Elder Financial Exploitation: Prevention and Filing SARs

QUESTION
We have read your articles about elder financial abuse. As long-time subscribers, we know that you have a keen interest in elder abuse. Recently, we found ourselves in a situation where we had to decide whether to file a SAR.

One of our clients is an elderly man. His wife passed away many years ago. He did not want to do a reverse mortgage. Instead, he did a cash-out refinance. The loan quickly fell into arrears.

His son was deeded an interest in our customer’s property, and the son handled the transaction. But the important point is that our customer never came to us. We never spoke with him. The loan was originated online, although we have a branch near him.

Alarm bells went off when the loan went quickly in arrears. We could not reach our customer, and whenever we tried to speak to him, the son got involved. Our compliance manager did an investigation and decided to file a SAR. She also alerted the police and the FBI. It is now an elder financial abuse case, and we are concerned that our regulator will hold us responsible for not doing enough to prevent this abuse from happening.

Your articles have helped us understand that our older customers could be victims of elder financial abuse. We have two questions:

 1) What actions can we take to prevent elder financial abuse?

 2) How do SARs play a role in tracking down perpetrators of this kind of exploitation?

ANSWER
If you have followed my views, you probably know that I am very concerned about “Elder Financial Abuse,” also known as “Elder Financial Exploitation.” I tend to use these terms interchangeably. Federal and state government agencies use both, too.

I have published articles, issued white papers, and spoken publicly on this subject. Yet, I am frustrated by the slow pace of awareness on the part of financial institutions concerning such outrageous abuse.

Here are some of my articles on this subject:

Elder Financial Abuse: Prevention and Remedies (Online)

Elder Financial Abuse (Online)

FinCEN: Elder Abuse - Red Flags (Online)

Elder Financial Abuse Epidemic (Online)

Elder Financial Abuse: Prevention and Remedies (PDF)

Elder Financial Abuse (PDF)

The ARTICLES section of our main website has several articles that indirectly relate to Elder Financial Abuse. My articles contain numerous helpful references and many resources to assist you in developing a strong program to prevent elder financial exploitation.

Let’s define broadly what I mean by Elder Financial Exploitation (“EFE”). Put briefly, EFE is the illegal or improper use of an older person’s funds, property, or assets. It is one of the most significant frauds against individual persons, and it is the most common form of elder abuse in the United States.

But only a small fraction of incidents are detected and reported, let alone satisfactorily remedied. Older adults are attractive targets because they may have regular sources of income, significant assets, or equity in their homes. Indeed, older people may be particularly vulnerable due to factors such as isolation, cognitive decline, physical disability, health problems, and bereavements, such as the loss of a partner, family member, or friend. Thus, their ability to protect themselves from individuals seeking to exploit them may be limited, increasing the need for effective interventions. Once victimized, they often experience financial insecurity and the loss of their dignity and quality of life.

And who are the perpetrators? Often, they include family members, caregivers, scam artists, financial advisers, home repair contractors, lawyers, accountants, doctors, and fiduciaries (such as agents under power of attorney and guardians).

Financial institutions can and should play a key role in preventing and detecting Elder Financial Exploitation. A financial institution’s familiarity with older adults may enable it to spot irregular transactions, account activity, or behavior. Prompt reporting of suspected financial exploitation to Adult Protective Services (“APS”), law enforcement, and Long-Term Care Ombudsman[i] – who are advocates for residents of nursing homes, board and care homes, assisted living facilities, and similar adult care facilities – can trigger appropriate intervention, prevention of financial losses, and other remedies.

You might reasonably say, “somebody should do something about this horrendous exploitation!”

Guess what? That “somebody” is you!

In March of 2016, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published an Advisory for financial institutions on preventing and responding to Elder Financial Exploitation (“Advisory”)[ii], and it also offered accompanying Recommendations as well as a report for financial institutions on preventing and responding to elder financial exploitation (“Recommendations”).[iii] The Bureau noted that banks and credit unions are uniquely positioned to detect an elderly account holder targeted or victimized and take action. The Advisory and Recommendations covered a spectrum of voluntary best practices to assist financial institutions. And nonbank, financial institutions, beware! There are many ways that you can determine if an elderly consumer is financially exploited.

I will mention some things you can do, and then I will provide some guidance on filing a Suspicious Activity Report (SAR) for Elder Financial Exploitation.[iv]

As a financial institution, what are some things you can do about elder financial exploitation? 

