Today, marketing strategies and initiatives have become big business for many financial institutions across the country. Not only do they represent a significant financial investment by a financial institution, they also can mean the difference between surviving or being lapped by the competition. To help tip the scales in the bank’s favor, it’s important to understand the numerous risks that are presented when marketing bank products and services.
Now, it’s quite common to just think about the compliance risk – the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, and regulations – when undertaking a marketing campaign. As many of you will probably agree, the advertising rules for deposit and loan products are fairly straight forward.
Take a closed-end loan for example, if the advertisement contains a trigger term, such as the number of payments or period of repayment, the amount of any payment or the amount of any finance charge then additional information must be disclosed with the market piece. Or, if an advertisement for a bank certificate of deposit contains the annual percentage yield (aka APY) then the advertisement would be required to disclose the minimum balance requirements, term of the account, and early withdraw penalties may reduce the earnings on the account, just to name a few.
But, what about the other risks that sometimes go unnoticed. Like, reputation risk, which is the risk to earnings or capital arising from negative public opinion. Maybe the reputation risk for a certificate of deposit advertisement is inherently low risk and not worth the consideration, but what about a closed-end mortgage loan advertisement that may potentially have a disparate impact on a prohibited basis under the fair lending laws. Now, this could certainly have an impact on the financial institution’s ability to establish new relationships or services or continue servicing existing relationships.
And, don’t forget about transaction risk, which is also referred to as operating or operational risk and is the risk to earnings or capital arising from problems with service or product delivery. This risk may arise if the advertisement were to create an issue with delivering on the promise for the product or service being advertised. For example, an incredibly low mortgage loan interest rate (which would be advertised as the annual percentage rate (APR) as we always must take into consideration compliance risk) may lead to an influx of loan applications. This may throw a wrench into the loan operations resulting in service delivery challenges, which also may be reflected in potential reputational risk.
As you can see, risk is present in all things we do. It’s important for financial institutions to take a holistic approach when advertising products and services to ensure all potential risk is considered and appropriate responses are taken to manage that risk in accordance with the institution’s risk appetite. Not all advertisements will present the same level of risk, but all advertisements will present risk that may impact the financial institution’s ability to meet its strategic goals and objectives.
The Community Reinvestment Act has been in the headlines for almost the past year: OCC and FDIC Joint Proposed Rule; OCC going it alone with its Final Rule; the FRB’s Advanced Notice of Proposed Rulemaking. Not to mention the Paycheck Protection Program (PPP) and just lending in general during a pandemic. In May of 2020, the Agencies (Federal Reserve, FDIC and OCC) issued an FAQ discussing the Consideration for Activities in Response to the Coronavirus Pandemic (here). It originally consisted of thirteen FAQs covering definitions like designated disaster areas, revitalization and community needs actions, and of course, PPP loans and their implications on both Call Reports and reporting requirements.
To recap, the Agencies believe that the COVID-19 national emergency does raise unique needs for revitalization and stabilization activities that differ than those taken in response to a natural disaster or other emergency. For that reason, the Agencies will be granting consideration for activities that revitalize or stabilize designated disaster areas by protecting public health and safety, particularly for low- or moderate-income individual, or low- or moderate-income geographies (LMI), or distressed or underserved nonmetropolitan middle-income geographies. These considerations are to be effective through the six-month period after the national emergency declaration is lifted. Qualifying activities for community development loans are those that include supporting community services targeted to LMI individuals and economic development meeting the “size” and “purpose” tests, affordable housing for LMI individuals or families.
When it came to the PPP, it was determined these loans would be considered eligible community development loans in amounts of $1 million or less to for-profit businesses or nonprofit organizations that were secured by nonfarm, nonresidential real estate and were reported as small business loans under the applicable retail lending test. The Agencies placed an emphasis on loans to small businesses located in LMI geographies or distressed or underserved nonmetropolitan middle-income geographies. Those loans greater than $1 million would be considered community development loans if they also had a primary purpose of community development defined per CRA.
On March 8th, the Agencies updated their frequently asked questions and introduced five new clarifications. These new FAQs clarify that the Agencies will not extend CRA service test consideration for PPP-related activities, but those activities may be considered under the CRA lending test when evaluating flexibility or innovative lending programs offered by the bank. Additionally, banks are not to report their CRA loan register PPP loans that have been rescinded or returned under the SBA’s safe harbor, as they will not be considered in their CRA evaluations. Now, PPP loans greater than $1 million in LMI geographies or distressed or underserved nonmetropolitan middle-income geographies will be considered an eligible community development activity.
In regard to non-PPP related CRA concerns during COVID-19, the Agencies have clarified that the waiving of ATM fees, overdraft fees, early withdrawal penalties on CDs and withdrawal fees on savings accounts are going to be considered examples of retail services considered responsive to needs of LMI individuals. Furthermore, allowing an LMI individual to make a draw from a home equity line of credit during the repayment period could constitute as a flexible lending practice. However, allowing an LMI individual to withdraw from an IRA or a HELOC during the draw period are routine banking services and are not to be eligible for CRA considerations. Lastly, services provided virtually by bank representatives that have primarily a purpose of community development and are related to the provision of financial services can serve as an alternative to in-person services.
It is important financial institutions review these latest FAQs and determine how or if this impacts its current practices of documenting and reporting CRA activities. What springs from CRA examinations is a review of Safety and Soundness, so financial institutions must have a clear understanding of any current or new lending or deposit products and offerings, as well as a documented, formalized procedure for its participation in the PPP.
