[James White]

We have a borrower situation presented recently that concerns consumer-purpose and UDAAP:

Two brothers operate a partnership, and the partnership as an entity, with the two brothers signing, have a mortgage on one of the brother’s homes. This was deemed consumer-purpose at the time (5+ years ago), but the brothers have recently decided they wish to disband the partnership. Our question came up as to doing a release of liability vs. doing a refinance. Given current market conditions, the brothers would prefer to not refinance as it would cause a dramatic rate increase for the loan. Our policy mentions that any consumer loan is not eligible for release of liability. Would we be in danger of a UDAAP violation if we entertained the release of liability in this case, if we then had to consider future similar situations for a release of liability? Ability to Repay for the brother and the home are considerations, are there any other compliance concerns in Reg X or elsewhere to consider?

Topic

[Kimberly Boatwright, CAMS, CRCM]

When considering an answer to your question. It appears you have a policy in place that doesn’t allow for the release of liability and considerations to policy is an exception to your FI’s lending requirements. In my opinion you have more fair lending risk than either UDAAP or Consumer Purpose at this stage of the life of loan. You need to look at this as a business decision and the impact it would have on safety and soundness and fair lending risks. If you were to grant an exception to policy couple of things to consider:
1. What happens in the case of a default? How will the FI recover the loss?
2. Do you have strong guidelines in place to make an exception to the policy? Have you have clearly defined requirements to grant the exception so that any other borrower has the same opportunity? Factors of consideration are based on tangible equally achievable standards, things like payment history, LTV, DTI and credit score. Nothing that is subjective? (I.e. good customers, good friends with so and so… )

Hope this helps.

Kimberley

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