Pages

Topics

Thursday, December 27, 2018

Policies and Procedures: Specific Components

QUESTION
We are a medium sized lender located in the Midwest. Recently, we decided to redraft our policies and procedures. However, we want to be sure we cover important features of a policy. It came to our attention that you provide policies and procedures for your clients. So, I am writing on behalf of my company to get your view. What are some specific components of policies and procedures?

ANSWER
Although there is a tendency to standardize the structure of policies and procedures, there are many instances where one size does not fit all. Nevertheless, in my view there are twelve basic features of a well-designed policy document.

Before drafting the policies, it is important to consider many factors, such as the institutions size, risk, and complexity; the nature and frequency of information updates; and the technology to be used in implementation. I could provide an outline of the steps involved in determining the choice of policies needed by a financial institution as well as how best to establish their implementation. But your question asks for the specific components of policies and procedures, so I will offer the twelve features that we recommend. If you need guidance in this matter, we offer cost-effective compliance support. Contact us HERE.

Here are the twelve basic components to a policy and procedure.

1.Outline the system that is appropriate to the nature, size, complexity, and scope of the business operations, as it pertains to a regulatory, statutory, Best Practices, or institutional policy solution.

2.Use standard data reporting formats and standard procedures for compiling, maintaining, monitoring, and furnishing information.

3.Maintain records for a reasonable period of time but not less than required by statute or any applicable record keeping requirement.

4.Establish and implement internal controls regarding the accuracy and integrity of information, such as periodic, preferably independent, internal audits, and provide standard procedures and means to verify random reviews.

5.Train staff involved in activities relating to the policy and procedure requirements, with attention given also to the reporting or filing requirements that may be mandated.

6.Provide appropriate and effective oversight of relevant service providers whose activities affect the fulfillment of the policy initiatives.

7.Ensure that information is specific to the financial institution; however, be mindful that mergers, acquisitions, change in corporate structure, and other obligations may affect re-aging and reporting.

8.Delete, update, and correct information, as appropriate, to avoid inaccurate information, and be sure to state the date of the update.

9.Conducting investigations, reviews, audits, procedural remedies, and process undertakings whenever there is an apparent breach of the policy, so as to ensure that the policy has accounted for any systemic failures.

10.Provide technological methods or other means to prevent a compromise of the Compliance Management System.

11.Keep information ready for periodic updating of the policy’s approved content and reporting requirements, and be sure to review all information with management, including an understanding that management will ratify the update.

12.Conduct a periodic evaluation of the practices, acquired information, disputed information, corrections of inaccurate information, means of communication, and other factors, that may affect the fulfillment of the policy’s purpose.

Track and document any practices or activities that may compromise accuracy or integrity of information. This means you need to review existing practices and activities, technologies, and other methods. Review historical records, too, and consider any previous disputes. Consider feedback from consumers, regulatory agencies, federal and state statutory frameworks. Include all relevant company departments in the discussion. Finally, meet periodically with management and affected company departments to review the policies.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, December 20, 2018

Social Media Advertising – Contest to Attract “Shares” and “Likes”


QUESTION
A couple of our loan officers want to promote their social media page by doing a drawing for the most “shares” and “likes.” How can we do this and not violate RESPA? 

ANSWER
The loan officers have not really provided much information to you about their proposed posting. That can be dangerous from a compliance standpoint because companies sometimes fail to understand that social media advertising is no different from any other kind of advertising in terms of compliance requirements. The social media posting needs to satisfy all advertising requirements as if it appeared in print media. You should require the loan officers to provide you with a copy of exactly what they want to post and then review it in light of your company’s Social Media and advertising policies. That being said, it is more likely than not that the proposed contest would violate RESPA Section 8 - and possibly other laws and regulations as well. I will address the problem areas one by one:

1. RESPA Section 8(a)

RESPA Section 8(a) prohibits the transfer of a thing of value pursuant to an understanding that settlement service business will be referred to any person:

(a) No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

A Section 8(a) violation requires three elements:
 
  • The payment or receipt of a “thing of value.”
  • An agreement or understanding.
  • A referral of “settlement service” business.

The origination of a federally related mortgage loan is a settlement service, including but not limited to the taking of a loan application, processing, underwriting and funding.

An agreement or understanding for referral of business can be inferred and does not need to be written or even verbal. It can be implied from conduct.

The definition of “thing of value” is very broad and includes “any payment, advance, funds, loan, service, or other consideration.”  Under Regulation X, the implementing regulation of RESPA, a “thing of value” is very broadly defined in includes the opportunity to win a prize. For example, HUD’s Industry “FAQs about RESPA” states that a lender may not set up a contest for real estate agents under which the agent who provides the lender with the most business will win a trip to Hawaii. The trip itself, and even the opportunity to win the trip, would be a thing of value given in exchange for the referral of business. (Note, however, that the FAQs also state that a lender may give a borrower an incentive, such as a chance to win a trip or a rebate for doing business with the lender, because such an incentive is “promotion” and not payment for a “referral.”

