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Thursday, July 26, 2018

Rental Property Rule

QUESTION
We hear a lot about consumer purpose versus business purpose loans. Our particular interest is in wanting to know about the “rental property rule.” So, what is the “rental property rule” and what is its effect on consumer purpose loans?

ANSWER
Use the Truth in Lending Act’s Regulation Z to determine whether a loan is for a consumer purpose or a business purpose. In making this determination, you need to be familiar with the Regulation Z commentary to 12 CFR 1026.3(a). The commentary lists a number of general factors you should use in determining whether a loan is a consumer-purpose or business-purpose loan.

In addition, the comments provide specific guidance regarding rental property.

Here are some guidelines for the rental property rule:

· If the proceeds of a loan are to be used to acquire, improve, or maintain rental property, and the borrower expects to occupy the property for 14 days or less in the coming year, the loan is considered to be for non-owner-occupied property and, therefore, is a business-purpose loan.
· If the borrower will occupy the property for more than 14 days in the coming year, the loan is considered to be for owner-occupied property, and the rental property rule would not apply. In this case, there are some additional guidelines to follow:
o   If the proceeds of a loan are to be used to acquire, improve, or maintain rental property, and the borrower expects to occupy the property for 14 days or less in the coming year, the loan is considered to be for non-owner-occupied property and, therefore, is a business-purpose loan.
o   If the purpose of the loan is to improve or maintain the property, the loan is a business-purpose loan if the property contains more than four housing units.

A property that contains fewer than the required number of units under a particular test might still be a business-purpose loan based on the general factors used to determine business purpose, which is why familiarity with the commentary is necessary. The 14-day rule is used as a general guide. However, keep in mind that other factors also may affect the determination of whether a loan is for business purposes.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, July 19, 2018

Accuracy of Data reported to a Credit Bureau

QUESTION
We completed an examination by our regulator and just received the audit report. One item sticks out as an adverse finding and causes some concern. It deals with an FCRA violation. The regulator’s view is that we did not report accurate borrower information to a credit bureau and even questions the integrity of our reported data. So, our question is this: what constitutes accuracy? Also, what is involved in data integrity of borrower information?

ANSWER
The Fair Credit Reporting Act (FCRA) offers a description relating to “accuracy” in the context of reporting information to a Consumer Reporting Agency (CRA). Your financial institution should be providing certain pieces of information to the CRA about an account or other relationship with the consumer. The information should, at minimum:

1. Reflect the terms of and liability for the account or other relationship;

2. Reflect the consumer’s performance and other conduct with respect to the account or other relationship; and,

3. Identify the appropriate consumer. 

[12 CFR § 334.41(a)(FDIC); 16 CFR § 660.2(a)(FTC); 12 CFR § 222.41(a)(FRB); 12 CFR § 41.41(a)(OCC); 12 CFR § 717.41(a)(NCUA)]

In the context of information, “integrity” means that information the financial institution provides to a CRA about an account or other relationship with a consumer. The information being reported should, at minimum:

1. Be substantiated by the financial institution’s records at the time that the information is furnished;

2. Be furnished in a form and manner that is designed to minimize the likelihood that the information may be incorrectly reflected in a consumer report; and,

3. Include the information in the financial institution’s possession about the account or other relationship that the appropriate federal financial institution regulator or the FTC, as applicable, has:
a. Determined that the absence of the information would likely be materially misleading in evaluating a consumer’s creditworthiness, credit standing, credit capacity, general reputation, personal characteristics, or mode of living; and
b. Listed in section I.(b)(2)(iii) of the “Interagency Guidelines Concerning the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies” (which section lists the credit limit for an account, if applicable and in the furnisher’s possession).
[12 CFR § 334.41(e)(FDIC); 16 CFR § 660.2(e)(FTC); 12 CFR § 222.41(e)(FRB); 12 CFR § 41.41(e)(OCC); 12 CFR § 717.41(e)(NCUA)]
Jonathan Foxx
Managing Director
Lenders Compliance Group 

Thursday, July 12, 2018

SAFE Act: Civil Liabilities

QUESTION
We would like to put a section into our SAFE Act policy and procedures to account for civil liabilities and penalties. What are the civil liabilities under the SAFE Act? Are there gradations of the penalty amounts?

ANSWER
The SAFE Act specifies a maximum civil penalty of $25,000 (adjusted to $28,474 as of January 12, 2018) for each violation of its provisions.

