Regulation P’s Revision

QUESTION

We have read that the CFPB recently issued final rule revisions for Regulation P. What we need to know is what happened. So, what was the revision? Are there new disclosures? Is there an effective date, and, if so, when?

ANSWER

Regarding the subject inquiry, I am going to answer as clearly as I can – hopefully not too wonkishly! – however, some background is needed for this explication. The revision you refer to is the CFPB’s amendment to Regulation P to include an exception to the annual privacy notice obligation set forth in the Gramm-Leach-Bliley Act (GLBA). The issuance date was August 17, 2018, and the effective compliance date is September 17, 2018.

You would need to go back almost three years ago, when the Fixing America’s Surface Transportation Act (FAST Act or FAST) amended the GLBA to provide for such an exception.[1] So, in actuality, the amendment is simply the CFPB ensuring now that Regulation P is consistent with the GLBA, as amended. I would note that although the effective compliance date is September 17, 2018, FAST’s amendment has been in effect. Therefore, financial institutions have been able to rely on the GLBA’s statutory exception to the annual notice obligation.

Now to dive into requirements of the notice itself. Under the GLBA, a financial institution must provide each consumer customer with an annual notice of its privacy policies and practices over the course of its relationship with the customer.[2] FAST amended the GLBA to provide an exception to the annual privacy notice requirement for financial institutions that satisfy two conditions; specifically, a financial institution is not required to provide an annual privacy notice to its customers if:

(1) the institution shares nonpublic personal information (NPI) about customers with nonaffiliated third parties only to the extent permitted by exceptions in the GLBA or Regulation P (i.e., the financial institution is not required to provide an opt out for sharing with nonaffiliated third parties), and

(2) the financial institution has not changed its policies and practices with respect to disclosing NPI from those described in the most recent privacy notice sent to customers.

Which brings us to Regulation P. In July 2016, the CFPB published its Proposed Rule to amend Regulation P to implement the FAST exception to the annual notice requirement. Therefore, the CFPB now adopts the proposal, largely as originally proposed.

Specifically, the Final Rule provides that a financial institution will not be required to deliver an annual privacy notice if:

(1) the institution discloses NPI only in accordance with the Regulation P exceptions, and

(2) the institution has not changed its disclosure policies and practices since the most recent privacy notice sent to customers.[3]

The Final Rule goes beyond FAST in the sense that it provides additional details surrounding when a financial institution that no longer qualifies for an exception must resume providing annual notices. Under the final rule, if a financial institution changes its policies in such a way that it is required to provide customers with a revised privacy (and no longer qualifies for the exception),[4] the financial institution will then be required to resume providing an annual notice thereafter (i.e., treating the revised notice as an initial notice).[5]

If the financial institution changes its policies but is not required to provide a revised privacy notice (despite the fact that it no longer qualifies for the exception), the financial institution will be required to deliver the annual notice within 100 calendar days after the change.[6]

The Final Rule eliminates the prior alternative delivery method for annual privacy notices that had been set forth in Regulation P.[7]

Your inquiry did not state whether you are a bank or non-bank and it did mention your primary regulator. So, take note of this caveat: financial institutions seeking to rely on the exception to the annual notice requirement should still consider the extent to which they are subject to a state privacy laws that would continue to impose an annual notice obligation or that would impose additional conditions on the availability of the exception.

To illustrate my point, I could go state by state, but, as an example, Vermont amended its financial privacy rules in March of this year to include an exception similar to the FAST Act.[8] Indeed, the Vermont rules impose additional conditions on the availability of an exception including that a financial institution does not disclose information to affiliates in a manner that would require an opt in under the Vermont Fair Credit Reporting Act and the financial institution posts its current privacy notice continuously and in a clear and conspicuous manner on a page of its web site on which the only content is the privacy notice.

Obviously, this is a regulatory mandate that requires very careful implementation protocol. If you need assistance in understanding the requirements and/or guidance in procedures relating to Regulation P, please contact us.

Jonathan Foxx

Managing Director

Lenders Compliance Group

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[1] Pub. L. No. 114-94, 129 Stat 1312 (2015)

[2] 12 CFR § 1016.5(a)(1)

[3] To be codified at 12 CFR. § 1016.5(e)(1)

[4] 12 CFR § 1016.8

[5] To be codified at 12 CFR § 1016.5(e)(2)(i)

[6] To be codified at 12 CFR § 1016.5(e)(2)(ii)

[7] This alternative took effect in October 2015, but provided little practical utility to financial institutions, particularly following the enactment of the FAST Act. The CFPB stated in the supplementary information accompanying the Final Rule that it removed the alternative delivery method because it believes it “will no longer be used in light of the annual notice exception,” as an institution that satisfied the conditions to use the alternative delivery method will now qualify for the exception to the annual notice.

