimony, child support, or separate maintenance, a creditor may consider factors such as:

1. Whether payments are received pursuant to a written agreement or court decree;
2. The length of time that the payments have been received;
3. Whether the payments are regularly received by the applicant;
4. The availability of court or other procedures to compel payment; and
5. The creditworthiness of the payor, including the credit history of the payor when it is available to the creditor. [12 CFR Supplement to Part 202 – Official Staff Interpretations § 202.6(b)(5)-2]

Jonathan Foxx

Managing Director

Lenders Compliance Group

Anti-Money Laundering Risk Assessments

QUESTION

We have two questions involving our anti-money laundering program: (1) When should we conduct a risk assessment? (2) How do we conduct a risk assessment?

ANSWER

Although many people think there is a specific timing requirement for risk assessments, the fact is the Bank Secrecy Act does not explicitly set forth guidelines on when it should be conducted. However, the risk assessment is usually conducted before the initial development of the compliance program. It is updated periodically. [Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Examination Manual (“FFIEC Exam Manual”)]

Our clients establish a policy to review the risk assessment either on an annual or a bi-annual basis. The risk assessment should also be updated when new products or services are offered, new offices are opened, or new delivery channels are activated. The risk assessment should be updated when another entity is acquired, a merger occurs or there is any other type of organizational change that may affect risks facing the organization.

It is also the case that many people do not realize that there is no statute or regulation which provides guidance on how a risk assessment for an AML compliance program should be conducted. Federal financial institution examiners receive guidance about risk assessments from the FFIEC Exam Manual. The FFIEC Exam Manual assists regulators in their determination of the overall or composite level of money-laundering, terrorist financing and related risks in an organization. [FFIEC Exam Manual, Appendix]

The risk assessment process or the final report does not have to be complicated and overly time-consuming. Depending on the complexity of the organization, at the most rudimentary level, the process may be as simple as listing the products and services offered, which customers use what products and services, and where and how the products and services are used. That said, an adequate and effective AML compliance program really cannot be developed without an appropriate understanding of an organization’s potential risk for abuse for money laundering, terrorist financing or other criminal activity. Therefore, the risk assessment process provides the organization with a structure for assessing the risks.

We have conducted AML risk assessments for many years. If you would like information about our risk assessment reviews, please contact us HERE.

Jonathan Foxx

Managing Director

Lenders Compliance Group

Proposition 2 Amendments to Texas Constitution

QUESTION

I know there have been changes to the Texas home equity laws, but do not know the specifics. What has changed?

ANSWER

Proposition 2, passed by Texas voters on November 7, 2017, amends sections 50(a), (f), (g) & (t) of Article 16 of the Texas Constitution, making changes to requirements for Texas home equity loans. These changes are effective for loans or refinancings made on or after January 1, 2018.

Among the significant modifications to § 50 are to the fees associated with the loan, removal of the prohibition on agricultural loans, making lending available to certain bank, savings and loans, savings bank, and credit union subsidiaries, and allowing a home equity loan to be refinanced as a traditional mortgage. The relevant changes are described below.

§ 50(a)(6)(E) - Fees:

The existing cap on fees and charges associated with a home equity loan has been 3%. This has now been changed to 2%. Although this would at first appear to be a win for consumers, the amendment also now excludes from fees (1) third-party appraisals, (2) surveys, (3) title insurance premiums, and (4) title examination reports, unless the cost is equal to, or greater than, the title premium. Because the addition of these fees might otherwise break the 3% cap, it is also a win for lenders. 

§ 50(a)(6)(I) - Agricultural Homestead:

The amendment removed the prohibition on home equity mortgages for agricultural homesteads. The new § 50(a)(6)(I) simply reads “Repealed.”

§ 50(a)(6)(P)(i) - Subsidiaries of Certain Financial Institutions:

The new constitutional amendment specifies that subsidiaries of banks, savings and loan associations, savings banks and credit unions, are now permitted to engage in home equity lending. 

Changes were made to other portions of Section 50 as well.