·        Report all cases of suspected EFE to relevant federal, state, and local authorities

The reporting should be done whether it is mandatory or voluntary under state or federal law. Note that In 2013 the eight federal regulatory agencies with authority to enforce the privacy provisions of the Gramm-Leach-Bliley Act (GLBA) issued Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults (“Guidance”).[v] The Guidance clarified that reporting financial abuse of older adults to appropriate authorities does not, in general, violate the privacy provisions of GLBA. Since then, new laws have been passed since the publication of the 2016 Advisory, such as the Senior Safe Act,[vi] which I discuss below. 

·        Understand the Reporting Requirements in your State

 The CFPB noted in 2016 that, while it recommends that first responders take action, only about half the states mandated that financial institutions report suspected EFE to APS,[vii] law enforcement, or both. The CFPB recommended that financial institutions determine whether and when state law mandates reporting by the institution. Under state mandatory reporting laws, proof of EFE usually is not required, and a reasonable suspicion of EFE triggers a duty to report. There is plenty of statutory authority.[viii]  As of April 2019, 26 states and the District of Columbia mandate reporting suspected EFE by financial institutions or specified financial professionals. The CFPB’s issuance that updated the Advisory and Recommendations contains a chart of state statutes involving mandatory reporting related to EFE and the role of financial institutions in reporting it.[ix] 

·        State Laws authorizing delays in Disbursing Funds

 Since 2016, a substantial number of states have enacted legislation based on a Model Act adopted by the North American Securities Administrators Association (“NASAA”). Although it does not apply to banks and nonbanks, it has some features that are worth considering for such financial institutions. For instance, it includes a provision permitting delayed disbursements of funds when the financial institution believes that financial exploitation may occur, with accompanying responsibilities.[x] These statutes generally provide timelines for transaction holds and provide immunity for institutions and employees who take the proactive steps of withholding transactions and reporting suspected financial abuse to specified authorities. They generally require financial institutions to report suspected financial exploitation if they choose to hold a transaction. But, as I noted, most of these statutes apply only to broker/dealers, financial advisers, and others dealing in securities.

However, state policymakers and key stakeholders continue to explore to enable banks and nonbanks to delay disbursements if they suspect that an older account holder has been or will be defrauded. The proposed or actual legislative changes suggest that policymakers seek additional ways to prevent EFE entirely or to limit the losses that older adults may incur when targeted. 

·        The Senior Safe Act, a federal statute enacted in 2018, encourages Reporting of EFE and provides Immunity in Specified Situations

The federal Senior Safe Act, effective June 2018, provides that financial institutions are not liable for disclosing suspected EFE to covered agencies[xi] if the institution has trained its employees on identifying EFE.[xii] The Senior Safe Act applies to depository institutions, credit unions, investment advisers, broker-dealers, insurance companies, insurance agencies, insurance advisers, and transfer agents.[xiii]

In addition to institutional immunity, the Senior Safe Act provides individual immunity for those who “served as a supervisor or in a compliance or legal function (including as a Bank Secrecy Act officer) for, or, in the case of a registered representative, investment adviser representative, or insurance producer, was affiliated or associated with, a covered financial institution.”[xiv] To establish immunity, the report must be made in good faith and with reasonable care, and the employee must have received appropriate training on how to identify and report elder exploitation.[xv] 

In its 2016 Recommendations, the CFPB recommended that financial institutions establish clear, efficient training protocols to enhance their capacity to detect EFE.[xvi] The CFPB Recommendations stress that training curricula should include indicators of potential EFE, and the CFPB compiled a list of warning signs in an appendix.[xvii] The Bureau recommended that training programs describe what actions to take when employees detect problems. It also recommended that the training describe the roles and responsibilities of management, frontline staff, and other employees to reduce ambiguity and promote efficient and timely action when staff suspects or observes EFE.[xviii] 

·        Training, Training, Training

It is “mission critical” that your organization provides periodic training to employees regarding Elder Financial Abuse. In February 2011, the Financial Crimes Enforcement Network (FinCEN) published an advisory that described potential signs of elder financial exploitation that might trigger the filing of a Suspicious Activity Report (SAR).[xix] A whole training course could be built around it!

The advisory described numerous possible signs of elder financial abuse, such as:

·        Erratic or unusual banking transactions or changes in banking patterns:

o   Frequent large withdrawals, including daily maximum currency withdrawals from an ATM;

o   Sudden non-sufficient fund activity;

o   Uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds;

o   Debit transactions that are inconsistent for the older adult;

o   Uncharacteristic attempts to wire large sums of money; or

o   Closing of CDs or accounts without regard to penalties.

