The New TRID Rules Cheat Sheet (Part 2)

Let’s continue with the TRID rules cheat sheet started last week. A lot of changes for construction loans, and a there’s a new tolerance rule to beware of.

Construction Loans

Construction loan rules got a lot of changes, and probably could have served as a blog on its own. But let’s break down the changes into its simplest form:

  1. Disclosing construction-permanent loans as 2 separate transactions: Clarifies how the 3 business rules work when disclosing construction-perm loans as two transactions. If receiving two separate applications, one for the construction phase and one for the permanent phase, then the 3 business day rule for delivering the LE applies following receipt of each separate application. If receiving one application for both phases (but still disclosing as two separate transactions) then both the construction LE and permanent LE must be delivered within 3 days of receiving the joint application.
  2. The new rules clarify how creditors must allocate construction versus permanent financing charges, fees, and points.
  3. The new rules clarify how construction inspection and handling charges are disclosed, as well as their applicability to the good faith standard.
  4. Clarifies how transactions without a seller should disclose the appraised value or estimated value of property on both the LE and CD, including when to use estimated values of improvements.
  5. Provides clarification on how the term of a construction-perm loan should be disclosed if the loan is being disclosed as part of a single transaction.
  6. Clarifies how to complete the Product disclosure, disclosure of interest-only features, and balloon payments disclosure for construction-only and construction-perm loans.
  7. Clarifies when the creditor must use the ARM disclosure for construction-permanent loans when the creditor may increase the consumer’s interest rate after converting to the permanent phase.
  8. Clarifies certain interest rate disclosures for construction-only and construction-perm loans.
  9. Clarifies disclosure of whether amounts can increase after closing for construction loans when the amounts and timing of advances are unknown.
  10. Clarifies aspects of the Projected Payments table.
  11. Clarifies disclosure of mortgage insurance and escrow payments in the Project Payments table when only the permanent phase requires payment, and the loan is disclosed as a single transaction.
  12. Clarifies how various construction costs should be disclosed on the LE and CD, and also address when creditors place a portion of the proceeds into a reserve account at closing.

Disclosing Simultaneous Subordinate Liens

The new rules modify and address the disclosures for bridge loans, and the disclosures provided to the sellers on the seller CD.

Tolerances for Total of Payments

The 2017 rules are adding a new tolerance to watch out for. Under the new rules, the “Total of Payments” disclosure on the CD will have the same tolerances as the “Finance Charge” disclosure; which is it’s considered accurate if the amount disclosed is 1) understated by $100 or less, or 2) is overstated.

Once again, just a quick-and-easy guide to give you an idea at a glance what the upcoming changes are about. More to come next week!

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

The New TRID Rules Cheat Sheet (Part 1)

The new TRID rules are out, though they don’t fully take effect until October 1, 2018. Starting in about 60 days, compliance with them are optional. Even though they are optional, it’s always smart to be ahead of the curve and prepared for when they are mandatory.

Still, not all the rules will all apply to everyone. So here’s a cheat sheet, a quick reference for what rules are changing. Use it to evaluate what will apply to your institution so you can start planning and prioritizing what you need to do to be compliant by October 2018.

Post-Consummation Notices

Currently, the TRID rules requires a creditor or servicer to provide certain disclosures after the loan is closed. The new rule applies to 2 disclosures: the notice when an escrow account is closed, and the partial payment policy of a new owner of loan. Those notices aren’t changing.

Under the old rules though, the notices only applied to mortgage applications received on or after October 3, 2015. The new rules say the notice requirements will apply now regardless of when the application was received.

Loan Secured by a Cooperative

Currently, whether certain disclosures need to be provided on loans secured by cooperatives depends on how state property law classifies the cooperative (that is, whether it’s treated as real property or personal property). The new rule takes away the state law requirement, and requires the disclosures to be made on all loans secured by cooperatives (closed-end consumer loans, of course).

Loans to Trusts

Commentary is being added to clarify that loans to certain trusts established for tax or estate planning purposes is treated as though they are extended to natural persons.

Exemptions for Housing Assistance Loans

TRID rules provide disclosure exemptions to certain housing assistance loans (the details are outside this post; it’s supposed to be a cheat sheet, remember?) The new rules say:

  1. Transfer taxes can now be payable by the consumer, and
  2. Recording feeds and transfer taxes are excluded from the 1-percent cap on total costs payable by the consumer.

It also changes the disclosures required.

