TILA. Q: I am working on a Loan Estimate (LE) for a purchase transaction on which we have not yet received a purchase agreement. The lender would like to include all of the seller fees on the LE so we would not have to redisclose the LE in the event we get a purchase agreement saying the buyer must pay all seller fees.
Is there any harm in doing this?
A: The LE intends to inform applicants of costs they are likely to incur as part of their loans. If there is some likelihood that the buyer will agree to pay the seller’s fees (such as if that is happening with some frequency in your market due to real estate market conditions), then it would probably be fine to include those normally seller’s fees on the buyer’s LE, showing to be paid by buyer/borrower.
If there is no basis for believing it likely that the buyer will agree to pay the seller’s fees, it may or may not be compliant to disclose those fees on the LE as to be paid by the buyer/borrower.
Regulation Z requires that these disclosures be made in “good faith.” The lender may need to probe a bit further to determine who will be paying these fees. Overdisclosing merely to avoid producing a revised LE is probably not a reasonable basis for “good faith” disclosures.
EFTA/TISA. Q: We are researching increasing our international wire transfer fee. We are having a debate whether this would require 30-day prior notice to customers. The reason for the debate is that the fee is disclosed in our current Terms & Conditions. My position is that it would not be required because it is not a fee connected to an account but a service we provide, even if the person doesn’t have an account.
Can you provide some clarification for us? Do we need to give prior notice to the customer?
A: You are correct. If the fee is not charged “in connection with” the account or with making/receiving electronic fund transfers, then Regulation E and Regulation DD do not require that it be disclosed.
While neither rule prohibits the bank from disclosing these non-account-related fees (allowing banks and thrifts to have consolidated fee schedules that they give with their regulatory disclosures), the mere inclusion of such fees in consolidated fee schedules does not make future increases subject to the rules’ advance notice requirements.
Insider Credit. Q: We have an executive officer (EO) whose stepdaughter is applying for a car loan. The EO’s wife will be co-signing for the car loan. Being that we are in Wisconsin, a community property state, does this loan need board approval?
A: Maybe not. If the loan proceeds are not transferred to the EO or used for their direct benefit, and the loan is to be repaid from the separate income of either the stepdaughter and/or the wife, then the loan is not considered an “extension of credit” to the EO. There is a Federal Reserve Staff Opinion on this type of issue (though it deals with the spouse’s business rather than their stepdaughter, the logic and reasoning seem to apply to this scenario).
In such a situation, prior approval by the board would not be necessary (under Regulation O) since this would not be an “extension of credit” to the EO. However, if there is some direct benefit, etc., for the EO and other criteria are met, prior approval would be required.
TILA. Q: Can we do a balloon loan for a loan secured by non-real estate investments? The applicants are purchasing real estate. Is there anything special we would need to do? I know on real estate loans that we would need to know that they could pay the loan without the investments and have the funds to pay the balloon. I don’t believe that it is the same for non-real estate loans.
A: A legal question is whether the bank can extend a balloon loan secured by non-real estate investments. You will need to check with the bank’s legal counsel on that one.
Even though this loan is to be used to purchase real estate, since a dwelling does not secure it, the “ability to pay/qualified mortgage” (ATR/QM) rules in Regulation Z will not apply. If the loan is for a personal, family, or household (consumer) purpose, then “regular” Regulation Z disclosures (“Fed box”) will be required. If it is not for a consumer purpose, then Regulation Z does not come into play.
ECOA/FCRA. Q: One of my branch managers recently asked me if we’re required to send out a notice of action when denying someone a deposit account. Can you send me some guidance on this?
A: There is no Regulation B-like requirement for sending a notice of the action taken and disclosing the adverse action taken and the reason(s) for it. (There is also nothing to prohibit giving such notice.)
However, like with credit applications, if banks take adverse action for a deposit account application based on a “consumer report,” then the Fair Credit Reporting Act (FCRA) does require that notice be given to the applicant. This notice would include the information about using a credit reporting agency and its name, address, etc. That is normally included in the second part of our credit adverse action notices.
So, the answer is yes and no. Yes, an FCRA adverse action notice must be sent if third-party information is used at all in making the decision. But no, a Regulation B-like notice of the action taken and reasons does not have to be given (but maybe).
EFTA. Q: If a customer calls the bank and says his son stole his debit card and used it, do we still need to file Visa chargebacks per Regulation E for this customer or does this customer need to get law enforcement involved?
A: This customer’s call is a notification of unauthorized use and must be handled and investigated by the bank just like any other such notice would be. Before beginning its investigation, the bank may not require the customer to file a police report, etc. The investigation may be easy since the customer is providing much of the information needed. Whether to involve law enforcement is up to the bank, probably in consultation with your customer.
Correction: An eagle-eyed reader of our last set of Q&A spotted that our answer to one question left out some detail involved in the situation discussed. The Q&A, as printed, stated the following.
Flood Insurance. Q: We have a current loan in process in which the borrower is contesting the flood determination on his property. The situation is a bit unusual for us in that the house itself is not located in the flood area, but other structures on the property are. The flood determination shows the house just out of the flood zone. We are leaning on the side of caution. If we are going to make the loan, flood insurance is required. Is there an exception that we might be missing?
A: The lender has the responsibility to make a flood hazard determination (using a third party that guarantees its results is fine) and is permitted to be “cautious.” From your description, it sounds like the outbuildings are clearly in Zone A, so flood insurance is not optional for them. The house is barely out of Zone A, so flood insurance coverage is not mandated by law/regulation – but the bank is not prohibited from requiring it in such a case.
For the house, it is up to the lender. For the outbuildings, there is no option (unless you can find some way to exclude them from the security interest – with the bank’s legal counsel).
Our reader said they think that is not quite right. They noted that they believed the bank can exclude outbuildings if by due diligence it can show there are no living quarters in them (i.e., no bathroom/kitchen/sleeping areas). Also, they were skeptical that whether the outbuildings are included in the security interest is a consideration for requiring flood insurance.
We looked at the issue again and replied that the flood rules could be a bit troublesome at times, and it looks like we trimmed some detail (use of outbuildings, for example) we should have kept. The reader was correct that an outbuilding detached from the dwelling and is part of the residential property (e.g., a detached garage) may be excluded from flood coverage if it is not also a residence (e.g., has an apartment upstairs) or is not used for agricultural or commercial purposes (e.g., storing farm equipment or serving as a workshop for a business, etc.). Although, a lender is always free to require flood coverage to protect all of its collateral, even if the rule does not mandate it in a particular situation (such as this).
Regarding the security interest issue, this is the heart of the whole issue concerning the definition of “designated loan.” If a structure is not security for the loan, then flood insurance is not a consideration. However, not being attorneys, we do not know how (or if) a building affixed to a particular parcel of land can be excluded from a security interest (mortgage or deed of trust) encumbering that parcel. If it can be done, then flood insurance would not be required by regulation (though it would still probably be prudent to have).
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