Q4 Lagniappe – Regroup and Refresh this Holiday Season

The Temenos Compliance Advisory team offers a “little something extra” for the holidays – a selection of interesting questions (and answers) addressing key topics from the 4th quarter.

Cindy LeBlanc
Cindy LeBlanc – Senior Compliance Advisor

With the hustle and bustle of holiday shopping, meal preparations, travelling and family and friends gathering, sometimes you need to find a quiet place to sit and regroup. A time to consider the wins and learning opportunities that you have experienced in 2019. The Temenos Compliance Advisory Team wants to provide Lagniappe — that “little something extra”– for you during this time. Come along with us as we review some interesting questions from the 4th Quarter covering topics such as Fair Lending, Regulation B Appraisal requirements, Flood and understated APRs.

Jumbo Loan Products and Fair Lending

Question: “Can our financial institution offer a product for jumbo loans for those who meet specific underwriting requirements? Would that cause a discrimination issue? Would it matter if we do not offer an in-house fixed rate product for non-jumbo loans?”

Answer: The regulations do not require a lender to do portfolio loans. If a particular lender is not in a position to offer jumbo products in house, and must conform to investor guidelines, this does not necessarily create a disparate impact situation. Oftentimes lenders will have different secondary market lending guidelines that differ from their in-house guidelines simply due to investor requirements.

Where there might be an issue is if a lender ONLY did jumbo loans, as that essentially would be imposing a minimum loan amount and that historically leads to fair lending issues. But if they have a non-jumbo, secondary market product, then I don’t see any issue with this.

E-sign Compliance & Regulation B

Question: “Can we send the appraisal required by Regulation B electronically? Do we have to comply with E-Sign?”

Answer: Yes, you may send the appraisal electronically, so long as you have complied with E-sign. See 1002.14(a)(5):

5) Copies in electronic form. The copies required by § 1002.14(a)(1) may be provided to the applicant in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).

You are not required to demonstrate actual receipt of the appraisal unless you are attempting to cut short the presumption of receipt period. See the following commentary:

i. For purposes of this timing requirement, “provide” means “deliver.” Delivery occurs three business days after mailing or delivering the copies to the last-known address of the applicant, or when evidence indicates actual receipt by the applicant, whichever is earlier. Delivery to or actual receipt by the applicant by electronic means must comply with the E-Sign Act, as provided for in § 1002.14(a)(5).

You can assume the appraisal was delivered to the borrower three days after you emailed it to the borrower.

Flood Insurance and Condominiums

Question: “If the loan balance is higher than the condominium’s Replacement Cost Value listed in an RCBAP, can a financial institution require additional flood insurance coverage?”

Answer: A lender can require more insurance than required by the regulation, so long as they are not over-insuring the property. When you are requiring more coverage than the insurable value ( RCV), you are creating a situation where you are over-insuring the collateral because the policy will never pay out more than the insurable value (RCV). So, you would not be able to require more than the RCV on this loan. See the following flood FAQ #16:

FAQ #16. Can a lender require more flood insurance than the minimum required by the Regulation?

FAQ #16 Answer: Yes. Lenders are permitted to require more flood insurance coverage than required by the Regulation. The borrower or lender may have to seek such coverage outside the NFIP. Each lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. However, lenders should avoid creating situations where a building is ‘‘over-insured.”

Understated APR

Question: “The APR was understated on a recent loan we closed. Can we simply reissue a revised CD on this loan, or should we refinance the whole thing with a brand new loan and disclosures?”

Answer: There’s no way to “fix” an understated APR by refinancing the loan. Refinancing doesn’t make this loan go away and a lender can’t treat it like it never happened. A lender should follow the guidance set out in the FDIC Compliance Exam Manual:

Under provisions of the Act, a financial institution will generally have no civil or regulatory liability if it takes two affirmative corrective actions. Within 60 days of “discovering” an error (but before institution of a civil action or receipt of a written notice of error from a consumer), the financial institution must both:

  • Notify the consumer of the error, and
  • Provide restitution to the consumer for overcharges

An error is “discovered” if the institution either identifies the error through its own procedures or if it is disclosed in a written examination report. If the financial institution attempts to correct a disclosure error by merely re-disclosing the required information accurately, without providing restitution to the consumer, correction has not been effected. Consumer restitution is an inseparable part of the correction action.

Restitution is calculated by following the FDIC Statement of Policy, which says the following:

Methods of Adjustment: The consumer’s account will be adjusted using the lump sum method or the lump sum/payment reduction method, at the discretion of the creditor.

So, here are your two options for calculating restitution:

Lump sum method means a method of reimbursement in which a cash payment equal to the total adjustment will be made to a consumer.

Lump sum/payment reduction method means a method of reimbursement in which the total adjustment to a consumer will be made in two stages:

  1. A cash payment that fully adjusts the consumer’s account up to the time of the cash payment; and,
  2. A reduction of the remaining payment amounts on the loan

For example, using the lump sum/payment reduction method, the lender would refund the borrower for the amount of interest that had accrued at the higher APR, and the lender would then reduce all future payments and accruals to the lower APR. The size of the lump sum payment will depend on how much interest had accrued at the higher rate prior to the error being discovered.

Thank you for joining us today! May you have a wonderful holiday season.

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Cindy LeBlanc
Cindy LeBlanc – Senior Compliance Advisor