I want this to be a quick reference, so I’m going to keep it relatively short. The next part of the new rule will get into some deeper and more pertinent subjects, such as significant construction loan rules, tolerances, and good faith and revised disclosures. I don’t want them to get buried here, so I’m going to leave this as it is.

Remember though, this is just scratching the surface. We’ll be learning a lot more about the new rules in the next few months.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

An Overview of Medical Marijuana Regulation

(Sorry for the long post, I kept it as brief as I could while hitting the important points.)

Marijuana has had a roller coaster of a year. In November, four states (Massachusetts, California, Maine, and Nevada) all passed measures to legalize its recreational use. Twenty-six states have legalized or permitted its use in one form or another. But then, on the other hand, the current Attorney General is asking Congress for permission to broaden the Department of Justice’s ability to go after medical marijuana businesses.

Here’s the thing: there is a lot of money out there in the marijuana industry (it’s already estimated at about $7.1 billion), and handling money is kind of what financial institutions do. There are many valid and competing public policy and risk concerns with handling marijuana money though. As a financial institution, you need to be aware and informed of the landscape and debate in order to make a well-reasoned decision on how to deal with this corkscrewing business.

So here’s a brief overview on the issues of the day to get a sense of how we got here and where we are going. Note this only applies to medical marijuana; it does not apply to recreational use!

The Cole Memo

In October 2009, Deputy Attorney General David Ogden issued a memo to the attorneys in its agency directing them on the Department of Justice’s policies and approaches to enforcing federal marijuana legislation in light of state medical marijuana laws. In June 2011, Deputy Attorney General James Cole issued another memo addressing widespread questions about the Ogden Memo and effectively updating it. Then, in August 2013, Deputy AG Cole issued yet another memo, called “the Cole Memo” even though the prior memo was also authored by Cole, which updated the prior two memos in light of state ballot initiatives to legalize marijuana for recreational use.

The DOJ had established eight “enforcement priorities” through the last two memos, and the Cole Memo reiterates them. The eight priorities that the federal government finds “particularly important” are:

  1. Preventing distribution of marijuana to minors;
  2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  8. Preventing marijuana possession or use on federal property.

The Cole Memo was a significant shift in how the DOJ used its resources in enforcing those “enforcement priorities.” The old memos could be categorized as saying the DOJ was going to try to get the most “bang for its buck” and thus it took into account size and scale of an operation, regardless of its compliance; but the new memos focused instead on ensuring that proper regulatory schemes are enacted and followed in those states that decriminalized.

Think of it as kind of like the regulators shifting from prioritizing individual infractions, to instead prioritizing that you have a proper CMS in place in order to minimize the likelihood of infractions.

FinCEN Guidance

Shortly after the Cole Memo, the Financial Crimes Enforcement Network (FinCEN) issued its own guidance for financial institutions on how to meet their BSA expectations. The FinCEN guidance draws heavily from the Cole Memo and the Cole Memo’s enforcement priorities. It emphasizes too that “the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity” and that the institution is therefore still required to file a SAR for marijuana related transactions. However, to prevent them from getting overwhelmed with an avalanche of SARs, FinCEN created three different levels of SARs financial institutions must file when it relates to marijuana:

  1. Marijuana Limited SAR Filings: These filings are for marijuana-related transactions, but the financial institution does not have reason to believe implicate any of the Cole Memo priorities;
  2. Marijuana Priority SAR Filings: These filings are for marijuana-related transactions in which the financial institution has a reason to believe may implicate one or more of the Cole Memo priorities;
  3. Marijuana Termination SAR Filings: These are for marijuana-related transactions in which the financial institution deems it necessary to terminate the relationship with the business.

There is much more in the FinCEN Guidance memo, and it is still “effective” as of this post (6/14/2017). Note that doesn’t mean it’s “controlling” or has any real weight in court though. But that brings us to…

United States v. McIntosh

In August 2016, the Ninth Circuit Court of Appeals issued its decision in United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016). In this case, the Department of Justice brought criminal charges against multiple defendants on federal marijuana charges. The defendants in the case were all involved in their state’s medical marijuana businesses, which was legal under their state law.

The defendant’s made some unusual motions under the circumstances to prevent the Justice Department from prosecuting, and it worked, for the most part. The defense argued that a rider on a federal appropriations bill funding the government prevented the Department of Justice from using any federal funds to “prevent [the] States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” The rider was from 2014 and was set to expire in a year, but the rider has since been renewed by Congress in each subsequent appropriations bill since it was included. The defendant’s argued that by spending federal dollars to prosecute the defendant’s for federal Controlled Substances Act violations, the DOJ was violating the rider and unlawfully using funds Congress didn’t give them.

