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With the mandatory compliance date for the new, revised General QM loan definition just on the horizon, banks should ensure their implementation plans are in place. In terms of a quick-look at dates, CFPB issued a final rule on December 29, 2020 (Final Rule) which amends the General QM loan definition in Regulation Z. The Final Rule included a mandatory compliance date of July 1, 2021. However, on April 27, 2021, CFPB extended that mandatory compliance date to October 1, 2022. The General QM Final Rule was effective on March 1, 2021 and, among other things, replaces the existing 43 percent debt-to-income ratio limit with price-based thresholds. As such, it presents the potential for significant changes to a bank’s mortgage lending operation.

To expand upon the new price-based thresholds with a general summary: a loan meets the revised General QM definition only if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by less than the applicable threshold set forth in the Final Rule as of the date the interest rate is set. Additionally, the Final Rule removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. Consequently, it amends the consider and verify requirements in Regulation Z and its associated commentary. First, it outlines the minimum considerations required by creditors, including, for example, the consumer’s current or reasonably expected income or assets. Second, it requires that creditors verify those considerations using reasonably reliable third-party records and reasonable methods and criteria.

Banks have likely already taken time to evaluate the categories of QMs they originate, and how the revised General QM definition may or may not affect its current loan policy and underwriting procedures. Even banks which originate Small Creditor QMs should still consider the extent to which they may or may not original General QMs. For example, does bank originate General QMs? Will it continue to do so, or will it exclusively utilize the Small Creditor QM exception, if applicable?

Given the mandatory compliance date of October 1, 2022 banks should confirm that their implementation steps are in place. Banks should prepare to fully transition current policies and procedures to conform with the new definition and consider what training might be necessary in advance of and after the transition.

As an additional resource, WBA has prepared an ATR/QM Toolkit to assist bankers.

Earlier this year the CFPB issued its long-awaited proposal for implementing Section 1071 of the Dodd-Frank Act, which requires collection of credit application data for small businesses, including women-owned and minority-owned small businesses. Comments on the proposal are due January 6, 2022. WBA will be creating a draft comment letter for use by members to reply to CFPB regarding concerns and impact of the proposal on banks. WBA encourages each bank to consider submitting its own letter reflecting bank-specific information. In preparation for these comments, WBA has prepared the following considerations regarding the rule.

What specific burdens will your institution face as a result the proposal? Some examples might include:

  • Costs, technology, training, staffing, customer-facing educational information needs.
  • Review of application process (based upon the rule’s definition of application).
  • Is the proposed “firewall” process workable for the bank?
  • What sort of implementation period will be necessary?

More specifically you might consider:

  • Will bank need to hire new staff (compliance, processor, etc.)?
  • Technology costs, such as a new platform, or 1071 data software.
  • Costs associated with updating existing systems, testing, applications, training, development of new policies and procedures, legal consultation, review of implementation, etc.
  • New annual costs related to collection such as customer service, data management, resolution of errors, exam prep, etc.

In preparation for filing comments, banks should plan to provide specific estimates where possible. For example, if bank predicts new software will be necessary to capture the data, be prepared to provide CFPB with a specific cost if possible.

As mentioned above, WBA will be creating a draft comment letter for use by members to reply to CFPB. The letter will be released shortly to allow banks time to personalize their letter with bank-specific information. For more information about CFPB’s Section 1071 proposal, please see the WBA Toolkit and PowerPoint materials.

WBA Legal has prepared a new toolkit to help senior management, commercial lenders, loan processors, compliance officers, and others involved with small business lending to better understand the impact of CFPB’s recently proposed small business rule on the bank. Once finalized, the requirement to collect and report certain data about small business credit applicants will have a dramatic impact on current application and processing operations and record retention.  

A PowerPoint summarizing CFPB’s proposed rule has been created for use by staff who seek to present the main components of the proposal to lending and processing staff. The PowerPoint provides a background, proposed compliance dates, information regarding covered financial institutions, definition of small business, minority-owned and women-owned business, definition of covered application and covered credit transaction, what data must be collected, and reporting information.  

In addition to the PowerPoint, the toolkit also includes a complete outline of the proposed rule, including the proposed commentary and several appendices. CFPB’s proposed rule summary and a data point chart are also included.  

CFPB is accepting comments regarding its proposal. WBA hopes each bank will take into consideration the information provided in this toolkit, assess the proposal’s impact on the bank, and provide comment to CFPB regarding such impact.  

WBA Legal will be creating a draft comment letter for use by members to reply to CFPB regarding concerns and impact of the proposal on banks. WBA encourages each bank to consider submitting its own letter reflecting bank-specific information.  

Feel free to contact WBA Legal at wbalegal@wisbank.com regarding CFPB’s proposal.

Rose Oswald PoelsBy Rose Oswald Poels

Last week for the first time in two years, I was back in Washington D.C. with a small group of nine bankers from Wisconsin for meetings with banking regulators and a few members of Congress. Joining WBA was a delegation of six bankers and two staff from the Illinois Bankers Association. While our meetings with regulators were still virtual, all meetings were productive affording the smaller group of bankers ample time to ask questions and hear directly from senior officials about a wide variety of issues.

