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BCC’s Common Lending Violations – Part 2

Banker’s Compliance Consulting writes and trains based on their experience in the field.  They have an intimate knowledge of the issues that face Banks and Credit Unions.  Check out this second edition on their “Top Lending Violations”.  This article as well as many more were featured in their monthly magazine, Banking on BCC.  Once you subscribe, you have access to the archives.

See part 1 here – https://www.bankerscompliance.com/bccs-common-lending-violations-part-1/


Sometimes the best way to learn is from other people’s mistakes.  With that in mind, we put together a list of frequently-cited lending violations, compiled from our in-bank reviews.  Hopefully, these will help reassure you that you are on the right track; if not, they might be the heads-up you need to fix any deficiencies you have. 

TRID Good Faith Effect

For purposes of TRID’s “Good Faith Effect”, establishing what you knew and when you knew it is really only the first step.  Another major consequence of TRID 2.0 was how you calculate tolerances.

The Rule allows “information-only” Loan Estimates to be provided [See the Commentary to §1026.19(e)(3)(iv) #4].  However, any disclosure must be based on the best information reasonably available to the creditor at the time it is provided.  While any fee changes must generally be reflected on revised Loan Estimates, any change not related to a valid changed circumstance may NOT be used for tolerance purposes.  [Commentary to §1026.19(e)(3)(iv) #5]

As a result, whenever there are multiple Loan Estimates or Closing Disclosures, TRID 2.0 made it almost impossible to do tolerance calculations based on those disclosures, since they are to be updated each time.  Many systems continue to struggle with this “good faith effect”. Again, we have a number of resources available in our Free Lending Tools on our website to help explain this.

2.  Fair Lending

From a compliance perspective, Fair Lending is one of the biggest things going!  Most have attempted to address fair lending risk with policy changes and risk assessments, but in many cases, there is still room for improvement.

One of the biggest areas of risk here is discretion, particularly when it comes to loan pricing.  More discretion equals greater risk.  When discretion is allowed, there needs to be monitoring in place to make sure there is not an unfair impact on any protected group.  Whether it be through file reviews or other tracking and monitoring of pricing deviations, you need to get a handle on the risk. 

Training is vital for not only a clear understanding of the fair lending rules and associated risks, but also of your policies, procedures and practices that help mitigate that risk!

3.  ECOA Appraisal Copy and Notice

To comply with the Regulation B/ECOA appraisal notice and copy requirements, step one is making sure the appraisal notice goes out within three business days of the initial ECOA “application date”, whenever a request will be secured by a first lien on a 1-4 family dwelling.  Step two is giving that appraisal and any other type of valuation and ensuring you are documenting when you’re doing so.

Three separate issues can easily come up, solely with just documenting delivery of the free copy.  First, the fact this requirement applies to both consumer AND commercial loan applicants gets overlooked.  We often see that consumer mortgage files have this step well-documented but the commercial and/or agricultural loan files do not.

Second, the rule applies to “all appraisals and other written valuations”.  In other words, coverage is not limited to a third-party appraisal…”valuationmeans any estimate of the value of a dwelling developed in connection with an application for credit.  This could be an internal valuation, an automated valuation model, real estate broker price opinion or government-sponsored enterprise report.

Finally, it must be documented that the consumer received the copy “promptly” upon completion of the valuation AND at least three business days prior to consummation.  This can only be documented if you show both when: 1) the valuation is complete; and 2) the copy is delivered.  Only documenting that all valuations were received three business days before closing does not fully satisfy the requirement.

4. Red Flags

The requirements for an Identity Theft Prevention Program are found in 12 CFR 334.90 (which apply to every account…not just consumer accounts…but that’s beside the point).  One of the required elements for the program is that institutions identify red flags for potential identity theft and incorporate them into the program. 

Policies and procedures must be designed to:

Identify red flags that indicate the potential for identity theft; 

Detect those red flags when they are encountered during the day-to-day operations of the bank;

Respond appropriately to any detected red flags; and,

Ensure that the Program is periodically updated.