Special Purpose Credit Programs

QUESTION
Your recent FAQ on Limited English Language Proficiency mentions Special Purpose Credit Programs. We are not that familiar with them. In the last few days, we have been considering your views as part of our marketing and compliance plans.

We would like to know more about these credit programs, because a few years ago our company was cited for favoring one class of loan applicants over another. This set off alarm bells here. It is our understanding that these programs could be a good way to improve our community relations.

What are Special Purpose Credit Programs? What are the procedures to roll them out?

ANSWER
The FAQ article you refer to, Limited English Language Proficiency, mentions the Special Purpose Credit Program (“SPCP”) in the context of the CFPB’s recent issuance, entitled Statement Regarding the Provision of Financial Products and Services to Consumers with Limited English Proficiency”[i]

Let’s step back a little for some historical analysis.

The Equal Credit Opportunity Act (ECOA) states that it is unlawful for any creditor to discriminate on the basis of sex, marital status, age, race, color, religion, national origin, receipt of public assistance benefits, and exercise of rights under the Federal Consumer Credit Protection Act (“prohibited bases”). 

At the same time, the ECOA clarifies[ii] that discrimination under the statute does not include refusal “to extend credit offered pursuant to…any special purpose credit program offered by a profit-making organization to meet social needs which meets standards prescribed in regulations by the [CFPB].”

By permitting the consideration of a prohibited basis in connection with a SPCP, Congress protected an array of programs specifically designed to prefer members of economically disadvantaged classes, such as government-sponsored housing credit subsidies for the aged or the poor and programs offering credit to a limited clientele such as credit union programs and educational loan programs.

According to the CFPB, various persons have expressed interest in developing SPCPs but raised concerns about how to do so consistent with Regulation B, ECOA’s implementing regulation. This suggested that regulatory uncertainty might inhibit broader creation of these programs by creditors.

In response, in December 2020, the CFPB issued an advisory opinion to address the regulatory uncertainty “in the hope that broader creation of special purpose credit programs by creditors will help expand access to credit among disadvantaged groups and will better address special social needs that exist today.”

So, with that brief historical context, let us consider how to go about implementing a compliant SPCP. To begin, a financial institution must prepare and follow a written plan that supports the need for the program.[iii]

The written plan must address: 

The class of persons the program will benefit. 

This class must consist of those “who would otherwise be denied credit or would receive it on less favorable terms.” The plan must explain whether the class of persons must demonstrate a financial need and/or share a common characteristic. The creditor may define the class with or without reference to a characteristic that is otherwise a prohibited basis under ECOA. For instance, if the lender appropriately determined need (as I’ve described in the last bullet point below), the written plan might identify a class of persons as minority residents of low-to-moderate income census tracts, operators of small farms in rural counties, minority- or woman-owned small business owners, consumers with limited English language proficiency, or residents living on tribal lands. 

The procedures and standards for extending credit under the program. 

The procedures and standards must be designed to increase the likelihood that a class of persons “who would otherwise be denied credit” will receive credit under the program or that a class “who would receive [credit] on less favorable terms” will receive credit on more favorable terms under the program. To this end, a creditor might introduce a new product or service, modify the terms and conditions or eligibility requirements for an existing product or service, or modify policies and procedures related to loss mitigation programs. 

For example, a creditor might offer a new small business loan product for woman-owned businesses by relaxing its customary standard of requiring 3 years of experience in the industry to one year, if the creditor has determined that this requirement probably prevented woman-owned businesses from qualifying for small business financing. The written plan must describe the procedures and standards and explain how they will increase credit availability for the identified class of persons. If the class of persons the program is designed to benefit will be required to share a common characteristic, the written plan may also explain whether the creditor will request and consider information that ECOA would otherwise prohibit. 

Either the time period the program will last or when the financial institution will reevaluate the program to determine if the need for it continues. 

If the creditor opts for the latter approach, reevaluation could be contingent on a certain set of circumstances or simply set a date. The written plan could adopt a combined approach. An example here might be where the program could end on a set date, or when a pre-established origination volume has been reached, whichever first occurs. If the creditor extends the program beyond the date set forth in the plan, it must document the terms of the extension to be sure the program continues to be administered pursuant to a written plan. 