We began the first day in the afternoon with briefings from the FDIC and OCC. FDIC Board Director Martin Gruenberg led the conversation highlighting the fact that while the FDIC anticipated stress in the banking system heading into the pandemic that did not materialize and notably, there have not been any bank failures in 2021. Areas of focus for the FDIC remain on commercial real estate, tailoring climate change risk concerns based on the impact to different markets and/or the size of the institution, and on the impact of non-bank companies to the financial system. OCC Acting Director Michael Hsu led the discussion with bankers emphasizing his support for community banks, his understanding of the need to tailor regulation to the size and complexity of each institution, and robust discussions around both FinTechs and climate change.

The next day featured conversations with FinCEN and CFPB. Naturally, the discussion with FinCEN was largely around the status of their development of a beneficial ownership registry which remains in process. Until one is finally launched, banks will still have to follow the current beneficial ownership rules. A representative from FinCEN’s Financial Intelligence Division indicated that they have seen an increase in all types of crime notably COVID-19 fraud, work at home scams, cyberthreats of all types (e.g. ransomware and account takeovers), and illicit use of cryptocurrency. The primary focus of our conversation and questions with the CFPB was around the upcoming Section 1071, small business data collection proposal. The bankers took turns stressing the hardships of the current proposal and asking for an extension of the comment period deadline so that the industry had adequate time to respond to the many issues raised in the over 900-page document. CFPB staff indicated that they have been in meetings with the core providers on this proposal already to help prep them ahead of time so that data collection would be easier once the proposal is finalized.

These meetings are impactful largely due to the proactive engagement of the bankers in the room. I encourage you to take advantage of these opportunities as they arise and be involved because each regulator we met with unequivocally stated they want to hear directly from bankers about the impact proposals have on their operations. While WBA certainly represents the industry’s concerns, bankers truly make the best advocates in sharing specific examples about the impact on the operations of individual banks.

The long awaited proposed rule regarding the collection and reporting of small business lending data as required by Section 1071 of the Dodd-Frank Act has finally been released by the Bureau of Consumer Financial Protection (CFPB). Unfortunately, the proposed rule is as broad and onerous as the industry expected it to be as it will be costly to train, implement, and monitor. The proposal would revise Regulation B, which implements the Equal Credit Opportunity Act (ECOA), to require the collection and reporting to CFPB certain data on applications for credit by small businesses. The proposal is substantial; however, below is a brief summary of the proposed rule.

Who Must Collect Data

The first step of analysis for any proposal is to identify whether it will apply to the bank. In this case, the proposal is broad and will very likely apply to all banks in Wisconsin. As proposed, if a bank originates at least 25 credit transactions that are considered “covered credit transactions” to “small businesses” in each of the two preceding years, the proposed rule will apply to the bank. Generally, a “small business” under the proposal is a business that had $5 million or less in gross annual revenue for its preceding fiscal year.

What CFPB has proposed be considered a “covered credit transaction” is a bit trickier an analysis but is generally the same as what is considered an application under the existing Regulation B definition of “application.” The proposed term does; however, exclude reevaluation requests, extension requests, or renewal requests on an existing business credit account, unless the request seeks additional credit amounts; also excluded is an inquiry or prequalification request.

What Data is to be Collected

Next, the data to be collected. Dodd-Frank Act Section 1071 identified certain data that must be collected by CFPB; the law also gave CFPB discretion to collect additional data. CFPB has incorporated all Dodd-Frank Act required data and several discretional data into its proposal. In particular, banks must collect a unique identifier of each application, application date, application method, application recipient, action taken by bank on the application, date action taken, denial reasons, amount applied for, amount originated or approved, and pricing information including interest rate, total origination charges, broker fees, initial annual charges, additional cost for merchant cash advances or other sales-based financing, and prepayment penalties.

Banks must also collect credit type, credit purpose, information related to the applicant’s business such as census tract, NAICS code and gross annual revenue for applicant’s preceding fiscal year, number of applicant’s non-owner workers, applicant’s time in business, and number of applicant’s principal owners.

There is also demographic information about the applicant’s principal owners to collect. These data points include minority- and women-owned business status, and the ethnicity, race, and sex of the applicant’s principal owners. The proposal also requires banks to maintain procedures to collect applicant-provided data at a time and in a manner that is reasonably designed to obtain a response, addresses how banks are to report certain data if data are not obtainable from an applicant, when banks are permitted to rely on statements made by an applicant, when banks must verify applicant’s responses to certain data collected, and when banks may reuse certain data collected in certain circumstances such as when data was collected within the same calendar year as a current covered application and when the bank has no reason to believe the data are inaccurate.

When and How Data Must be Reported

Banks would be required to collect data on a calendar-year basis and report the data to CFPB by June 1 of the following year. CFPB has proposed to provide technical instructions for the submission of data in a Filing Instructions Guide and related materials.

The submitted data is also to be made available to the public on an annual basis. Banks would be required to make the reported data available on their website, or otherwise upon request, or must provide a statement that the bank’s small business lending application register is available on CFPB’s website. Model language for such statement has been proposed by CFPB.

