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Friday, March 27, 2020

Self-Assessing and Self-Reporting


QUESTION
Our state banking department has sent us a note that they want us to self-assess certain areas. They plan to “evaluate” if we are acting “responsibly” by finding out if we are taking the time to check ourselves. 

The idea is for us to do a self-assessment to minimum risk to consumers. 

What kind of evaluations should we be taking to ensure that we are meeting the department’s expectations?

ANSWER
The banking department’s view in this area goes back many years. Self-assessing is not new. In fact, in 2013 the CFPB issued a Bulletin that identified several activities that businesses could engage in that could prevent and minimize harm to consumers, referring to these activities as “responsible conduct.” So, the wording of the note you received has a legacy to it. The terminology “responsible conduct” is influenced by that 2013 Bulletin.

There are certain factors that the CFPB and, by extension, state banking departments consider as the fulfilment of responsible conduct. Recently, the Bureau updated the aforementioned Bulletin, further providing the view that if an entity engages in another type of activity than these factors, an activity particular to the entity’s situation that is both substantial and meaningful, the CFPB may take that responsive activity into consideration.[i]

I will provide a brief description of each factor, which can be extrapolated to complying with state banking department expectations. I think you should review these factors and integrate them into your Compliance Management System.

Self-Assessing
Also described as self-monitoring or self-auditing, self-assessing is a proactive commitment by an entity to use resources for the prevention and early detection of violations of consumer financial law.

Resources
  • What resources does the entity devote to compliance?
  • How robust and effective is its compliance management system?
  • Is it appropriate for the size and complexity of the entity’s business?

Compliance Management System
  • Has the entity taken steps to improve its compliance management system when deficiencies have been identified either by itself or external regulators?
  • Did the entity ignore obvious deficiencies in compliance procedures?
  • Does the entity have a culture of compliance?

Violations
  • Considering the nature of the violation, did the entity identify the issue?
  • What is the nature of the violation or likely violation and how did it arise?
  • Was the conduct pervasive or an isolated act? How long did it last?
  • Did senior personnel participate in, or turn a blind eye toward, obvious indicia of misconduct?
  • How was the violation detected and who uncovered it?
  • If identified by the entity, how did the entity identify the issue (i.e., from customer complaints, audits or monitoring based on routine risk assessments, or whistleblower activity)?
  • Was the identification the result of a robust and effective compliance management system, including adequate internal audit, monitoring, and complaint review processes?
  • Was identification prompted by an impending exam or an investigation by a regulator?
  • What self-assessment mechanisms were in place to effectively prevent, identify, or limit the conduct that occurred, elevate it appropriately, and preserve relevant information?
  • In what ways, if any, were the entity’s self-assessing mechanisms particularly noteworthy and effective?

Self-Reporting
Prompt self-reporting of likely violations also represents concrete evidence of an entity’s commitment to responsibly address the conduct at issue. Conversely, efforts to conceal a likely violation from the banking department may constitute evidence of the entity’s lack of commitment to responsibly address the conduct at issue.

Disclosure
  • Did the entity completely and effectively disclose the existence of the conduct to the banking department, to other regulators, and, if applicable, to self-regulatory organizations?
  • Did the entity report any additional related misconduct likely to have occurred?

Reporting
  • Did the entity report the conduct to the Bureau without unreasonable delay?
  • If it delayed, what justification, if any, existed for the delay?
  • How did the delay affect the preservation of relevant information, the ability of the Bureau to conduct its review or investigation, or the interests of affected consumers?

Being Proactive
  • Did the entity proactively self-report, or wait until discovery or disclosure was likely to happen anyway, for example, due to impending supervisory activity, public company reporting requirements, the emergence of a whistleblower, consumer complaints or actions, or the conduct of the department’s investigation?

Friday, March 20, 2020

Calculating APR in Reverse Mortgages

QUESTION
I am a compliance analyst for a mortgage lender. Until recently, we didn’t originate many reverse mortgages. In the last few weeks, there has been quite an increase in applications for reverses. 

Our loan officers tell us that most of the applicants want reverses because they are scared of not having enough money to make it through the pandemic crisis, and some of them are very concerned that they are going to get sick or maybe even die. So, they want to take the equity out now. 

The question that keeps coming up that I would like you to discuss involves the APR calculation. We have customers who say that we are not disclosing the APR correctly because we’re calculating on an annual basis. 

Our question is, what is the unit measurement for calculating APR on reverse mortgages?

ANSWER
Some of our clients have told me that there is increasing interest in reverse mortgages by seniors who want to be sure they have money to get through the COVID-19 Pandemic and also have sufficient funds available in case they get sick.

Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA) requires creditors to disclose the annual percentage rate (APR) in accordance with either the actuarial method or the U.S. Rule method.

To explain, the explanations, equations, and instructions for determining the APR in accordance with the actuarial method are set forth in Appendix J to Regulation Z. Appendix J provides that the unit-period for a single advance, single payment transaction, for the purposes of determining the APR, must be the term of the transaction, not to exceed one year. In all other transactions, the unit-period must be the common period that occurs most frequently in the transaction unless an exception applies.

Generally, by its terms, a closed-end reverse mortgage is a single advance, single payment transaction because it includes a single lump-sum advance at origination and a single payment due at the end of the loan term. Pursuant to Regulation Z, the unit-period for the purposes of determining the APR for the closed-end reverse mortgage, with a term greater than a year, is one year.

However, in addition to a single lump-sum advance at origination, some closed-end reverse mortgages may have multiple advances throughout the loan term. For example, a closed-end reverse mortgage with a Life Expectancy Set Aside (LESA) typically has a set number of semiannual advances for the payment of property taxes, and flood and hazard insurance premiums. According to Regulation Z, the unit-period for the purposes of determining the APR for this kind of loan would be six months because that would be the common period that occurs most frequently in the transaction.

Regulation Z states that the APR is considered accurate for a regular transaction if it is not more than 1/8 of one percentage point above or below the APR determined pursuant to §1026.22(a)(1). The APR is considered accurate for an irregular transaction if it is not more than 1/4 of one percentage point above or below the APR determined pursuant to § 1026.22(a)(1).

In the CFPB’s Summer 2019 issue of Supervisory Highlights, the Bureau reported that, in one or more examinations, its examiners observed that creditors were disclosing inaccurate APRs for closed-end reverse mortgages. [Supervisory Highlights, Summer 2019, 84 Federal Register 49250 (Sept. 19, 2019), Consumer Financial Protection Bureau.]

Specifically, while conducting loan file reviews, examiners observed creditors using a unit-period of one month instead of one year to calculate the APR, leading to inaccurate calculations outside Regulation Z’s permissible tolerances. In response to this finding, the creditors agreed to revise their calculation methodology to reflect the correct unit-period and provided affected consumers with reimbursements.

Examiners also found creditors disclosing inaccurate APRs for closed-end reverse mortgages with a LESA. While conducting loan file reviews, examiners observed creditors using a unit-period of one month instead of six months to calculate the APR, leading to inaccurate calculations outside Regulation Z’s permissible tolerances. In response to this finding, the creditors agreed to revise their calculation methodologies to reflect the correct unit-period.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, March 12, 2020

Protecting Tenants at Foreclosure

QUESTION
We are foreclosing on a residential property that has tenants in it. We have sent this to our outside counsel to work on, but our compliance department wants to know what are the issues that we can anticipate.

Our question is this: if we are foreclosing on a residential property where a tenant is still there, what types of regulations should we consider?

ANSWER
One place to start is to review the Protecting Tenants at Foreclosure Act (PTFA), which applies to a foreclosure involving any of the following:
  • A federally related mortgage, as defined by RESPA, which means a loan (other than temporary financing) made by a federally related creditor and secured by a one- to four-family residential real property;
  • A dwelling; or
  • Residential real property.

The PTFA applies to every foreclosure on property that includes a dwelling occupied by a tenant, regardless of whether the loan is for a consumer or commercial purpose and whether the dwelling is real or personal property. It applies regardless of the number of dwelling units are on the property. The law applies to foreclosures on loans secured by one- to four-family dwellings, multi-family properties, and apartment buildings.

Purchasers of this property will need to consider the PTFA, because it protects a tenant if state or local law allow the purchaser to terminate the tenants lease or tenancy after a foreclosure sale. The purchaser must:
  • Give any tenant a 90-day notice to vacate before evicting the tenant.
  • Honor the terms of a bona fide lease or tenancy on the property, unless the purchaser intends to occupy the property as his or her primary residence.

Note the term “bona fide” – the PTFA protects bona fide tenants from having their lease eliminated, unless the purchaser intends to occupy the property as his or her primary residence.

A tenant is bona fide if:
  • The tenant is not the mortgagor or the child, spouse, or parent of the mortgagor.
  • The tenant entered into the lease or tenancy in an arm’s-length transaction before the date on which complete title to the property transferred to the buyer.
  • The rent is not substantially less than fair market rent for the property, or if it is, the rent is reduced or subsidized due to a federal, state, or local subsidy, including but not limited to a Section 8 housing assistance payment contract.

