Posts filed under ‘Compliance’
Don’t be fooled by the fact that it’s a beautiful morning here in Albany New York and Memorial Day is right around the Corner. These are actually compliance omens. It means that time is running out for your credit union to take a serious look at how it plans to comply with the new integrated disclosure requirements that kick in for mortgage applications received on or after August 1. You will be providing a loan Estimate and a Closing Document to your members.
My concern is that, whereas the industry spent months fretting over the QM rules, the sense I get is that the integrated disclosure rules haven’t generated the same angst. To the extent this is because you have used the last year to get ready I apologize and you can go on with your day. To the extent that there are some of you who think this rule is something that your vendor will take care of grab a second cup of coffee-this is admittedly dry reading in the morning-and ask yourself these basic operational questions. The new mortgage disclosures involve operational considerations that will impact your credit union’s bottom line.
Are you ready to make sure that your anxious homebuyers receive their Closing Disclosures at least three days before the loan is consummated?
This is probably the change with which you are most familiar. The days of a member getting the HUD1 at closing are over. With very narrow exceptions a Closing Disclosure must be received at least three business days before consummation. (A business day for purposes of the closing Disclosure requirement is all calendar days except Sundays and legal holidays)
An example provided by the CFPB illustrates just how big a change this is. If your member receives the closing document by overnight mail on a Saturday the earliest you can close is Thursday, assuming there are no holidays in between. This means that you better reach out to your network of attorneys and have a discussion about who is ultimately responsible for preparing the closing disclosure and getting it to the member. You also should practice calming down your homebuyers if new disclosures have to be provided and you can’t allow them to close on Thursday. This is by far the most foolish requirement I’ve seen the CFPB impose on the home buying process but you still have to figure out how you are going to comply.
Do your originators know what an application is? Have you given any thought to what information you are going to ask potential mortgage applicants and in what order? Gone are the days when an application is whatever you say it is. Like it or not anytime a member provides your employees with six magic pieces of information they have provided you with enough information to be given a Loan Estimate These 6 pieces of information are: The consumer’s name; The consumer’s income; The consumer’s social security number to attain a credit report; The property address; An estimate of the value of the property and The mortgage loan amount sought.
There is no wiggle room here: once you get this information a member must be sent an estimate within three business days. (For purposes of this disclosure a business day is any day you are substantially open for business excluding Sundays and legal holidays)
The flexibility you have under the rule is the order with which you request the information, For example if you are wacky enough to want to know the loan term that the member is in the market for there is nothing to stop you from making that the first question you ask. There is also nothing to stop you from prequalifying members by getting only five of the magic factoids so long as the member is informed that the prequalification is not a Loan Estimate and the member is not prohibited from giving you other information.
If your staff does not properly understand this subtle but important change you won’t be providing Loan Estimates when you should be or, conversely, so mechanically conforming to these new requirements that you don’t get all the information you are allowed to before making lending decisions.
What vendors do you want to insist your members use for settlement services? The Loan Estimate requires you to provide your buyers with a breakdown of origination charges, an estimate of settlement services they cannot shop for and estimated services they can shop for.
Easy enough. But the amount that the estimated charges in a Loan Estimates can vary from actual costs disclosed in the Closing Document without triggering a tolerance violation depends on how much freedom you give your member to shop for a vendor.
This means that if you always insist that members use Old Friend John to do all appraisals and he costs more than you estimated on the Loan Estimate then the member can’t be made to eat the difference.
But let’s say you allow the member to shop for an appraiser and provide him with a list with the name of at least one appraiser that he may use. If your buyer chooses from you list of suggested appraisers than the appraisal charge is grouped together with other charges that, in the aggregate, can vary by up to 10% with the increased cost paid by your member.
Let’s say that after giving you member the right to shop for settlement costs and providing him with a list of appraisers he ignores your recommendation and gets ripped off by his Uncle Bob. The increased cost can be passed on completely to the member.
If I succeeded in scaring you into action just go to the CFPB’s website-it has some great resources. Have a nice weekend.
Court Hands Creditors An Important Win
A unanimous Supreme Court handed creditors an important victory that will help keep the time it takes to resolve Chapter 13 bankruptcies from getting longer than your typical Red Sox baseball game-which seems to last forever. (Their starting pitchers take five minutes between pitches.) The case is Bullard v. Blue Hills Bank, No. 14-116, 2015 WL 1959040, at *8 (U.S. May 4, 2015).
