August 2020 Newsletters

HPML Escrow Relief … At Last!

by C/A Staff

It has been long enough now that many of you may have forgotten, but back in 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) contained a HPML escrow relief provision (Section 108). On July 2, the CFPB finally delivered the proposal to implement this provision and deliver the relief to smaller banks and credit unions.

Before we get to who gets the relief, let’s first make sure that we all know exactly what a HPML loan is. A higher-priced mortgage loan (aka HPML loan) is a closed-end consumer loan secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set:

  • By 1.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac;
  • By 2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or
  • By 3.5 or more percentage points for loans secured by a subordinate lien.

Now, let’s take a look at the details of the proposal:

The exemption will apply to any loan made by a bank or credit union that is secured by a first lien on the principal dwelling of a consumer if:

  • the institution has assets of $10 billion or less;
  • 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
  • the following existing HPML escrow exemption criteria are also met:
    • during the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor extended a consumer credit transaction secured by a first lien on a dwelling, or property attached to a dwelling, that is located in an area that is either “rural” or “underserved”; and
    • the institution and its affiliates may not maintain an escrow account other than those established for first-lien higher-priced mortgage loans for which applications were received on or after April 1, 2010, and before May 1, 2016, or those established after consummation as an accommodation to distressed consumers to assist such consumers in avoiding default or foreclosure.

The proposal also brings forward the exclusion from exemption eligibility transactions involving forward purchase commitments if the purchasing bank/creditor does not satisfy the exemption conditions (asset size, first lien threshold, etc.).

The proposal was published in the Federal Register on July 22, 2020 with comments due by September 21, 2020.

A Second Round of Stimulus Checks?

by C/A Staff

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27th, 2020. As part of the CARES Act, stimulus checks were issued to over 150 million individuals of up to $1,200 for each qualifying adult, and an additional $500 per qualifying dependent. As the COVID-19 disaster continues to spread across the country, Congressional leadership on both sides of the aisle along with White House officials all agree a second round of stimulus checks is necessary. It’s uncertain how much these payments would be for, who would receive the checks, or when they would be sent. However, the current momentum seems to suggest a second round of stimulus checks is coming. So, let’s take a look at a few key issues that plagued the first round, and how they may affect a potential second round of stimulus checks.  

Deceased Customers

In the mad dash to get the stimulus checks issued, the IRS mistakenly sent a substantial number of payments to deceased individuals. According to a recent Government Accountability Office report, more than 1.1 million checks, totaling nearly $1.4 billion, were sent to dead people through the end of April. This led to a massive amount of uncertainty for financial institutions on how to properly handle these payments. In response to the confusion, the Treasury stated it had performed eligibility screening for the issued checks, and that banks should continue to post them according to the payment instructions. However, the most recent guidance suggests this will not be a problem in future rounds of stimulus payments. As of July 10th, the Bureau of Fiscal Services and the IRS had cancelled all outstanding checks issued to deceased individuals. The guidance also says the agencies took action to prevent future payments to any deceased individuals. So, the good news here is that your Bank can safely assume this won’t be an issue during the second round of stimulus payments. Nevertheless, if any checks are incorrectly issued again, they should be returned to the IRS. 

Protected Funds

One of the most common questions we encountered was concerning debt collection and whether these payments were protected from garnishment. Unlike Social Security and disability benefits, the stimulus checks only had minimal protections. Specifically, the CARES Act limited the initial offsets of the payments to past-due child support. No other Federal or state government debts reduced the checks. However, once received and deposited by consumers, the payments were not protected from garnishment by creditors. Moreover, once the funds were deposited into customers’ accounts, banks had the green-light to offset unpaid fees or other delinquent debt.  

For a second round of stimulus checks, it’s uncertain whether this would be the case. On July 23rd, the Senate passed bill S.384, which protects stimulus checks paid out under the CARES Act from garnishment by debt collectors. For now, the legislation is essentially retroactive for all intents and purposes as it only applies to the CARES Act, and has only been passed by one chamber of Congress. However, it’s safe to assume that in a second round of stimulus payments, there will be some sort of strengthened protections for the funds.

So What Now?

For now, that’s about the extent of what we know. But rest assured the Compliance Alliance team is staying attuned to all the potential upcoming changes, and we’ll be here to guide you through whatever challenges come your way.

Modernizing Modern Disclosures

It seems like 2020 has been the year of change for banks. In some ways, everything has been turned on its head with banking remotely, being pushed into a further online presence, and a deluge of new rules, regulations, and guidance from the regulators on a wide variety of topics. Now E-Sign is one of those topics. On July 2, 2020, the E-Sign Modernization Act was introduced in the Senate, which could make some big changes for the bank.

The E-Sign Act as it is currently written requires that the bank obtain demonstrable consent from a consumer before sending federally required disclosures electronically. This means that the consent process must show the customer can receive the documents in the same manner in which they were sent and consent to receiving them in that manner, before the bank sends the forms in that medium. The intent of the rule was to be sure that consumers can receive the documents that are being sent to them. In the year 2000 when the E-Sign Act was originally enacted, this was a great win for consumers, but subsequently has become a burden for banks. This is because the current rule does not necessarily describe exactly what demonstrable consent looks like, or what would be considered sufficient. This has caused great debate, confusion, and frustration in the consumer industries. It also seems a bit unnecessary now in the 2020s, when nearly everyone has a smartphone, most applications are smartphone compatible, and communication regarding whether the customer received the documents that were sent to them is able to be nearly instantaneous.