Files often lack documentation to show that all four steps are happening.  Most struggles are associated with red flags that come from “Alerts, Notifications or Warnings from a Consumer Reporting Agency.”  Most institutions’ policies identify such alerts as Red Flags but, when presented, the alerts are not documented appropriately.  It is a vital part of your program to make sure the detection and response are occurring as well as being documented.

5. TRID Coverage

You need to make sure that the TRID requirements are being applied to all appropriate applications.  Since the very beginning, the TRID requirements have applied to any consumer-purpose, closed-end loan application that is secured by real property.  There are still many misconceptions here, particularly with commercial and/or agricultural lending areas. 

Before TRID came along, there were several exemptions from TIL/RESPA for certain loan types (e.g.,  construction-only loans, bridge loans, loans to be secured by bare land or 25 acres or more).  NONE of these exemptions apply to TRID.

Significant time and effort goes into making sure that TRID disclosures are technically accurate and delivered in a timely manner.  If coverage is misunderstood, however, you risk having a consumer who did not receive any of the required disclosures at all!  It’s not that uncommon for us to see these closed-end, consumer-purpose loans being missed, usually due to a misunderstanding as to what is and is not covered by TRID.  Just one oversight like this could lead to bigger issues, so make sure lenders understand when TRID applies!

We hope you find these to be good reminders of some of the trickier regulatory requirements and a good list to use going forward when auditing and training.

Part 1 of 2

Published
2021/12/03

BCC’s Common Lending Violations – Part 1

Banker’s Compliance Consulting writes and trains based on their experience in the field.  They have an intimate knowledge of the issues that face Banks and Credit Unions.  Check out this second edition on their “Top Lending Violations”.  This article as well as many more were featured in their monthly magazine, Banking on BCC.  Once you subscribe, you have access to the archives.

See Part 2 here – https://www.bankerscompliance.com/bccs-common-lending-violations-part-2/


Sometimes the best way to learn is from other people’s mistakes.  With that in mind, we put together a list of frequently-cited lending violations, compiled from our in-bank reviews.  Hopefully, these will help reassure you that you are on the right track; if not, they might be the heads-up you need to fix any deficiencies you have. 

1.  TRID Good Faith Effect

When it comes to the TILA & RESPA Integrated Disclosures (TRID) Rule, one of the biggest questions is:  What did you know and when did you know it?  This should be your new mantra when reviewing files in the wake of TRID 2.0, which became mandatory in October 2018.

Every Loan Estimate and Closing Disclosure provided must be made “in good faith”.   To be considered “in good faith”, the disclosures must be based on the best information reasonably available at the time the disclosure is made.  This new standard makes it vitally important to document when you learn about certain information relevant to those disclosures.  For example, a Loan Estimate might not include information from a purchase agreement (PA) because it had not yet been provided.  For that reason, it’s very important to document WHEN you actually receive the purchase agreement.  Doing so is necessary to help establish that disclosures are issued in good faith, which again means using the best information reasonably available at the time the disclosure is made.

Make sure your file documentation reflects when you received important pieces of information, whether it be the purchase agreement, third-party fee amounts or other new or changed information (i.e. a valid changed circumstance).  You need to document the timeline of events to show that disclosures were based upon the best information available when they went out the door.

While this requirement has been in place for a while, we continue to see issues.  If you haven’t done so already, be sure to check out our TRID “Good Faith” Effect 2.0 tool.  It’s just one of the Free Lending Tools available on our website and will help illustrate how things changed with TRID 2.0. 

2.  Home Mortgage Disclosure Act (HMDA)

If you are a HMDA Bank, it should come as no surprise that HMDA is on this list of top violations. Collecting, documenting and reporting HMDA data can get very complicated!

From a loan officer’s perspective, it is important to ensure each scenario is well-documented at the time of application.  Remember, HMDA is an application regulation.  While most loan officers are getting pretty comfortable with collecting Demographic Information and completing the form, there are still quite a few areas that could be documented at the time of the application that would make the review and reporting process much easier.