A description of the analysis the financial institution conducted to determine the need for the program. 

The program must be established and administered pursuant to a written plan to benefit a class of people who would otherwise be denied credit or receive credit on less favorable terms, as determined by a “broad analysis” using the financial institution's own data and research or data from outside sources, such as governmental reports or studies. 

The Regulation B Commentary[iv] provides two examples of classes that might be benefited: 

(1) a creditor might design new products to reach consumers who would not meet, or have not met, its traditional standards of creditworthiness due to factors such as credit inexperience or the use of credit sources that may not report to consumer reporting agencies; or 

(2) a creditor could review HMDA data along with demographic data for its assessment area and conclude that a need exists for a special purpose credit program for low-income minority borrowers. In the case of small business lending, a creditor might consider the Small Business Administration’s or Federal Reserve Board’s Small Business Credit Surveys. A creditor might consider other governmental or academic reports and studies exploring the historical and societal causes and effects of discrimination. 

The creditor must show a connection between the research or data informing its analysis and the fact that, under customary standards of creditworthiness, a class of persons probably would not receive credit or would receive credit on less favorable terms than ordinarily available to other applicants applying to the creditor for a similar type and amount of credit. 

For example, a creditor who identifies a class of applicants who do not have sufficient savings to meet mortgage loan requirements (or who receive those loans on less favorable terms) could offer down payment assistance funds pursuant to an SPCP. In this example, the creditor could demonstrate that under its own standards of creditworthiness, either: (1) “insufficient cash” is listed as a principal reason for denial of similar mortgage loan applications among the identified class of applicants frequently enough to indicate they probably would not receive credit; or (2) requirements regarding minimum amounts of cash to close or liquid assets will probably impair access for the identified class of applicants. 

If no SPCP has yet been established, a creditor may use statistical methods to estimate demographic characteristics but it cannot request demographic information that it is otherwise prohibited from collecting, even to determine whether a need for the program exists. While a creditor may use a wide swath of research and data to determine the need for a special purpose credit program, including its own lending data, it may not violate Regulation B’s prohibitions on the collection of demographic information exclusively to conduct this preliminary analysis before establishing an SPCP.

Once an SPCP has been established, the creditor may then request and consider information regarding common characteristic(s) if needed to determine the applicant’s eligibility for the program. For example, if the creditor establishes an SPCP that requires an applicant to reside in an area designated as a low-to-moderate income census tract and be Black, Hispanic, or Asian, the creditor could request race or ethnicity information from applicants to confirm eligibility for the program. 

The CFPB’s advisory opinion noted that it applies solely to certain aspects of SPCPs designed and implemented by for-profit organizations to meet special social needs under Regulation B and ECOA. The opinion does not apply to credit assistance programs expressly authorized by federal or state law for the benefit of economically disadvantaged classes of persons, or to any credit assistance program offered by a not-for-profit organization, for the benefit of its members or for the benefit of an economically disadvantaged class of persons.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

---

[i] Statement Regarding the Provision of Financial Products and Services to Consumers with Limited English Proficiency, Bureau of Consumer Financial Protection, 86 FR 6306-6313, January 21, 2021
[ii] § 701(c)
[iii] Equal Credit Opportunity (Regulation B); Special Purpose Credit Programs, Bureau of Consumer Financial Protection, 86 Federal Register 3762 (Jan. 15, 2021)
[iv] See Regulation B, 12 C.F.R. § 1002.8, and related Commentary

Limited English Language Proficiency

QUESTION
Recently, we completed a huge banking examination. During the exit interview, we were shocked to find out that examiners thought we did not provide language support in our assessment areas where most of the population speaks a language other than English at home.

We have loan officers who speak a non-English language. But the examiners still claimed we were possibly excluding customers based on their language differences.

When the exit meeting was over, we all met in the conference room, and somebody said that it’s just too bad if the applicants don’t speak English – she said, “they’re here, they should speak English.” The CEO, who was present at this point, immediately shut her down.

Now, we are tasked with making sure our public facing contact ensures that we are responsive to issues involving limited English proficiency. We are in touch with your firm to monitor our actions, including retaining you for call calibration.

What are some of the challenges we face in addressing limited English proficiency?

ANSWER
As some of you know, I speak several languages. A few so-called dead languages have made their way into my language fluencies. Of the ten languages, I have also taught a few of them at the graduate level. So, language fluency is a matter of significant personal interest. To some extent, I think some companies take the non-English speaking public for granted when it comes to communicating with them in a language they understand.