Louis Bullard filed a petition for Chapter 13 bankruptcy in Federal Bankruptcy Court in Massachusetts. For our purposes, the important thing to remember is that he ultimately proposed splitting the debt into a secured claim in the amount of his house’s then-current value (which he estimated at $245,000), and an unsecured claim for the remainder (roughly $101,000). Bullard would continue making his regular mortgage payments toward the secured claim, which he would eventually repay in full, long after the conclusion of his bankruptcy case. He would treat the unsecured claim, however, the same as any other unsecured debt, paying only as much on it as his income would allow over the course of his five-year plan. At the end of this period the remaining balance on the unsecured portion of the loan would be discharged. In total, Bullard’s plan called for him to pay only about $5,000 of the $101,000 unsecured claim. The bank objected and after a hearing the bankruptcy court refused to accept the plan.
Here is where it gets technical but important. Instead of submitting another plan Mr. Bullard immediately appealed the bankruptcy court’s refusal to confirm his plan. The question that the Supremes decided yesterday was whether debtors have the right to immediately appeal a judge’s decision rejecting a repayment plan or whether they have to wait until a bankruptcy plan is agreed to or the bankruptcy dismissed before bringing an appeal? The Court ruled that debtors had to wait until a bankruptcy is finally resolved. The ruling is consistent with the Second Circuit approach to bankruptcies appeals.
The ruling means that debtors must either resubmit a less favorable payment plan or move to dismiss the bankruptcy and bring an immediate appeal. This would end the automatic stay on collection efforts. As a result, creditors have more leverage over debtors when it comes to repayment plans-a fact acknowledged by the Court. “We do not doubt that in many cases these options may be, as the court below put it, “unappealing.” But our litigation system has long accepted that certain burdensome rulings will be “only imperfectly reparable” by the appellate process.”
Besides, the court’s approach is a heck of a lot better than letting debtors drag out bankruptcies for years by appealing every time they propose an inadequate bankruptcy plan.
Interstate oversight Pact Agreed To
The CU Times informs us that Michigan’s Department of Financial Services announced on Friday that it was joining an interstate compact for the supervision of state chartered credit unions that operate in more than one state. Why do I care? Because one of the key questions facing New York federal credit unions considering converting to the state charter is who will regulate their out-of-state activities? No such concerns exist for federal charters.
At last week’s State GAC conference Ruth Adams, NY’s Deputy Superintendent for Community and Regional Banks who oversees supervision of state chartered credit unions , said that the state is interested in developing similar supervisory agreements as part of its efforts to encourage more state charters. Michigan’s announcement is another indication that such agreements have risen on regulator to-do lists and this is a good thing. To give you a sense of what these agreements do here is a link to the Southeastern cooperative agreement entered into in 2008.
It’s Deja Vu All over Again
In case you missed it, NY’s State Senate Majority Leader Deal Skelos of long Island was arrested on federal corruption charges yesterday. We will have to wait and see what unfolds in the coming days. Since Senate Republicans hold a one seat majority and democrats hold all of the other statewide offices the Senate Majority leader is the most powerful Republican in New York State.
When I tell people that a good chunk of my professional life is spent reading and responding to regulations, they smile and their eyes glazed over as they try to suppress a yawn. But, believe it or not, an infusion of new members on the NCUA Board means that regulators are really looking to make some meaningful changes. Here are my thoughts on yesterday’s board meeting. All of these regulations and proposals were influenced by industry comments.
Associational Common Bonds Rule
This was the most controversial rule of the day. Responding to concerns that some credit unions were creating sham associations simply for the purpose of increasing membership eligibility, NCUA finalized regulations strengthening its oversight of associational membership requirements. On the bright side, the proposal increases to 12 the types of associational groups that receive automatic pre-approval, including “organizations promoting social interaction or educational initiatives among persons sharing common occupational professions.”
If I wanted to be a glass half-full kind of guy I would say that the final regulation is much improved from the initial draft thanks to industry suggestions. If I wanted to be a glass half-empty kind of guy, I would continue to question why NCUA felt the need to go forward with this regulation in the first place. The only organization that really thought associational membership was being abused was the American Bankers Association.
