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I agree with your thoughts about this being a fair lending issue. I assume the concern is that the current arrangement of no expenses may not last forever; however, I don’t think it would be wise to add potential expenses that the borrower is not incurring because it is not an accurate representation of the applicant’s commitments/expenses, you do not when/how much potential future expenses would be, and the process could have fair lending implications. I think this practice could be viewed as intentionally trying to disqualify certain borrowers or it could be viewed as an innocent policy that may have a disparate impact on people of a protected class. Are there certain applicants (minorities, specific religion, or specific age, etc.) who are be more likely to live at home or in a multi-family living arrangement where they might not incur expenses? Could this practice be deemed that you are intentionally/overtly discriminating against these groups? Or if this policy seems like a justifiable business practice on the surface, to protect the bank, could it have a similar disparate impact on a protected class of consumers?
UDAAP is an underlying concern for many things; I think this practice could have potential unfair treatment concerns.
I don’t an error/violation of the timeframes would prohibit you from reversing provisional credit. I would suggest refunding any fees that resulted from the bank’s error.
There isn’t a specific record retention period requirement for adverse action notices outlined in the FCRA, which is what would apply to DDAs. There is a requirement for 3 years for prescreening and a reasonable period of time for the accuracy and integrity rules. Here is a link to a chart that details record retention timeframes for federal consumer protection laws/regs: chart.
If it has a credit feature attached to the deposit account and there is adverse action taken Reg B/ECOA could apply. The ECOA record retention rule is generally 25 months after notice.
If the surplus lines insurer is “otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located” and the policy meets the other requirements it should be fine. I’d suggest becoming familiar with the applicable state’s department of insurance and how they mark insurers, including surplus lines insurers, so you can recognize if they are licensed, admitted or otherwise approved.”
From the preamble to the final rule:
The Agencies received specific comments on the section of the proposed definition of “private flood insurance” relating to the State licensing of insurers. These commenters expressed concern that this definition could be interpreted to exclude policies issued by surplus lines insurers for noncommercial properties. In response to these commenters, the Agencies confirm that policies issued by surplus lines insurers for noncommercial properties already are covered in the definition of “private flood insurance” as policies that are issued by insurance companies that are “otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located.”If they are approved by the applicable state DOI, that would meet the “licensed, admitted, or otherwise approved” criteria.
Giving this some more thought… wondering why the borrower isn’t listed on the force placed policy as a loss payee? If you are purchasing the policy on their behalf and they will be paying for it they should benefit from the policy/be listed on the policy.
I still believe the rules were intended to address situations where the borrower is bringing you a private policy; however, I also think you would have trouble justifying purchasing a force placed policy that doesn’t at least comply with the discretionary rules.
The CFPB called me back today and said the refinance loan in your example would meet the real estate secured loan exclusion since it ‘otherwise perfect” the security interest in the property through language in the loan agreement and the mortgage.
Collecting gender on a deposit account might not cause a problem, but I think it certainly could, especially in today’s regulatory environment. For that reason I would avoid the practice. There aren’t specific rules for collecting or prohibiting collection of demographics associated with deposit accounts as there are for loans, but if you have an overdraft product – which most banks do – that is one area where it could create a problem. I can’t see how it would be worth the risk.
The private flood rules apply to policies the borrower is bringing to you… it is defining what you must/may accept from the borrower.
In regards to the compliance aid statement in general, if a compliance aid statement is included you can rely on that as proof it does meet the definition of private flood insurance. With that said, if you know a policy doesn’t meet the definition, but it still includes the compliance aid statement I think you’d be putting your bank at risk if it didn’t at least comply with the discretionary rules. So, yes, you can rely on the compliance aid statement when determining if you are going to accept the private policy from the borrower… however, I would add the caveat that if you are aware that it does not, you need to do your due diligence to make sure you can accept it.
