COLLECTION MORTGAGE LENDINGCOMPLIANCE ALERT

November 2016 | Vol. 16 | No. 11

NEWS & ANALYSIS ON LEGISLATION, REGULATION, LITIGATION & ENFORCEMENT

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5 Field-Tested Tips HelpYou Sail Through TRIDExams

A CFPB Expert DivulgesHow To Avoid 5 CommonCompliance Pitfalls

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Steer Clear of HMDA Hot Water With This Q&A Guide

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Appeals Court RulesCFPB StructureUnconstitutional

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Failure To Revise Title Premium Insurance Disclosures Irks Industry

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CFPB’s Examination

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Shield yourself from regulatory scrutiny and avoid exam-related headaches by learning from the mistakes of other mortgage originators.

This month, Eli spoke with a former Consumer Financial Protection Bureau (CFPB) regulator about the Agency’s recent Supervisory Highlights for mortgage origination. Read on for an inside perspective on the errors regulators have found—and how to fix them.

Lesson #1: Make sure discount points never dip below zero

Don’t fall into the trap of incorrectly calculating the amount financed on loans with discount credits. And if your computer system is to blame, fix it!

Reg: Regulation Z requires you to calculate the amount financed in three steps: (1) determine the principal loan amount or the cash price (minus any down payment), (2) add any other amounts that the creditor finances that are not part of the finance charge, and then (3) subtract any prepaid finance charge.

Mistake: Some institutions incorrectly calculate the amount financed using discount credits, and then incorrectly calculate the finance charge based on the same. This improper calculation method results in a negative finance charge and a financed amount that exceeds the stated loan amount—adding up to a Reg Z violation.

Example: A borrower takes a 3.25 percent interest rate in exchange for a credit of $2,000 toward closing costs. However, closing costs total $1,600, leaving a $400 credit that can be applied to reduce the principal balance. Some lenders’ systems may treat this remainder as a negative credit when calculating the Amount Financed, resulting in an Amount Financed that is more than the loan amount, explains Ben Olson, former Deputy Assistant Director for the CFPB’s Office of Regulations, currently a partner at Buckley Sandler.

Although some viewed negative credit as permissible in the past, the CFPB has disallowed negative credits in these circumstances, he adds.

Solution: If your institution’s system allows for negative points when calculating the Amount Financed, change it so the amount can never go below zero, Olson advises.

Lesson #2: Rein in RESPA referrals

Affinity relationships can bring significant benefits, but hold these relationships up to RESPA Section 8 requirements—or expect a CFPB crack down.

Reg: RESPA Section 8 and its implementing Regulation X generally prohibit the acceptance of any fee, kickback, or other item of value in exchange for a referral. An affiliated business arrangement (ABA) is permitted so long as nothing of value is exchanged for a referral.

Mistake: Some institutions require borrowers to use an affiliate for flood determination and tax services. Although RESPA permits exceptions for certain referrals: attorney, credit reporting agency, or real estate appraiser, you are not allowed to require borrowers to use other types of settlement services.

Solution: Make sure your ABA disclosure does not require use of an affiliate for flood, tax, or other settlement services that are not subject to an exception. Also, use the model ABA disclosure (with no alterations or additional content) when referring borrowers to an affiliate. CFPB “has gone after companies that improperly altered the model form,” Olson warns, “so, when in doubt, provide the model form.”

Lesson #3: Don’t overlook adverse action notices

Credit denial is not the last word – don’t forget the adverse action notice! You must also inform borrowers when they don’t qualify for the best loan terms.

Reg: The Fair Credit Reporting Act requires you to provide the consumer with notice of an adverse action (e.g., a denial of credit) if you take such action based on a consumer credit report.

Mistake: Some institutions take adverse action based on information in consumer reports but fail to make the required disclosures.

ComplianCe

a CFpB expert Divulges How To avoid 5 Common Compliance pitfalls Tip: Negative discount credits are not allowed!

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No more going easy! Now that TRID (TILA-RESPA Integrated Disclosure rule) is more than a year old, expect Consumer Financial Protection Bureau (CFPB)

regulators to scrutinize your TRID compliance more closely at your next exam.