The court agreed, with some reservations, and ruled that the rider only prevented the DOJ from prosecuting medical marijuana businesses who strictly complied with State law. If the business did not strictly comply with the State’s regulations and laws, then they are fair game for the DOJ.

From the Cole Memo to FinCEN guidance, the consistent message has appeared to be “acceptable, with strict compliance.” The McIntosh ruling changed that message though from a policy choice to a mandate imposed on the DOJ by the courts. Thanks to the rider in the funding bill, as long as there is strict compliance with state law concerning medical marijuana, the courts appear to be saying the DOJ has no authority to use federal funds to prosecute violations of federal law (for that limited purpose).

Sessions’s Letter to Congress

Finally, on May 1, 2017, Attorney General Sessions submitted a two-page letter to Congress requesting more authority to prosecute medical marijuana businesses. You may have heard the story framed as “Jeff Sessions Wants to Go After Medical Marijuana” or “Jeff Sessions personally asked Congress to let him prosecute medical marijuana” or that Sessions wants to “crackdown” on medical marijuana.

A more accurate statement is that Sessions was writing because he wants the rider cited in McIntosh gone. His letter specifically mentions the case, and urges Congress to remove the rider from the next appropriations bill. This would give the DOJ much greater freedom to set its own policy and agenda, and to pursue cases without fear of “losing” funding. (They won’t really lose funding, they would just be able to be enjoined from continuing to prosecute.)

Conclusion

So that is the brief history of how we got to where we are regarding the federal government’s position on the medical marijuana business. (Note again that none of this applies to recreational use.) The federal policy position appears to be in a state of flux at the moment with a lot of uncertainty, which is never a good time to start making decisions. But the point is there is a huge market developing and it is going to need to be served at some point, and the best way to stay ahead is to stay informed.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Disclosing Construction vs. Refinance Loans

This is a question I received recently, and I think it’s a situation that might not come up often enough to remember all the rules about it. So it’s always helpful to review.

Here’s the situation: A borrower comes to you and is seeking a loan to make major additions to their home. They have an existing home, so the original structure is there, but the new additions will be more than double the size of the home, and increase the value more than two times. You consider this to be a construction loan given the size of the project. It’s a 30 year loan with a one year interest only construction period.

Because there is an existing structure though, there is also an existing lien already on the property. Therefore, part of the loan, in addition to financing the construction of the addition to the home, will be used to pay-off and replace the existing loan.

How should you characterize this type of loan for TRID purposes? How is it disclosed?

First, it’s not a purchase transaction because the borrower has already purchased the existing structure on the property, so that’s already off the table. That’s a simple answer. So it comes down to construction, refinance, or home equity then.

Home equity is the catch-all for loans secured by the property but is not for the purpose of purchasing the property, constructing it, or refinancing an existing lien. If it doesn’t fit into one of those categories, it’s probably a home equity loan. But it’s preferred; it’s a fallback. So, unsurprisingly, it’s down to a construction or refinance loan.

It’s tempting to think this loan is a construction loan for TRID purposes. The work that will be done is extensive and worth more than the original property, the loan is more than twice the amount of the original lien, and the new loan is even structured with a 1 year interest-only payment period. For all intents and purposes, it looks like a construction loan, and maybe even internally you consider it to be a construction loan.

Be careful though. The definition of a construction loan is found in 12 C.F.R. § 1026.37(a)(9)(iii), and a significant part of the definition is that a construction loan is, for TRID purposes, only when the credit will be “used to finance the initial construction of a dwelling.” In our situation here then, the dwelling is already there; it’s just being massively updated. Therefore, because the loan is for additions to an already existing structure, it is not for financing the initial construction of a dwelling.

The loan is actually a refinancing then. There is an existing lien which will be “satisfied and replaced” by the permanent financing of the new loan, and this is an essential element for identifying refinancings.

This falls outside the normal situation for refinancings, so I understand any hesitation or uneasiness with calling the transaction a refinancing. But the definition of refinancing is broad, and only has a few elements to it. A refinancing must be 1) a new extension of credit, which will be used to 2) satisfy and replace an existing obligation, and 3) is secured by the subject property. That’s pretty much it. So even though this transaction might not be the typical refinancing transaction, it still falls under TRID’s refinancing definition.

Finally, don’t forget the priority order for TILA. If a transaction has multiple purposes, the preferred order is 1) Purchase, 2) Refinance, 3) Construction, and 4) Home Equity. So even if this transaction is both a construction and refinance transaction, refinance is preferred over construction, and therefore should be reported first.