Limit of Certain Bank Personnel’s Access to Certain Data

The proposed rule implements a requirement under Section 1071 that banks limit certain employees’ and officers’ access to certain data. CFPB refers to this as the “firewall.” Pursuant to the proposed rule, an employee or officer of a bank or bank’s affiliate who are involved in making any determination concerning the applicant’s covered application would be prohibited from accessing an applicant’s responses to inquiries that the bank made regarding whether the applicant is a minority- or woman-owned business. Such employees are also restricted from information about an applicant’s ethnicity, race, and sex of the applicant’s principal owners.

There are exceptions to the requirement if it is not feasible to limit such access, as that factor is further set forth in the proposal. If an exception is permissible under the proposal, notice must be given to the application regarding such access. Again, CFPB has created model language for such notice.

Recordkeeping and Enforcement

The proposal establishes certain recordkeeping requirements, including a three year retention period for small business lending application registers. The proposal also includes a requirement to maintain an applicant’s responses to Section 1071 inquiries regarding whether an applicant is a minority- or women-owned business, and responses regarding the ethnicity, race, and sex of the applicant’s principal owners, separate from the rest of the application and accompanying information.

The proposal does include enforcement for violations of the new rules, addresses bona fide errors, and provides for a safe harbor.

Learn More and Get Involved

The proposal and additional information, including a chart of the proposed data collection points, may be viewed at: https://www.consumerfinance.gov/rules-policy/rules-under-development/small-businesslending-data-collection-under-equal-credit-opportunity-act-regulation-b/

WBA will comment on the proposal and will create a template letter for bankers to use in providing their own comments to CFPB regarding the impact the proposal will have on the bank. Comments are due 90 days from publication of the proposed rule in the Federal Register. At time of publication of the article, the proposal had not yet been published. CFPB has proposed mandatory compliance of a final rule be eighteen months after its effective date. WBA Legal is creating a working group to collect data and concerns from Wisconsin’s bankers on the proposal. If you wish to be part of the working group, please contact WBA Legal at wbalegal@wisbank.com.

This article originally ran in the September 2021 edition of the WBA Compliance Journal, to view the entire publication, click here.

This is the Special Focus section of the September 2020 edition of Compliance Journal, click here to view the entire edition.

The Bureau of Consumer Financial Protection (CFPB) has proposed the creation of a new category of qualified mortgages (QM) named Seasoned QM.  

As a general matter, the Ability-to-Repay/Qualified Mortgage Rule (ATR Rule) requires a creditor to make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan according to its terms. Loans that meet the ATR Rule requirements for QMs obtain certain protections from liability. CFPB stated it created the Seasoned QM category to complement existing QM definitions and to help ensure access to responsible, affordable mortgage credit—especially given the upcoming sunset of the temporary GSE QM category. CFPB also stated it seeks to encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are only rebuttable presumption QMs under existing QM categories. 

Under the proposed rule, a covered transaction would receive a safe harbor from ATR liability at the end of a 36-month seasoning period as a Seasoned QM if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements. The following is an overview of the restrictions and requirements of the proposed Seasoned QM. 

Product Restrictions and Underwriting Requirements 

A covered transaction must meet the following product restrictions to be eligible to become a Seasoned QM: 

  1. The loan is secured by a first lien; 
  2. The loan has a fixed rate, with fully amortizing payments, and no balloon payment; 
  3. The loan term does not exceed 30 years; and 
  4. The total points and fees do not exceed 3 percent of the loan amount.  

For a loan to be eligible to become a Seasoned QM, the proposal requires that the bank consider the consumer’s debt-to-income (DTI) ratio or residual income and verify the consumer’s debt obligations and income. Similar to the existing Small Creditor QM category, the proposal does not specify a DTI limit. Additionally, the bank is not required to use Appendix Q to Regulation Z in calculating and verifying debt and income. The proposed commentary provides that a loan that complies with the consider and verify requirements of any other QM definition is deemed to comply with the consider and verify requirements of the Seasoned QM.  

Portfolio Requirement 

The proposed rule also sets forth a portfolio requirement for the new category. To be a Seasoned QM, the covered transaction cannot be subject, at consummation, to a commitment to be acquired by another person; and, legal title to the covered transaction cannot be sold, assigned, or otherwise transferred to another person before the end of the seasoning period. The proposal provides for two exemptions from this portfolio requirement in that the covered transaction may be sold, assigned, or otherwise transferred to another person pursuant to a capital restoration plan or prompt correction action, other action or instruction from a person acting as conservator, receiver, or bankruptcy trustee, or an order of the bank’s state or federal regulator. The covered transaction may also be sold, assigned, or otherwise transferred pursuant to a merger or acquisition of the bank with another person. 

The exemptions to the portfolio requirement apply not only to an initial sale, assignment, or other transfer by the originating creditor, but to subsequent sales, assignments, and other transfers as well. For example, assume Bank A originates a covered transaction that is not a QM at origination. Six months after consummation, the covered transaction is transferred to Bank B pursuant to merger of the two banks. The transfer does not violate the portfolio requirements of the proposed rule because the transfer is as a result of a merger. If Bank B sells the covered transaction before the end of the seasoning period, the covered transaction is not eligible to season into a QM under the Seasoned QM rules unless the sale falls within one of the two listed exemptions.  

