compliance challenges in a changing economic environment · fair credit reporting act • if...

Consumer ComplianceDivision of Banking Supervision and Regulation

Compliance Challenges in a Changing Economic Environment

“Call the Fed” Audio ConferenceDecember 10, 2008

The following presentation contains the views and opinions of the speakers and his or her interpretation of regulatory guidance. It does not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.


Home Equity Lines of Credit: Compliance Implications Relating to Freezing or

Suspending HELOCS

Jason LewConsumer Compliance Examiner

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Contents• Modifying Home Equity Plans• Compliance Considerations – Where is the Risk?

– Regulation Z (Truth in Lending Act)– Regulation B (Equal Credit Opportunity Act)– Fair Lending – Fair Credit Reporting Act

• Best Practices• Resources

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Modifying Home Equity Plans• Data through September 2008 shows U.S. home prices continue

to decline across the U.S. (S&P Release dated 11/25/08)

• Many institutions have begun addressing the risk of declining home prices by reducing or suspending home equity lines of credit

• Although prudent to address the credit risk associated with these plans, it’s important to be aware of the compliance rules that apply

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Regulation Z – Truth in Lending Act• When can institutions reduce or suspend home equity lines of credit?

• Regulation Z contains limitations with regard to changes in terms

• Only under certain circumstances can lenders reduce or suspend home equity plans, including when:

– The value of the dwelling securing plan declines significantly below dwelling’s appraised value for purposes of plan

– The creditor reasonably believes consumer will be unable to fulfill repayment obligations under plan because of a material change in consumer’s financial circumstances

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Regulation Z – Truth in Lending Act (cont.)

• Significant decline not defined; may “vary according to individual circumstances”– Commentary provides example where excess equity at time of origination

declines by more than 50 percent– When different criteria are used, information to support rational should be

documented and retained– Appraisals are not required; however, must be able to substantiate

methodology used to determine new value

• Material change in financial circumstances – two conditions must be met for exception to apply– “Material change” in consumer’s financial circumstances– As a result of change, creditor must have reasonable belief consumer will be

unable to fulfill payment obligations of plan

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Regulation Z – Truth in Lending Act (cont.)

• Temporary nature of suspension or reduction Creditors only permitted to reduce or suspend lines while one of the designated circumstances exist

• Reinstatement of credit privileges Once conditions that caused suspension or reduction cease to exist, credit privileges must be reinstated

• Monitoring Bank should monitor condition to ensure it meets responsibility for identifying when condition ceases to exist

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Regulation B – Equal Credit Opportunity Act

• Adverse Action – Is the suspension or reduction considered adverse action?– Adverse Action includes an unfavorable change in terms that does not affect

all or substantially all of a class of creditor’s accounts– As not all customers may experience reduction or suspension, action would be

construed as adverse action

• Notification Requirements– Must be in writing and provided to each affected consumer– Must be provided within 3 business days and contain specific reasons– Should explain if borrower is required to request reinstatement of credit

privileges – If borrower reinstatement not stipulated, institution responsible for monitoring

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Fair Lending Considerations

• Policy for reductions and suspensions should be applied consistently and without regard to any prohibited basis to avoid the risk of discrimination or unfair practices

• Property values and financial circumstances should be calculated/determined using methods that have a sound factual basis and should be applied consistently

• Creditor should analyze impact of with regard to affected borrowers and neighborhoods, considering potential for disparate treatment or impact

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Fair Credit Reporting Act

• If reduction or suspension based on credit bureau information and meets definition of adverse action under Regulation B, FCRA notice must be included in adverse action notice

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Best Practices

• Become familiar with the rules

• Be sure that staff (i.e., lenders and credit risk managers) are aware of potential compliance implications of institution’s decisions

• Have controls in place to ensure regulatory requirements are being met

• Support decisions with data

• Conduct fair lending assessment of proposed methodology for freezing or reducing home equity plans. Ensure methodology and related policies will be applied consistently and not result in unexplained or unintended outcomes

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Resources

• Federal Reserve Bank of San Francisco Publications Section with Link to Consumer Compliance Outlook– http://www.frbsf.org/publications/banking/index.html

• FDIC Financial Institution Letter Regarding HELOCS (FIL-58-2008)– http://www.fdic.gov/news/news/financial/2008/fil08058.html