This may be just a long-winded way of looking at the construction vs. refinancing rules, which you may already know quite well. But it doesn’t hurt to revisit the rules from time to time, especially when you have unconventional transactions come across your desk.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

 

Answering a Few Questions on the New HMDA Rules

A few weeks ago I published the slides to a presentation I did on the new HMDA rules. One slide, slide 33, had questions with no answers. They were intended to spark discussion on the rules and illustrate some differences between the old rules and the new ones, in real time, so I didn’t put in any answers on the slides. So I’ve decided to answer them here. Some questions are meant to be a bit vague though, and the answer dependent on information that isn’t in the question, to help illustrate what information is important and what isn’t so important.

#1. A lawyer purchases a 2-family dwelling intending to convert it into his law office.

Not reportable, for two reasons. First, remember the new focus is on what’s securing the loan. Covered loans are only loans secured by a dwelling, but once it’s converted into a law office, the structure securing the loan is no longer a dwelling. Second, business purpose loans are exempt unless they are also home purchase, home improvement, or refinancings. Since the purpose of the loan is not to purchase a home, it’s not reportable. This would not have been reportable under the old rules either, but mostly for the second reason.

#2. A borrower takes out a home equity loan on his primary residence to put a down-payment on a vacation home.

Reportable, as a home purchase. This would have been reportable under the old rules also, but again the reason is different. Under the old rules, it would have been a home purchase because the loan was being used to purchase another dwelling. Under the new rules, it’s a reportable loan because it’s secured by the first dwelling (the purpose is not as relevant). This is again to highlight how the determination of whether a loan is reportable depends on the security interest more than the purpose.

#3: A builder gets a construction loan to purchase a single-family dwelling, demolish it, and construct a new single-family dwelling to be sold upon completion.

This one was meant to be a bit ambiguous. The “to be sold upon completion” part suggests it could be temporary financing and not intended to be permanent, and therefore not reportable. It also depends, under the new HMDA rules, whether or not it’s secured by a dwelling. BUT if the loan is secured by the newly constructed dwelling and intended to be permanent financing, it is reportable. If the loan was a short-term construction only loan that would be replaced by a buyer’s permanent loan after construction, then this loan is not reportable but the buyer’s loan would be. Not really enough information here to be certain either way, but the important thing is to know that the answer depends on how the loan is secured and whether it is permanent or temporary financing.

#4. Lender refinances a loan secured by multifamily apartment complex to finance the construction of a new apartment building.

Reportable, home purchase. Similar to #2, but this shows how the business exemption works. This is a business purpose loan on investment property, so it’s normally not reportable. But there is an exception to the exemption which makes business purpose loans that are secured by dwellings AND used as a home purchase, home improvement, or refinancing reportable. So here you have a business purpose loan that is 1) secured by a multifamily apartment dwelling, and 2) being used to purchase a dwelling, making it a reportable commercial loan. It would also be reported as a home purchase and not a refinance.

#5: A builder gets a construction loan to purchase vacant land and finance the construction of a single-family dwelling to be sold immediately after completion.

Similar to #3, this one doesn’t have enough information. If the loan is secured by the vacant land, then it’s not reportable under the exception to reporting loans secured by unimproved land. If it’s a construction-only loan intended to be replaced by permanent financing, then the construction-only loan is temporary and not reportable. If it’s intended to be permanent financing and secured by the new newly constructed dwelling, then it’s reportable.

#6. A borrower gets a short term loan to purchase a dwelling, improve it, and immediately sell it.

Not reportable. Short term loans, not intended to be permanent (even if it’s extended later), are temporary financing and not reportable.

So there you go. Often times with these things the rules aren’t that complicated, it’s the underlying facts that make things complicated. Hopefully that helps, but if you still have any questions, please don’t hesitate to reach out! I’m always happy to chat with a fellow HMDA fan.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Open-End Lines of Credit Under the New HMDA Rules

I wrote previously about the new HMDA rules, and how they are changing our vocabulary a bit. The new vocabulary includes new, broader definition of what’s included in HMDA, and that’s how it’s expanding the scope of HMDA. Some loans that were previously not covered by HMDA now are covered, such as HELOCs.

Here’s a quick refresher/reference of what’s covered under the old and new rules:

  • Old HMDA: Home purchase loans, home improvement loans, and refinancings.
  • New HMDA: “Covered loans,” meaning closed-end mortgage loans and open-end lines of credit, not otherwise exempt.