As outlined, a covered transaction sold pursuant to a capital restoration plan under a prompt corrective action before the end of the seasoning period does not violate the proposed rule’s portfolio requirements. However, if the bank simply chose to sell the same covered transaction as one way to comply with general regulatory capital requirements in the absence of supervisory action or agreement, then the covered transaction cannot become a QM as a Seasoned QM, though it could qualify under another definition of QM.  

Seasoning Period 

The “seasoning period” means a period of 36 months beginning on the date on which the first periodic payment is due after consummation of the covered transaction, except that if there is a delinquency of 30-days or more at the end of the 36th month of the seasoning period, the seasoning period does not end until there is no delinquency. The seasoning period also does not include any period during which the consumer is in a temporary payment accommodation extended in connection with a disaster or pandemic-related national emergency, provided that during or at the end of the temporary payment accommodation there is a qualifying change or the customer cures the loan’s delinquency under its original terms.  

If during or at the end of the temporary payment accommodation in connection with a disaster or pandemic-related national emergency there is a qualifying change or the consumer cures the loan’s delinquency under its original terms, the seasoning period consists of the period from the date on which the first periodic payment was due after consummation of the covered transaction to the beginning of the temporary payment accommodation and an additional period immediately after the temporary payment accommodation ends, which together must equal at least 36 months.  

The proposed rule defines a “qualifying change” to mean an agreement that: (a) is entered into during or after a temporary payment accommodation in connection with a disaster or pandemic-related national emergency and must end any pre-existing delinquency on the loan obligation when the agreement takes effect; (b) the amount of interest charged over the full term of the loan does not increase as a result of the agreement; (c) there is no fee charged in connection with the agreement; and (d) all existing late fees, penalties, stop payment fees, or similar charges are promptly waived upon the consumer’s acceptance of the agreement.  

A “temporary payment accommodation in connection with a disaster or pandemic-related national emergency” is defined to mean temporary payment relief granted to a consumer due to financial hardship caused directly or indirectly by a presidentially declared emergency or major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or a presidentially declared pandemic-related national emergency under the National Emergencies Act. Examples of temporary payment accommodations in connection with a disaster or pandemic-related national emergency include, but are not limited to, a trial loan modification plan, a temporary payment forbearance program, or a temporary repayment plan.  

Consumer Payment Performance Requirements 

The proposed rule also requires certain payment performances by the consumer. To be a Seasoned QM, the covered transaction must have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. “Delinquency” is defined in the proposed rule to mean the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and, if applicable, escrow by the date the periodic payment is due under the terms of the legal obligation. Other amounts, such as any late fees, are not considered for this purpose. The “due date” is the date the payment is due under the terms of the legal obligation, without regard to whether the consumer is afforded a period after the due date to pay before being accessed a late fee.  

Further, a periodic payment is 30 days delinquent when it is not paid before the due date of the following scheduled periodic payment. A periodic payment is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential scheduled periodic payments and does not make both sequential scheduled payments before the due date of the next scheduled periodic payment after the two sequential scheduled periodic payments. For example, assume a loan is consummated on October 15, 2022, that the consumer’s periodic payment is due on the 1st of each month, and that the consumer timely made the first periodic payment due on December 1, 2022. For purposes of determining delinquency under the proposed rule, the consumer is 30 days delinquent if the consumer fails to make a payment (sufficient to cover the scheduled January 1, 2023 periodic payment of principal, interest, and, if applicable, escrow) before February 1, 2023. The consumer is 60 days delinquent if the consumer then fails to make two payments (sufficient to cover the scheduled January 1, 2023 and February 1, 2023 periodic payments of principal, interest, and, if applicable, escrow) before March 1, 2023.  

For any given billing cycle for which a consumer’s payment is less than the periodic payment due, a consumer is not delinquent as defined in the proposed rule if: (a) the servicer chooses not to treat the payment as delinquent for purposes of RESPA, Regulation X, if applicable; (b) the payment is deficient by $50 or less; and (c) there are not more than three such deficient payments treated as not delinquent during the seasoning period.  

Conclusion  

CFPB has proposed the creation of a Seasoned QM category as means to complement existing QM definitions and to help ensure access to responsible, affordable mortgage credit. A covered transaction would receive a safe harbor from ATR liability at the end of a 36-month seasoning period as a Seasoned QM if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements as outlined above.  

CFPB has proposed that a final rule relating to the proposal would take effect on the same date as a final rule to amend the General QM definition. Comments regarding the proposed Seasoned QM category were initially due September 28, 2020; however, CFPB has
since extended the comment period until October 1, 2020. WBA plans to file comments in general support of the proposal while offering several recommendations of change for CFPB to consider. Click here to view the proposal.