[8] It also removed from the rules the alternative delivery exception that was originally added in 2015 similar to the CFPB’s own updates to Regulation P.

Qualified Mortgages: Third-Party Processing Fee in Points & Fees Test

QUESTION

With respect to the Qualified Mortgage points and fees calculation, we currently include third party processing fees.  However, it is our understanding that many of the larger companies in the industry exclude third party processing fees from the points and fees calculation. We would also like to do so provided we are comfortable with the legality of the practice.

ANSWER

A very good question and in the absence of further guidance from the regulators, a lender’s position on the issue depends on investors overlays and the lender’s appetite for risk.    

One of the characteristics of a qualified mortgage is that points and fees may not be excessive. The limits on points and fees vary depending on the loan amount and are adjusted annually for inflation by the CFPB. 

Currently, those limits are as follows:

o   3%, of the loan amount on a loan exceeding $105,158;

o   $3,155, for a loan greater than or equal to $63,995, but less than $105,158;

o   5 percent of the loan amount, for a loan greater than or equal to $21,032, but less than $63,995;

o   $1,052, for a loan greater than or equal to $13,145, but less than $20,000: 8 percent of the loan amount, for a loan amount less than $12,500.[i]

As to the inclusion or exclusion of a third-party processing fee, some lenders/investors assume the position that the processing fee is part of the origination fee and therefore, even if payable to a third party, must be included in the points and fees test. 

By contrast, many take the position, based upon the regulatory authority cited below, that so long as the fee meets the following criteria, it may be excluded from the QM points and fees test:

• The processor or processing company is not affiliated with the lender or the broker
• As the creditor, the lender receives no direct or indirect compensation in connection with the charge
• The third party processing fee is bona fide and reasonable
• The processing company is properly licensed and registered with NMLS to perform processing services if required by the law of the state in which the subject property is located
• If state law does not require the company to be licensed and registered, the individual contract processor must be licensed and registered with NMLS to perform processing services
• The third party processing fee should be disclosed on the LE in Section B “Services the Borrower Did Not Shop For”
• The third party processing fee must be paid directly to the third party processor or processing company
• The law of the state in which the subject property is located does not prohibit charging a consumer a contract processing fee in addition to origination fees
• A copy of the invoice is retained in the loan file and the fee amount matches the amount on the Loan Estimate and Closing Disclosure.

As with most “grey area” issues, you should check with your investor as to their specific overlays and requirements.

Regulatory Authority 

(Emphasis added.)

12 CFR 1026.43(b)(9) Points and fees has the same meaning as in §1026.32(b)(1).

12 CFR 1026.32(b) Definitions. For purposes of this subpart, the following definitions apply:

(1) In connection with a closed-end credit transaction, points and fees means the following fees or charges that are known at or before consummation:

(i) All items included in the finance charge under §1026.4(a) and (b), except that the following items are excluded:

* * *

(D) Any bona fide third-party charge not retained by the creditor, loan originator, or an affiliate of either, unless the charge is required to be included in points and fees under paragraph (b)(1)(i)(C), (iii), or (iv) of this section;

(iii) All items listed in §1026.4(c)(7) (other than amounts held for future payment of taxes), unless:

(A) The charge is reasonable;

(B) The creditor receives no direct or indirect compensation in connection with the charge; and

(C) The charge is not paid to an affiliate of the creditor.

Official Commentary, Paragraph 32(b)(1)-2

2. Charges paid by parties other than the consumer. Under §1026.32(b)(1), points and fees may include charges paid by third parties in addition to charges paid by the consumer. Specifically, charges paid by third parties that fall within the definition of points and fees set forth in §1026.32(b)(1)(i) through (vi) are included in points and fees. In calculating points and fees in connection with a transaction, creditors may rely on written statements from the consumer or third party paying for a charge, including the seller, to determine the source and purpose of any third-party payment for a charge.