Some things may seem perfectly obvious at the time, as to not warrant further documentation, but these same things can cause questions down the road.  For example, consider a mixed-use property that has both commercial and residential space.  The determination of whether the primary purpose of the mixed-use property is a dwelling or not may be obvious to the lender now, but trying to recall the reasons behind that thought process or determination may be a lot more difficult many months later.  Remember, you have flexibility under §1003.2(f) when determining whether or not you have a dwelling when it comes to mixed-use properties.  It’s very helpful when that determination is made early and documented clearly!

Clear documentation of the specific application scenario, the type of loan applied for and reasons for the action taken can cut out a whole lot of guesswork down the road.

3.  Equal Credit Opportunity Act (ECOA)/TRID/HMDA:  Application Date(s)

Usually, one of the first things we need to know when reviewing a loan file is the application date.  In light of the different definitions of “application” found in ECOA, TRID and HMDA, the most accurate response is, Which application date?

It can be tricky to know when you have an “application” under the different definitions.  We recommend starting at the beginning.  First, document your ECOA application date, which is an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested… [§1002.2(f)]  At this point, there should also likely be documentation of joint intent (if applicable); Demographic Information or Government Monitoring Information (as applicable); and the three-business day clock for delivery of the ECOA Appraisal Notice begins.

TRID and HMDA, however, each have their own different definitions and triggers.  The difference between  application dates under HMDA and TRID as opposed to ECOA may be only when a property is identified.  Often, the ECOA application (a request for credit) is received first and the actual property isn’t identified until later.  Many lenders do not document this important point clearly, which causes issues with demonstrating compliance.  For example, although the appraisal notice can be found on the Loan Estimate, your three business days to get that notice out under ECOA may start before your three business days to get the Loan Estimate out under TRID.  By waiting for the Loan Estimate to get the appraisal notice out, you could be late with the appraisal notice if the ECOA and TRID application dates are different.

You need to make sure that each application date for each applicable regulation is clearly documented in every loan file.  Sometimes, those dates may all line up with each other.  Those dates, however, could also end up being different.  Make sure your loan files tell the story!

4.  Bank Secrecy Act – Customer Due Diligence

It can be easy to forget about the Customer Due Diligence (CDD) requirements found in the Bank Secrecy Act (BSA) and how they pertain to lending.  With any loan application, there are usually questions asked and information gathered.  In doing so, how is that information being documented for purposes of establishing or updating your customer risk profile?

The CDD requirement is ongoing and the customer risk profile is to be updated as necessary.  The beneficial owner requirements are only part of this process.

5.  Flood Notice

Flood Insurance requirements can be some of the most challenging.  One violation we continue to see is the failure to deliver the required Flood Notice a reasonable amount of time before loan closing (or other triggering event).

According to §339.9(c), once you have determined a loan will be secured by improved property located within a Special Flood Hazard Area (SFHA), you must provide the SFHA Notice.  The SFHA Notice must be delivered within a “reasonable time” before the transaction is completed (e.g., signing a modification, etc.). 

So, what is a “reasonable time”?  That’s a good question!  Once upon a time, the regulation stated 10 days would be considered reasonable, but those references were eventually removed.  Even though the regulation no longer mandates the Notice be delivered at least 10 days in advance of closing, the 10-day requirement is still alive and well in practice.  Banks have been cited for not providing the notice in a timely manner when done less than 10 days before closing a loan or otherwise completing a transaction.  Examiners often find flaws in explanations why a period of less than 10 days was deemed “reasonable”. 

Take this as a caution; any time the Flood Notice is provided less than 10 days before closing; it could be a red flag and subject to heavy scrutiny!

We hope you find these to be good reminders of some of the trickier regulatory requirements and a good list to use going forward when auditing and training.

Part 1 of 2

Published
2021/12/03

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