By, Ally Bates

In a letter filed with CFPB, WBA stated general support to implement EGRRCPA section 108 to exempt from Regulation Z’s HPML escrow rules any loan made by a financial institution that is secured by a first lien on the principal dwelling of a consumer if the institution: (1) has assets of $10 billion or less; (2) together with its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year; and (3) meets certain existing HPML escrow exemptions criteria. The new exemption is in addition to existing HPML escrow exemptions. 

To help alleviate the potential that an institution inadvertently makes itself ineligible for the new exemption, the proposal would also modify a May 1, 2016 date within the current HPML escrow exemption requirements to a new end date that will be approximately 90 days after the effective date of the forthcoming final rule.  

While WBA stated general support, WBA recommended the 90-day prerequisite be extended to no less than 120 days as additional time is needed for financial institutions to identify and adapt to the changes made by the proposed rule. The letter may be viewed below: 

  

By, Ally Bates

On July 7, 2020, the Bureau of Consumer Financial Protection (CFPB) issued two new frequently asked questions regarding Regulation C, Home Mortgage Disclosure Act (HMDA), reporting requirements for financial institutions. The FAQs discuss reporting of multiple data points when certain factors are relied upon in making a credit decision. 

Multiple Data Points 

The first question asks whether financial institutions are required to report the credit score, debt-to-income ratio (DTI), and combined loan-to-value ratio (CLTV) relied on in making a credit decision when such data is not the dispositive factor? CFPB responds that yes, credit underwriting data such as credit score, DTI, and CLTV must be reported if they were a factor relied on in making a credit decision—even if the data was not the dispositive factor.  
 
For purposes of Regulation C, it does not matter whether the application is approved or denied; if certain data was relied on in making a credit decision, such data must be reported. For example, if the credit score was relied on in making a credit decision, the credit score must be reported. If the financial institution denied the application because the application did not satisfy one or more underwriting requirements other than the credit score, the financial institution is still required to report the credit score relied on. The same analysis applies to the reporting of CLTV and DTI.  

The second question asks if, when income and property value are factors in the credit decision, though not the dispositive factor, should such data points be reported? CFPB responds that yes, when a credit decision is made, Regulation C requires reporting of the data “relied on in making the credit decision.” Hence, if these data are relied on in making a credit decision, such data must be reported.  

There is no requirement in Regulation C for either of these data points to be the dispositive factor in order to be reported. Specifically, the commentary explains that when a financial institution evaluates income as part of a credit decision, it must report the gross annual income relied on in making the credit decision. For example, if an institution relies on the verified gross income of an applicant to make a credit decision, the institution is required to report the verified gross income. The comment does not state that verified gross annual income must be dispositive in the credit decision.  

The commentary also provides a similar narrative for property value. Income and property value apply the relied-on standard in a similar way to credit score, DTI, and CLTV and should, therefore, be reported if relied on in making a credit decision.  

Conclusion 

The FAQs emphasize specific factors that, when relied upon in making a credit decision, must be reported. The data points are required even when the information is not the dispositive factor in a credit decision. 
 
The FAQs can be found here. 

By, Ally Bates

Today, WBA commented on CFPB's interim final rule to amend Regulation X to temporarily permit mortgage servicers to offer certain loss mitigation options based on the evaluation of an incomplete loss mitigation application. WBA's comments generally supported the rule for its temporary solutions offered to borrowers in forbearance as a result of COVID-19. WBA also recommended that the options be expanded, so that they might be utilized in the event of future emergencies. 

Read the full letter.

By, Ally Bates

On June 4, 2020 the Consumer Financial Protection Bureau (CFPB) released a notice of proposed rulemaking (proposal) to address the sunset of LIBOR, which is expected to be discontinued after 2021. The proposal would provide examples of replacement indices that meet certain Regulation Z (Reg Z) standards, permit creditors new means to transition home equity lines of credit and credit card accounts from LIBOR to a replacement index, and address change-in-terms notice provisions.

Reg Z contains separate provisions for open-end credit that is home secured and open-end credit that is not home secured. These distinctions are important for identifying applicability of various rules, and the proposal amends each separate rule appropriately. However, from a conceptual standpoint, the changes are fundamentally similar. To present these fundamental changes in a manner that is simpler to understand from a conceptual standpoint, and to avoid redundancy, provisions for open-end home-secured and not home-secured plans have been presented together.

Open-end Credit Subsequent Disclosure Requirements

Reg Z specifies when change-in-terms notifications must be sent to consumers. The transition from LIBOR may trigger certain notification requirements, which CFPB seeks to clarify in the proposal. For example, the proposal would specify that any change-in-terms notice must include any replacement index, including any adjusted margin, regardless of whether the margin is reduced or increased. Reg Z Section 1026.9(c) contains rules for when written change-in-terms notifications are required, both for open-end credit plans secured by the consumer’s dwelling and open-end not home-secured plans. Those rules can be summarized in a way that is relevant to the proposal as follows:1

  • For open-end credit plans secured by the consumer’s dwelling, a creditor must provide a notice whenever a term required to be disclosed (required term) is changed, or the required minimum periodic payment is increased.
  • For open-end (not home-secured) plans, a creditor must provide a notice whenever a significant change in required account terms is made.
  • Both rules provide an exception from notice requirements when the change involves a reduction of any component of a finance or other charge.