• OTS Issuance of HELOC Account Management Guidance– http://files.ots.treas.gov/481121.pdf

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http://www.frbsf.org/publications/banking/index.html

http://www.fdic.gov/news/news/financial/2008/fil08058.html

http://files.ots.treas.gov/481121.pdf


CRA in a Declining Economic Environment

Kelly K. WalshSenior Examiner

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ContentsFacing the challenges of the current economic environment while managing CRA

• What’s the Same?• What’s Different?• Tips for Managing CRA in this Environment• Best Practices• Resources

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What’s the Same?• Regulation and examination procedures have not changed

• Need to understand and manage CRA performance on an ongoing basis

• A performance context that details opportunities and constraints in local community

• Focus on lending test

• Need for qualified community development activities

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What’s Different?

• Local economy• Housing market• Credit standards • Loan demand • Capacity to lend • Needs in the community• Community development opportunities

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Develop a Stronger Performance Context• How has the environment changed for you institution?

• What does bank management know about the local market and economy, relative to community development opportunities?

• Has loan demand declined or changed?

• Has the creditworthiness of the bank’s customers changed?

• Is the bank facing any liquidity or other constraints?

• Has your business strategy or product offering changed as a result of current economic conditions?

• Are there any other relevant factors that may impact your capacity or ability?

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Analyze Direct Lending• Review lending volumes

• Analyze geographic distribution and proportion of loans to borrowers of different income levels and businesses of different sizes

• Are fewer loans made to small businesses or in low- and moderate- income areas? Why?

• Does your performance context support these lending levels and patterns?

• Are there other programs that support direct lending?– FHA Hope 4 Homeowners program by making FHA insured loans to at

risk borrowers. http://portal.hud.gov/portal/page?_pageid=73,7601299&_dad=portal&_schema=PORTAL

– Federal loan guarantee programs such as FHA and SBA

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http://portal.hud.gov/portal/page?_pageid=73,7601299&_dad=portal&_schema=PORTAL


Understand Community Development Activities

• Where are they located?– Within assessment area– In a broader statewide or regional area that includes the bank’s assessment

area

• Do they have a Community Development purpose?– Affordable housing for LMI individuals; – Community services targeted to LMI individuals; – Activities that promote economic development by financing businesses or

farms; or – Activities that revitalize or stabilize LMI geographies, designated disaster areas

or distressed or underserved non-metropolitan middle-income geographies designated by the Board of Governors, FDIC and OCC.

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Examples of Qualified CD Loan Activities

• Contact developers who are accessing funding through HUD's Neighborhood Stabilization Program.

• These developers will receive funding for acquisition and development of foreclosures to turn those properties around. The developers may also need bank financing for other operating costs until the projects can be sold.

• http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/

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http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/


Examples of Qualified CD Investment Activities

• Providing funding for housing counseling – Consumer Credit Counseling Services– HUD certified counseling agencies– The state of CA is funding Rural Community Assistance Corp and Calif.

Reinvestment Coalition with housing counseling grants--banks could support these organizations to further leverage the state's support

• Provide donations to help capitalize loan-rescue funds for low- or moderate-income borrowers mired in predatory loans. – A number of predatory loan rescue funds have been established to help keep

homeowners in their properties and avoid the trauma of foreclosure. Supporting a loan-rescue fund that is part of a municipal plan to revitalize and stabilize a low- or moderate-income geography would also be viewed positively under CRA.

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Examples of Qualified CD Service Activities

• Provide housing counseling directly– Training programs could include:

• readiness to buy a home• budgeting and money management• basic banking• understanding credit• the home buying process (working with a realtor, house shopping)• the mortgage (processing, underwriting, closing)• post purchase counseling & foreclosure protection

• Use HUD's HOPE NOW program to work with borrowers who need loan modifications to prevent foreclosure– http://www.hopenow.com/

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http://www.hopenow.com/


Best Practices• Make a determination about which activities have a community development purpose

– Don’t provide examiners an extensive list of “possible” CD loans, services and investments to review

• Provide supporting information for donations (not just a copy of the check)– What information did the bank rely on to determine that the donation was a qualified community

development investment? Does the non-profit serve predominantly LMI people or small businesses?