§ 50(f) Refinance:

Section 50(f) (“Once a HELOC, Always a HELOC”) has been amended to allow refinances of home equity loans as traditional mortgage refinances with specific conditions:

A.    the refinance is not closed before the first anniversary of the date the extension of credit was closed;

B.    the refinanced extension of credit only includes the actual costs of refinancing and does not advance the borrower any funds;

C.    the refinance does not (with all other loans on the homestead) exceed 80% of the fair market value of the property;

D.    the lender provides the owner the specific written notice included in the provision not later than the third business day after the date the owner submits the loan application to the lender and at least 12 days before the date the refinance of the extension of credit is closed.

The Notice under 50(f)(ii)(D) states that the borrower has the option to refinance as either a home equity loan or a non-home equity loan, if available, and contains warnings as to rights which may be waived by refinancing as a non-home equity loan. Specifically, warnings that a non-home equity loan:

(1) WILL PERMIT THE LENDER TO FORECLOSE WITHOUT A COURT ORDER ;

(2) WILL BE WITH RECOURSE FOR PERSONAL LIABILITY AGAINST YOU AND YOUR SPOUSE; AND 

(3)  MAY ALSO CONTAIN OTHER TERMS OR CONDITIONS THAT MAY NOT BE PERMITTED IN A TRADITIONAL HOME EQUITY LOAN. HOWEVER, A HOME EQUITY LOAN MAY HAVE A HIGHER INTEREST RATE AND CLOSING COSTS THAN A NON-HOME EQUITY LOAN.

 § 50(g) - 50(a)(6) Notice: 

The 12-day notice which is currently required by Section 50(g) has been amended to reflect the fee cap and agricultural homestead changes to 50(a)(6).

§ 50(t)(6) – Repeal of the 50% LTV cap on HELOCs:

The existing constitutional provision prohibited advances on HELOCs if the total principal amount outstanding exceeded 50 percent of the fair market value of the homestead. This provision has been repealed by the new amendment, so that the 80% LTV cap provided in § 50(t)(5) and § 50(g)(6)(B) applies to such advances.

Brennan Holland
Director/Legal & Regulatory Compliance
Lenders Compliance Group

FHA and VA Loans – Charging Notary Fees

QUESTION

We need some assistance regarding our ability as a lender to charge the borrower notary fees on FHA and VA loans when it is an employee of the lender who is acting as the notary. Can you please provide some guidance?

ANSWER

With respect to a VA loan, the lender may not charge the borrower a separate itemized notary fee, regardless if the notary is an employee or not. All such fees are intended to be covered by the 1% flat fee charge. 

[VA Lender’s Handbook Ch. 8.2-d]

With respect to an FHA loan, the current handbook provides that the lender may charge the borrower “reasonable and customary fees that do not exceed the actual cost of the service provided”. 

[HUD Handbook 4000.1.II.A.6.a.x(A)] 

The italicized section of the previous sentence implies that a lender may not charge for services provided by its employees as the lender did not incur any costs, as the employee’s salary is part of the lender’s overhead.

A prior version of the HUD handbook specifically delineated allowable fees which included a notary fee if notarization is required by the state and the notarization is performed by a notary who is not employed by the lender.  

[HUD 4000.2 Rev-3 Ch. 5-2(O)]  

HUD Handbook 4000.2 Rev-3 was superseded by Handbook 4155.2 which did away with the specific categories but stated that the cost for any item charged must not exceed the cost paid by the lender or charged to the lender by the service provider, thus making it impermissible to charge for services provided by the lender’s employees. Handbook 4155.2 has been superseded by Handbook 4000.1 discussed above.

Pertinent sections of the Handbooks cited above are set forth below.  

HUD Handbook 4000.1.II.A.6.a.x(A)

x. Closing Costs and Fees

The Mortgagee must ensure that all fees charged to the Borrower comply with all applicable federal, state and local laws and disclosure requirements.

The Mortgagee is not permitted to use closing costs to help the Borrower meet the Minimum Required Investment (MRI).

(A) Collecting Customary and Reasonable Fees. The Mortgagee may charge the Borrower reasonable and customary fees that do not exceed the actual cost of the service provided. The Mortgagee must ensure that the aggregate charges do not violate FHA’s Tiered Pricing rules.