i. Examples—included in points and fees. A creditor's origination charge paid by a consumer's employer on the consumer's behalf that is included in the finance charge as defined in §1026.4(a) or (b), must be included in points and fees under §1026.32(b)(1)(i), unless other exclusions under §1026.4 or §1026.32(b)(1)(i)(A) through (F) apply. In addition, consistent with comment 32(b)(1)(i)-1, a third-party payment of an item excluded from the finance charge under a provision of §1026.4, while not included in the total points and fees under §1026.32(b)(1)(i), may be included under §1026.32(b)(1)(ii) through (vi). For example, a payment by a third party of a creditor-imposed fee for an appraisal performed by an employee of the creditor is included in points and fees under §1026.32(b)(1)(iii). [See comment 32(b)(1)(i)-1.]

ii. Examples—not included in points and fees. A charge paid by a third party is not included in points and fees under §1026.32(b)(1)(i) if the exclusions to points and fees in §1026.32(b)(1)(i)(A) through (F) apply. For example, certain bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either are excluded from points and fees under §1026.32(b)(1)(i)(D), regardless of whether those charges are paid by a third party or the consumer. (Emphasis added.)

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

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[i] All fee and loan amounts are indexed for inflation. Section 1026.43(e)(3)(ii) provides that the limits and loan amounts in § 1026.43(e)(3)(i) are recalculated annually for inflation by the CFPB using the CPI-U index in effect on June 1. On August 30, 2017, the CFPB issued its Annual Threshold Adjustments for 2018 which modify the limits and loan amounts set forth herein. Those adjustments should be reviewed and implemented each year.

Bonus for Loan Officer’s Recruitment of New Loan Officer

QUESTION

If one of my loan officers recruits a new loan officer for us, is it legal to bonus the existing loan officer ten (10) basis points for each of the loans that the new loan officer brings in?

ANSWER

This is an interesting question because the bonus compensation is linked to new loans brought in by another loan officer. This raises questions regarding compliance with anti-kickback provisions of Section 8 of the Real Estate Settlement Procedures Act (RESPA), and the Loan Officer Compensation rules of the Truth in Lending Act (TILA).

The bonus plan probably does not violate RESPA §8, if both loan officers are W-2 employees, because Regulation X, the implementing regulation for RESPA, specifically permits the following:

“(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;” and 

“(vii) An employer's payment to its own employees for any referral activities.” (Emphasis added.) ^[i]

Also, assuming the bonus compensation is not paid by the consumer, so that the loan officers are not paid “dual compensation” by both the loan originator organization and the consumer in violation of Regulation Z, the implementing regulation for TILA[ii], such a bonus may be permissible under the TILA Loan Officer Compensation rules under certain conditions:

1. The compensation plan does not result in any kind of “steering” of consumers into loans not in their interest in order to increase the loan officer’s compensation. Such “steering” is prohibited under Regulation Z.[iii]

             

2. The compensation is not based on the term of a transaction or the profitability of a transaction or pool of transactions under Section 36(d)(1) of Regulation Z.[iv] In general, this section prohibits compensation based on “profits,” unless profits are from business other than mortgage-related business. However, the Rule adds two exceptions to this general prohibition: (1) mortgage-related business profits can be used to make contributions to certain tax advantaged retirement plans (which does not appear to be the case here); and (2) mortgage-related business profits can be used to pay bonuses and contributions under certain other plans if either the amount paid does not exceed 10% of the individual loan originator’s total compensation or the loan originator acts as an originator on 10 or fewer transactions over the preceding 12 months.[v]  The operative language of Reg. Z is as follows:

“(iv) An individual loan originator may receive, and a person may pay to an individual loan originator, compensation under a non-deferred profits-based compensation plan (i.e., any arrangement for the payment of non-deferred compensation that is determined with reference to the profits of the person from mortgage-related business), provided that:

(A) The compensation paid to an individual loan originator pursuant to this paragraph (d)(1)(iv) is not directly or indirectly based on the terms of that individual loan originator's transactions that are subject to this paragraph (d); and

(B) At least one of the following conditions

 is satisfied:

(1) The compensation paid to an individual loan originator pursuant to this paragraph (d)(1)(iv) does not, in the aggregate, exceed 10 percent of the individual loan originator's total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid; or

(2) The individual loan originator was a loan originator for ten or fewer transactions subject to this paragraph (d) consummated during the 12-month period preceding the date of the compensation determination.”