Thank you for contacting Lenders Compliance Group to assist you. In setting up your language sensitivity program, I think you’re on the right track to have us not only monitoring your forms, disclosures, and advertisements but also conduct call calibration, which audits your telephonic contact with the public. For more information about Call Calibration, contact us HERE. In responding to the examiners, you will want to demonstrate an affirmative defense, such as the foregoing actions would provide.

Our nation consists of many assessment areas, some of which contain communities where English is not the dominant language spoken at home or even in local commerce. How sensitive you are to their language needs is reflective of the understanding of your mission. And, in any event, if your company can’t bring itself to be sensitive to the language needs of the assessment area, regulators will indeed have a way of getting your attention with sufficient tact and circumstance to get you sensitized.

The Dodd-Frank Wall Street Reform and Consumer Protection Act emphasized the role of the CFPB in ensuring “fair, equitable, and nondiscriminatory access to credit.” The Act also prohibited any unfair, deceptive, or abusive act or practice (UDAAP). And, the Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on sex, marital status, age, race, color, religion, national origin, receipt of public assistance benefits, or the exercise of rights under the Federal Consumer Credit Protection Act (which includes ECOA, the Truth-in-Lending Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act).

Be aware that the CFPB has instituted enforcement actions against companies that allegedly charged consumers with limited English proficiency (“LEP”) higher prices and offered more limited access to products and services than they charged and provided to more proficient English-speaking consumers.

In January 2021, the CFPB issued a Statement to encourage financial institutions to serve LEP consumers better and to provide principles and guidelines to assist financial institutions in complying with the Dodd-Frank Act, ECOA, and other laws.[i] The Statement offers guidance on how to provide access to credit in languages other than English in a manner beneficial to consumers.

Take note of how the Statement provides the following regulatory attempts to address LEP challenges: 

·        Regulation E's remittance transfer provisions (Electronic Fund Transfer Act) require disclosures in a language other than English in certain circumstances.[ii] 

·        Regulation E's prepaid account sections require financial institutions to provide pre-acquisition disclosures in a foreign language if the financial institution uses that same foreign language in connection with the acquisition of a prepaid account in certain circumstances.[iii] 

·        Regulation Z’s (Truth-in-Lending) provisions: (1) addressing obligations relating to advertising and disclosures in languages other than English for closed-end credit;[iv] and (2) providing that disclosures made in languages other than English must be available in English upon request.[v] 

·        State statutes require transactions negotiated or conducted primarily in a foreign language to include certain documents in the language of negotiation under certain circumstances.[vi]

The CFPB issued the Statement after seeking input from stakeholders on fair lending compliance issues and access to credit issues. Some industry members expressed concern about the fact that over 350 languages (sic) are spoken in the U.S., so it would be unrealistic and cost-prohibitive for any financial institution to fulfill all the credit needs of all customers in all languages.

Understandably, commenters expressed uncertainty about how to prioritize one language over others and what factors to consider when seeking to provide services in one or more languages. Others mentioned the technical, operational, and compliance challenges specific to providing accurate translations.

Some folks were particularly concerned about fair lending risks in making decisions about language selection for non-English language services and about potential UDAAP risks in determining how and in which language to offer products and services, especially when not all products and services are provided in languages other than English.

In my view, the Statement sets forth rather vague guiding principles, such as: 

·        Encouraging financial institutions to serve LEP consumers better while ensuring compliance with relevant Federal, State, and other legal requirements; 

·        Instituting “pilot programs,” where financial institutions that wish to implement pilot programs or other phased approaches for rolling out LEP-consumer-focused products and services may consider doing so in a manner consistent with the guidelines outlined in the Statement; 

·        Developing new products and services, where a company considers developing a variety of compliance approaches related to the provision of products and services to LEP consumers consistent with the guidelines set forth in the Statement; 

·        Ensuring timely disclosure, allowing financial institutions to mitigate certain compliance risks by providing LEP consumers with clear and timely disclosures in non-English languages describing the extent and limits of any language services provided throughout the product lifecycle; and, 

·        Increasing access to credit, where companies consider extending credit under a legally compliant Special Purpose Credit Program (SPCP) to increase access to credit for certain underserved LEP consumers. 

The following are several key guidelines provided in the Statement that are meant to suggest solutions when serving LEP consumers. However, be sure to evaluate any plans in the light of the applicable regulations (such as I mentioned above) as well as potential regulatory scrutiny. 