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Solution: Ensure your systems are set up to provide notices when you take adverse actions, and communicate to staff their responsibility to make the disclosure, Olson says.

For review, adverse action notices should include:

1. The name, address, and telephone number of the consumer reporting agency that furnished the report;

2. A statement that the consumer reporting agency did not make the decision to take the adverse action;

3. The consumer’s right to obtain a free copy of a consumer report from that consumer reporting agency; and

4. The consumer’s right to dispute with the furnishing consumer reporting agency the accuracy or completeness of information contained the consumer report.

Remember: Credit denial is not the only type of adverse action; if a client does not qualify for the best loan terms due to his credit report, the Fair Credit Reporting Act may consider the modified terms an adverse action and require the proper notice, Olson adds.

Lesson #4: Keep interest and principal payments separate

Keep your ducks in a row when it comes to principal and interest payments.

Reg: Regulation Z requires that creditors disclose interest-only loan payment amounts that will be applied to interest and principal. These amounts must be itemized and labeled as “interest payment” and “principal payment.”

Mistake: Some institutions offering interest-only bridge loans fail to accurately disclose the monthly interest payment because that payment mistakenly included amounts intended to repay closing fees financed into the principal balance. Such a failure, primarily due to a software error to

separately itemize and properly disclose the correct interest and principal payment, violates Regulation Z.

Example: A consumer needs to borrow $100,000 to purchase the property, plus $5,000 more for closing costs. An institution might improperly treat the $5,000 portion of the loan as interest when it is actually principal, Olson explains.

Solution: Ensure your lending system properly distinguishes between monthly accrued interest and upfront costs (including prepaid interest) that are included in the loan amount, Olson says.

Lesson #5: Patch CMS holes and ‘police’ yourself

If someone else is catching errors for you, that’s a sign your compliance management system (CMS) needs improvement.

Mistake: At some institutions, examiners concluded that a weak CMS allowed violations of Regulations V, X, and Z to occur.

Examples: Some institutions had weak oversight of automated systems, including inadequate testing of codes that calculate the finance charge and the amount financed when originating consumer residential loans. In addition, some businesses failed to monitor for changes that would require updated disclosures in compliance with applicable federal consumer financial laws.

The Bureau expects financial institutions to use their CMS to “police themselves” so they stay in compliance, Olson notes.

Solution: Perform testing to make sure your automated calculations are resulting in the correct amount, he adds. Whether you do a post-closing quality control review of all loans or just a sample, make sure you complete this step to demonstrate good faith compliance efforts.

Resource: CFPB’s Summer 2016 Supervisory Highlights: http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_12.pdf q

TRiD ToolBox

5 Field-Tested Tips Help You Sail Through TRiD examsYou may be assessed on how quickly you can access disclosure records.

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Read on for tips on how to best prepare for TRID exams from four Weiner Brodsky Kider PC (WBK) attorneys with first-hand experience at guiding clients through the CFPB’s examination and investigation processes.

Tip #1: Violations require a speedy cure

Mistakes happen—but you must demonstrate that you are serious about getting post-consummation cures right.

Problem: Some creditors are failing to provide the corrected Closing Disclosure (CD) within the appropriate timeframe and with a properly calculated refund, share the WBK attorneys.

What to do: Conduct prompt post-closing reviews of all transactions subject to the TRID Rule. Also, collaborate with settlement agents to reconcile and finalize CD data, the WBK team advises.

Random testing is also important. Select a sample of cured loans, and recalculate the amounts to be refunded or credited. Then, check to see whether consumers received the correct credit at closing, or a refund within the required 60-day time period after closing, recommends the Banking Exchange article “Testing Is Your Essential TRID Armor.”

Important: Include all products and channels in the testing sample, including those from different loan origination systems, the article continues.

If you’ve made any revisions to disclosures, make sure you are testing tolerances against the revised amounts, not the original, reminds Jack Konyk, Executive Director of Government Affairs at WBK.

Tip #2: Keep records at your fingertips

Is your record management system able to readily produce data for examiners’ review?

CFPB exams have shown that creditors should be testing the accessibility of their records to see how quickly they can locate and retrieve specific documents, says the WBK team.