Under the scenario you have described, it is also possible that the loan officer may not actually qualify as a “loan originator” on any of the transactions you refer to, if he or she does not engage in any of the activities on any of the subject transactions that are described in the definition of “loan originator” under Regulation Z Section 1026.36(a). In that event the limitations of the Rule would not apply. The applicable definition of “loan originator” is as follows:

“(a)(i) For purposes of this section, the term ‘loan originator’ means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition. The term “loan originator” includes a creditor that engages in loan origination activities if the creditor does not finance the transaction at consummation out of the creditor's own resources, including by drawing on a bona fide warehouse line of credit or out of deposits held by the creditor. All creditors that engage in any of the foregoing loan origination activities are loan originators for purposes of paragraphs (f) and (g) of this section. The term does not include:

(A) A person who does not take a consumer credit application or offer or negotiate credit terms available from a creditor, but who performs purely administrative or clerical tasks on behalf of a person who does engage in such activities.” (Emphasis added.)

Since the terms “arranges,” “assists,” and “otherwise obtains” are broad, it is theoretically possible that someone could construe the loan officer’s recruiting activities of another loan officer as falling within those specified activities, but that is not likely. Nevertheless, it is probably safest to assume that the loan officer is an “originator” and to try to comply with the terms of the exception to the L.O. Compensation Rule outlined above.

Michael Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group &

Servicers Compliance Group

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[i] 12 CFR §1024.14(g)(iv) and (vii)

[ii] 12 CFR §1026.36(d)(2)

[iii] With certain specified exceptions, under 12 CFR 1026.36(e)(1) “[i]n connection with a consumer credit transaction secured by a dwelling, a loan originator shall not direct or “steer” a consumer to consummate a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer's interest.

[iv] See 12 CFR §1026.36(d)(1)

[v] See Section 1026.36(d)(1)(iii)-(iv)

Examination Hot Topics

QUESTION

As a stateside, non-depository, mortgage licensee, I am interested in learning about areas of concern relating to regulatory examinations. What are some of the hot topics and regulator recommendations in these areas?

ANSWER

I recently attended the 29th Annual Regulatory Conference, held in Boston, for the American Association of Residential Mortgage Regulators (AARMR). One of the breakout sessions was entitled Examination Hot Topics.  The session was moderated by a state regulator from Georgia and included three state regulators from the states of Missouri, Connecticut and Michigan.

Topics and issues raised are detailed below.

Loan Brokerage Fee Agreement: The disclosure should be provided by the broker and not the lender.

Profit-based Bonuses: Broker, mortgage loan originator, profit-based bonuses are exceeding the 10 % threshold.

Marketing Services Agreements: The use of Marketing Services Agreements has increased resulting in RESPA issues. One area of contention is whether advertising should be paid by the mortgage company or the loan officer. 

Rental Agreements: There is no basis by which to establish market value of rental agreements. The example referenced two identical office spaces within the same office complex valued at $300 and $600, respectively.

Change in Circumstances: The calculations do not provide adequate supporting information in the file to facilitate the examination review.

Mortgage Fraud known as “Convenience Fraud:” MLOs are signing borrowers’ names on forms. They are also using electronic signatures. This activity has resulted in loss of licenses.

Cut and Paste Tactics: This activity is on the rise. The activity includes altering IRS Form 4506-T relating to designation of third parties to receive the tax return information. It also includes the forging of signatures on borrower loan documents, claiming as an excuse that the borrower was on vacation. One regulator stated that they found practice signature evidence and the actual cuts in the borrower loan file!

Unlicensed Loan Originations: Unlicensed individuals are taking applications over the phone (usually in call centers), due to lack of management oversight of their operations. This process results in more loan volume. Companies offer the excuse that they are only taking “partial” applications.

Mortgage Call Report (MCR): The MCR information is inaccurate. The requested loan list at the time of examination does not correlate with the loans listed on the Mortgage Call Report. Companies need to establish a process that includes work papers to back-up the information. It was also recommended that MCR reporting duties should not be assigned to untrained individuals and that a back-up person be assigned to the task.

Unlicensed Underwriting: Brokers are doing underwriting without the required lender licensing.

Third-Party Processing: Lenders are inquiring about the requirements for third-party processing and underwriting. Many are engaged in the activity without the proper license.

Hiring Practices: There is evidence of companies hiring convicted felons in direct violation of statutes and regulations. Some of these companies have been reported to the regulators by competitors.

Disclosure Text Errors: Incorrect language is being used in disclosures related to TRID and foreclosures. Be certain to reference state and federal requirements in this area.

Advertising: Issues have been identified relating to advertising. The main point is that marketing and compliance departments have two different goals. The compliance group must review all ads prior to being released to the public. There are issues with companies misleading the public by holding themselves out as government agencies.