Let’s look at the open-end lines of credit definition because it is a bit clunky and awkward. “Open-end lines of credit” have their own special meaning under the new HMDA rules, and the rules refer to and semi-incorporate the definition of “open-end credit” in Reg. Z (TILA).

Under HMDA, an open-end line of credit is an extension of credit that:

  1. Is secured by a lien on a dwelling, and
  2. Is an open-end credit plan as defined under Reg. Z, but without regard to whether the credit is
    1. consumer credit,
    2. extended by a creditor, or
    3. extended to a consumer.

(12 CFR § 1003.2(o))

Just looking at that definition requires some mental gymnastics, not to mention simultaneous references to two different regulations, just to determine whether or not a loan is HMDA reportable or not. So I’m going to try to combine the rules for a slightly simpler, easier to reference rule. But first, what’s an “open-end credit” plan under Reg. Z?

Under Reg. Z, “open-end credit” means consumer credit extended by a creditor under a plan which:

  1. The creditor reasonably contemplates repeated transactions;
  2. The creditor may impose finance charges on an outstanding balance; and
  3. The credit extended to the consumer during the term of the plan (up to a limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

(12 CFR § 1026.2(a)(20).

Reg. Z and HMDA have their own distinct definitions for terms, hence the part about disregarding the Reg. Z definitions of “consumer credit,” “creditor,” and “consumer.” So HMDA, in the final part of its definition, is trying to a Reg. Z definition without all the other Reg. Z terminology as well.

Ugh…

But you can essentially substitute “consumer credit” for just “credit,” and “creditor” for “financial institution,” and “consumer” with “applicant” and plug it back into the HMDA definition for open-end line of credit.

So to put it together into one HMDA rule, for HMDA an open-end line of credit is an extension of credit that:

  1. Is secured by a lien on a dwelling, and
  2. Is credit extended by a financial institution which,
    1. The institution reasonably contemplates repeated transactions;
    2. The institution may impose finance charges on an outstanding balance; and
    3. The credit extended to the applicant during the term of the plan (up to a limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

Some final notes: I didn’t go into the first part of the HMDA definition because it’s fairly self-explanatory, but it’s very important and distinguishes between a HMDA reportable line of credit and a non-reportable line. This goes to the new dwelling-secured standard of HMDA.

Also the last requirement for the credit being generally available during the term of the plan means the plan must have a reusable line, even if it has a termination date. (See 12 CFR § 1026.2(a)(20)—Official Interpretation 5). This means the total credit lent under the plan is theoretically unlimited for the term of the plan as long as the borrower continues to repay the credit used.

Finally, for real estate, open-end real estate mortgages must be evaluated independently under the definition regardless of what it’s called in the industry. “The fact that a particular plan is called an open-end real estate mortgage, for example, does not, by itself, mean that it is open-end credit under the regulation.” (See 12 CFR § 1026.2(a)(20)—Official Interpretation 7.) In other words, don’t be fooled by a name; just because something may be called an “open-end mortgage” doesn’t meet it necessarily meets the regulatory definition for open-end credit.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Covered Loans Under HMDA

The old HMDA rules required financial institutions to report on applications, originations, and purchases of home purchase loans, home improvement loans, and refinancings. The new rules, however, replaces the “home purchase,” “home improvement,” and “refinancing” language with “covered loans.” Whether a transaction is a “covered loan” has become much more complicated though.

A “covered loan” is

  1. a closed-end mortgage loan, or
  2. an open-end line of credit, and
  3. not an excluded transaction.

Both closed-end mortgage loans and open-end lines of credit need to be secured by a lien on dwelling, not just any old open-end line of credit. The new HMDA rules give “open-end line of credit” its own unique definition, so don’t be confused. I’m also going to refer to both types of credit as just “a loan” in the following list of excluded transactions:

Excluded Transactions (12 CFR § 1003.3(c)(1)-(12))

  1. A loan purchased by a financial institution acting in a fiduciary capacity (such as as a trustee)
  2. A loan secured by a lien on unimproved land;
  3. Temporary financing
  4. Purchase of an interest in a pool of loans;
  5. The purchase of servicing rights;
  6. The purchase of loans as part of a merger or acquisition (or as part of the purchase of assets and liabilities of a branch office)
  7. A loan or application for a loan for under $500;
  8. The purchase of a partial interest in a loan;
  9. A loan used primarily for agricultural purposes;
  10. A loan used primarily for business purposes
    1. UNLESS it is a home improvement loan, home purchase loan, or a refinancing, as determined by the “primary purpose” test of Regulation Z (TILA).
  11. A closed-end mortgage loan originated by a financial institution that originated fewer than 25 closed-end mortgage loans in each of the two preceding calendar years; OR
  12. An open-end line of credit originated by a financial institution that originated fewer than 100 open-end lines of credit in in each of the two preceding calendar years.