The PTFA does not preempt state or local laws if those laws afford the tenant more stringent or additional protections, and, indeed, there are 10 states that provide the same or more protections.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Thursday, March 5, 2020

Pandemic Preparation: Bracing for COVID-19

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QUESTION
I am the Chief Risk Officer of a multiplatform lender. We are in 48 states. Over the last few weeks, I have been tasked with setting up an infrastructure to handle the impact of the coronavirus on our company. I am also concerned about our non-online loan officers who have continual face-to-face contact with the public. I read your announcement about getting prepared for the pandemic, which was very informative. However, because we are such a large company, I am challenged in finding a means to go beyond mere training. What else can I do to inform our employees of the actions they should take to protect themselves from the coronavirus?

ANSWER
I appreciate your concern. The coronavirus is no hoax. It is deadly. As I write, China is currently reporting that there are patients who recovered from the coronavirus, tested negative, and were released from medical care into the general population, only to again test positive for the coronavirus, with additional complications developing, such as pneumonia. Currently, the US government has embargoed sharing sufficient, vital, and lifesaving information (i.e., the size and results of tests) – and, what’s worse, there are not enough test kits.

We published the announcement, entitled Coronavirus: CDC Guidance - An Urgent Message. I urge everyone to go there and read it! You can print it out, too. The announcement is devoted to the impact of this pandemic on businesses. It has received a huge response. But time will tell if companies take the actions needed to protect themselves!  

The US is on the threshold of the first wave of the pandemic. There will be considerable mortality and sickness. Over the next few months, the mortality and morbidity will crest at awful levels, but perhaps nothing like the impact of the second wave, which will commence in Fall and Winter. It is the second wave of such a pandemic that usually is many times more severe than the first wave. Unprepared institutions will incur all manner of risks, adverse knowns and unknowns, and financial setbacks. Now is the time for management to act soberly, calmly, confidently, and deliberately.

During these difficult times, it is important for management to set standards to diffuse the panicking alarmists and people with political agendas who would prey on our fears or dismiss the severity of this worldwide pandemic. The coronavirus is not political. Pay attention to medical professionals and scientists. Politicians who have no medical expertise or think science is a joke or have no expertise specific to the epidemiological conditions and symptoms of the coronavirus are in no position to offer medical or scientific guidance. Ignore them! This virus is not SARS, it’s not MERS, and it’s not influenza. It is a unique virus with unique characteristics. You should conduct an online search of scientific and medical organizations to compile sufficient information to draft and disseminate a policy document for your employees.

Containment is possible, but it must be implemented immediately!

Here are some actions to consider:

Management: The Senior Management and Board of Directors should meet and draft a statement that recognizes the potential impact of the pandemic on the financial institution and sets forth a directive to put in place various strategies to identify and reduce risk.

Manual: Develop a manual that is provided to employees, containing the outline of your response plan. Obtain a written attestation from employees that they have received and read the manual.

Human Resources: Ensure that HR is fully engaged in handling sick leave and other remedial measures. Be sure that HR has researched and proactively prepared for ADA requirements.

Links: Disseminate links to medical and scientific organizations, such as -


Hotline: Provide a hotline that has a distribution list to Compliance, HR, Legal, and Management.

Committee: Establish a Health Management Committee that is tasked with keeping the company current on the COVID-19 pandemic, its effects, its impact, and the actions needed to contain it. Give the Committee authority to take affirmative actions on behalf of the company.

Disaster Recovery and Business Continuity Plan (DRBC): Draft and ratify a DRBC as soon as possible and continually update the Business Continuity section per the changing demands of the pandemic.

Training: Use medical and scientific personnel to assist in training employees on the ways and means to contain the pandemic. Training should be done online.

Meetings and Travel: Cancel group meetings, conferences, and conventions. Cancel all unnecessary travel where flying is being discouraged by health notices. Group meetings and certain kinds of travel are vectors for spreading coronavirus.

Weekly Online Update: Offer employees a weekly online update, where employees can receive current information about critical news involving the pandemic as well as how to engage with the public, such as in taking face-to-face applications.

Management Message: Management should not sugar-coat the implications of the coronavirus or play politics. Any equivocating will be viewed as disingenuous and could provoke panic. Keep it real! The company may become seriously exposed to a reduction in workforce and revenues. Management should issue periodic statements about what it is doing to mitigate the risks, encourage its employees, and do what it can to support the community it serves.

If you want to discuss your particular situation, you can contact me HERE.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group