Compliance Query

Q:  I have heard from others that there is a compliance issue related to joint credit reports. What is the issue and how can I avoid it?

A:  The joint credit report issue pertains to the difference in the credit report charge between married and unmarried joint applicants. The FDIC and the Federal Reserve have determined that imposing a higher fee on unmarried joint applicants is a fair lending violation. This inconsistent treatment is prohibited under the Equal Credit Opportunity Act (ECOA – Regulation B) due to the use of marital status.

In response to this issue, the consumer reporting agencies (CRAs) have indicated that banks may obtain the joint reports only if the joint applicants reside at the same address. The CRAs further contend that the joint reports have never been limited to married applicants. However many credit report delivery systems ask for applicant and spouse rather than applicant and co-applicant when ordering the joint credit report. In any event, banks may use the spouse field to enter an unmarried co-applicant’s information as long as both applicants reside at the same address.

Banks may avoid this fair lending violation by expanding the use of joint credit reports to unmarried joint applicants; however, there are other solutions. First, banks may decide not to impose any charges for obtaining credit reports, which would eliminate the possibility of the violation. Second, banks may impose the same credit report charge on both married and unmarried joint applicants regardless of the actual charge; although, be sure to use the lower of the two to avoid a RESPA unearned fee violation. Third, banks may decide to avoid joint credit reports altogether and only obtain individual credit reports for each joint applicant.

Q:  On the revised GFE there is a Block 7 for Government Recording Charges and a Block 8 for Transfer Taxes, but which charges go where?

A:  The best way to differentiate between these two similar blocks of information is that transfer taxes will be based on the transaction amount, while the recording charges will be set fees applied to the transaction. The recording charges will include the mortgage filing fee, mortgage satisfaction fee, mortgage assignment fee; however the MERS assignment fee should be included in the origination charges, and the agricultural conservation fee applicable in select counties. The transfer taxes will include the mortgage registry tax, which is the mortgage amount times 0.0023 and 0.0024 for Hennepin and Ramsey counties, and the state deed tax. HUD applies the 10% tolerance only to the Block 7 Government Recording Charges because some other jurisdictions impose recording charges based on the total page number of documents being recorded, which may not be known until closing. HUD applies zero tolerance to the Block 8 Transfer Taxes because the lender should know the transaction amount at the time of application, and a change in the transaction amount does qualify as a changed circumstance triggering a revised GFE.

Q:  What occurrences trigger mandatory corrected disclosures for mortgage loans?

A:  If the APR becomes inaccurate, then you must provide corrected disclosures. Changes to the underlying interest rate and/or finance charge(s) can make the APR inaccurate. The disclosed APR will be accurate as long as it is within 0.125%, above or below, of the actual APR. The tolerance increases to 0.25% for loans that include multiple advances, irregular payment periods or payments (other than the first period or the first or final payment). For mortgage loans with understated APRs, if the understatement is due to understated finance charges of $100 or less, then the APR is still accurate. For mortgage loans with overstated APRs, if the overstatement is due to overstated finance charges, then the APR may still be accurate. As long as the amount financed minus the present value of payments at the disclosed APR is equal to or less than the amount by which the FC is overstated, then the APR is still accurate. You may use the OCC’s APRWIN software, available at www.occ.treas.gov/aprwin.htm, to help you make these calculations.

Remember, that you must provide corrected disclosures three business days prior to loan closing. However, if you do not provide the corrected disclosures in person, or have some verifiable method of actual delivery, then you must provide corrected disclosures six business days prior to loan closing to account for delivery time. For the purposes of corrected disclosures business days refer to all calendar days except Sundays and legal public holidays.

Q:  I know that some new rules will take effect on October 1, 2009, but I have lost track of which ones amid all the regulatory changes over the last twelve months. What are the regulatory changes that go into effect on October 1, 2009?

A:  The changes that go into effect on October 1, 2009 involve Regulation Z (TILA) and Regulation C (HMDA). The modifications to Regulation Z are extensive and cover advertisements for open-end (226.16) and closed-end credit (226.24), prepayment penalty restrictions (226.32) for high-cost and higher-priced mortgage loans, repayment ability requirements (226.34) for high-cost and higher-priced mortgage loans, higher-priced mortgage loan requirements (226.35), except for the escrow requirements, and restrictions on appraiser interactions and servicing practices (226.36). The detailed modifications and additions are described in the Federal Register notice from the Federal Reserve Board on July 30, 2008, which can be found at: http://edocket.access.gpo.gov/2008/pdf/E8-16500.pdf.

The change to Regulation C involves lowering the rate spread on first lien and subordinate lien loans to 1.5% and 3.5%, respectively, and replacing the Treasury security yield as the rate comparison with a new “average prime offer rate,” which is market-based survey of annual percentage rates (APRs). The Regulation C changes apply to all loan applications taken on or after October 1, 2009.

Q:  I have heard that the Financial Crimes Enforcement Network (FinCEN) has amended the Currency Transaction Report (CTR) exemption rules for Phase II entities. What are these amendments?

A:  Effective January 5, 2009, FinCEN amended the exemption rules for both Phase I and II exempt entities. Banks no longer need to undertake an annual review or file an initial designation of exempt person (DOEP) form for certain Phase I entities, including depository institutions, U.S. or State governments, and entities acting with governmental authority. The Phase II amendments adjust the requirements for Phase II eligibility, i.e. new customers are eligible after two months (down from twelve) with the bank and need at least five (down from eight) CTR reportable transactions annually. Finally, the Phase II amendments remove the biennial renewal filing requirement and the change of control reporting requirement for all Phase II entities.

Q:  I have heard that bank examiners are looking closely at flood insurance policies to verify that the flood zone in the policy matches the flood zone indicated on the bank’s standard flood hazard determination (SFHD) form. Does the flood zone need to be the same on these two documents and what happens if they differ?

A:  This issue has become a point of examiner emphasis and generally the flood insurance policy and SFHD should indicate the same flood zone designation for the subject property. The bank is responsible for obtaining flood insurance that meets the requirements of its initial SFHD. The risk is that a bank may be underinsured and may be ineligible for FEMA disaster funds when the flood zone designation differs between the flood policy and the SFHD. However, the policy and SFHD may differ for legitimate reasons, for example the property has been grandfathered at a zone with a lesser flood zone risk. In any case, industry best practices dictate that the bank review flood policies in detail and proactively address any coverage issues that may arise.