Here are the critical document-retention timelines:

5 years: Retain the CD and all related documents for five years after consummation. 3 years: Retain copies of all completed Loan Estimates (LE), including revised LEs and associated records of TRID compliance, for at least three years after consummation.

Tip: “Associated records” include all documentation related to changed circumstances that permit you to issue revised LEs and reset tolerances within three business days of receiving supporting information (e.g., fee increases exceed the 10-percent cumulative tolerance threshold), the WBK team explains.

Tip #3: Pin down the meaning of ‘business day’

Know the two different definitions of “business day” under TRID:

“Open for business:” With some disclosure requirements, such as the LE that is provided within three business days of application, “business day” means “a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.” Excluding Sundays and Holidays: In other situations, including the seven-business-day waiting period before consummating the transaction, “business day” means all calendar days except Sundays and the legal public holidays, the WBK team notes.

Key: Review your policies and procedures to verify that you deliver the disclosures within the mandated timeframes using the correct definition of “business day,” WBK adds.

In addition, ensure you have “verifiable methods to prove disclosure delivery” within the required time period, the Banking Exchange article states. For instance:

When using the “mailbox rule,” document the mailing date.If you use alternative ways to confirm receipt, demonstrate clear confirmation of that receipt in your records.

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You may think that the 2018 implementation of new HMDA rules is far off, but falling behind may lead to a Regulation C violation—and even administrative sanctions or penalties.

Prepare to meet the coming HMDA requirements with these expert answers to common questions.

Q: How should I start preparing for new HMDA reporting rules?

The new rules will impact how you take applications, and you might be surprised at how much new information must be collected, kept, and reported, warns Jack Konyk, Executive Director of Government Affairs at Weiner Brodsky Kider PC (WBK), a Washington, D.C.-based firm with a national practice. So it’s never too early to familiarize yourself.

Important: The Final Rule’s expanded data collection requirements take effect for covered loans and applications for which you take final action on or after January 1, 2018. Because you may take final action on the loan months after the application date, you need to have the ability to start collecting and recording the required data in 2017, advises a team of four WBK attorneys.

What to do: Implementation will be a multi-step process. To prepare, the WBK team advises, you should:

Review carefully the Final Rule (www.federalregister.gov/documents/2015/10/28/2015-26607/home-mortgage-disclosure-regulation-c), including the Commentary, as well as the Consumer Financial Protection Bureau

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No matter what types of delivery receipts you have, make sure to document them consistently!

Tip #4: Break out your calculator

Exam results show it’s important to check and double-check your calculations.

Examiners are finding inaccuracies in calculations of amounts disclosed on both the LE and CD, the WBK team says, including:

“In 5 Years” calculations,tolerance categories, andTotal Interest Percentage (“TIP”) calculations.

Tip: The Summer 2016 CFPB Supervisory Highlights hint at other areas TRID examiners will focus on, including correctly calculating the amount financed on loans with discount credits, and properly itemizing and labeling “interest payments” and “principal payments.” (For more information, refer to the cover story on CFPB compliance in this issue.)

Sum up: Develop precise methods for calculating the various disclosures, and implement comprehensive audit practices to avoid technical errors, the WBK team advises.

Tip #5: Prepare to be quizzed

When examiners visit, be ready to talk.

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You must demonstrate a strong monitoring and testing process that is capable of producing error-free results, the WBK team says. Be ready to explain how you:

monitor for errors through your compliance management system;perform transaction testing of mortgage loan files; andprepared for and implemented the TRID requirements, including your compliance training requirements for all employees prior to and after the Rule’s effective date.

Takeaway: Work to identify errors yourself, and take prompt action to fix any issues that investigators or auditors have identified, advises Ben Olson, former Deputy Assistant Director for the CFPB’s Office of Regulations and current partner at Buckley Sandler. When you discover a mistake, go back and fix past transactions it may have affected by providing a refund or adjusting the account balance, he adds.

Everyone has experienced TRID errors, a fact that regulators are quick to acknowledge. While exams thus far have been more diagnostic, regulators may start applying a stricter standard to loans made more than a year after TRID’s effective date, Olson says.

