March 2020 Newsletters

Highlighting Mortgage Servicing Issues

By C/A Staff

The CFPB releases its supervisory highlights every quarter, calling attention to frequent violations that they have taken enforcement actions against, and they just released the Winter 2020 edition on February 14th. These supervisory highlights are incredibly valuable because they give the industry a rare glimpse into which rules the regulator is currently putting a microscope to, and give banks an opportunity to hyper-focus their compliance efforts on those particular areas so they can be ready for the next examination in those areas.

This particular issue covered a myriad of topics, but mortgage servicing issues were of particular consequence. This is of no surprise to those of us on the hotline, as that area is a consistent hotbed for questions. Although these violations were in relation to Payday Lenders, the issues are still important to note for other bankers.

When it comes to origination, lenders frequently had inaccurate APRs, incorrect finance charges, and failed to retain records for the required amount of time. It is important to remember that the APR must generally be within 1/8th of percent or .125% of the Reg Z calculation to be considered accurate. Most lenders had issues with disclosing an APR because they had employees manually calculate the APR when their software system was unavailable.

Instead of having employees manually calculate the APR, the bank may consider working with the vendor to be able to get the system running again before printing any documents. If the bank absolutely cannot wait, the bank may consider verifying any calculations with APRWIN from the OCC. The bank would also want to verify that the finance charge has been calculated correctly and that all requisite fees have been included. The bank may find our Fees and Charges Matrix helpful. The bank would also want to be sure to keep all Reg Z disclosures and supporting documents for at least 2 years after disclosures under Reg Z. You can find that in our Record Retention Cheat Sheet.

Another issue that many lenders were cited for was failing to give the principal reasons for denial on adverse action notices. Regulation B and the FCRA require that lenders give consumers the principal reason or reasons that their application for an extension of credit was denied. The reason cannot be vague, it must be specific to why they were not extended credit.

The CFPB cited lenders for not providing the specific principal reasons or for providing the incorrect reasons. The supervisory highlight did mention that many of these were due to software system failures. It is important to note that software system failures are not a defense for providing incorrect adverse action notices or not providing them at all. Banks should take care to spot check notices to be sure that they are correct and that notices were sent as required.

Two important UDAAP issues that were noted in the supervisory highlight were related to applying consumer payments incorrectly and charging fees that were not previously disclosed. Banks should be sure that they are applying payments from consumers timely to be sure that consumers are not being charged more in interest due to the bank’s delay in applying payments. Banks should also be sure to not charge fees that were not previously disclosed in the loan documents.

Be sure to join other member banks in our next huddle to hear about their recent or current exam experiences.

Signs of the Times: FDIC Mulls Changes to Ad Regulations

By C/A Staff

Recently the FDIC issued a Request for Information (RFI) regarding their advertising requirements, signaling an interest in re-evaluating the regulations, which were last updated in 2006[1].  Banking has changed drastically in the past decade and a half, as the state of affairs in 2006 did not really include online banking, mobile banking, smartphone apps, digital wallets, or many of the other 2020 technologies now considered standard.  In issuing this RFI, the FDIC is attempting to modernize and keep up with the changing face of banking.

To this end, the FDIC is seeking public help with their ad regulations found at 12 CFR 328.  The FDIC is encouraging comments from all interested parties on all aspects of this regulation.  The existing regulations require the use of the FDIC’s official sign wherever deposits are taken, as well as the use of the official advertising statement in advertisements for deposit products and services and non-specific products and services.

The official sign is well-known to be 7” by 3” with black lettering on a gold background and is required to be continuously displayed at each station where deposits are normally received.  The official sign is allowed but not required at remote service facilities that accept deposits, such as ATMs.  With this RFI, the FDIC is interested in comments regarding the importance of having the official sign continuously displayed at every station.  Would it be sufficient to have a digital display that periodically shows the official sign in the area where deposits are taken? Should the requirements keep up with the changes in the places where deposits are taken?  Should remote facilities be included? Are the size and color restrictions on the official sign still important?

Our most common question about the official sign is whether the it is required on ATMs. The answer is no, but you’re allowed to display it and many banks choose to do so.

According to the regulation, banks may comply with the requirement to include the official advertising statement by stating “Member FDIC.”[2]  Of particular interest to the FDIC are comments regarding whether certain forms of advertising should be exempt from the regulation, and conversely, should certain exempt forms of advertising be required to carry the official statement?

Our most common question about the official statement is whether “Member FDIC” is required on various advertisements (e-mail signature, t-shirt, scoreboard, etc.) where the bank’s name or logo is promoted, but not necessarily on any products.  The answer is often yes, but the facts and circumstances will help to determine the answer on a case-by-case basis.

Comments must be received by March 19, 2020 and can be submitted through the normal channels, such as the FDIC’s website, or e-mailing the agency at [email protected], making sure to include RIN 3064-AZ14 in the subject line.

Regulation Z and “Investment” Properties

By C/A Staff

So this might be shocking to some, but not all “investment” properties are exempt from Reg. Z.

Now, let’s break this down a little bit. For Reg. Z purposes, we’re generally looking at the purpose of the loan itself and not so much the purpose of the property securing the loan. As we all know, if the purpose of the loan proceeds is primarily business purpose, then the whole loan will not be subject to Reg. Z.

Reg. Z doesn’t even use the term “investment property,” but it does have exemptions for rental properties. These exemptions depend on three things—whether the property is owner-occupied, the purpose of the loan, and the number of units. If your loan meets all these conditions, then it’s automatically exempt from Reg. Z.