When Congress expanded the ability of credit unions to offer Interest-On-Lawyer Trust Accounts (IOLTA) late last year, it also empowered them to offer “similar” escrow accounts. Yesterday, the NCUA proposed regulations defining those similar accounts. Under the proposed rule, they would include accounts for pre-paid funeral expenses, for example. At yesterday’s board meeting, NCUA officials stressed that they are more than willing to consider expanding the types of accounts eligible for insurance coverage under this law. This is one area where a well-written comment letter could clearly benefit the entire industry.
“Technical” Amendments for Corporate Rules
My old boss in the Legislature used to say that there is no such thing as a technical amendment, only amendments that no one understands. I was thinking of this quote yesterday as I heard the board discuss amendments to corporate borrowing authority. These amendments didn’t go as far as the corporates would have liked; however, the final rule improves on the initial proposal by extending to 180 days the maximum term of a corporate’s secured borrowing authority. In listening to the board discuss the proposal, I was struck by how concerned NCUA still is about allowing the corporates to rely too heavily on perpetual capital.
In addition to finalizing this technical amendment, the NCUA proposed an interesting change allowing the corporates to provide bridge loans to credit unions awaiting funding from the Central Liquidity Facility (CLF). When a credit union borrows funds from the facility it can take up to ten days to get the money. Considering that the purpose of the CLF is to provide emergency liquidity for credit unions, this strikes me as a huge defect in the system. NCUA is proposing to allow the corporates to provide members with bridge loans to cover the gap between the request and availability of funds.
I wish the industry would be more concerned with the issue of how best to revitalize the CLF fund. The corporates capitalized the fund with credit unions having access so long as they were a corporate member. When the corporates crashed, so too did their ability to fund the CLF and the industry has been remarkably short-sighted, in my ever-so-humble opinion, when it comes to devising an industry based source of emergency liquidity. At least this is a step in the right direction.
Appraisal Management Companies
NCUA signed off on joint regulations mandated by Dodd-Frank strengthening regulations related to Appraisal Management companies. This regulation is a bit strange, as no one at NCUA seems to know for sure if any credit unions invest in appraisal management CUSOs. This means that even though NCUA approved the rule, it may have absolutely no impact on credit union operations.
On that note, enjoy your weekend.
RESPA has always prohibited kickback schemes. Specifically, RESPA explains that ”No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C.A. § 2607 (West). But figuring out where the line is between legitimate salesmanship and illegal kickbacks has always been a gray area and RESPA enforcement has always been a tad lax.
Yesterday provided examples of how RESPA says what it means and means what it says. The Bureau That Never Sleeps and the Maryland AG sued originators over an alleged referral kickback scheme (http://www.consumerfinance.gov/newsroom/cfpb-and-state-of-maryland-take-action-against-pay-to-play-mortgage-kickback-scheme/). Closer to home, Governor Cuomo and New York’s Department of Financial Services proposed tough new regulations that would, among other things, prohibit title insurance companies from providing meals and entertainment expenses to loan originators (http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf).
First, let’s talk about the RESPA violation. The CFPB and the Maryland AG are suing Genuine Title, a now defunct Maryland company that offered closing services. It’s alleged that the company provided loan officers with marketing services “including purchasing, analyzing, and providing data on consumers, and creating letters with the loan officers’ contact information” and that in return, the loan officers would refer homebuyers to Genuine Title.
RESPA stands for the simple proposition that you can’t get something for nothing. If an originator is getting a fee for doing nothing more than referring business, then something is wrong.
As for New York State, it is moving to clamp down hard on title insurance practices that it believes drive up the cost of title insurance and limit consumer choice. The Governor doesn’t always get quoted in DFS press releases. Here is an indication of how strongly the administration feels about the amount of gift giving going on in the title insurance industry.
“New Yorkers should not have to foot the bill for outrageous or improper expenses made by title companies just to refinance or close on their home,” Governor Cuomo said. “Our administration will not stand for that kind of abuse in the title insurance industry, and these new regulations will help ensure that New Yorkers are protected from unfair charges and get the most bang for their buck.”