Because the index is a required term, a creditor must provide a change-in-terms notice disclosing the index that is replacing the LIBOR index for both open-end credit plans secured by the consumer’s dwelling and for non-home-secured plans. The exception does not apply to the index change, regardless of whether there is also a change in the index value or margin that involves a reduction in a finance or other charge.

Reg Z currently requires notification of a margin change if the margin is increasing. However, a decrease in the margin would be excepted from the notification requirements because the change would involve a reduction in a component of a finance or other charge. The proposal would revise the exception when the change involves a reduction of any component of a finance or other charge so that it does not apply on or after Oct. 1, 2021, where the creditor is reducing the margin when a LIBOR index is replaced. Thus, the proposal would make it clear that a change-in-terms notice for any replacement index must include any adjusted margin regardless of whether the margin is reduced or increased.

The Truth in Lending Act generally requires that changes in disclosures have an effective date of the 1st of October that is at least six months after the date the final rule is adopted. However, in the proposal, CFPB notes that creditors may want to provide the information about the decreased margin in the change-in-terms notice even if they replace the LIBOR index and adjust the margin earlier than Oct. 1, 2021.

Requirements for Home Equity Plans and Credit Cards

Reg Z generally prohibits a creditor from changing the terms of a HELOC except under certain circumstances. Additionally, Reg Z Subpart G contains rules implementing requirements under the Credit CARD Act. In the case of a credit card account under an open-end consumer credit plan, a card issuer may not increase an APR (or certain other charges) except under certain circumstances.

Existing unavailability provisions exist for both HELOC plans and credit card plans, which permits the creditor to change the index and margin. In both instances, the proposal would revise existing unavailability provisions, primarily for technical, conforming, and clarification purposes. The proposal would also create LIBOR-specific provisions and permit a creditor to use either those new provisions or the existing, updated unavailability provisions.

Reg Z currently provides that a creditor may change the index and margin used under either plan under certain circumstances, namely beginning with the situation where the original index has become no longer available. The proposal would update both existing unavailability provisions so that a creditor may change the index and margin used under the plan if the original index is no longer available, the replacement index has historical fluctuations substantially similar to that of the original index, and the replacement index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the original index became unavailable. The proposal would also provide that if the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. Thus, the proposal would change the existing requirements in the following three ways:

  1. Using the term “historical fluctuations” rather than the term “historical movement” to refer to the original index and the replacement index. This would primarily be a technical change with the revised definition being shaped by conforming changes throughout the rule.
  2. Including a provision regarding newly established indices. A similar provision currently exists in Reg Z requiring newly established indices to produce a rate substantially similar to the original index. The proposal would clarify that the creditor using a newly established index may adjust the margin in order to produce a substantially similar APR.
  3. The terms “replacement index” and “replacement index and replacement margin” are used instead of “new index” and “new index and margin.” This proposed change is intended to avoid any confusion when the rule refers to a replacement index and replacement margin as opposed to a newly established index.

The proposal would also add new LIBOR-specific provisions to Reg Z. These provisions would permit creditors for both types of plans that use a LIBOR index under the plan to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, under certain circumstances, without needing to wait for LIBOR to become unavailable.

Specifically, the proposal would provide that if a variable rate is calculated using a LIBOR index, a creditor may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as:

  1. The historical fluctuations in the LIBOR index and replacement index were substantially similar; and
  2. The replacement index value in effect on Dec. 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on Dec. 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan.

Additionally, if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on Dec. 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan.

Card Issuer Reevaluation of Rate Increases

Reg Z contains provisions that requires a card issuer to perform an ongoing review for credit card accounts when an APR is increased. Thus, if the LIBOR transition results in an APR increase, a card issuer would be required to complete an analysis reevaluating the rate on that account every 6 months until certain requirements are met. For this purpose, LIBOR must be used as the comparison index.

The proposal would create an exception for those card issuers that transitioned from LIBOR using either Reg Z’s existing unavailability provision, or the proposal’s LIBOR-specific provision discussed above. The proposal also would provide instructions on how to replace LIBOR as a benchmark for comparison for card issuers who were already required to perform a review as of March 15, 2021.

Where the transition results in an APR increase, no analysis reevaluating the rate would be required. The proposal also would provide instructions on how to replace LIBOR as a benchmark for comparison for card issuers who were already required to perform a §1026.59 review as of March 15, 2021.

Closed-end Considerations

Pursuant to Reg Z, if a creditor changes the index of a variable-rate closed-end loan to an index that is not a “comparable index,” the index change may constitute a refinancing for purposes of Regulation Z, triggering certain requirements. The proposal would provide an example of an index that is a “comparable index” to LIBOR for closed-end products. Specifically, CFPB would add an illustrative example to identify the Secured Overnight Financing Rate-based spread-adjusted replacement indices recommended by the Alternative Reference Rates Committee as an example of a “comparable index” for the LIBOR indices that they are intended to replace.