For owner-occupied rental properties, the exemption is split in two. For the first one, if the loan is to purchase rental property that has three units or more, then the loan is automatically exempt. For the second one, if the loan is to improve or maintain a rental property, then the property must have five units or more to fall under this exemption:

5. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

i. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.

ii. Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. …


On the other hand, for non-owner-occupied rental properties, the property can have just one unit and still be exempt. So any loan to buy, improve, or maintain non-owner-occupied rental property is considered exempt.

4. Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This includes, for example, the acquisition of a warehouse that will be leased or a single-family house that will be rented to another person to live in. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied and this special rule will not apply. For example, a beach house that the owner will occupy for a month in the coming summer and rent out the rest of the year is owner occupied and is not governed by this special rule. …


But what if the property is not a rental at all? For example, a purchase of raw land that is expected to appreciate in value or a “fixer upper” that the borrower is expecting to flip. Well we know it won’t be “automatically” exempt as a rental property, but the commentary also gives us several factors to consider when trying to determine whether the purchase is primarily business purpose. For example, what is the borrower’s primary occupation? Is this just a one-off personal investment and not the borrower’s primary line of business? How much of the borrower’s total income will come from this investment property? How large is the transaction?

A. The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.

B. The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.

C. The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.

D. The size of the transaction. The larger the transaction, the more likely it is to be business purpose.

E. The borrower's statement of purpose for the loan.

Even considering all of this, so many people make the mistake of thinking that the label “investment” automatically makes the loan exempt from Reg. Z, but next time you have an investment property come across your desk, you’ll know to look a little deeper.

As always, if you have any questions about Reg. Z exemptions, feel free to ask us on the Hotline.


By C/A Staff

A bipartisan group of U.S. Senators introduced legislation to update federal anti-money laundering laws to end the incorporation of anonymous companies in the United States.  Known as the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity In Shell Holdings (or the ILLICIT CASH Act), it has the potential for Senate passage after the House of Representatives Committee on Financial Services voted in favor of a measure with similar provisions—the Corporate Transparency Act of 2019 (CTA).  Both Bills require companies to disclose their true owners when they incorporate and keep their ownership information up to date. Anonymous companies forming in the United States have successfully evaded sanctions and continue to finance terrorist networks.  Ringing a bell?

FinCEN implemented its “rule,” effective May 11, 2018, that also intended to crack down and combat illegal financial activities.  The Beneficial Ownership Rule required banks to establish and maintain written procedures designed to identify and verify beneficial owners of legal entity customers in its anti-money laundering compliance programs.  Now, this task is potentially expanded, promising the creation of a FinCEN national database to verify a legal entity’s beneficial ownership information.  The CTA’s goals are high: modernization of the current BSA/AML framework and enhancements to enforcement communications between banks and law enforcement.  But the ILLICIT CASH Act brings in even broader database requirements.  This requirement would apply to corporations, limited liability companies, or “other similar” entities—broader in scope than the CTA, which only applied to corporations and LLCs.  Both would continue to exempt businesses arguably most able to abuse the financial system—public companies, government-owned enterprises, banks, credit unions, broker-dealers, exchanges, clearing agencies, investment companies, insurance companies, commodities traders, registered public accounting firms, public utilities, churches, charities, political organizations and other not-for-profit organizations, and businesses with more than 20 employees and gross receipts of more than $5 million.  So, the only non-exempt category are small businesses. Whether this is an advantageous responsibility or a burden is open for interpretation to the 11 million businesses with 20 or fewer employees who would be subjected to the requirements.

Unlike CTA, exemptions would be self-effectuating. So, a local church would be exempt without having to petition FinCEN for the exemption. Initially beneficial ownership reporting would only be required of newly created entities.  After two years, the requirement would be imposed on all existing small businesses.  Reports would be required at the time of formation and any ownership changes would have to be reported within 90 days.  The ILLICIT CASH Act puts that obligation on “reporting companies.” Information required would be legal name, business or residential address, and unique identification number from a passport, driver’s license or other identification of beneficial owners.  The definition of beneficial ownership remains consistent with what financial institutions have come to expect.

Passage of this bill would bring about changes to the BSA/AML framework, hopefully those that increase efficiency.  The bill would require the Treasury to establish exam and supervision priorities to supplement and guide financial institutions.  It would also require periodic law enforcement feedback to financial institutions on their suspicious activity reports (SARs), develop a streamlining of reporting requirements, formulate a review of currency transaction report (CTR) and SAR thresholds, as well as a review of current guidance for the removal of any outdated or unnecessary regulations and guidance.  It would require the establishment of various teams, reports, priorities and interagency consultations to implement risk-based policies.  An independent Office of the Financial Institution Liaison within FinCEN to receive financial institutions’ feedback regarding their examinations, and to act as a liaison between financial institutions and their regulators.

However, opposition to this type of reform to BSA/AML requirements has surfaced.  The Act could impose duplicative and burdensome regulations on small businesses and threaten personally identifiable information of small business owners.  Privacy concerns are raised with the beneficial ownership database, as it would contain full legal names, dates of birth, addresses, and unexpired driver’s license numbers or passport numbers.  Unlike the CDD rule, this information would be accessible upon request through appropriate protocols to any local, state, tribal or federal law enforcement agency, or those from other countries.  This further raises questions as to data breach and cybersecurity risks.  FinCEN’s maintenance of a database could be hacked for nefarious reasons, as recent attacks have shown that the federal government is not entirely immune.

No movement has been slated for the ILLICIT CASH Act bill at this time—but it is definitely more than déjà vu.