For those reasons, some lawmakers have introduced the E-Sign Modernization Act to remove the demonstrable consent requirement from the E-Sign Act. Under the new rule, the bank would still need to provide disclosures regarding software and hardware requirements and obtain consent from the customer before sending any federally required consumer disclosures electronically. However, the consent would no longer have to be “demonstrable consent,” meaning, the consent would no longer have to be obtained in a way that shows that the customer can obtain the documents in the same medium that they will be sent. This could potentially remove some cumbersome financial and operational burdens from the bank and ultimately make transacting with consumers a faster and more efficient process.

So far, the rule has only been introduced, read twice and referred to the Senate Committee on Commerce, Science, and Transportation. It has not yet had any other movement in the Senate before Congress went on recess. Congress will be tentatively returning on September 8th after Labor Day weekend. Thereafter, the bill would still need to pass the senate and then the house in order to make it for signature before the President and then finally becoming law. As such, it is important that if banks want to see this change, that banks contact and support its State Banking Associations to lobby Congress to support the E-Sign Modernization Act and bring electronic disclosures into the new online era.

What is ERM?

by C/A Staff

It’s the new buzz word sweeping the banking industry. Well, maybe a slight over exaggeration since the concept of enterprise-wide risk management (ERM) has been around for some time. But, it’s certainly something that many banks have either adopted or are in the process of implementing. Why? Banks recognize that strong risk management practices are important.

One of the most important reasons for implementing an ERM program is to improve the organizational decision-making process in hopes of achieving strategic goals and objectives. ERM is known to help this process by removing obstructions to information, which will yield better organization performance, thus creating the value-add proposition.

In practice, the ERM program involves processes to detect, measure and manage risks related to the achievement of the bank’s goals. This is accomplished by identifying events in the external environment (e.g., economy, regulatory landscape, and competition) and within a bank’s own internal environment (e.g., people, process, and infrastructure). When these events intersect with the bank’s strategic goals and objectives – they become risks. 

Simply put – risk is the possibility that an event will occur that could adversely impact the bank’s strategic goal and objectives.

The generally accepted banking risks are compliance, credit, interest rate, liquidity, operational, reputation, and strategic. Historically, banks have managed these risks by utilizing certain departments or functional areas specialized in the particular risk. This approach, at times, may isolate the sharing and transparency of information, and likely impact the quality of strategic risk decisions.

By nature, ERM is designed to provide transparency across the entire organization. It’s known to break down “silos” and engage all parties with the intent of increased communications. Ideally, the collaboration will lead to better strategic alignment with everyone rowing in the same direction (My Minnesota banking friends will appreciate the nod to Gopher football!).

Now that we briefly highlighted the value-add ERM program, it’s important to also understand what ERM is not. Unlike risk elimination (approach of the military and law enforcement, and sometimes bank compliance departments – which is certainly needed), risk management includes the coordinated efforts used to direct and influence an organization’s management of risk. Further, it’s not meant to be a checklist, audit, or one-time project.

Those that have already implemented an ERM program can attest to it becoming the fabric of the organization. The goal of ERM is not to replace or duplicate existing risk functions, but instead leverage those functional area and bring together all the current risk management activities. This will happen in a coordinated and collaborated effort when possible, and lead to better strategic decision-making.

So, what is ERM? It’s a roadmap to get the organization where it wants to go while avoiding any potholes along the way. Safe travels!

COVID Loan Accommodations – The Second Wave

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided for numerous forms of relief to businesses and borrowers and many banks were working with its borrowers to try to assist during these times of economic hardship. For many banks, the first round of accommodations is coming to a close and many are set to expire soon. Unfortunately, some borrowers will be ready and able to return to their normal payment schedules, but there are still countless number of people who are still continuing to face hardships. In trying to arrange further accommodations, there could be difficulty assessing the borrowers’ credit risk because of the lack of borrower financial data and the impact of COVID-related difficulties. Therefore, the Federal Financial Institutions Examination Council (FFIEC) has issued a joint statement to provide guidance for the banks to consider when working with the borrowers.

The biggest concern is not knowing what would happen in the future after this pandemic as it is difficult to grasp the long-term effects of the coronavirus. In working with the borrowers, the FFIEC emphasizes the importance of monitoring the loan information including the terms (i.e. payment changes, interest rate changes, and modified amortization terms). It also speaks to keeping track of the underlying collateral for all of these loans to help protect the bank and to ensure that the borrower has the ability to uphold the modified terms of the loan. This would apply to both consumer and commercial loans as the borrower’s future earnings could change drastically for some time even after the pandemic passes.

This isn’t to say that the underwriting for these accommodations should be so strict so that the borrowers are harmed. In the most recent guidance, the FFIEC continues to encourage banks to work with consumers with “available options for repaying any missed payments at the end of their accommodation to avoid delinquencies or other adverse consequences.” The guidance continues to list different methods of trying to work with borrowers such as by providing additional accommodation options that are affordable and sustainable, and communicating with the borrowers in a timely manner throughout the process.

The big issue here is that there is no bright line rule for any of these accommodations. On one end, the FFIEC is recommending using safe and sound practices in the banks’ underwriting policies so that the banks are protected. On the other, it recommends being flexible with the borrowers so that they could stay on track with the payment terms of the loan. Therefore, the biggest task in getting all of this done is finding the right balance between the two. There would definitely be scenarios that could bring too much pressure for either side, but until there is a little more certainty to the whole COVID pandemic and its long-term economic effects, it is all just a matter of risk assessments for the bank to try find a happy medium between accommodating borrowers while also ensuring that they are ultimately able to pay off the loan without defaulting.