·        Language Selection. In determining whether to provide non-English language services to LEP consumers and in which language(s), financial institutions may consider documented and verifiable information such as the stated language preferences of its current customers or U.S. Census Bureau demographic or language data. 

·        Product and Service Selection. In determining which products and services to offer in languages other than English, financial institutions may consider various factors, including the extent to which LEP consumers use particular products and the availability of non-English language services. In determining when during the “product lifecycle” financial institutions can offer services in non-English languages and the extent of those services, consider activities and communications – whether verbal or written – that most significantly affect consumers. In making product and service selections, review relevant policies, procedures, and practices for features that pose a heightened risk of unlawful discrimination, including distinctions in product offerings or terms related to prohibited bases or proxies for prohibited bases (i.e., geography). 

·        Language Preference Collection and Tracking. Financial institutions may collect and track customer language information in a variety of ways to facilitate communication with LEP consumers in non-English languages. For instance, in 2017, the CFPB officially approved a redesign of the Uniform Residential Loan Application (URLA) that included a question to collect mortgage applicants’ language preference. Although the FHFA opted to remove that question when it approved the URLA changes (for Fannie Mae and Freddie Mac), financial institutions may use similar questions to obtain customer language preference information outside the mortgage lending context. However, financial institutions must ensure that information collected about language preference is not used in ways that violate applicable laws. Be careful! The CFPB has brought enforcement actions against institutions for alleged violations that resulted, at least in part, from the exclusion of consumers with non-English language preferences from offers provided to similarly situated consumers without those language preferences. 

·        Translated Documents. Financial institutions must comply with Federal and State laws that require translated documents under certain circumstances. If the translation of documents is not mandated, financial institutions may assess whether and to what extent to provide translated documents to consumers. A company that provides translated documents must ensure those translations' accuracy and seek to prioritize communications and activities that most significantly affect consumers. And a financial institution may wish to use translated documents provided by the CFPB and other government agencies.

Whatever you do, make sure that you have activated your “change management” procedures and updated your Compliance Management System (“CMS). We can evaluate your Compliance Management System using our CMS Tune-up, so contact us HERE. 

According to the CFPB, a company may mitigate fair lending and other risks by implementing a strong CMS that affirmatively codifies how to serve LEP consumers in a compliant manner. You can also develop an LEP-specific CMS or integrate an LEP focus into your company’s broader fair lending, UDAAP, and consumer compliance CMS.

At a minimum, I suggest these procedures to be layered into the implementation process:

 Document the Decisions. With respect to providing products and services in non-English languages, document decisions related to the selection of (1) language(s), (2) product(s), and (3) service(s).

Monitor, Audit, Call Calibration. When providing services in non-English languages, be sure to regularly monitor those services, including changes in those services, for fair lending and UDAAP risks. Indeed, it would be best if you considered monitoring or conducting regular fair lending and UDAAP-related assessments of advertising, including promotional materials and marketing scripts for new products. You can accomplish such assessments with our Compliance Tune-up reviews, so contact us HERE.

Fair Lending Testing. Common features of a well-developed CMS include regular statistical analysis of loan-level data for potential disparities on a prohibited basis in underwriting, pricing, and other aspects of the credit transaction

Third-Party Vendor Oversight. If your company contracts with service providers to offer any products or services to LEP consumers, it should ensure that the products and services do not violate applicable laws or pose fair lending or UDAAP risks to LEP consumers. We can provide the service provider approvals through our Vendors Compliance Group. Still, the task of checking for their compliance with applicable consumer financial protection law, fair lending, and UDAAP risk is ultimately the responsibility of your company.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

______________________________
[i] “Statement Regarding the Provision of Financial Products and Services to Consumers with Limited English Proficiency,” Bureau of Consumer Financial Protection, 86 FR 6306-6313, January 21, 2021
[ii] 12 C.F.R. § 1005.31(g)(1)(i)
[iii] 12 C.F.R. § 1005.18(b)(9)
[iv] 12 C.F.R. § 1026.24(i)
[v] 12 C.F.R. § 1026.4(e)
[vi] For instance, see Cal. Civ. Code § 1632(b); Or. Rev. Stat. § 86A.198; and Tex. Fin. Code § 341.502(a-1)

Regulation B: Prequalifications

QUESTION
Most of our loan originations are from online interactions with applicants. We offer a prequalification program.