For now, exam success is not about proving you got TRID perfect. Examiners “want to see good faith efforts toward compliance” and a declining error rate, he sums up. q

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HmDa

Steer Clear of HmDa Hot Water With This Q&a GuideGear up systems to collect the 39 new or modified data points.

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(CFPB)’s implementation resources (www.consumer-finance.gov/policy-compliance/guidance/implemen-tation-guidance/hmda-implementation).Review the data that is currently captured in your systems to identify any potential gaps. Update relevant policies and procedures and evaluate the adequacy of current training programs.Revise technological processes and systems.Evaluate relationships with third parties that handle HMDA data (such as vendors).

Q: What do I need to know about the new HMDA data points?

Your future compliance success rests on being prepared to collect a considerable amount of new data.

According to the article “5 Tips to Prepare for New HMDA Reporting” by Buckley Sandler attorneys:

9 data points are the same as the current HMDA rule, 14 data points have been modified from the current HMDA rule, and 25 data points are new.

Review all 48 data points to determine if your systems can accurately collect and record the new and modified data, the article continues. Also, ensure that systems can pull the correct data from TRID disclosures and other documents for HMDA reporting.

New data example #1: In 2018, you will be expected to report certain pricing data points, such as discount points, lender credits, and origination fees, from the TRID Closing Disclosure.

New data example #2: Other new data falls under the race category, which now includes more specific choices for people of Hispanic origin and the option to select up to three ethnicities for applicants of multiple lineages, Konyk says.

New data example #3: In addition, you will be required to report your reason for a loan denial, which was previously optional for most institutions, says Randy Carey, Professional Consultant with Regulatory Compliance and Internal Audit Services out of Galveston, Texas. There are now four categories under denial reasons with a free-form text field to clarify an “other” response with up to 50 characters. Use a consistent methodology for what you write in the free-form field, Carey adds.

New data example #4: Some data points under the Final Rule, such as Property Value and Combined LTV Ratio, use a “relied on” standard, meaning that you report the

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information to the extent that you relied on it to make the credit decision. Check whether you have procedures in place for tracking and reporting the data you relied on, the WBK team counsels, particularly when a file may contain multiple versions of the data at issue.

Bonus tip: While the “Action Taken” and “Type of Purchaser” data points are modified rather than new, lenders often struggle with the accuracy of these categories during CFPB examinations, the WBK team notes. Now is a great time to carefully review existing data points to ensure full compliance.

Q: Will I have to report open-end lines of credit under the new rules?

Yes, you will need to report some types of lending, not subject to HMDA before, under the new rules.

Example: While previously optional, under the Final Rule you must report open-end lines of credit secured by a dwelling, including multi-family dwellings, if you made at least 100 such loans in each of the two preceding calendar years, according to WBK attorneys.

If you are subject to reporting on your open-end lines of credit, you must report reverse mortgages as well as consumer, commercial, or business-purpose transactions, regardless of the purpose of the loan, Carey adds.

Certain loan types are excluded from reporting requirements, including temporary financing, loans secured by a lien on unimproved land, or loan purchases as part of a merger or acquisition, according to the WBK team.

Q: Will I need to start reporting HMDA data on closed-end home purchase loans if I complete less than 100 per year?

The previous HMDA-reporting threshold of 100 closed-end home purchase loans (including refinancings) has been considerably reduced.

New threshold: Starting in 2018, you must participate in HMDA reporting if you complete 25 closed-end mortgage loans in each of the preceding two calendar years, according to a Mayer Brown guide titled “HMDA and Revised Regulation C: Guidance for Multifamily Lenders.”

Q: Who reports HMDA data when multiple financial institutions are involved?

The broker rule remains the same: An institution that makes a credit decision on an application prior to closing

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reports that decision regardless of which business name the loan closes in.

Example: Financial Institution A receives an application for a covered loan from an applicant and forwards that application to Financial Institution B. Financial Institution B reviews the application and the loan is approved, denied, or withdrawn. Even if the loan closes in Financial Institution A’s name and Financial Institution B purchases the loan from Financial Institution A post-closing, Financial Institution B still reports the transaction as an origination, denial, or withdrawal since it made the credit decision prior to closing, Carey notes. Financial Institution A does not report the transaction.

