Intending to Proceed
by C/A Staff
Today we’re looking at Regulation Z’s rule on intent to proceed. At its heart, the rule is quite simple—the bank is not allowed to impose fees on a consumer before that person has received the Loan Estimate (LE) and provided intent to proceed with the transaction. We do get a variety of hotline questions about the intent to proceed requirement, though, so we’ll go over a few of those right now.
First things first—it’s always important to look at scope. The intent to proceed requirement technically only applies to TRID loans; i.e. consumer-purpose, closed-end loans that are secured by any real estate. Now there is only one exception from this requirement, and that is for the credit report, as long as it is “bona fide and reasonable.” So your bank is allowed to charge for a credit report before providing the LE or receiving intent to proceed, but nothing else.
Another frequent question is whether a consumer must provide intent to proceed in writing. This is a common misconception, but not a requirement. The rule allows the consumer to provide the bank with intent to proceed in “any manner the consumer chooses,” unless the bank requires that it be provided a certain way. Many bank or investor policies do require that intent to proceed be provided in writing rather than orally for documentation purposes, in which case the consumer would have to provide it in writing—but it’s never been a requirement in the actual rule.
Although it doesn’t come up too often, it’s important to note that silence is not enough to show intent, under any circumstance. For example, the bank cannot provide the LE, wait a while for the consumer to respond, and then charge the consumer a fee for an appraisal if the consumer does not respond in that time. This is true even if the bank disclosed this to the customer—it’s just not allowed at all.
Yet another is whether the bank can order certain services, like an appraisal, before getting intent to proceed. We interpret that the bank can do this, as long as the bank accepts that it will have to absorb the whole fee if intent to proceed is never provided.
Another that comes up is what the meaning of “impose is”—the rule says that a bank imposes a fee if it “requires a consumer to provide a method for payment, even if the payment is not made at that time.” So simply requiring a credit card number, even if it isn’t used, or requiring a check, even if it isn’t cashed, would not be allowed if it’s for a restricted fee.
A couple of other notes as this relates to other rules is that intent to proceed only has to be obtained once for any transaction. Even if multiple revised LEs are provided, intent to proceed does not have to be obtained again for each one. And even though they sound similar, “joint intent” is a completely separate requirement under Reg. B, rather than reg. Z, and has very different requirements.
We do have a sample of a notice of intent to proceed available on the website, as well as a full TRID toolkit. For any more questions, you can always contact us on the hotline.
Validity Put in Question: Madden and the “Valid-When-Made” Doctrine
by C/A Staff
There’s a long-standing legal doctrine dating back to colonial times known as “valid-when-made.” For over 200 years, it has supplied stability and certainty to lenders and market participants who lend, or supply credit, to borrowers via acquisition. Recently the venerable doctrine has been called into question by a meandering decision emanating from the 2015 Second Circuit Court of Appeals. The serpentine ruling has quietly slithered into the weeds creating a situation where one must tread very carefully. Here’s why:
The doctrine provides that a loan, if valid at the time of inception, cannot be deemed invalid or its terms determined unenforceable due to its transfer, sale or assignment to another person. Madden v. Midland Funding, LLC calls that principle into question.
In Madden, Midland Funding purchased the plaintiffs’ charged-off credit card debt from a national bank (FIA National Bank), which had purchased the debt from Bank of America, the original lender. As owner, Midland sought to collect the debt. The Second Circuit held that Midland Funding violated the Fair Debt Collection Practices Act by falsely representing the amount of interest it was entitled to collect, ruling the purchaser of charged-off debt from a national bank does not inherit the preemptive interest rate authority of the national bank under Section 85 of the National Bank Act. This makes credit debt subject to the usury limitations provided by state law (in this case, NY). The U.S. Supreme Court denied the defendants’ petition for writ of certiorari (legalese for re-review).
Following the Madden decision, lending plummeted in the states comprising of the Second Circuit (VT, CT, NY), with marketplace lending and securitization industries attempting to engage lawmakers to overturn Madden. While passing the House, it was not taken up by the Senate Banking Committee. In November 2019, the OCC and FDIC proposed rules to codify “valid-when-made:” “Interest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment or other transfer of the loan.” The Proposed Rule would solidify US lending practices that a national bank or insured state bank could enter into a loan contract, charge interest at the maximum rate permitted by the state where it’s located, and then assign the loan with preemption of usury laws in the states where investors are located. What these Proposed Rules fail to address is the companion “true lender” doctrine—the entity that makes a loan and then assigns it to a third party is the “true lender.” This issue remained outside of the scope of the Proposed Rules because the FDIC and OCC are concerned using bank charters to evade valid legal restrictions.
