In Regulation Z there is found 12 CFR § 1026.36, an unusual section that discusses payment processing, loan originator compensation, steering, and prohibitions on mandatory arbitration clauses, to name a few. Among this hodge-podge is found the prohibition against dual compensation for loan originators.
As part of the larger discussion on loan originator compensation, 1026.36(d) focuses more on ways in which a loan originator may NOT be compensated, rather than the various ways in which they may be compensated. Regulations in general normally work the other way around: the regulation tells you what you must do, and everything else (if not prohibited) is acceptable. In this case, the regulation focuses primarily on what you cannot do.
The loan originator compensation rule applies to closed-end consumer loans secured by a dwelling, and has two major prohibitions: 1) payments based on a term of the transaction, and 2) payments by persons other than the borrower (i.e., dual compensation). In the first prohibition, the rule prohibits loan originators from being compensated on the term of the transaction, or proxy of a term of the transaction, where the transaction is one or more consumer mortgage loans. On the surface this prohibition seems simple – you’re not allowed to pay a higher compensation for a higher interest rate or pay out a higher commission on an ARM loan vs a fixed-rate loan. Because it can get a little more complex than it initially seems check out our Loan Originator Compensation Webinar and Manual if you want to know more about this prohibition.
The second prohibition for loan originators is a prohibition on payments by persons other than the borrower (i.e., dual compensation). As Regulation Z explains it, if any loan originator receives compensation directly from a borrower for a loan secured by a dwelling, then the loan originator is prohibited from receiving compensation from any other person for that transaction.
With the rise in interest rates, we’ve seen creative solutions to buyers’ needs, including an increase in the number of sellers offering to buy down the borrower’s rate using seller credits. The question then arises as to whether this seller credit could represent a violation of the prohibition against dual compensation. In a scenario in which the borrower is buying down the rate, and the seller is also additionally buying down the rate further, is the money from the seller considered compensation received from someone other than the consumer?
Probably not, but it could be under the right circumstances. Concerning the idea of receiving compensation “directly from the borrower,” Regulation Z counterintuitively broadens this concept to include payments not just from the borrower, but payments from others also. Payments made due to an agreement between the borrower and another person, in which the other person agrees to pay some of the borrower’s loan costs is consider being paid “directly by the borrower.” In our above example with a seller providing a credit to buy down the borrower’s rate, if there is an agreement between the borrower and seller that the seller will provide a credit towards the borrower’s closing costs, then these funds paid by the seller are considered to be paid directly by the borrower.
As the regulation states in 1026.36(d)(2)(i)(B): “Compensation received directly from a consumer includes payments to a loan originator made pursuant to an agreement between the consumer and a person other than the creditor or its affiliates, under which such other person agrees to provide funds toward the consumer’s costs of the transaction…” However, if no agreement exists between the borrower and seller in which the seller agrees to pay some of the borrower’s loan costs, then the expansion of compensation paid “directly by a borrower” would not apply to these seller payments, and such payments by the seller could violate the dual compensation provision in 1026.36.
Natural disasters such as floods, earthquakes, tornados, and hurricanes can happen anywhere at any time, so it is important that banks are as prepared as possible for these events. How can you be as prepared as possible for catastrophes? By implementing a good, workable business continuity plan. A viable plan begins with a comprehensive approach to risk assessment, so the most probable disasters can be considered. Such planning often categorizes threats on a scale from high to low, according to both their probability of occurring and the impact each could have on the bank.
One of the first exercises in the business continuity planning process is performing a business impact analysis. By identifying critical business functions and resources and establishing time frames for recovery, the business continuity planning team can prioritize recovery efforts. The business impact analysis helps provide an unbiased look at what really matters when disasters happen.
You’ll also want to determine how much planning and preparing is the right amount for your bank. Incorporating basic principles of sound business continuity planning, such as identifying potential threats, assessing their potential impact, assigning priorities, and developing planned responses is a must. We have tools to help with your preparation: check out our Business Continuity Plan Policy, Business Impact Analysis template and our recent webinar Developing Your Business Continuity Management Plan.
The agencies have also provided guidance on the matter which can further help the bank in both preparing and in response to such disasters. For instance, the OCC issued a bulletin suggesting banks consider waiving or reducing ATM fees, temporarily waiving late payment fees or early withdrawal penalties, restructuring debt obligations when appropriate (although generally not longer than 90 days), expediting lending decisions when possible, and originating or participating in sound reconstruction loans.
The FDIC issued similar guidance that highlighted the unique challenges created by natural disasters, including communication and power outages, destruction of facilities, and interruption in availability of certain branches and ATMs. History has shown us that banks should anticipate communications disruptions and difficulty of staff to reach a recovery area. Banks should consider establishing an alternative facility if a financial institution is damaged or destroyed, prepare for the need to operate only in cash, and recognize the bank’s potential to aid other local banks.
The focus of preparation should be the potential impacts rather than the sources of the threat and what type of disasters you’re potentially facing. A threat that presents a low probability of occurring and a low impact may not warrant much attention. However, every threat that poses a high adverse impact generally warrants further consideration, regardless of the probability its occurrence. Additionally, banks should regularly test disaster recovery and business continuity plans to ensure their continued effectiveness for responding to changing business and operational needs.