You’re right, there isn’t clarity on the real estate secured loan exclusion as it applies to refinances and unfortunately the preamble to the final rules doesn’t provide much clarity either. It does indicate that the requirement for the perfection of the security instrument during the term of the loan is in part to avoid the real estate loan exclusion being used as a sham:
The proposed
requirement that the security interest in
the real estate be recorded or perfected
also strongly discourages attempts to
use this exclusion for sham or evasive
purposes. Recording or perfecting a
security interest in real estate is not a
cursory exercise for a lender—recording
fees are often charged and
documentation is required.The purchase money exclusion specifically states the exclusion applies to the initial purchase, meaning refinances are excluded, so that is clear. However, considering the context of how real estate security interests work there is a little more ambiguity in this exclusion. I believe the intent is to exclude real estate secured loans, specifically because if the security instrument has already been perfected in the original loan and will extend to the refinance then there isn’t the need to re-file/record it during the term of the refinance. But again that isn’t completely clear with the way the regulation is worded.
I have reached out to the CFPB to see if they will offer any clarification on the language of this exclusion.
The final rule is silent on charging a fee. Since it is not specifically prohibited we believe you can charge a fee for the determination and any subsequent determination that would be necessary. You will need to consider whether this would be included in the finance charge; we believe the safe approach would be to include the charge in the finance charge. As for fair lending, it is always prudent to keep an eye on what could cause disparate impact or be considered disparate treatment. If you are reviewing these other policies and not charging fees that could possibly be an issue. However, the reason banks are considering charging a fee is because the private flood rules are putting a large burden on financial institutions – it is this extra work and burden of making the determinations that you are potentially charging for.
I’d recommend discussing both the fee with your regulator prior to implementation to get a better understanding of their interpretation and how they will view the practices before they come into your bank your next exam.
If a private policy does not meet the mandatory acceptance criteria then you are not required to accept the private policy. You are permitted (i.e. you may), accept the private policy IF it meets the discretionary criteria. You would need to determine if the policy meet the discretionary criteria, through a review of the policy compared to the criteria, before you could accept it.
What you’ve described seems to be acceptable. You want to ensure you are disclosing it as a separate fee paid to the bank and include it in the finance charge.
The costs of a private insurance reviews are likely to be substantial. Out of curiosity, do you plan to charge a substantial fee (that could cover the cost of the review) to all borrowers with property located in a SFHA or do you plan to charge a modest fee to all in order to cover the significant cost on a few loans?
The final rule is silent on charging a fee. Since it is not specifically prohibited we believe you can charge a fee for the determination and any subsequent determination that would be necessary. You will need to consider whether this would be included in the finance charge; we believe the safe approach would be to include the charge in the finance charge.
As for the flat flood processing fee, how would that fee be labeled and what would it be for?
In regards to instituting a policy of not making loans that will be secured by property in a special flood hazard area, this isn’t prohibited, but you would need to consider possible fair lending implications (e.g. disparate treatment or impact, proxy for redlining, etc.).
I’d recommend discussing both the fee and the “no flood loans” policy with your regulator prior to implementation to get a better understanding of their interpretation and how they will view these practices before they come into your bank your next exam.
If the customer has already purchased the policy and presents it to you, you can review it at that time to make the determination. If it is not acceptable you may need to require them to purchase a different policy at which time they would cancel the initial policy and get a refund of the pro-rated premiums (and/or possibly assessed a cancelation fee). An insurance company should also be able to provide their customer a copy of the policy they will be purchasing for review prior to purchase so they know what they are purchasing. If this is the case, you would want to confirm that the policy hasn’t been amended or changed (specifically the portions you’re required to review) which can likely be done through the form information including revised dates/form numbers.
Technically, I don’t think the rescission would be required since you are closing in the same creditor that extended the initial extension of credit. However, I think it is prudent to look at the intent of the regulation which provides an exemption to rescission for a refinance (new money would not qualify) if it the same creditor – if you know you are making the loan on behalf of another lender (you will be immediately selling the loan) it may be best to give the right of rescission. Also, what are the secondary market lenders requirements – do they require rescission be provided? I would consider both of these when making the decision.
I think if you provide a disclosure you are required to comply with those disclosures. If you do not comply, it has potential to turn into a UDAP violation.