The Agencies believe Madden diminishes the value and liquidity of bank loan portfolios and negatively impacts safety and soundness. Assuming the Proposed Rules are adopted, the likelihood of lawsuits affecting the sales of loans outside the Second Circuit becomes moot. But failing to address the “true lender” doctrine would still present litigation on loan sales and enforcement. As always there is a comment period for 60 days after publication in the Federal Register.
Do We Really Need to Have Policies AND Procedures?
by C/A Staff
Policies serve as the core of our financial institution compliance programs. They set the standard and provide the framework for compliance in each department within the bank. This leaves many to wonder why procedures are even necessary if there is already a plan or framework in place for compliance success.
Simply put, policies are guidelines. They define your financial institution’s standards or rules for different areas and departments within the company. For instance, a policy may define a set of rules for compliance with opening new accounts. The rule is very specific about the overall expectations for compliance, but the rule doesn’t define how to meet the expectations. Policies are not meant to define the steps for accomplishing an outcome. Procedures provide the tools needed to meet the expectations. They are the strategic process needed to comply with the rules or standards which are outlined within a policy. They are the action plan. Where the policy provides the rules for opening new accounts, the procedures give you the step by step instructions for successfully opening a new account according to the rules defined within the policy. Procedures define how to execute a plan to achieve a result that meets policy expectations.
Policies are more broadly defined as they provide us with guidelines; they include the what and why of an organization’s expectations. Procedures tend to be narrower and more detailed as they include the how and who in the process to accomplish an organization’s expectations. So, when writing a policy or framework for a specific area or department within your organization, include the rules and expectations required to meet your organization’s needs as well as the state and federal requirements. Ensure your procedures include detailed steps and processes to meet your organization’s expectations. Using template policies and procedures can be a helpful starting point when creating new guidelines. Be sure that you are adopting policies and procedures which are appropriate for your institution specific size and risk level. There should also be a correlation between your policy and procedures. Defining the guidelines of your institution’s policies and procedures can be time consuming but having both are essential in effectively and efficiently operating any organization. Both are necessary for not only the achievement of compliance within a specific area of the organization, but for the overall compliance of the organization. Having clearly defined policies and procedures minimize the opportunity for misinterpretation and maximize the opportunity to execute and achieve.
While policies provide guidelines or compliance goals for financial institutions, procedures serve as the plan to bridging the gap between the guideline and achieving the goal. It’s kind of like that cliché, the only difference between a dream and goal is having the plan. We can write the perfect policy and daydream about a flawless visit with our examiners, but without a plan to execute the guidance within our policies, our compliance success is nothing short of a dream.
URLA Update
by C/A Staff
Can you believe it’s been three years since Fannie Mae and Freddie Mac (the GSEs) made the announcement that they were going to revise the Uniform Residential Loan Application (URLA) for the first time in 20 years?
Granted, change is needed and the new ‘dynamic’ form should be a much-improved version over the current URLA, but due to several delays in the effective and mandatory use dates for the URLA, we’re still using the outdated form. There was an original effective date of January 1, 2018, which was later moved to February 1, 2020 with optional use allowed beginning on July 1, 2019. Then, last June, the GSEs postponed the July 1 date, leaving the door open until their announcement was made on December 29, which gave us a new effective date of September 1, 2020, and mandated use date of November 1, 2020. So why all the delays? The first reason: changes, changes, changes! It appears the powers that be just can’t make up their mind about what they want to include on the form.
One of the first revisions to the URLA was the addition of the Language Preference Question. The last round of changes, coming at the direction of the Federal Housing Finance Agency, involved removing this question after concerns were raised involving customer relations issues if lenders could not actually serve borrowers in their preferred language. There were also operational and legal questions raised by the language preference information. Without answers to how these issues and questions could be resolved, it was decided to remove the Language Preference question, along with the Homeownership Education and Housing Counseling question, and include them on a separate, voluntary form.
Another reason for the delays is the consideration of how long it will take to implement the changes. It’s important to remember the GSEs aren’t the only ones involved in the process; aggregators and software providers will need time to revise and test their systems for readiness. There will also need to be a testing period for lenders to submit applications.
So, when exactly are we supposed to start using the new URLA?
- The GSEs “Implementation Timeline” currently projects a functionality integration test period from March 1 through September 1.
- March 1 through June 1 is a period in which directly integrated software providers and lenders will be able to test the loan application submission process.
- Also during this time period, loan officers and their teams will be able to undergo training on the redesigned URLA and accompanying supporting processes and procedures.
- There is additional production testing from June 1 through August 31 for certain directly integrated customers to identify and/or address any unexpected issues prior to the open production period.
- Finally, beginning September 1, all lenders may optionally choose to begin using the newly designed URLA form and may do so at any time from September 1 through October 31, 2020.
- Mandatory usage of the form begins November 1, 2020.
Stay tuned, we here at C/A will keep you informed as this process progresses.