A disaster like the recent Hurricane Ian, although infrequent, serves as a reminder why banks should implement business continuity and disaster recovery plans and work to make creative solutions to address unforeseen difficulties quickly. It may be impossible to prevent or anticipate all disasters, but banks must prepare and practice for them.
Stop me if you’ve heard this one before: the National Flood Insurance Program (NFIP) was recently reauthorized again. “Again?” you ask. Wasn’t it just reauthorized? And wasn’t it just reauthorized right before that? And right before that? And right before that? If the NFIP was originally passed over 50 years ago, why does it seem to keep getting reauthorized so often? The technical reason is that the NFIP does not contain a single expiration provision, so the program must continually be reauthorized, and Congress puts an expiration date on each reauthorization.
If it seems like you’ve heard about NFIP reauthorizations a lot recently, it’s because you have. In the past five years the NFIP has been reauthorized twenty-two times. On average that’s about once every 2.75 months, or once about every 82 days. The last “long-term” NFIP reauthorization was in 2012 as part of the Biggert-Waters Flood Insurance Reform Act, but that authorization expired on September 30, 2017. Since 2017 the longest reauthorization was one year, authorized during Fall 2020 during the COVID-19 debacle, and the shortest reauthorization was four days, earlier this year in March 2022.
Much like the Federal Deposit Insurance Corporation (FDIC) advertises that no depositor has ever lost a penny of insured deposits since the FDIC was created in 1933, the Federal Emergency Management Agency (FEMA) also promotes that FEMA and Congress have never failed to honor the flood insurance contracts in place with NFIP policyholders. Even if the NFIP wasn’t reauthorized in time and the program lapsed (which has happened more than once in the last five years), FEMA still has the authority to ensure the payment of valid claims. The effect of a lapse is that policies cannot be purchased or renewed during a lapse, but once reauthorization occurs, NFIP policies may once again be purchased or renewed. Industry sources estimate that upwards of 40,000 home mortgage loans per month could be affected by an NFIP lapse.
The NFIP was most recently scheduled to expire on September 30, 2022, but as earlier indicated, it was indeed reauthorized. Apologies for burying the lede, but the recently reauthorized NFIP now expires on December 16, 2022. Before the digital ink will dry on this article, the NFIP is already “about to expire again” in about 60 days which, as discussed, is nothing new for the National Flood Insurance Program.
Despite the continual reauthorization process, the NFIP remains the primary source of flood insurance coverage for residential properties. According to Congressional estimates, there are nearly 5 million NFIP flood insurance policies providing over $1.3 trillion in coverage in the United States.
This looks to be a continual source of headache going forward, but here at Compliance Alliance we’ll continue working to send out daily e-mails, weekly newsletters, and monthly magazines keeping you informed about what’s going on in the industry (such as the NFIP expiration/reauthorization rollercoaster), as well as answering your questions on the hotline as the need arises.
We’ve been hearing for a while now that changes were coming to Beneficial Ownership. The process has started, but will not be effective immediately, and of the three new final rules to be issued, the third rule will be the one that has the most impact on financial institutions. The first of the final rules to change the beneficial ownership requirements has been published.
How did we get here?
Section 6403 of the Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), requires three things of the Financial Crimes Enforcement Network (FinCEN): 1) establish a database for beneficial ownership information, 2) establish rules for access to disclosure of beneficial ownership information, and 3) revise the existing customer due diligence (CDD) requirements for financial institutions. The current CDD rule has, since 2018, required that financial institutions collect information from legal entity customers regarding the beneficial owners of the legal entity customer.
Where are we now?
Of FinCEN’s three requirements in Section 6403 of the CTA, we’re on step one of three. In December 2021 FinCEN published a notice of proposed rulemaking (NPRM) related to establishing a database for beneficial ownership information. Just recently FinCEN published the final rule related to establishing a database for beneficial ownership information. At the heart of this final rule is the requirement for corporations, limited liability companies, and entities created by the filing of a document with the Secretary of State’s office to provide beneficial ownership information directly to FinCEN. As part of establishing a database for beneficial ownership information, this rule also describes what information is required to be filed, along with the dates by which action must be taken. This final rule is effective January 1, 2024.
Because this first final rule implementing Section 6403 isn’t effective until January 2024, presumably the next step would be for FinCEN to publish a notice of proposed rulemaking either related to the access of the database which houses beneficial ownership information, or a revision of the CDD requirements for financial institutions. It’s this latter rule that financial institutions are most anxiously awaiting, as that should signal a change in information collection requirements for banks. It is anticipated that banks will be collecting less information after the effective date of the final rule that revises the CDD requirements, so it’s no wonder that institutions are feverishly awaiting these revisions.
Compliance Alliance published a summary of the 2021 NPRM earlier this year. A summary of the final rule is pending and will be uploaded to our website as soon as it is available. If you have any questions about the final rule in the meantime, reach out to us on the hotline.