In the proposal from your loan officers, the drawing prize would most likely qualify as a “thing of value.” And, since this thing of value would presumably be offered not only to prospective borrowers, but also to people whose “likes” and “shares” would amount to recommendations to others, there is a high likelihood that the “likes” and “shares” could be construed as “referrals” of settlement service business provided in exchange for a thing of value and, hence, a violation of RESPA.

2. Possible Illegal Lottery  

Many states have enacted laws that restrict the use of “lotteries” and sometimes make conducting them a crime.  The law of each state where the promotion can be viewed should be read carefully to determine whether this promotion is covered by any anti-lottery or gambling law.  In that regard, a lottery is generally defined to include an advertising technique that involves: (1) consideration, (2) chance, and (3) a prize. For example, if: (1) a consumer closes a loan with a mortgage lender, (2) and the consumer’s lucky number is drawn, then (3) the lender awards the consumer a trip to Hawaii. Here the elements might possibly be: (1) the website viewer provides your company with consideration by posting “likes” and “shares” in order to win a prize in the drawing.

3. Possible UDAAP  

Since, in order to participate in the contest, it is required that the contestant provide “likes” and “shares” of the website, these could certainly be construed as an actual or implied “endorsements.” Do the postings then fall into the category of fake or false “testimonials” or “endorsements” if the “likes” and “shares” are posted only to win the contest?  FTC rules state that endorsements in advertising must reflect the honest opinions, findings, beliefs, or experience of the endorser. They should not contain any representations that would be deceptive or could not be substantiated if made directly by the advertiser. [16 CFR §255.1(a)] An endorsement includes any advertising message (including verbal statements, and demonstrations.) Advertisements presenting endorsements by what are represented, directly or by implication, to be “actual consumers” should use actual consumers, in both the audio and video or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product. [16 CFR 255(2)(b)]  Here, the advertised product is, by implication, the company and its various loan products.

4. Discriminatory Impact/Redlining  

Federal regulators have encouraged mortgage lenders to be careful about advertising patterns or practices that a reasonable person would believe indicate prohibited-basis customers are less desirable.  This means that the rules of the contest must be carefully drawn to make sure that no protected class of persons is excluded from access to participation, either intentionally or statistically.

In short, contests like this posted on social media can be fraught with compliance risk, much of which may not be immediately apparent. You are wise to require prior review.

Michael Pfeifer, Esq.
Director/Legal & Regulatory Compliance
Lenders Compliance Group &
Servicers Compliance Group   

Thursday, December 13, 2018

Qualified Mortgages: Inclusion of Affiliate Fees in Points and Fees Test

QUESTION
As a lender, we are exploring an opportunity to open an affiliated insurance company. However, we are concerned about fees, as fees to affiliates are included in the qualified mortgage (QM) points and fees calculation. We already have an affiliated title company. Currently, we include the entire fee paid to the title company in the points and fees calculation. Having to include both the fees of the title company and the insurance company in the points and fees calculation will be especially problematic for lower balance loans. However, I am hearing that we may only need to include in the points and fees calculation that portion of the fee actually retained by the affiliate. Can you please shed some light on this issue?

ANSWER
In accordance with the Official Commentary to the Truth-in-Lending Act, only that portion of the fee that the affiliated ultimately retains that is included in the QM Points and Fees test.

For example, let’s assume that your title company, who is an agent for the title insurer, retains 85% of the title premium, with the 15% balance going to the third party title insurer. As the title company only retains 85% of the fee, only that portion is included in the points and fees test. The same would hold true for your affiliated insurance company. The fact that the Closing Disclosure shows that the entire fee is paid to the title company does not alter the fact that the portion of the fee that is not ultimately retained by the affiliate need not be included in the points and fees calculation.

The relevant section of the Official Commentary is set forth below as well as an excerpt from the informal guidance given by the Bureau during a CFPB/MBA Webinar held on October 17, 2013.

Official Commentary Paragraph 32(b)(1)(i)(D) (emphasis added).

1. Charges not retained by the creditor, loan originator, or an affiliate of either. In general, a creditor is not required to count in points and fees any bona fide third-party charge not retained by the creditor, loan originator, or an affiliate of either. For example, if bona fide charges are imposed by a third-party settlement agent and are not retained by the creditor, loan originator, or an affiliate of either, those charges are not included in points and fees, even if those charges are included in the finance charge under §1026.4(a)(2). The term loan originator has the same meaning as in §1026.36(a)(1).