A Closer Look at #11 and #12

Numbers 11 and 12 are important for when you determine whether you need to report certain loans. They come up again when you’re looking at whether you’re a “financial institution” that needs to report under HMDA. (Section 1003.2(g)). One part of the test of being a reporting financial institution for HMDA is you need to have originated either the 25 closed-end or 100 open-end loans in the previous two calendar years. But, once you’ve figured out whether you’re a financial institution that needs to report, when looking at which loans you report, you only report the type loans above the “25 or 100 for 2 years” test.

For example, if you originate 200 and 250 open-end lines of credit for the last 2 years, but only originated 20 and 15 closed-end mortgages, then you would only report the information for the open-end lines and not the closed-end.

And if you’re asking yourself “why?” or trying to figure out the logic of it all, it’s because of #11 and 12 above. The closed-end mortgages in that example are a excluded transactions under section 1003.3(c)(12), and therefore they are not a “covered loan.”

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Identifying Your Loans Under the New HMDA Rules

The Universal Loan Identifier

You don’t nearly triple the amount of reportable data by keeping things simple. The new HMDA rules expand on nearly everything that needs to be reported on the LAR, including how loans are identified for reporting purposes. The current rules require an “identifying number for the loan or loan application” and each institution “must ensure that each identifying number is unique within the institution.” (12 CFR 1003.4(a)(1) and Comment 4). The new rules though require a “universal loan identifier (ULI),” which has its own specific requirements now.

There are now 3 parts to a ULI:

  1. A Legal Entity Identifier (LEI);
  2. A 23 character identifier that’s “unique within the financial institution;” and
  3. A 2 character check digit.

The first part is likely to be the most confusing and newest, so let’s break it down.

The Legal Entity Identifier

History and Regulation

The LEI is a unique identifier for financial institutions internationally, like an international social security number for banks. It was first introduced around the beginning of 2013 as part of an international effort with the G20 nations as a reaction to the financial crisis. It established the LEI Regulatory Oversight Committee (ROC), which helped establish the Global LEI Foundation (GLEIF), whose goal was to help oversee the issuing of LEIs. The GLEIF accredit Local Operating Units (LOUs), which are the organizations that are authorized to issue LEIs. But before GLEIF was established, the ROC was endorsing organizations who were also issuing LEIs, and these are called “LEI ROC-Endorsed pre-LOU.” These organizations can be international or national; in fact, at the moment there does not appear to be any organization issuing LEIs that is based in the United States. They also have multiple purposes and functions; for example, the London Stock Exchange is a pre-LOU LEI issuer.

That history is to put into context the following regulatory language: Section 1003.4(a)(1)(i)(A)(1) and (2) requires the LEI be issued by “ a utility endorsed by the LEI Regulatory Oversight Committee” or “a utility endorsed or otherwise governed by the Global LEI Foundation (GLEIF) (or any successor of the GLEIF) after the GLEIF assumes operational governance of the global LEI system.” Or, in other words, a “LEI ROC-Endorsed pre-LOU” or a LOU.

There are about 30 total pre-LOUs and LOUs, and the list can be found here: https://www.gleif.org/en/about-lei/how-to-get-an-lei-find-lei-issuing-organizations. As of October 2015, if an institution wishes to issue LEIs, they must be a GLEIF-accredited LOU.

Getting a LEI

Financial institutions need to register to receive an LEI. There is a lot of discretion on which pre-LOU or LOU to register with, though when selecting where to register to receive an LEI, take into account such things as language, currency, and time zones. Each LEI charges its own fees, usually a larger initial fee (about $200 at the moment) and annual re-registration fees (about $100).

After selecting an organization and applying, the LOU needs to collect a “minimum set of reference data,” such as the official name of the entity, headquarters address, and the address of legal formation to name a few. The LOU is required to check each entry against reliable sources such as official public records to verify the provided information.

The wait time can vary depending on the LOU.

I reached out to the GLEIF to ask about LEI issuers in the US, and the three biggest LEI issuers in the US are:

  1. Business Entity Data B.V. (https://www.gmeiutility.org/) (Netherlands)
  2. London Stock Exchange (http://www.lseg.com/LEI) (U.K.)
  3. WM Datenservice (https://www.wm-leiportal.org/) (Germany)

The LEIs and associated data submitted to the LOU about the institution are public record, and made available to regulations and the public continuously and for free.