The Dodd-Frank Act offers the possibility of substantially higher penalties than the maximum penalty specified by the SAFE Act, the SAFE Act being a Federal consumer financial law within the meaning of the Dodd-Frank Act. (See below for my definition of the foregoing emboldened term.)

These penalties (which the CFPB may inflation-adjust from time to time) may vary from up to $5,000 per day for any violation, to $25,000 per day for a violation “recklessly engaged in,” and to $1 million per day for a provision “knowingly violated.” Even firms that are not subject to the CFPB’s enforcement authority – such as depository institutions with total consolidated assets of less than $10 billion – are subject to these penalties, which could be sought by their prudential regulator or an applicable state Attorney General or state regulator, and perhaps by consumers as well.

On January 12, 2018, the CFPB adjusted the civil money penalty amounts, as required by the Federal Civil Penalties Inflation Adjustment Act. The CFPB increased the maximum civil monetary penalties under the Consumer Protection Act (Title X of the Dodd-Frank Act), 12 USC § 1055, for violating a Federal consumer financial law to $5,639 per day for a Tier 1 penalty, $28,195 for a Tier 2 penalty (“reckless” engagement), and $1,127,799 for a Tier 3 penalty (“knowing violation”).

The term Federal consumer financial law includes the Alternative Mortgage Transaction Parity Act (AMTPA), the Consumer Leasing Act (CLA and Regulation M), the Electronic Fund Transfer Act (EFTA and Regulation E), the Equal Credit Opportunity Act (ECOA and Regulation B), the Fair Credit Billing Act (FCBA, addressed in Regulation Z), the Fair Credit Reporting Act (FCRA), the Home Owners Protection Act (HOPA, primarily regarding mortgage insurance), the Fair Debt Collection Practices Act (FDCPA), parts of the FDIC Act and Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act (HMDA and Regulation C), the Home Ownership and Equity Protection Act (HOEPA, addressed in Regulation Z), the Real Estate Settlement Procedures Act (RESPA and Regulation X), the S.A.F.E. Mortgage Licensing Act (SAFE Act), the Truth-in-Lending Act (TILA and Regulation Z), the Truth-in-Savings Act (TISA), section 626 of the Omnibus Appropriations Act of 2009 (addressed in the MAP and MARS rule, CFPB Regulations N and O), and the Interstate Land Sales Full Disclosure Act.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Friday, July 6, 2018

Quality Control Self-Assessments

QUESTION
Our company utilizes a third-party quality control firm to perform post-closing reviews. We are meeting the requirement for the quality control review and the vendor management review by performing the pre-funding and post-closing reviews and reviewing the reviewer or auditing the auditor. How does this practice fulfill Fannie Mae’s Quality Control Self-Assessment requirements?

ANSWER
While you are meeting part of Fannie Mae’s mortgage quality control requirements with the review of loan files both pre-funding and post-closing and performing the vendor management of the third-party vendor, there are additional steps you must implement to ensure the entire quality control program meets or exceeds Agency expectations and requirements.

In 2013, Fannie Mae issued guidance for lenders to manage risk and comply with the Seller/Servicer Guide requirements, by providing the Quality Control Self-Assessment Worksheet to measure the effectiveness of your quality control program.

This worksheet contains ten sections and it reviews the requirements for a strong and compliant Quality Control Plan and Program. The ten sections are: 1) Governance/Authority, 2) Training, 3) Defect Rate, 4) Pre-Funding, 5) Post-Closing, 6) Appraisals, 7) Reporting, 8) Action Planning, 9) QC Vendor, and 10) Third Party Originations. This is a helpful tool to review the infrastructure of your internal quality control requirements. 

There are many components to a compliant Quality Control Plan. For instance, you must be diligent with periodic internal audits performed by internal staff or outsourced to a reputable risk management firm such as ours.

Regarding the completion of the worksheet, your Quality Control Manager should work with your Compliance Manager and/or your third-party quality control vendor. An annual self-assessment is in your best interest as policies and procedures are growing documents and even the smallest change can move you from being in compliance to being out of compliance. 

The Quality Control Self-Assessment Tool can be downloaded here

Better yet, contact me to find out how we can support your quality control needs! We offer an independent risk assessment of the quality control function. For auditing, we have a full compliment quality control process and our reports meet regulatory scrutiny. 

Brandy George
Executive Director
LCG Quality Control
Director
Underwriting Compliance
Lenders Compliance Group