Earlier this month the, the CFPB issued an interpretive rule expanding the protections in the Equal Credit Opportunity Act (ECOA) found in Regulation B. As a reminder, these protections include discrimination on the basis of race, color, religion, national origin, sex, marital status, age, the fact that the applicant’s income (in whole or part) derives from public assistance, or whether the applicant has exercised any rights under the Consumer Credit Protection Act. In the recent issued interpretive rule, the CFPB expanded the prohibitions against sex discrimination to include discrimination based on sexual orientation or gender identity, including actual or perceived nonconformity with traditional sex-based or gender-based stereotypes, and discrimination based on an applicant’s social or other associations.
Because the CFPB’s rule is interpretive, it is not subject to any delays, is not subject to the normal notice-and-comment period, and will become effective when it is published in Federal Register. It is also important to note that this rule did not change the wording in the regulation itself, but merely broadened the interpretation of the meaning of word “sex” as it is used in Regulation B.
For the background and history on the change made by the interpretive rule, in 2016, in response to an inquiry the CFPB indicated that ECOA and Regulation B supported arguments that the prohibition against sex discrimination also included protections from discrimination based on an applicant’s sexual orientation and gender identity. In June 2020, the U.S. Supreme Court issued a decision in Bostock v. Clayton County, Georgia, finding that the prohibition against sex discrimination in the Civil Rights Act of 1964 encompassed both sexual orientation and gender identity discrimination. In July 2020, the CFPB issued a Request for Information (RFI) to solicit comments and help identify opportunities to prevent discrimination, and asked whether the Bostock decision should affect the CFPB’s interpretation of ECOA.
The CFPB has stated that they will review their publications and examination guidance documents and, if needed, update these materials to reflect this interpretive rule. The CFPB has also noted that they will take enforcement action, when necessary, to hold financial institutions accountable for their actions that violate ECOA.
In response to the CFPB’s expansion of the protections under ECOA found in Regulation B, it may be a good idea for banks to reevaluate their ECOA/Regulation B policies to accommodate for these changes. The extent of the changes to the bank’s policies would be up to the bank and each bank’s desire for the need for clarification. Stating in your polices that the bank does not discriminate on the basis of sex is technically all that should be necessary and should be compliant. However, some banks will no doubt want to show compliance with the interpretive rule by adding language to their policies to reflect the changes in interpretation. Compliance Alliance is working to update our Regulation B policy to address these changes, and the updated tool will be posted on our website and a notification will be included in our daily e-mail when our policy is updated.
In February 2019, the Agencies finalized regulations implementing the private flood insurance-related provisions of the Biggert-Waters Act. The private flood rules established guidelines for both mandatory and discretionary acceptance of private flood policies. They also created a compliance aid that a lender may rely on in its assessment of the policy. You can read Compliance Alliance’s Private Flood Insurance Final Rule Summary at https://compliancealliance.com/find-a-tool/tool/private-flood-insurance-final-rule-summary.
The Agencies issued proposed new and revised Interagency Questions and Answers in July 2020 that included two Q&As related to private flood insurance. The Agencies are now proposing 24 questions and answers for public comment. You can read the proposed FAQs at https://www.federalregister.gov/documents/2021/03/18/2021-05314/loans-in-areas-having-special-flood-hazards-interagency-questions-and-answers-regarding-private and submit comments until May 17, 2021. The agencies categorized the proposed FAQs in the three sections:
- Private Flood Insurance – Mandatory Acceptance (9 questions)
- Private Flood Insurance – Discretionary Acceptance (4 questions)
- Private Flood Insurance – General Compliance (11 questions)
The newly proposed FAQs mirror many of the questions we answer on Hotline. Members often ask us whether there are any circumstances under which lenders must accept a discretionary acceptance policy. Proposed new Q&A Mandatory 1 says a lender may decide to only accept private flood insurance policies under the mandatory acceptance provision of the regulation.
Members also frequently ask about the deductibles on private flood insurance policies. The proposed FAQs would provide that a policy with a coverage amount exceeding that available under the NFIP may have a deductible exceeding the specific maximum deductible under an SFIP. However, the proposed answer would also advise that the lender should consider whether the deductible is reasonable based on the borrower’s financial condition for safety and soundness purposes. The proposed FAQs also tell lenders that the lender may require the deductible to be lower than the maximum deductible allowable under the NFIP.
Members often ask our Hotline advisors what paperwork is necessary to determine whether the lender may accept a private flood policy. Under the proposed FAQs, the lender may rely solely on the declarations page if it: (1) provides sufficient information for the lender to determine whether the policy meets the mandatory acceptance provision or the discretionary acceptance provision of the regulation or (2) if the declarations page contains the compliance aid assurance clause. However, the lender should request additional information about the policy to aid its determination if the declarations page lacks sufficient information for the lender to determine whether the policy satisfies the mandatory acceptance or the discretionary acceptance provision of the regulation.
Compliance Alliance is committed to bringing you the tools and training you need to comply with all applicable federal regulation. Our recent webinar on Flood Insurance at https://compliancealliance.com/news-events/flood-insurance-requirements-2020-webinar includes all the information you need on private flood insurance. Our C/A Flood Toolkit at https://compliancealliance.com/find-a-tool/by-toolkit/flood contains a Private Flood Insurance Policy Checklist (https://compliancealliance.com/find-a-tool/tool/private-flood-insurance-policy-checklist) to help you evaluate private flood insurance policies from your borrowers. If you are looking for even further assistance, Review Alliance can even help review the private flood insurance policies to assist in your determinations.