• Track the number of hours of community development service performed – Examiners use this to measure performance

• Track the number of units supported with Community Development investments and loans– “This loan funded the construction of 54 units; 40 are affordable to those earning less than 80% of

AMI”– “This LIHTC funded 260 units of affordable housing”

• Track which assessment area received benefit– This will also help the bank self identify weaknesses

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Resources

• Federal Reserve Bank of San Francisco website– http://www.frbsf.org/community/

• Bankers Quick reference Guide to CRA– http://www.dallasfed.org/ca/pubs/quickref.pdf

• Statement on Working with Mortgage Borrowers– http://www.federalreserve.gov/boarddocs/srletters/2007/SR0706a1.pdf

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http://www.frbsf.org/community/

http://www.dallasfed.org/ca/pubs/quickref.pdf

http://www.federalreserve.gov/boarddocs/srletters/2007/SR0706a1.pdf


New Consumer Protection Rules for Mortgages

Laura L. BoughnerSenior Examiner

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Contents• Regulation Z Amendments

– Defines “higher-priced” mortgage loans– Adds protections from unfair, abusive or deceptive lending practices– Requires certain early disclosures– New advertising standards

• HMDA Amendments• Best Practices• Resources

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Regulation Z Amendments• Address concerns in subprime mortgage lending

– Protect consumers from unfair or deceptive acts and practices in mortgage lending

• Effective date of October 1, 2009– Except for escrows (April 1, 2010 for site-built homes & October 1, 2010 for

manufactured homes)

• Defines new “Higher-Priced Mortgage Loan”– 150 bps over average prime rate offer rate; 350 bps for subordinate lien loans– Change from proposal which relied on Treasuries– Expected to cover all subprime loans and some Alt-A– Few exceptions (e.g., HELOCs, temporary financing)– Basis for new restrictions

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Higher-Priced Mortgage Loans (cont.)

• Creates Ability to Repay and Verification of Income Standards

• Prohibits making loan without regard to borrower’s ability to repay from income and assets other than home value

– Does not prescribe underwriting standards– Required for all loans; “pattern or practice” standard removed

• Required to verify income and assets relied upon to determine repayment ability– Third-party documentation– Must consider and verify current obligations– May rely on credit bureau report

• Presumption of Compliance– Verify income and assets relied on and verify current obligations– Use highest scheduled payment for first seven years– Consider debt-to-income ratio or residual income

• Excluded: negative amortization & certain balloon loans

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Higher-Priced Mortgage Loans (cont.)

• Escrow Accounts Required– Mandated on first-lien loans– Creditor decides whether to permit opt-out

• Prohibited in first 12 months

• Prepayment Penalties Restricted– Not permitted on loans subject to payment changes during the first 4 years– Restricted for all other loans (fixed rate)

• Cannot exceed first two years of loan term• Cannot be imposed by same creditor or affiliate

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Protections for all Mortgages• Restrictions

– Prohibits lender or broker from coercing appraiser– Prohibits servicers from imposing certain unwarranted charges– Requires prompt pay-off statement

• Early Disclosures– Disclosure of loan terms within 3 days of application, or before a fee is charged

• Advertisements– Accurate and complete– Prohibits certain deceptive practices

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HMDA Amendments• Amended to complement the final rule under Regulation Z

– Agreeing the definition of higher-priced mortgage loans

• Lender to report spread between APR and average prime offer rate if spread meets or exceeds

– 150 bps for a first-lien– 350 bps for subordinate liens

• Average prime offer rate derived by Fed– Board to publish tables & methodology on FFIEC website by January 1, 2009

• Change effective for – Applications taken on or after October 1, 2009– All loans consummated on or after January 1, 2010, regardless of application dates

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Best Practices• Determine applicability and need for change

• Review policies and procedures for needed changes for the new rules

• Train staff

• Sample loans to ensure accuracy of systems

• Ensure that you have adequate monitoring systems in place to identify errors

• Keep senior management and the board of directors informed with periodic MIS

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Resources

• FFIEC website– www.ffiec.gov

• PMMS data– www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp

• Federal Reserve Final Rule Publications– http://www.federalreserve.gov/newsevents/press/bcreg/2008bcreg.htm

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http://www.ffiec.gov/

http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp

http://www.federalreserve.gov/newsevents/press/bcreg/2008bcreg.htm


Questions?

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Presenter Contact Information• Jason Lew

– [email protected]– (415) 974-2882

• Kelly Walsh– [email protected]– (415) 974-3149

• Laura Boughner– [email protected]– (415) 974-3119

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