Common Violations and Risk Areas
By Amy Kudlacek
Our local Compliance Professionals Peer Group met last Friday and enjoyed a presentation by Compliance Examiner Tim Taubenheim. Mr. Taubenheim is located in the FDIC's Grand Island Field Office. One focus of his presentation was Common Violations and Risk Areas. While these items were specific to the Grand Island Field Office, they serve as a good review and could be a heads up to any institution. Below are my notes for lending related violations:
Truth in Lending
HELOC Statements
If a bank is allowing customers to finance origination fees with a HELOC advance. The fees must be adequately disclosed as a finance charge on the first periodic statement. Failure to do so is a reimbursable violation. If the bank's vendor cannot accommodate this requirement, a bank should require the fees be paid in cash. See our June 2007 newsletter article for more on this issue.
226.18(m) - Security interest
Bank's often fail to accurate disclosed the collateral in the Truth in Lending disclosure. Often times, this is caused by recalling a previous note and failing to change the collateral on the new loan documents.
226.23(b) and (c) - R/R notice and disbursement of funds
Many banks are unaware that Truth in Lending provides different model forms for right of rescission based on the type of closed-end transaction. Mr. Taubenheim indicated providing the wrong rescission notice is a "content disclosure". Be sure to give the correct notice, when applicable.
226.32(d) - loan restrictions on high cost mortgages
The balloon payment and default rate restrictions are the most common violations dealing with HOEPA.
Fair Credit Reporting
609(g) - Notice to Home Loan Applicant
Many banks are not providing the require disclosure on denials as well as approved loans in which a credit score was used.
615(a)(2) - Name and address of credit reporting agency
Banks are not identifying the credit reporting agency on adverse action notices. Also, many banks over disclose the use of a credit report. If you didn't use the credit report to deny the applicant, you shouldn't disclose the use of the credit report.
RESPA
3500.7(c) and 3500.8(b) - Completion of GFE and HUD-1
Banks need to watch how they disclosed title insurance on lines 1109-1110. Be sure the premium amount not the coverage amount is listed. This will change when the new RESPA rules take effect in January 2010.
3500.17(i)(1)(viii) and 3500.17(i)(4)(iii) - Escrow Accounts
Many banks fail to identify the reason the low monthly balance was not reached on the annual statements.
Many banks fail to issue a short year statement when a loan is paid off (even in a refinance transaction).
Also, banks are technically NOT allowed to net the escrow into the loan payoff. The bank is supposed to issue a refund check (for the old loan) and establish a new escrow (for the new loan). This also applies to refinancings.
Flood Insurance
339.3(a) - Flood coverage at closing and sufficient coverage
Replacement Cost Value is not being used exclusively for determining adequate coverage. However, if a substantial discrepancy is present between the appraised value and the RCV, this will generally result in a violation. Use the hazard insurance value as a good rule of thumb.
339.9 - Notice of SFHA
A notice must be provided each time you make, increase, renew, or extend a loan secured by improved real estate located in a Special Flood Hazard Area. Banks often forget to provide a new notice for refinancings, renewals and extensions.
Equal Credit Opportunity
202.13(a) and 202.13(b) - requesting and obtaining monitoring data
If banks are not using an application that contains the monitoring data request, they need to ensure they are using another collection form. The applicant must get the disclaimer prior to completing their monitoring data.
202.5(b) - requesting race and sex when it is not required
If a bank over-collects monitoring data, they can just "x" through it and notate that it was inadvertently collected. This is still wrong but it is okay to document the error internally.
Based on these findings, you may want to review your banks procedures to ensure you are still in compliance. You may find that additional training is in order.