Mortgage Servicing Compliance: Examinations of mortgage servicers identified issues involving the lack of compliance with the terms and conditions by the new servicer. Recommendation was for servicers to have robust policies and procedures. It was also noted that companies are not posting payments properly. Files need to have better documentation.

Commingling of Funds: Companies are commingling operating funds and escrow funds in direct violation of the law.

It is my hope that you have come away with some new insights into examination areas of concern raised by state regulators.

We can assist you in preparing for examinations and in providing you with the ability to outsource some of the compliance functions in your operation. Our compliance support includes all mortgage banking policies and procedures, mortgage and servicing compliance, quality control analytics, vendor management, licensing and Mortgage Call Reports. Please contact us for a free consultation.

Alan Cicchetti

Director/Agency Relations, Lenders Compliance Group

Executive Director, Brokers Compliance Group

Qualified Mortgages at Community Banks

QUESTION

I am the Director of Compliance at a community bank. Recently, there were substantive changes to the Qualified Mortgage requirements, under Regulation Z. From my reading of the new rule, community banks would benefit because it makes our portfolio loans de facto Qualified Mortgages. My concern is whether we must ensure that our loans meet certain Qualified Mortgage criteria. Like most community banks, we do not intend to sell our loans. What criteria does a community bank have to meet to use the new Qualified Mortgage exemption?

ANSWER

This is a very good question. I will provide a concise response. Section 129C(b) of the Truth-in-Lending Act (TILA), added by the Dodd-Frank Wall Street Reform and Consumer Protection Act, offers “qualified mortgages” (QMs) a presumption that the lender has satisfied the Ability-to-Repay Rule as implemented in Regulation Z § 1026.43. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCP Act) inserted a special QM for community banks. 

Section 101 of the EGRRCP Act amends the ability-to-repay (ATR) and qualified mortgage (QM) provisions in TILA § 129C to specify that certain mortgage loans made by an insured depository institution or insured credit union with less than $10 billion in total consolidated assets (the Act’s apparent definition of a “community bank”) are QMs that automatically satisfy the ATR requirements. In other words, they qualify as loans for which the creditor need not fuss with the detailed provisions of the CFPB’s ATR regulation. [Section 101, Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law No.115-174 (May 24, 2018)]

Although this section might appear simple, it is not.

To fall within this bucket of QMs, a mortgage loan must have several features typical of other QMs and generally must be held in portfolio. The loan:

• Must comply with TILA’s limitations on prepayment penalties for qualified mortgages, that is, any prepayment penalty imposed during the first year of the loan may not exceed 3 percent of the outstanding balance, during the second year may not exceed 2 percent of the outstanding balance, during the third year may not exceed 1 percent of the outstanding balance, and after the end of the third year may not exceed 0 percent of the outstanding balance (i.e., no prepayment penalty after the third year).
• Must not have total points and fees exceeding 3% of the total loan amount.
• Must not have negative amortization or interest-only features.
• Must have been subjected to consideration and documentation requirements regarding debt, income, and financial resources of the consumer. Section 101 gives a creditor flexibility in determining these requirements. Section 101 specifies that multiple methods of documentation are permitted, and a creditor need not comply with Appendix Q of Regulation Z, which specifies standards for determining monthly debt and income.
• Generally, must be held in portfolio and not sold to another person. 

The statute offers an exception from the portfolio retention requirement for certain transfers of the loan’s legal title, including a transfer by reason of bankruptcy or failure of the lender, transfer to another insured depository institution or insured credit union with less than $10 billion in total consolidated assets so long as that institution holds the loan in portfolio, transfer pursuant to a merger so long as the loan is retained in portfolio, or transfer to a wholly-owned subsidiary of the lender provided that after the transfer the loan is considered to be an asset of the parent lender for regulatory accounting purposes.

Thus, if a community bank wishes to take advantage of the Section 101 exemption, it must do the following for each mortgage loan it would like to exclude from the standard ATR requirements (unless the loan already qualifies as a QM):

• Comply with the prepayment penalty limitations.
• Ensure that the loan does not have total points and fees exceeding 3% of the total loan amount.
• Not include negative amortization or interest-only features.
• Apply the bank’s own consideration and documentation requirements regarding debt, income, and financial resources.
• Hold the loan in portfolio.

Jonathan Foxx

Managing Director

Lenders Compliance Group