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Friday, September 28, 2018

Mortgage Servicing Disclosure – State Law and Preemption

QUESTION
We are a bank that has its headquarters in New York. We really like your newsletter. Our servicing department asked about how to handle the Servicing Disclosure Statement if there are conflicts with state law. So, are there state laws that actually conflict with the Servicing Disclosure Statement rules preempted?

ANSWER
Thank you for reading our newsletter! We’re glad you find it helpful and informative.

With respect to a mortgage servicing loan, a lender or servicer is considered to have compliance with provisions of any state law or regulation required notice to a borrower at the time of application for a loan if the lender or servicer complies with the Servicing Disclosure Statement requirements.

Any state law requiring notice to the borrower at the time of application regarding the potential for servicing transfer is preempted, and there may be no additional borrower disclosure requirements regarding the potential for a servicing transfer under state law.

But, keep this in mind, provisions of state law requiring additional notices to insurance companies or taxing authorities are not preempted, and the additional information may be added to a Servicing Disclosure Statement if the procedure is allowable under state law. [24 CFR § 3500.21(h)]

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, September 20, 2018

Supervisory Guidance versus Regulatory Requirements


QUESTION
I am a Chief Compliance Officer for a regional bank that has a large residential mortgage loan origination platform and has its own and servicing portfolio. At any given time, we have multiple examinations going on. An audit report from our regulator is requiring us to implement certain procedural changes in our loan origination platform. One if these changes to procedure is very costly and I want to find out if the supervisory guidance stated in the audit is deemed mandatory as a matter of law. Can you please explain how to evaluate supervisory guidance as it relates to regulatory requirements?

ANSWER
This is a subject that has been mulled over for many years. Recently, five federal agencies issued a joint statement on the role of supervisory guidance as distinct from regulatory requirements.[1] The issuance is meant to provide a better understanding of supervisory guidance.[2]

According to the joint statement, supervisory guidance “does not have the force and effect of law” and “the agencies do not take enforcement actions based on supervisory guidance.” Or, to put it very bluntly, supervisory guidance is not law.

This is a very important threshold, though some people think it is a distinction without a difference. Supervisory guidance is supposed to outline an agency’s supervisory expectations or priorities. Often this outline occurs in the context of expressing the agency’s views regarding appropriate practices in a given subject area. Sometimes, the agency is simply responding to industry requests for guidance. Supervisory guidance also provides “examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers.”

However, supervisory guidance must be contrasted with regulations which “generally have the force and effect of law [and] generally take effect only after the agency proposes the regulation to the public and responds to comments on the proposal in a final rulemaking document.”

You might think that reaffirming the role of supervisory guidance would be welcomed by supervised institutions, especially banks such as yours that have committed significant resources to implementing the details of supervisory guidance. But, in actual practice, areas that have not been subject to, and are not appropriate for, detailed regulatory requirements have been addressed by extensive, and often specific, guidance that has been viewed as stating inflexible requirements. And that outcome is apparently implicit in your concerns.

My reading of the joint statement is to view it as a clarifying explication for both supervised institutions and also examiners, in the sense that an agency’s guidance needs to be applied flexibly with the understanding that the ultimate goal is safety and soundness, compliance with actual statutory and regulatory requirements, and appropriate practices, rather than just the details of the guidance.

Notwithstanding this clarification, supervisory guidance can and usually does lead into regulatory requirements. To quote the issuance: 
“[e]xaminers will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.”
The joint statement sends a signal to examiners that there may be situations where “examiners may reference (including in writing) supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.”

I would be cautious about assuming that a “bright line” defense is available, as it is really only available on a case-by-case basis. For instance, the joint statement provides that the agencies “intend to limit the use of numerical thresholds or other ‘bright-lines’ in describing expectations in supervisory guidance.” According to the issuance, “where numerical thresholds are used ... the thresholds [will be] exemplary only and not suggestive of requirements.”

And be cautious also how you handle a response to supervisory guidance. The issuance states that “examiners will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance.” However, “any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.” Although examiners may identify unsafe or unsound practices or other deficiencies in risk management (viz., compliance risk), or other areas that do not constitute violations of law or regulation, the regulators' attention will be toward ensuring that the supervisory guidance enunciates “safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.”

The reaffirmation of the role of supervisory guidance as a means of communication with supervised institutions is important to consider, but it is the case that field examiners will continue to offer guidance in the examination process. In my view, when considering the foregoing contrast between supervisory guidance and regulatory requirements, it would be a good idea to work with a risk management firm like ours, familiar with a regulator’s expectations as well as the relevant statutes, or perhaps seek the advice of a competent attorney.