The proposed regulations would prohibit title insurers from offering inducements to get business including: meals and beverages; entertainment, including tickets to sporting events, concerts, shows, or artistic performances; gifts, including cash, gift cards, gift certificates, or other items with a specific monetary face value; travel and outings, including vacations, holidays, golf, ski, fishing, and other sport outings; gambling trips, shopping trips, or trips to recreational areas, including country clubs; parties, including cocktail parties and holiday parties and open houses. THIS IS NOT THE COMPLETE LIST
Suffice it to say it’s about to get a lot less fun dealing with title insurers in NYS.
Here is a link to the proposal: http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf
NCUA Board meeting today
Here is a quick reminder that the NCUA is having a board meeting today. Among the issues on the agenda are a vote on a final rule amending common bond requirements for associations and proposed regulations for IOLTA accounts. Remember that federal law now authorizes credit unions to open up Interest on Lawyer Trust Accounts. The regulation will presumably describe what accounts are similar enough to IOLTAs that they can also be offered by credit unions.
It was nice seeing so many of you at the State GAC over the last couple of days. Great job!
New York’s foreclosure law is one of the most complicated and time consuming in the country. Not only was the state one of the first in the nation to impose 90 day pre-foreclosure requirements and judicially imposed settlement conferences that provided a model for the CFPB but, as the housing crisis worsened, some courts became more and more aggressive in interpreting these and other laws for the benefit of delinquent borrowers.
To supporters of New York’s laws these protections are necessary to insure that homeowners have the legal protections necessary to keep their homes. To critics, a group whose ranks I have become an increasingly fervent member, state and federal protections are, when judged in the aggregate, not so much good faith borrower protections as they are procedural trip wires which slow down the foreclosure process to such an extent that they make owning a home in New York more expensive and contribute to urban blight.
The latest example of New York’s approach to housing policy is a bill drafted by the Attorney General to deal with the proper maintenance of abandoned “Zombie” property that has not yet been foreclosed on but has been abandoned by the homeowner. I have written other blogs about the proposal before, but I recently took another look at the legislation after it was officially introduced (A.6932\S.4781) on April 10th.
First, the good news is that the bill may make it easier to more quickly foreclose on abandoned property by making vacancy a ground for foreclosure and establishing courts specifically for such foreclosures. If you are going to make lenders maintain property than it makes sense to give them legal title as quickly as possible. It’s clear that supporters of this bill have listened to the critics. Its much more reasonable than it could have been.
Now for the bad news. It would mandate the establishment of a statewide abandoned property registry. Lenders may still find themselves on the hook for maintaining property they don’t own.
In addition, a provision in the bill demonstrates that legislators and regulators continue to have an absolute fetish when it comes to imposing notice requirements on lenders dealing with delinquent homeowners. The law would require lenders to send a notice to a delinquent borrower that “You are allowed by New York state law to continue living in your home regardless of any collection methods we pursue or oral or written statements made during the collections process, including the foreclosure process, until such time as you are ordered by a court to leave your property.”
This notice shall be sent within 15 days of property becoming 90 days delinquent that means that the homeowner not only is entitled to a 90 day pre foreclosure notice but now will receive this additional notice. This is, of course, in addition to the erstwhile summons and complaint that for hundreds of years has put people on notice that they are being sued.
In addition to these state specific mandates CFPB imposed regulations now require mortgage servicers to make a good faith effort to establish contact by 36 days after a homeowner misses a payment and provide written notice no later than 45 days after delinquency providing information about loss mitigation and counseling options. And of course federal regulations now prohibit a foreclosure action from being filed until the borrower is more than 120 days delinquent.
What astounds me is that anyone can look at these protections and conclude that homeowners need more notices or that greater legal burdens need to be imposed on borrowers.
Let’s not forget that the primary problem is people purchased homes they can no longer afford.
I’m off my soapbox, Have a good day,
To its credit, for almost a decade now NCUA has been emphasizing the need for due diligence when entering into third party relationships. Unfortunately, based on what I have seen, the quality of credit union oversight varies widely with too many credit unions continuing to place too little emphasis on a properly drafted contract which commits vendors to upholding privacy standards and establishes a framework whereby your credit union monitors vendor performance.
So, I’m not surprised with the results of a survey released last week by New York’s Department of Financial Services. The Department surveyed 40 financial institutions about their vendor management activities. Its findings are likely to result in proposed state regulations outlining vendor relationship requirements. It concluded that:
- Nearly 1 in 3 (approximately 30 percent) of the banks surveyed do not require their third-party vendors to notify them in the event of an information security breach or other cyber security breach.