Unofficial Transcript of the CFPB/MBA Webinar held on October 17, 2013:

LISA APPLEGATE: Okay, let’s stay on the topic of affiliates and move on to fees paid to affiliates. The Bureau has received many requests for confirmation that charges paid to its affiliates, are limited to the amount the affiliate retains, even if the combined charge is originally paid to the affiliate.

ANDY ARCULIN: Okay, so this is something that has come up quite a bit, and it commonly, to give you just an illustration, and I’m sorry, I don’t have it on the screen for you, but I think it will be easy enough to follow. The most common illustration of this rule that I’ve heard is, the creditor has an affiliated appraisal management company - an AMC. And a charge is paid to the AMC, say its $500 to do an appraisal, but the AMC itself doesn’t do the appraisal, the AMC itself hires an appraisal company that actually is an independent, unaffiliated third party to do the appraisal and pays that non-affiliate $400, but keeps $100 for itself. The question that has come up is, the $500 charge that’s paid to the affiliate, meaning the money is handed to the affiliate and the affiliate essentially outsources the work, is that required to be included in points and fees or is only the piece that the affiliate keeps for itself required to be in points and fees? This is, our reading of this rule is that, generally “paid to,” means a person that is the ultimate recipient of and retains the charge. You know, I would also just note that it doesn’t matter, under these rules, who pays it, as long as it’s not the creditor. If you know, there’s no requirement that the consumer has to pay this charge, it simply just says “paid to.” But that’s sort of an aside. What matters is that, you know, for purposes of our interpretation of this rule, the portion that’s retained by the affiliate is what would need to be included in points and fees. So under the example I gave, you have, if you have $500 that’s sent to an affiliate, but $400 is actually, you know, assuming that the charge is reasonable and there’s no compensation paid in connection with it, just to make sure we’re covered there, the $400 is to a third party that’s not affiliated and the charge wouldn’t be included anywhere else, in our view, only the $100 retained by the affiliate would be included in points and fees.

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

Thursday, December 6, 2018

Tolerance Categories and Good Faith

QUESTION:
TRID has three categories for tolerance. I know that the categories depend on the lender’s “good faith” in implementing them. What would constitute “good faith” in these categories?

ANSWER:
Regulation Z, the Truth in Lending Act’s implementing regulation, establishes tolerance categories limiting the permissible variations between the estimated amounts and the actual amounts, specifically, a 10% category, an unlimited variation category, and a zero percent category. 

An amount disclosed on the Loan Estimate is considered in good faith (and in compliance with the regulation) if the actual charge does not exceed the estimated amount by the amount permitted by the applicable tolerance rule.

The 10% Category is an estimate of a charge for a third-party service or a recording fee and is in good faith if:

(1) the aggregate amount of actual charges for third-party services and recording fees does not exceed the aggregate amount of those charges disclosed on the Loan Estimate by more than 10 percent;
(2) the charge for the third-party service is not paid to the creditor or an affiliate of the creditor; and,
(3) the creditor permits the consumer to shop for the third-party service.

Only these items fit into the 10% category:

(1) fees paid to an unaffiliated third party if the creditor (i) permitted the consumer to select a settlement service provider not on the written list of service providers and (ii) disclosed on that list that the consumer may select the provider; and,
(2) recording fees.

The Unlimited Variation category is an estimate of the following charges and is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of the amount of variation between it and the amount actually charged:

(1) prepaid interest;
(2) property insurance premiums;
(3) amounts placed into an escrow, impound, reserve, or similar account;
(4) charges paid to third-party service providers for which the consumer is permitted to shop and that the creditor did not identify on the written list of service providers; and,
(5) charges paid for third-party services not required by the creditor, including services provided by affiliates of the creditor.

Differences between the amount of these charges disclosed in the Loan Estimate and actual charges do not constitute a lack of good faith so long as the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor when the Loan Estimate was provided.

The Zero Percent category is for all other charges and are in good faith only if the actual charge does not exceed the estimated amount. These include, but are not limited to, fees paid to the creditor, fees paid to the mortgage broker, fees paid to an affiliate of the creditor or mortgage broker, fees paid to an unaffiliated party if the creditor did not permit the consumer to shop for a third-party settlement service provider, and transfer taxes.

An estimate of the following charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of the amount of variation between it and the amount actually charged:

(1) prepaid interest;
(2) property insurance premiums;
(3) amounts placed into an escrow, impound, reserve, or similar account;
(4) charges paid to third-party service providers for which the consumer is permitted to shop and that the creditor did not identify on the written list of service providers; and,
(5) charges paid for third-party services not required by the creditor, including services provided by affiliates of the creditor.

Differences between the amount of these charges disclosed in the Loan Estimate and actual charges do not constitute a lack of good faith so long as the original estimated charge, or lack of an estimated charge for a particular service, was based on the best information reasonably available to the creditor when the Loan Estimate was provided.

Jonathan Foxx
Managing Director
Lenders Compliance Group