Compliance Update with Amy K
by Amy Kleinschmit
Chief Compliance Officer
7/17/2020

CFPB Proposed Rule – HPML Escrow Exemption

The Consumer Financial Protection Bureau (CFPB) issued a proposed rule to implement requirements from the Economic Growth, Regulatory Relief, and Consumer Protection Act concerning escrow accounts for Higher-Priced Mortgage Loans (HPML). This proposed rule is open for a 60 day comment period and can be found here.

In the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) Section 108, Congress directed the CFPB to issue regulations to add a new exemption from TILA’s escrow requirement that exempts transactions by certain insured depository institutions and insured credit unions. 

Briefly, the proposed rule would add new § 1026.35(b)(2)(vi) and would exempt from the Regulation Z HPML escrow requirement any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if (1) the institution has assets of $10 billion or less; (2) the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year; and (3) certain of the existing HPML escrow exemption criteria are met. The “existing HPML escrow exception criteria” are: (1) the requirement that the creditor extend credit in a rural or underserved area (§ 1026.35(b)(2)(iii)(A)); (2) the exclusion from exemption eligibility of transactions involving forward purchase commitments (§ 1026.35(b)(2)(v)); and (3) the prerequisite that the institution and its affiliates not maintain an escrow account other than those established for HPMLs at a time when the creditor may have been required by the regulation to do so or those established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure (§ 1026.35(b)(2)(iii)(D)).

An “unofficial” redline of these proposed changes can be found here.

 

CFPB Final Rule – Payday Lending Rule

The CFPB also recently issued their final rule regarding its payday, vehicle title and certain high-cost installment loans. This final rule can be found here.  The rule will be effective 90 days after it is published in the Federal Register.

Briefly, the CFPB is revoking: (1) the “identification” provision, which states that it is an unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms; (2) the “prevention” provision, which establishes specific underwriting requirements for these loans to prevent the unfair and abusive practice; (3) the “principal step-down exemption” provision for certain covered short-term loans; and (4) the “furnishing” provisions, which require lenders making covered short-term or longer-term balloon-payment loans to furnish certain information regarding such loans to registered information systems (RISes) and create a process for registering such information systems.

This final rule DID NOT revoke the “Payment Provisions.” As summarized in the CFPB’s press release, “these provisions prohibit lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals. The payment provisions also require such lenders to provide consumers with written notice before making their first attempt to withdraw payment from their accounts and before subsequent attempts that involve different dates, amounts, or payment channels. These provisions are intended to increase consumer protections from harm associated with lenders’ payment practices.”

The press release goes on to discuss the current court stay pursuant to a court order issued in Community Financial Services Association v. CFPB, No. 1:18-cv-00295 (W.D. Tex. Nov. 6, 2018). As noted in the press released, “the Bureau will seek to have them go into effect with a reasonable period for entities to come into compliance” in reference to the payment provisions.

The CFPB provided an unofficial redline and an executive summary of this final rule. The CFPB has also updated the small entity compliance guide and provided FAQs about the Payday Lending Rule clarifying the payment provisions’ scope and assisting lenders in complying with those provisions.

 

NCUA Legal Opinion Letters

The NCUA recently issued two legal opinion letters. First, the NCUA issued a letter relating to the term “reasonable proximity” in terms of field of membership. This letter can be found here. The NCUA was asked “whether the term “reasonable proximity,” as used in the Federal Credit Union Act (“Act”) and as interpreted by NCUA regulations, includes a geographic limitation that is a specific distance.” The letter discusses the NCUA’s analysis of this question, but the short answer is “No, there is no statutory constraint on the term “reasonable proximity” that would impose a limit such as a maximum distance between the location of the group and the location of the FCU.”

The second legal opinion letter discusses automated loan underwriting system – segregation of duties for loan officers. This letter can be found here. This letter addresses the question, “You have asked if § 1761c(b) of the Federal Credit Union Act (FCU Act) prohibits a member service representative (MSR) of a federal credit union (FCU) from inputting data into an FCU’s automated loan underwriting system (ALUS) and then disbursing the funds if the ALUS approves the loan.” Again the letter provides the NCUA’s analysis of the issue to conclude that, “§ 1761c(b) of the FCU Act does not prohibit such a scenario, provided appropriate controls and safeguards are in place to comply with the purpose of this provision of the FCU Act.”

The letter goes on to discuss some safeguards that could be taken, such as “establishing internal controls and official procedures that: 1) strictly limit the MSR’s duties in the ALUS context to data processing and other necessary administrative functions that are separate and distinguishable from loan officer duties; 2) develop internal procedures to maintain a segregation of duties between the MSR and the loan officer outside of the ALUS function so there is no confusion about what duties each performs; 3) establish internal checks and balances to: a) effectively monitor that MSRs are correctly inputting data into the ALUS and correctly disbursing funds based on ALUS credit decisions; and b) detect any instances of fraud or embezzlement; and 4) exclude MSRs from any involvement with the ALUS other than effectuating accurate data input and proper disbursements.”

 

Interesting Research Results

On Monday the CFPB released a report regarding the results of credit builder loan products. The press release and report can be found here. The research examines 1,531 credit union members who were offered a credit builder loan (CBL). Briefly, the CFPB’s research found that consumers who have no existing debt tend to benefit more from CBLs than people with existing debt. Based on this research, the CFPB also issued a Practitioner Guide to assist financial institutions in helping consumers succeed with CBLs and other credit-building tools. Some tips include: help borrowers stay current on their credit builder loan; help consumers stay current on other debt obligations; encourage consumers to use CBLs as a savings tool; connect CBL borrowers in need of more support to wraparound services; and continue to assist consumers in finding the right loan or other product for their situation. The Guide also includes a number of resources for consumers – such as a link to the “Want credit to work for you? Start with these steps” booklet. The colorful, compact booklet is designed to help financial educators talk to consumers about how to order and review credit reports, dispute any errors they identify, make a plan to establish or build credit, and respond to identity theft.

As discussed in the research, “CBLs are designed to help consumers new to credit establish a credit score and those with lower scores improve their repayment histories. A CBL’s defining feature is a requirement that borrowers make payments before receiving loan funds. When a borrower opens a CBL, the lender moves its own funds into a locked savings account. The borrower then makes installment payments over a period typically set at 6 to 24 months. The lender reports these payments to the credit reporting agencies. The lender deposits principal payments into the borrower’s savings account, after each payment or in entirety when the borrower completes the program.”

CFPB research has found that approximately 26 million U.S. adults, about one-in-ten, lack a credit record and are “credit invisible.” Another 19 million have a credit record but no score because their history is too thin or out-of-date.

 

InfoSight Updates

Expedited Funds Availability Act - Regulation CC in the Accounts Channel was previously updated to include changes effective July 1, 2020, which included:

  • Increasing the "next day availability" amount from $200 to $225 and the “Large Dollar” amount from $5,000 to $5,525;
  • Eliminating "non-local" checks;
  • Threshold amounts for funds availability will be adjusted for inflation every 5 years.

Also, HMDA Reporting Thresholds were previously updated in the Home Mortgage Disclosure Act Channel to include the change in the reporting threshold for closed-end mortgage loans from 25 to 100.

*****

Remember – a smooth sea never made a skilled sailor. If you have any questions, please do not hesitate to contact me, Amy Kleinschmit. Have a great weekend! (Photo: Pirate Ship "The Dauntless") 

 

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