- Fewer than half of the banks surveyed conduct any on-site assessments of their third-party vendors.
- Approximately 1 in 5 banks surveyed do not require third-party vendors to represent that they have established minimum information security requirements. Additionally, only one-third of the banks require those information security requirements to be extended to subcontractors of the third-party vendors.
- Nearly half of the banks do not require a warranty of the integrity of the third-party vendor’s data or products (e.g., that the data and products are free of viruses).
As I see it, one of the biggest problems is that businesses think of the contract as one of those last second details to be addressed after a vendor has been selected. It doesn’t have to be this way. For your larger vendor contracts you should ask your finalists to provide you with copies of their base contracts. You have leverage you should use if you find that one vendor has better terms than another. Furthermore, if one vendor is more committed than another to insuring data security then you can and should take this into account when making your final decision. Finally, you are being penny wise and pound foolish if you don’t pay for an attorney who has experience with vendor contracts and who is aware of pertinent regulatory requirements. By the way, the Association is willing and able to provide these services.
Is the Fed Getting Cold Feet?
The recent spate of lack luster economic news may keep the Fed from raising interest rates when it meets in June, according to an interesting WSJ article today. If this reporting is correct, a consensus is emerging that with inflation still below its 2% target range and employment still lagging, it makes sense to wait until later in the year before deciding to pull the trigger on the first rate increase since the Fed placed short term interest rates near 0 in December 2008.
Two quick thoughts, this is another great example of the Groundhog Day economy we have been stuck in for some time now. Economists confidently predict every Fall that the economy is finally on solid footing only to back away from the predictions following tepid economic growth in the first quarter. For what it’s worth, this blogger still believes the Fed will raise rates ever so slightly in June, if only to shift the debate away from when interest rates will rise to how high they should go. Low interest rates have artificially inflated equities for several years now by making the market the only place to get an adequate return.
On that note, have a nice weekend.
Verizon recently came out with its annual analysis of Data Breach Incidents Reports and it is a much read for at least one employee at every credit union. (http://www.verizonenterprise.com/DBIR/2015/?&keyword=p6922139308&gclid=CJXf_83Z-sQCFQqOaQodiIwAyw).
How effectively you deal with data breaches is an increasingly important factor in determining your credit union’s bottom-line. Verizon’s report is the best I have seen when it comes to providing an objective analysis of data breach trends. Here are my takeaways from the report:
Is greater information sharing the answer? One of the best ways to mitigate the negative consequences of data breaches is to get the word out about compromises as quickly as possible. We need more sharing of information. But rather than facilitating sharing within a given industry, the report concludes that greater emphasis has to be placed on sharing between industries that share common characteristics. In fact, it concludes that “our standard practice of organizing information-sharing groups and activities according to broad industries is less than optimal. It might even be counterproductive.” Greater inter-industry coordination is the type of mission that only government can facilitate and it’s fraught with a host of privacy issues. We are talking about sharing information about members over an array of businesses and industries inconceivable when Gramm–Leach–Bliley was passed.
Just how much are all of these data breaches costing us? The report attempts to quantify how much data breaches cost. It estimates that the average loss for a breach of 1,000 records is between $52,000 and $87,000. However, estimates vary widely based on the size of the breach, so the report also provides a chart on page 30 of the report providing a range of estimated costs based on the size of the breach.
Think of how valuable this information is and could be, particularly as the estimates get more accurate. For example, is it worth switching to EMV technology? Maybe, maybe not, depending on the scope and size of your potential data breach exposure. At least no one has to be groping around completely in the dark when making these decisions.
Is there anything that you can cost effectively do to help prevent or mitigate breaches? Here is some good news. Despite all the technological sophistication that goes into carrying out and preventing data breaches, a tremendous amount of data breach protection can be achieved by educating your own workforce and being as careful as you can be about who has access to information that could facilitate data breaches. For example, the report estimates that 55% of incidents stemmed from “privilege abuse.” In addition, employees aren’t all that quick when it comes to reporting data breaches. Perhaps it’s time for those “welcome to the new job” overviews HR gives to the new hires to include a talk about reporting potential phishing attacks. Another interesting factoid is that many data breaches involve compromises of software for which patches were available but not installed.