Portability of LEIs

The good news is that LEIs can be transferred or “ported” from one LOU to another. Like keeping your cell phone number when switching carriers, once an organization is given an LEI, it will not change depending on which LOU is maintaining it. This means you won’t be stuck with your original LEI issuing LOU. So you can register now with the London Stock Exchange, and later transfer it to a more local LOU if a new one is established.

The upcoming changes to HMDA will take some time to really understand and get used to, but one big step is understanding and preparing for the new LEI requirement. Getting the issue of obtaining an LEI down is likely something that is better handled sooner rather than later though, as applications are sure to spike soon. Best of luck!

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

The UCC And Mortgages

Did you know that the Uniform Commercial Code applies to mortgages? For example, did you know that the Note, or promissory note, may or may not be governed under Article 3 as a “negotiable instrument” depending on how the Note is worded? Or that the mortgage is just a form of a security interest under Article 9, and does not actually create the debt but just gives the lender a security interest in the real estate? (The Note creates the debt, by the way.) In fact, as far as I can tell, “mortgage” is only defined in the Massachusetts statutes in the UCC chapter, in Article 9. M.G.L., ch. 106, sec. 9-102(55): “(55) ”Mortgage” means a consensual interest in real property, including fixtures, which secures payment or performance of an obligation.” (https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXV/Chapter106/Article9/Section9-102).

I think the fact that the UCC rules are always in the background often doesn’t get a lot of recognition or respect in mortgage lending, probably because mortgage lending has been given so many of its own specific laws and regulations which override the UCC’s general rules. But the UCC still has a very important role in mortgage lending, often without individuals making the loans realizing it.

You especially see this with fixtures. Fixtures blur the line between real property and goods, so the rules about them can be tricky when seeing how they stand next to mortgages. To make it worse, whether or not something is a fixture is not an easy question to answer. For example, a 45,000 pound machine bolted in place and connected to a power line has been considered not a fixture by one court (In re Park Corrugated Box Corp., 249 F. Supp. 56, 58-59 (D.N.J. 1966)), while a mobile home was considered a fixture in another court (George v. Commercial Credit Corp., 440 F.2d 551, 554 (7th Cir. 1971)). The best a creditor can do is try to make an educated guess about whether something would be a fixture, and protect themselves as much as they can either way.

Anyway, the point is that it’s often overlooked that among all the other rules in play regarding mortgages and lending, ECOA, HMDA, TILA, RESPA, and everything else, the UCC rules are also lurking in the background, subtly guiding and informing how lenders lend.

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Understanding Call Recording Compliance

An NSCCA member submitted a question on call recording to be researched and answered by Spillane Consulting for this blog. (That’s what we’re here for!)

This member is about to start recording phone calls between consumers and the collections department. They had a specific question related to one of the compliance requirements, which we WILL get into. But first a background on this issue for everyone else.

In General: Pros and Cons of Call Recording

For companies trying to prove compliance and to monitor customer service levels, call recording is an enticing option. It can be useful in defending against a lawsuit or regulatory action (or on the offensive in a bankruptcy or foreclosure proceeding).

Of course, the sword is double-edged … call recordings can be used against you. Sometimes call recording makes it harder to make contact with a consumer because of the disclosure sometime required to begin the conversation, i.e. “Hello, this call may be recorded … *click.”

Compliance Issue: Massachusetts Wiretap Law

If your bank decides call recording is a great idea, make sure to comply with the Massachusetts law against secretly recording conversations. This Massachusetts law is stricter than most states. In most states, a company can record conversations with consumers without consent (there is a Federal law against secret recordings, but it only prohibits a 3rd party secretly recording another conversation). But some states, like California and Massachusetts, a stricter rule applies that requires both parties’ consent. MA Chapter 272, Section 99. These “two-party” or “dual consent” states prohibit call recording of any private conversation without both parties consenting to the recording. In these states, a bank that wants to record conversations with consumers must disclose the recording at the beginning of the call.

The two-party consent rule recently made headlines in California. Wells Fargo was fined $8.5 million for failing to disclose that calls were recorded. There’s a similar judgment against Houzz.com.  And sports fans might remember the recording of Donald Sterling’s racist remarks that led to his downfall as owner of the Los Angeles Clippers.