HUD Handbook 4155.2 6.A.3.a Collecting Customary and Reasonable Fees

The lender may only collect fair, reasonable, and customary fees and charges from the borrower for all origination services. FHA will monitor to ensure that borrowers are not overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on the amount of any fees that a lender may charge a borrower(s) for obtaining an FHA loan.

Aggregate charges may not violate FHA’s tiered pricing rules, per ML 94-16.

Additionally, FHA does not allow “mark-ups.” The cost for any item charged to the borrower must not exceed the cost paid by the lender, or charged to the lender by the service provider.

Only the actual cost for the service may be charged to the borrower.

HUD Handbook 4000.2 Rev-3 Ch. 5-2(O)

CLOSING COSTS AND OTHER FEES (05/04)

Listed below are the customary and reasonable fees and charges that may be collected from the borrower by the lender and used to meet the minimum investment requirement for purchases and added to the existing indebtedness for refinances. The cost for any item charged to the borrower must not exceed the cost paid by the lender or charged to the lender by the service provider.

* * *

O. Courier/Wire/Notary Fees. Courier fees and wire fees may be charged only on refinances and only for delivery of the mortgage payoff statement to the lien holder and for closing documents to the settlement agent. The borrower must agree in writing to pay for the courier and wire fees, prior to loan closing. Notary fees may be charged if notarization is required by state law and is performed by a notary who is not employed by the lender.

VA Lender’s Handbook Ch. 8, 2-d: Lender's One Percent Flat Charge (11/08/12)

In addition to the “itemized fees and charges,” the lender may charge the veteran a flat charge not to exceed one percent of the loan amount.

Calculate the one percent on the principal amount after adding the funding fee to the loan, if the funding fee is paid from loan proceeds (except Interest Rate Reduction Refinancing Loans (IRRRLs).

Note: For IRRRLs, use VA Form 26-8923, IRRRL Worksheet, for the calculation.

The lender’s flat charge is intended to cover all of the lender’s costs and services which are not reimbursable as “itemized fees and charges.”

The following list provides examples of items that cannot be charged to the veteran as “itemized fees and charges.” Instead, the lender must cover any cost of these items out of its flat fee:

• notary fees

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Credit Transactions involving Spouses

QUESTION

We opt to furnish information on our mortgage loan transactions. We have a few questions involving the reporting of these transactions to consumer report agencies or other creditors. What are our requirements to furnish information involving spouse? Are we required to maintain files in a certain manner? Do we have to keep separate files for each participant to a joint account? Also, what information is furnished when the spouse assumes the mortgage loan?

ANSWER

Under the Equal Credit Opportunity Act (ECOA), creditors are not required to furnish information to the consumer reporting agencies or other creditors, although creditors may be subject to other requirements under which they must furnish information on consumers to consumer reporting agencies. [12 CFR Supplement I to Part 202, Official Staff Interpretations § 202.10-1]

When a creditor furnishes credit information to consumer reporting agencies or other creditors, the creditor must designate:

1. Any new account to reflect the participation of both spouses if the applicant’s spouse is permitted to use or is contractually liable on the account (other than as a guarantor, surety, endorser, or similar party); and
2. Any existing account to reflect such participation, within ninety days after receiving a written request to do so from one of the spouses. [12 CFR § 202.10(a)] 

With respect to maintaining files, the creditor is not required to create or maintain separate files in the name of each participant on a joint or user account, nor is it required to maintain any other, particular system of recordkeeping or indexing. ECOA requires only that a creditor be able to report information on consumer accounts in the name of each spouse. If a creditor receives a credit inquiry about a wife, the creditor should be able to locate her credit file without asking the husband’s name. [12 CFR Supplement to Part 202, Office Staff Interpretations § 202.10-4]

Regarding the spouse assuming the mortgage, when new parties who are spouses undertake a legal obligation on an account, as with the assumption of a mortgage loan, the creditor should change the designation on the account to reflect the new parties and must furnish subsequent credit information on the account in the new names. [12 CFR Supplement I to Part 202, Official Staff Interpretations § 202.10(a)-1]

Jonathan Foxx

Managing Director

Lenders Compliance Group