People go online and provide a set of information to us. Then we get them prequalified, although we still need other information, like the appraised value of the house they’re buying.

Our customers really like our program because they can rely on our letter of prequalification to know the maximum house price and down payment they can afford.

Our concern is about issuing Regulation B’s Notice of Action Taken.

For prequalifications, when do we issue the Notice of Action Taken?

ANSWER
You ask an interesting question. I think you may be surprised with the answer!

Most financial institutions these day that are engaged in mortgage lending offer customers “prequalification” for a mortgage loan. Usually, all of the application information is taken from the customer, including credit reports, employment verifications, and the verification of other information, but some part of the loan underwriting process is left out.

This occurs when the customer does not yet have a particular home or property in mind, but instead, wants to “prequalify” for a loan. If your customers know the maximum amount they can borrow with a given amount for the down payment, they will know the price range they can afford for a home. When a customer finds a home, they return to the lender with that information.

There are a number of compliance rules under several regulations that require certain actions and/or disclosures whenever an application form is given by a lender or, in the case of Internet banking, whenever the individual is asked to supply or transmit application information online.

The prequalification process, though, does not fit neatly into what is traditionally thought of as an “application” and, by extension, does not therefore fit neatly into the concise framework of the regulations. In most instances, the issue has been dealt with in the Commentary to the regulations, but there are still instances where the issue is less than clear.

Let's zero in on your concern. For purposes of disclosures and reporting, when is the Notice of Action Taken required under Regulation B?

The general rule under Regulation B for consumer credit is that a financial institution must take action on and notify the applicant of action taken within 30 days of receiving a completed application. However, under the Commentary to sections 1002.2(f) and 1002.9 of Regulation B, whether a financial institution must provide a notice of action taken for a prequalification or preapproval request depends on the financial institution’s response to the request.

Delving further into the response, a lender may treat the request as an inquiry if it provides general information, such as loan terms and the maximum amount a consumer could borrow under various loan programs, explaining the process the consumer must follow to submit a mortgage application and the information the lender will analyze in reaching a credit decision.

But, a lender has treated a request as an application, and is subject to the Adverse Action Notice requirements if, after evaluating information, the lender decides that it will not approve the request and communicates that decision to the consumer. For instance, in reviewing a request for prequalification, if a financial institution tells the consumer that it would not approve an application for a mortgage because of a bankruptcy in the consumer’s record, the financial institution has denied an application for credit.

Therefore, if a prequalification application is denied, an Adverse Action Notice is required to be provided to the applicant.

However, if the applicant is prequalified for credit, no notification under Regulation B is required until the applicants have found a home they want to purchase and provides this information and any other required information to the financial institution which completes the application. Once all of the required information is received (i.e., appraisal, and so forth), the application is complete and the 30-day decision clock begins to run.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

What’s in a word? “Lender” Defined

QUESTION
Last week, we watched a presentation from a top business management company. The theme was about the challenges that mortgage lenders face these days.

As a large mortgage lender, we found the presentation interesting. However, it occurred to us that they gave this big presentation and did not define the word “lender” in their slides.

So, we looked at the mortgage regulations and found that the definition varied, depending on the regulation. After talking about it, we decided to ask you for a general, working definition that we could use.

What is a generic definition of a “lender?”

ANSWER
This is a good question. You did not mention if the regulations you looked at were state or federal. And that is important. In any event, I think the essence of your question is meant to pertain to both state and federal banking laws. Our firm is always using definitions as they are defined in a specific statute. We deal with consumer credit compliance all the time and know the importance of statutory and regulatory definitions.

My guess is that you had the federal mortgage regulations in mind. So, I will give you a bird’s eye view based on the federal regulations and how they may extend to state law. Sometimes we can determine what a mortgage lender is by describing what it is not. That may seem counterintuitive, but it really isn’t. You’d be surprised how much litigation pivots on a judicial interpretation of what is or is not meant by a single word!

A recent case shows the importance of the term “lender” as it is used in state and federal law. The case is Kemp v. Nationstar Mortgage Association, which was litigated in Maryland’s Court of Special Appeals.[i] First, I will provide a brief outline of the case. Then, I’ll offer a few observations.

Kemp obtained a mortgage loan from Countrywide, which assigned the loan to Fannie Mae. Unfortunately, in 2017 Kemp fell behind on her payments, and her loan servicer, Seterus, declared the loan in default. Kemp had learned that Seterus charged her $180 for twelve property inspections it ordered after she defaulted. In November 2017, Seterus offered, and Kemp accepted, a loan modification, which rolled several of the property inspection fees into the loan balance.