Jonathan Foxx
Managing Director
Lenders Compliance Group 




[1] Board of Governors of the Federal Reserve System in issuing the attached statement are the Bureau of Consumer Financial Protection, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency
[2] Interagency Statement Clarifying the Role of Supervisory Guidance, SR 18-5 / CA 18-7, September 12, 2018. Quotes used are from this Interagency Statement.

Thursday, September 13, 2018

Adverse Action not based on Credit Report

QUESTION
We are a small mid-west bank with limited compliance staff. I receive your FAQ newsletter and actually have a folder for all of them! I wish we had compliance people who could handle all the compliance issues here. This is my first question. Our regulator came down hard on us for denying the available credit on a loan product. The credit report did not show any change, but another source disclosed an issue that would increase our risk. We did not think notice needed to be given, since the credit report information is not the reason for our decision. My question: is there a disclosure requirement when the credit report is not involved in denying credit?

ANSWER
Thank you for the kind words. We have offered this weekly newsletter for many years as our way of showing compliance support for participants in mortgage banking and, by extension, to consumers. Many of our clients do not have fully staffed compliance departments. But they don’t need to spend more on compliance than is really needed. Our firm is built on the proposition that you can obtain top level compliance expertise on a cost-effective basis for a flat monthly fee, no strings attached. With us, you actually interact with experts in compliance. Contact us for a free one hour consultation at any time.

Regarding your question, the view you express is common, though it is a misconception. The scenario triggers adverse action requirements.

If a financial institution denies consumer credit or increases the charge for consumer credit, in whole or in part, because of certain information obtained from a party other than a consumer reporting agency, the institution must, at the time the adverse action is communicated to the consumer, clearly and accurately disclose to the consumer his or her right to make a written request for the reasons for the adverse action within sixty days. If the consumer timely makes such a written request, the institution must provide the reasons for the adverse action with a reasonable period of time. [15 USC § 1681m(b)(1)]

You do not mention the source used for denying the extension of credit. Keep in mind that the type of information covered by the disclosure requirement obtained from a party other than a consumer reporting agency, bearing upon the consumer’s creditworthiness, may include findings involving credit standing, credit capacity, character, general reputation, personal characteristics or mode of living. [Idem] But be careful in construing these types of information for an adverse action decision, so as to avoid claims relating to fair lending violations and certain UDAAP allegations, among other things.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, September 6, 2018

Call Center Scripts

QUESTION
We recently got into trouble with our regulator due to our call center scripts. Based on their audit, they determined that our scripts were discriminatory. This happened even though we planned our scripts carefully and thought they would not cause violations. The on-site examiner is now requiring us to do call calibration. So, can you provide some kind of guidelines for call calibration?

ANSWER
I don’t mean to be immodest, but I really think you should contact us for detailed guidance. We are one of the few risk management firms in the country that have a practice area devoted to call calibration compliance. I strongly recommend that a financial institution get call calibration done periodically throughout the call center’s existence. This is an area of compliance just filled to the brim with potential regulatory violations!

First, a word about the purpose of call calibrations. When a financial institution provides call center contact with the public, it is critical to ensure that supervisors and agents do not cause compliance or procedural issues. This is not merely a matter of good customer service. And any contact with the public is subject to call calibration. Obviously, having consistency about products and services is an important factor in communicating knowledgeable responses. But, even one errant word or suggestion can cause a serious regulatory problem. If an examiner finds a pattern of violative statements, the road to an administrative action may quickly result. This is why calls should be screened by a monitoring firm for quality assurance, preferably a firm with considerable regulatory compliance expertise. The process of this screening is called call calibration. And the results of the screening are provided in a report.

With respect to guidance, a creditor may not make any oral or written statement(s), in advertising or otherwise, to applicants or prospective applicants, where such statements could be construed to discourage on a prohibited basis a reasonable person from making or pursuing an application. Although the provisions of the Equal Credit Opportunity Act (ECOA) and Regulation B address persons who are applying for or have received an extension of credit, an "anti-discouraging rule" generally applies to prospective applicants. Many states watch call center activity, too, within the context of their regulatory frameworks.

Prohibited practices include:

1. A statement that the applicant should not bother to apply, after the applicant states that he or she is retired;

2. The use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in violation of the ECOA; and,

3. The use of interview scripts that discourage applications on a prohibited basis. [12 CFR § 202.4(b); as CFR Supplement I to Part 202 – Official Staff Interpretations § 202.4(b)-1]

These are just a few prohibited practices. Call centers expose a financial institution to many more violations. Proper regulatory compliance guidance combined with appropriate procedures and detailed call calibration can provide considerable protection from regulatory challenges. If you want to contact us, we offer a free one-hour consultation to discuss these matters. CLICK HERE to arrange a conference.

Jonathan Foxx
Managing Director
Lenders Compliance Group