Conclusion

CFPB’s proposal would provide examples of replacement indices for LIBOR, permit a means for creditors to transition existing accounts that use LIBOR to a replacement index, address change-in-terms notice provisions, and address the rate reevaluation provisions applicable to credit card accounts. Financial institutions using LIBOR as an index for calculating rates for open-end and closed-end products should consider how these changes affect their plans for the transition to replacement indices. As noted above, this article has been presented to understand the proposal on a conceptual level. As such, financial institutions should refer to the applicable provisions within the proposal itself depending on the types of products they offer for more specific requirements. CFPB has also provided FAQs (which includes other transition topics in addition to the proposal) and “fast facts” regarding the proposal. 

Questions can also be directed to the WBA Legal Call program at wbalegal@wisbank.com.

CFPB’s Proposed Rule
FAQ
Fast Facts

Birrenkott is WBA assistant director – legal. 

Note: The above information is not intended to provide legal advice; rather, it is intended to provide general information about banking issues. Consult your institution's attorney for special legal advice or assistance.

The requirements as presented in this article are summarized to better present the proposal and do not represent an accurate summary of requirements in their totality. See Reg Z Sections 1026.9(c)(1) and 1026.9(c)(2) for the full requirements. 

By, Amber Seitz

Events

During our second-quarter update, we will look at the changing landscape of the deposit area and all the hot spots for compliance. This is a look-see at what has passed and what is to come. Learn more in this incredible catch-all program for those of you on the deposit side of the compliance and operations area.

Covered Topics

  • FDIC Insurance Changes on Trusts
  • CFPB released on March 16th a statement that discrimination issues could apply to trusts
  • FDIC Supervisory Highlights focus on Regulation E yet again—Flexible OD Programs
  • Hot Spots on Regulation E continue
  • Beneficial Ownership proposed changes
  • Proposed IRA Changes pass the House—calling it Secure Act 2.0
  • OFAC and Ukraine what you need to know and do

Who Should Attend
Deposit Compliance, Deposit Operations, Training, Branch Staff, and Senior Management.

Instructor Bio
Deborah Crawford is the president of Gettechnical Inc., a Virginia based training company. She specializes in the deposit side of the financial institution and is an instructor on IRAs, BSA, Deposit Regulations and opening account procedures. She was formerly with Hibernia National Bank (now Capital One) and has bachelor’s and master’s degrees from Louisiana State University. She has 30+ years of combined teaching and banking experience.

Registration Options
Live Access, 30 Days OnDemand Playback, Presenter Materials and Handouts $279

Available Upgrades:
12 Months OnDemand Playback + $110
12 Months OnDemand Playback + CD + $140
Additional Live Access + $75 per person

 

Regulators are reviving their focus on fair lending and have published new materials and related guidance. It is critical that your institution is using these resources to update your fair lending compliance management system. These topics and more have been the subject of recent agency-issued blogs, press releases, webinars, speeches, and enforcement actions. Are they receiving adequate attention at your financial institution, too?

AFTER THIS WEBINAR YOU’LL BE ABLE TO:

  • Use current agency guidance to enhance your fair lending compliance management system
  • Assist consumers with limited English proficiency
  •  Explain sex-based discrimination
  • Discuss appraisal discrimination
  • Understand the components of the new Combatting Redlining Initiative
  • Describe redlining actions that resulted in enforcement actions

WEBINAR DETAILS
The regulatory agencies are renewing their emphasis on fair lending. This webinar will dive into the recent agency-issued fair lending materials, including the Fair Lending Report of the Bureau of Consumer Financial Protection, to ensure you have the most up-to-date resources and training materials. The Bureau’s annual risk-based prioritization process involves combining emerging developments and trends with tips and leads from industry whistleblowers, advocacy groups, and government agencies; supervisory and enforcement history; consumer complaints; and results of HMDA analysis and other data.

Based on these documents, this webinar will cover redlining, appraisal discrimination, special purpose credit programs, sex-based discrimination, and consumers with limited English proficiency — all of which should be addressed in your institution’s policies, procedures, training, or monitoring activities. Join us to learn tips and best practices to ensure your organization has updated its fair lending compliance management system to reflect this renewed focus.

WHO SHOULD ATTEND?
This informative session is designed for lenders, chief lending officers, compliance officers, and risk officers.

TAKE-AWAY TOOLKIT

  • List of reference materials for topics discussed
  • Exercises to train staff on specific fair lending areas
  • Explanation of how to determine sex and race when information is not collected
  • PDF of slides and speaker’s contact info for follow-up questions
  • Attendance certificate provided to self-report CE credits
  • Employee training log
  • Interactive quiz

NOTE: All materials are subject to copyright. Transmission, retransmission, or republishing of any webinar to other institutions or those not employed by your agency is prohibited. Print materials may be copied for eligible participants only.

MEET THE PRESENTER – Molly Stull, Brode Consulting Services, Inc.
Molly Stull began her career as a teller while working on her undergraduate degree and has continued working in the financial industry ever since. She has experienced the growth of a hometown bank, branch mergers, charter changes, name changes, etc. Stull has activated business resumption plans, performed secondary market quality control reviews, processed wires, filed SARs, and coordinated reviews with external auditors and examiners. Her favorite role has always been educating staff and strongly believes that if staff understands the reason for a process, they will be more compelled to follow the procedures. Stull holds a bachelor’s from the University of Akron and an MBA from Ashland University.