Specific Question of the Day

So far doesn’t sound too difficult, right? Just inform consumers up front that the call will be recorded. Well one NSCCA member is struggling with whether this is strictly required with every single person spoken to, as sometimes a single call will require speaking to multiple persons before getting to the actual consumer.  So do we need to give this disclosure to absolutely every person who answers the phone? Sometimes our callers get routed from person to person, secretary to administrator, department to department, before being able to speak to the actual person they’re trying to contact in the first place. Do we need to repeat “This call may be recorded” every single time?

Receptionist: Hello, this is Smith Paper Company.
Bank: This call is being recorded…. Hi, this is Jim from ABC Bank, may I speak to Jane Consumer?
Receptionist: I think Jane is downstairs in shipping, let me transfer you.
Shipping Department:  Hello?
Bank: This call is being recorded…. Hi, this is Jim from ABC Bank, am I speaking with Jane Consumer?
Shipping Department: No, sorry. Jane is in her office, let me transfer you.
Jane’s Office: Hello?
Bank: This call is being recorded…. Hi, this is Jim from ABC Bank, am I speaking with Jane Consumer?
Jane’s Office: No, sorry. I’m Jane’s executive assistant. Jane’s off today, would you like to leave a message?

And on it goes …. You see the annoyance? Wouldn’t it make more sense just to wait and give the disclosure to Jane Consumer after confirming she was on the phone?

Specific Answer of the Day

In short, Yes, the disclosure should be given to every person. But good news, it can be preceded by an introductory greeting. Like this: “Hi, my name is Jim from ABC Bank. This call is being recorded. May I speak to Jane Consumer”?

Now, some companies may choose to push the boundaries and delay disclosure until confirming the identity of the consumer. That, of course, would be even better.  But we do not recommend this and I’ll explain why below.

“Introductory Greeting” Exception.

Instead of starting every single call off with a robotic “This call is being recorded.” disclosure, best practice is to permit an introductory greeting followed immediately by the disclosure. The wiretap law prohibits recording a conversation. Is it a conversation before the other party even gets a chance to respond? The law doesn’t allow this expressly, but the California consent order against Wells Fargo makes this clear (and there’s no reason to think the same interpretation would not be adopted here):

“Wells Fargo … shall make a clear, conspicuous, and accurate disclosure (the ‘Recorded Call Disclosure’) to any such consumer of the fact of recording, and to make such disclosure immediately at the beginning of any such communication. The  Recorded Call Disclosure may be preceded by an introductory greeting that identifies the caller and entity on whose behalf the call is being made.

So this will help call recorders a little. Remember the disclosure is still given before the other party has a chance to respond. But can we go even further and delay giving the disclosure until confirming that we’re speaking to the correct person.

Disclosure Only to Right Person

In the example above with Jim, the receptionist, the shipping department, the secretary, and Jane, can Jim avoid telling everyone that the call was being recorded except for Jane? Is it permissible for him to wait and only Jane that the call is being recorded?

Some institutions are acting as if this is the case. Maybe, under these specific facts, this is a legitimate risk-based decision. After all, why on earth would these people complain or consider a lawsuit against ABC Bank? They had meaningless conversations of under 5 seconds.

While I understand the logic, I do not recommend this approach. The problem is that you do not know in advance when you’re speaking to the consumer. Therefore, if you delay the disclosure until confirming identity, there will be many cases where substantive pieces of conversation are spoken before the disclosure occurs. Imagine these scenarios where the consumer could reveal something significant before the disclosure was given:

Bank: Hello this is Jim from ABC Bank. May I speak to Jane Consumer?
Jane: Stop calling me at work, I’m not paying your stupid car loan!
Bank: Hello, this is Jim from ABC Bank. May I speak to Jane Consumer?
Jane: (pretending to be someone else) Nooo, I’m sorry you have the wrong number. Please don’t call here again.

So here you have two conversations that you might very want to use later with your defense against a complaint or in a collection proceeding. But you have two upset consumers. And, worse yet, you have two consumers with legitimate arguments that ABC Bank violated the Massachusetts law against secret recording.

So, to avoid complications like this, we recommend giving the disclosure up-front (after an introductory greeting) with every person spoken to.

Final Note:  I realize a simple fix would be for the call recording software to be turned on only after the disclosure is given. While I suppose that might lead to other problems (employees forgetting to turn on, for example), in any case it doesn’t appear that most technological solutions available offer this option.

 And that’s all, folks. Thanks for submitting the question to us for research!

Ben Giumarra, Esquire
Director of Regulatory Affairs
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
www.scapartnering.com