In December 2017, Kemp sued Seterus and Fannie Mae on behalf of herself and a class, alleging that Seterus had violated § 12-121 of Maryland’s Commercial Law, which prohibits a “lender” from imposing a property inspection fee “in connection with a loan secured by residential property.”

The trial court dismissed the complaint, holding that Seterus and Fannie Mae were not “lenders” and that § 12-121 did not prohibit them from charging inspection fees.

The Court of Special Appeals reversed. The view here was that the trial court’s interpretive construction would defeat the broader statutory purpose and lead to absurd results. This is because § 12-121 applied to assignees. Maryland’s General Assembly, the court held, did not intend for the section’s broad prohibition against property inspection fees to apply only to the originator of the loan and, even more to the point, to allow assignees of the loan or their agents to charge the very fees the originators could not.

Now for some observations.

Both lenders and borrowers should be careful when considering the reach of a decision, such as in the case I’ve cited above. As I inferred, the meaning of a term such as “lender” may change from one statutory provision or framework to another. For instance, in the case of Bishop v. Carrington Mortgage Services, LLC,[ii] a federal district court considered a claim by borrowers that their mortgage loan servicer, which handled servicing for an assignee of the borrowers’ loan, had improperly charged them a $5 fee to make their payments online, in violation of several state statutes and the Federal Debt Collection Practices Act (FDCPA). In Bishop, the federal court apparently chose to discount Kemp, which was a state court decision.

Let’s drill down a bit.

In November 2005, Alexander took out a residential mortgage loan from America’s Wholesale Lender to buy a home. She entered into a deed of trust that included this language:

“In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or Applicable Law.”

Alexander’s Note required her “to make all payments under this Note in the form of cash, check or money order” and to make those payments at a specified post office box or “at a different place if required by the Note Holder.”

Seven years later, in 2012, Alexander’s Note was assigned to The Bank of New York Mellon, as trustee for the certificate holders of the CWABS, Inc., Asset-Backed Certificates, Series 2005-13, which I’ll call “CWABS.” In August 2013, CWABS retained Carrington Mortgage Services to service Alexander’s loan.

When Alexander made her monthly payments, Carrington Mortgage offered her options with respect to the payment method. She chose to make her payments online to Carrington Mortgage, each time incurring a $5 processing fee, rather than to send a check or money order and not incur a processing fee. Alexander sued Carrington Mortgage on behalf of herself and a purported class, alleging that the practice of charging a $5 “convenience fee” violated various Maryland statutes, most notably for our purposes Maryland Commercial Law § 12-105(d).

According to the court, § 12-105 limits the fees a “lender” may charge. Under Maryland law, a “lender” means “a licensee or person who makes a loan subject to this subtitle.” A “lender” does not include a subsequent assignee of the loan or the loan servicer. The court cited Flournoy v. Rushmore Loan Management Services, LLC,[iii] a federal court decision that Kemp had disavowed.

In Bishop, the court mentioned Kemp this way:

“While Plaintiffs argue that the recent Maryland Court of Special Appeals’ decision in Kemp v. Nationstar Mortgage Association supports finding that Carrington was a lender, that decision specifically applied to Section 12-121 of Maryland's Commercial Law Code, finding that ‘§ 12-121 is not limited to the originators of loans.’…. This holding does not extend to Section 12-105(d), which still requires that the lender be the originator of the loan.”

I know it seems convoluted, but, according to the court, this left no question that Carrington was not the originator of the loan, so Alexander’s claim under § 12-105(d) failed. The court discounted Kemp simply because Kemp dealt with a different provision, to wit, § 12-121, without addressing the “broader statutory purpose” cited by Kemp.

How another court will consider the question is anyone’s guess. A decision might depend on whether the action is filed in a state court or a federal district court. But, I hope you can see how the word “lender” is determined as defined by a statute.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

______________________________________  
[i] 248 Md. 1, 239 A.3d 798, Md. App. (Ct. Spec. App. 2020)
[ii] Bishop v. Carrington Mortgage Services, LLC, 2020 U.S. Dist. (D. Md. Dec. 11, 2020)
[iii] Flournoy v. Rushmore Loan Management Services, LLC, 2020 U.S. Dist. (D. Md. Mar. 17, 2020)