Month: October 2014

Are you following Massachusetts Adverse Action rules too? (in addition to ECOA)

We travel around a lot … hearing war stories, sharing ideas, witnessing the right and the wrong way to do any variety of things (sort of like a honeybee).  So this week we thought we’d share an issue we’ve seen a lot of in the past month, something that keeps popping up.

The Massachusetts Adverse Action requirements.

Most everyone is comfortable with the Federal requirements (under ECOA) for Adverse Actions … 30-days, notice, etc. etc. But Massachusetts has its own Adverse Action rules, and we have to comply with both, they’re not the same!  Different disclosure. Different timing requirements. But probably all on the same form (phew).

Let us go through the basics:

There are three requirements that Massachusetts sets forth regarding Adverse Action notices that are not found in ECOA.

1. If your decision was wholly or partially due to information contained in a consumer report from a consumer reporting agency, you have to, within ten (10) business days of your decision, notify such consumer in writing against whom such adverse action has been taken.

This 10- day requirement is not found in ECOA. Under ECOA, for instance, you are required notify the applicant within 30 days after receiving a completed application of the adverse action on the application.

2. You HAVE to provide written notice as follows:

You have the right to obtain a free copy of your credit report within sixty days from the consumer credit reporting agency which has been identified on this notice. The consumer credit reporting agency must provide someone to help you interpret the information on your credit report. Each calendar year you are entitled to receive, upon request, one free consumer report.

You have the right to dispute inaccurate information by contacting the consumer credit reporting agency directly. If you have notified a consumer credit reporting agency in writing that you dispute the accuracy of information in your file, the agency must then, within thirty business days, reinvestigate and modify or remove inaccurate information. The consumer credit reporting agency may not charge a fee for this service.

If reinvestigation does not resolve the dispute to your satisfaction, you may send a statement to the consumer credit reporting agency, to be kept in your file, explaining why you think the record is inaccurate. The consumer credit reporting agency must include your statement about the disputed information in a report it issues about you”.

3. Finally, under Massachusetts law, you HAVE to notify the consumer, in writing, at the time of a mortgage loan application denial of his right to appeal any such denial to the appropriate mortgage review board.

Similar to the two other requirements listed above, this is obligation is not found in ECOA.

At this point, you may be asking yourself, “well, I thought that federal law trumped state law. Therefore, as long as follow the federal law (ECOA) shouldn’t I be good?”

That’s a good question. However, (thankfully) ECOA provides guidance here. It states, “[e]xcept as otherwise provided in this section, this regulation alters, affects, or preempts only those state laws that are inconsistent with the Act and this regulation and then only to the extent of the inconsistency. A state law is not inconsistent if it is more protective of an applicant.

What does that mean? It means that both Federal and Massachusetts State Law apply, because State Law only supplements the Federal ECOA requirements (and does not replace them).

Please call or post comments if anything here is unclear or you want to dive into anything here a little deeper.  We’re excited for the opportunity to share some of our ideas and thoughts with the SNECG group … and we hope we continue to be a valuable partner to all its members.

 

 Ben Giumarra is a regulatory consultant for Spillane Consulting Associates, Inc. out of Braintree, MA. SCA has provided Consulting, Professional Staffing, and Quality Control services to New England Financial Institutions since 1991, with a primary focus in mortgage lending.

Ben Giumarra is a regulatory consultant for Spillane Consulting Associates, Inc. out of Braintree, MA. SCA has provided Consulting, Professional Staffing, and Quality Control services to New England Financial Institutions since 1991, with a primary focus in mortgage lending.

Why are you still underwriting to 43% and appendix Q?

If you’re a “small creditor,” there’s likely little or no reason for you to be underwriting to the standard QM requirements of 43% and appendix Q.  Discontinuing those practice–and getting back to common sense underwriting–can unlock marketing advantages and ease the burden on underwriters still struggling with appendix Q.

CFPB Director R. Cordray has emphasized efforts made to exempt smaller banks from certain aspects of the QM rule, notably those with less than $2 billion of assets and those that make 500 or fewer mortgages annually.

“We made this change in our rules to reflect our deeply held view that community banks did not engage in the kinds of irresponsible practices that gave rise to the financial crisis.”

“At the [CFPB] we’re all well aware that credit unions [and small banks] were not a cause of the recent financial crisis.  You were not underwriting the bad loans that brought down the housing market.  Instead, you continued to uphold sound underwriting standards, even though you may have lost customers during that period and market share to irresponsible lenders who did not play by the rules.  And you sounded the alarm well before the growing irregularities in the mortgage market caused the credit crunch that sank the economy.”

Think about it. Your slightly larger competitors (and especially brokers and mortgage companies) are stuck with the regular QM requirements … they have no “small creditor” protection.  From their perspective, they have to make some decisions about loans over 43% or unable to meet appendix Q’s rigid underwriting requirements:

  • Offer non-QM loans and accept dangerous liability risk
  • “Price up” to accommodate risk
  • Risk pricing the same … potentially increase margins across-the-board
  • Go “QM-only” and refuse to do those loans

None of these options are good … and these companies are going to struggle making loans to self-employed borrowers, retirees, people on fixed income, and even on perfectly safe jumbos (45% DTI, not saleable to FNMA, 800 FICO … great loan! but not QM!).

But that’s nothing “small creditors” need to worry about! You can exceed 43% on a loan and still receive full protection of QM (albeit your own special version of QM).  We’ve been in plenty of small creditors’ shops to discuss this point–and more often than not, our recommendation is to shred appendix Q and erase any mention of 43% in the Lending Policy.  Without appendix Q, you can underwriter more quickly and by using common sense. And as to the 43%, we all know there are some loans where a higher DTI still makes sense–why not take advantage here?

The whole purpose of the “small creditor” exception is to provide smaller institutions relief from these regulations.  Why accept this burden voluntarily? 


 

 

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Ben Giumarra is a regulatory consultant for Spillane Consulting Associates, Inc. out of Braintree, MA. Spillane Consulting has provided Consulting, Professional Staffing, and Quality Control services to New England Financial Institutions since 1991, with a primary focus in mortgage lending.