Q: What system updates should I work on?

Getting ready to capture and report the new and revised data points will require several systems updates.

For instance: The updated Universal Loan Identifier (ULI) Requirement may pose a challenge because ULI

creation requires you to engage in several new and technical steps. Ensure systems are set up to perform the mathematical and technological operations that generating a compliant ULI requires, the WBK team advises.

You also must prepare systems to handle the new free-form text fields, (e.g., when reporting a reason for denial under “Other”), the WBK attorneys continue. Keep in mind that these fields have specified character limits.

To be able to answer auditors’ and regulators’ questions, you should have robust audit controls built into your system, Konyk advises. Aim for an audit trail that documents the “who, what and when” of data field changes, he says.

Bottom line: Once you’ve updated systems to capture the new data, do internal tests as well as testing through client interactions, Konyk says. Pair staff training with system testing, and you’ll be set up for smooth sailing on the HMDA implementation date. q

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inDuSTRY noTeS

Appeals Court Rules CFPB Structure UnconstitutionalYou may soon see some changes at the Consumer Financial Protection Bureau—although it’s still unclear how the shake-up will impact your future compliance responsibilities.

The U.S. Court of Appeals for the District of Columbia ruled on October 11 that it is unconstitutional for a single director, who does not answer to the President or Congress, to lead the consumer watchdog agency, reports The Washington Post.

The reasoning: Other independent government agencies are typically headed by a group of commissioners, rather than a single individual.

The decision comes in response to a petition from mortgage lender PHH calling for the agency to be eliminated. (The bureau had hit PHH with a $109-million enforcement action that was later vacated by the federal appeals court ruling). Rather than shut down the CFPB, the district court ordered restructuring so that the President can remove the director at will, without cause, reports The Post.

“The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a

single person, such as the Department of Justice and the Department of the Treasury,” the court said.

The ruling comes amidst continual efforts by Republican lawmakers and financial groups to weaken or dismantle the agency, which was created by the 2010 Dodd-Frank financial reform law.

Conservatives and the industry have criticized the CFPB for various enforcements, writes The Post, including payday lender restrictions, higher standards for brokers who work with retirement investments, and a proposal banning financial firms from using arbitration clauses that prohibit customers from participating in class action lawsuits.

Consumer groups and other supporters of the CFPB fear the change could make the agency more vulnerable to political shifts, such as the election of a Republican president who is opposed to the Bureau.

Failure To Revise Title Premium Insurance Disclosures Irks IndustryIf your customers are confused and even angry about title insurance premium inconsistencies, you’re going to have to continue to muddle through case-by-case explanations—because the feds aren’t offering any help.

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Bad news: The TRID rule that requires consumers to receive incorrect fees for title insurance premiums on their disclosure will not be fixed, according to a July statement by Consumer Financial Protection Bureau (CFPB) Director Richard Cordray.

The crux of the issue: When lender’s and owner’s title insurance policies are bought and issued at the same time, a discount is usually applied to the combined premium, explains Jack Konyk, Executive Director of Government Affairs at Weiner Brodsky Kider PC. However, the CFPB requires the lender’s and the owner’s premiums to be disclosed individually, even if they’re not correct, he adds.

The Bureau believes the current way is the “most transparent method of disclosing the costs of the required lender’s title policy and the optional owner’s policy,” Cordray wrote.

Why? The Director believes the current disclosure method promotes the sale of owner’s policies, according to an American Land Title Association (ALTA) blog post.

Meanwhile, ALTA contends the CFPB’s calculation method to disclose title premiums leads to consumer confusion and betrays the Bureau’s mission to give consumers accurate information about the cost of their real estate transaction.

Action: ALTA is calling on the industry to report data and anecdotal stories to the Bureau to highlight the confusion the current method is causing for consumers.

One lender quoted on ALTA’s blog wrote: “We did our best to help explain the situation, but it’s clear that consumers are confused and highly skeptical as to the way title insurance must be disclosed under TRID.” q