REGISTRATION OPTIONS

  • $245 – Live Webinar Access
  • $245 – OnDemand Access + Digital Download
  • $320 – Both Live & On-Demand Access + Digital Download

The CFPB has confirmed that the two final rules issued under the Fair Debt Collection Practices Act (FDCPA) will become effective on November 30, 2021. These new rules affect both financial institutions and their third-party debt collectors. The first rule focuses on debt collection communications (i.e., phone, voicemail, email, texts, and social media). It increases consumers’ control over how often and by what means a collector can communicate with them.

The second rule clarifies the disclosures that must be provided to consumers at the beginning of collection communications. It also addresses the specific steps that must be taken to disclose the existence of a debt to the consumer before reporting it to a credit reporting agency. In addition, it prohibits collectors from threatening to sue on time-barred debt. This webinar will explain the compliance implications to your systems and procedures so you can prepare before the November 30 deadline.

Attendance certificate provided to self-report CE credits.

HIGHLIGHTS

Explain the new rules regarding debt collection communications, such as voice messages, emails, texts, and social media
Observe the new call attempt restrictions – not more than seven times within seven days
Define the new term “limited-content message” and explain what information must (and must not) be included in such messages
Understand how and when collectors must contact the consumer before furnishing debt information to a credit reporting agency
Describe what qualifies as time-barred debt and how collectors must handle it
Implement sufficient oversight of in-house collectors and third-party debt collectors

TAKE-AWAY TOOLKIT

CFPB’s small entity compliance guide for the debt collection rules
CFPB’s executive summary of the final rules
Employee training log
Interactive quiz
NOTE: All materials are subject to copyright. Transmission, retransmission, or republishing of any webinar to other institutions or those not employed by your financial institution is prohibited. Print materials may be copied for eligible participants only.

WHO SHOULD ATTEND?
This informative session will benefit loan officers at all levels, loan operations personnel, credit administration staff, collection personnel, compliance officers, attorneys, managers, and others involved in the collection process.

ABOUT THE PRESENTER – Elizabeth Fast, JD & CPA Spencer Fane LLP
Elizabeth Fast is a partner with Spencer Fane Britt & Browne LLP where she specializes in the representation of financial institutions. Elizabeth is the head of the firm’s training division. She received her law degree from the University of Kansas and her undergraduate degree from Pittsburg State University. In addition, she has a Master of Business Administration degree and she is a Certified Public Accountant. Before joining Spencer Fane, she was General Counsel, Senior Vice President, and Corporate Secretary of a $9 billion bank with more than 130 branches, where she managed all legal, regulatory, and compliance functions.

REGISTRATION OPTIONS:

Live Webinar – $245
Recorded Webinar and Digital Download – $245 plus tax
Live Webinar, Recorded Webinar and Digital Download – $320 plus tax

As planned, the fourth session of the 2021 WBA Community Bankers for Compliance will be held in-person!

October 26, 2021, Stevens Point – Holiday Inn Hotel & Convention Center
October 27, 2021, Madison, DoubleTree by Hilton Madison East

 

TOPIC: Fair Debt Collection Practices Act and Home Equity Lines of Credit

The fourth quarter 2021 Community Bankers for Compliance program will focus on two different areas of a bank’s lending program.

First we will discuss the revisions to the Fair Debt Collection Practices Act regulation. This was originally going to be a topic in the second quarter 2022, however the CFPB delayed implementation until January 2022. Recently they reverted implementation back to November 2021, making this a time sensitive topic. Regardless of your status regarding the regulation, the presentation will provide useful information for all banks. For instance, how can you legally collect via text message, voicemail, email or other electronic means? Many banks will not have to comply with the regulation, or only portions of the regulation. The manual will include the whole regulation, as well as the new Small Entity Compliance Guide. But we will focus our attention on those areas that will be most useful to attendees.

In recent weeks we have received a number of questions, assignments, and review work for home equity lines of credit. While nothing really has changed in the regulation, the presentation will focus on those areas that appear to be the most troublesome. We will cover the entire HELOC portion of Regulation Z, but will focus on those items that have been most prevalent in hotline questions and phone calls. While most banks have a HELOC program, we will be covering this subject at the end of the day so that those banks that do not have a program can either learn about it as they are getting ready to begin offering the product or simply call it a day because it does not apply to them.

The subjects for the regulatory update will be determined by circumstances and releases from the various agencies.

Future Presentations

Subjects for future seminars will be shaped by regulatory events as they unfold. The CBC quarterly compliance program remains committed to providing as much up-to-the-minute information as possible. The program will closely monitor releases from the CFPB and other agencies to assure that you have the most up-to-date and accurate information possible.

Who Should Attend?

Compliance officers, senior mortgage management, lending management, lenders and processors, and any others with responsibilities for lending should attend. Additionally, audit personnel will find this session useful.