By Rose Oswald Poels, WBA president and CEO
This week’s Executive Letter is a more technical topic than usual, given recent calls into WBA legal and a discussion at last week’s FDIC Chicago Region Directors’ College Program that WBA hosted in Madison. At the program, FDIC mentioned a supervisory concern stemming from findings in recent compliance exams.
Unfortunately, FDIC is finding inconsistency between how banks’ loan systems are making rate changes versus how the rate change was contracted for within the terms of a note or loan agreement. The matter is arising given the changing rate environment, which is causing more banks to implement rate changes to their variable rate loan products, such as adjustable rate mortgages (ARMs) and variable rate home equity lines of credit (HELOCs).
Examiners have found that rate changes implemented by several banks’ lending systems are occurring sooner than what was within the terms of the ARM, HELOC, or other variable rate loan product. The inconsistency in an increasing rate situation results in customer harm as the rate changed earlier than what was contracted for with the customer.
Given the increased attention to this matter and last week’s discussion of FDIC’s findings, I wanted to remind members to double-check their loan system parameters to make sure the timing of a rate change matches the timing contracted for. It’s my understanding that some banks’ loan documentation language is hard-coded and cannot be changed. For these banks, rate change options may be narrower than the programming options available by a bank’s core lending system. FIPCO® loan form rate change language is user-created, providing greater flexibility, but there still needs to be synergy between the contracted term and loan system parameters.
When reviewing loan system parameters for the timing of rate changes, I encourage you to also consider an overall review to ensure that the system matches all loan terms. For example, ensuring the correct index, margin, payment calculation method, and rounding criteria are in place.
Also, while not rate change related, another inconsistency identified by FDIC is the interest accrual method. Differences have been found, such as the loan agreement identified one particular methodology, but the loan system is set to calculate the interest based upon a different methodology. For example, the note articulates the interest calculation of 30/360 however, the loan system is set to calculate the interest on actual/360 or as actual/365.
If in review you find an error occurred and a rate change occurred prematurely, be sure to research the extent of the error for further conversation with bank’s counsel about how best to remedy the situation, including refunding the customer any amount collected before the rate change should have occurred. It is better to find the error and resolve it than leaving this particular matter for an examiner to find.
If you have additional questions about rate changes or other compliance exam concerns, be sure to reach out to WBA legal at wbalegal@wisbank.com.
