ECOA. Q: The bank has an application that was entered into the automated underwriting system and received an approve/eligible response. But later that same day, during a conversation with the applicant, the bank finds that the property is a leasehold and, thus, not eligible for the secondary market. The bank does not make such loans. So, is this a denial or an application for a product not offered? Not sure how to handle this one.
A: This is a denial to extend credit due to the fact that the bank does not offer the type of credit or credit plan requested. That would be cited as the reason for the adverse action on the denial notice to the applicant.
EFTA. Q: If we have debit card transactions outside of the U.S. blocked, would that have to be disclosed to the account/card holder?
A: Regulation E requires the bank to disclose any limitations on the frequency and dollar amount of transfers. Blocking transactions not originated in the U.S. would impact the frequency of transfers, at least for some customers. So, this should be stated in the initial EFT disclosure. If this limitation has not been disclosed to current/existing customers, the bank should inform them in writing, which can be a message or an insert sent with a monthly statement.
TILA. Q1: We have a loan request for a customer that will be located on 79 acres, but they are building a house. This house will obviously be for consumer purposes but will have a shop that will store farm equipment. The lender from the commercial side of the fence is hoping to do this loan instead of sending it to the consumer. Is that permissible?
A1: For Regulation Z purposes, it does not matter which functional area of the bank extends the loan. If the loan is primarily for consumer (personal, family or household) purposes, appropriate disclosures must be given. In this case, that would mean TRID disclosures — Loan Estimate(s) and Closing Disclosure(s). You say that the purpose of the loan is to build a new house for the borrower, along with a shop/building for storing farm equipment, it sounds like it is probably a consumer-purpose loan.
The bank can use any reasonable method for determining what the primary purpose is — e.g., what amount of the loan is to build the house vs. to build the shop/storage building. If the amount for the farm storage shop/building is greater than for the house, then an argument could be made that the loan is primarily for agricultural purposes and, thus, exempt from Regulation Z. But, if it is the other way, TRID rules.
Whichever way the decision goes, be sure that the file is well documented on what is determined and how the bank made its determination.
Q2: A similar situation presented itself while talking with another employee about this scenario. When a customer that is John & Jane Doe Revocable Trust owns 150 acres free and clear but is using proceeds from a loan secured by that property to construct a condo, this would also be considered a consumer/TRID purpose, correct?
A2: Sounds like another consumer-purpose loan, and when real estate (dirt) is part of the collateral, TRID is triggered. I suspect your skeptical colleague must be hung up on having a trust (a non-natural person) involved. But, the CFPB explicitly dealt with that some years ago in the Official Staff Commentary on Regulation Z, Comment 2(a)(11)-3, to the definition of “consumer,” by saying, “Credit extended to trusts established for tax or estate planning purposes or to land trusts … is considered to be extended to a natural person for purposes of the definition of consumer.”
TISA. Q: We currently offer only fixed-rate certificates of deposit (CD). We still issue certificates for these. Management wants to offer a promotional 30-month variable-rate CD with a special introductory rate not tied to any index, and these promotional CDs would automatically renew at maturity into our regular fixed-rate 30-month CDs.
Can we switch customers from a variable-rate product to a fixed-rate product without having to send new disclosures at maturity (or before maturity?). This promotional CD is for new money only and will be the only variable-rate CD we offer.
A: Regulation DD does not explicitly require disclosure of the fact that a renewal CD will be fixed, rather than variable rate, but it may be a good idea to disclose that to avoid later customer and regulator concerns.
Since this CD has a term of over one year, the bank must send a full account disclosure for the renewal CD with the prematurity notice it must send before maturity. This account disclosure will inform the customer that the interest rate for the renewal CD is fixed (and not variable).
ECOA/FCRA. Q: We have a joint application for a loan that we are denying. The reason we are denying it is because the primary applicant was not upfront with us about the purpose of the loan, and we found this out only when we asked for copies of the bills for debts the borrower was paying off and he was not able to provide any. The primary borrower can be denied for “collection action or judgment,” but the co-applicant has excellent credit and income to support the loan.
Are we required to send the co-applicant a notice of adverse action or would it be acceptable to provide just the credit score disclosure since we did pull credit?
A: The primary applicant should receive an adverse action notice with denial reason(s). Since you pulled credit reports, both applicants should be given the Fair Credit Reporting Act (FCRA) adverse action notice (e.g. use of information from a consumer reporting agency, along with its name, address, telephone number, etc.). If credit scores were used, credit score disclosure disclosures should also be sent to both applicants.
Consumer Protection (Insurance). Q: For indirect lending, if the bank itself does not solicit or sell insurance related to the transaction the Consumer Protection in Sales of Insurance disclosure is not required at the time of application. However, if the car dealership solicits or sells credit life or disability insurance through a third party on the transaction, should the bank be looking for the application disclosure?
A: This depends on how the indirect lending relationship is structured. If the deal involves three-party paper — the dealer is the lender and then sells the loan to the bank — then, as long as the dealer is not selling or soliciting for the insurance at an office of the bank, this rule does not apply.
If the deal is on two-party paper — the bank is the lender and the dealer is just its agent taking the application and closing the loan — then the rule does apply and the application (credit) and sale (insurance) disclosures must be given at their appropriate times.
Insider credit. Q: Are overdrafts of a related interest of a director of the bank covered under the Regulation O overdraft rules? For example, a director has identified that ABC Company is a related interest since the director is a partner in the company. For ABC Company, we have received a debit item that would overdraw the account by more than $1,000.00. Should this item be returned?
A: No, this provision of Regulation O does not apply to overdrafts on accounts of related interests of insiders. Footnote 3 of the regulation states, “This prohibition also does not apply to the payment by a member bank of an overdraft of a related interest of an executive officer, director or principal shareholder of the member bank or executive officer, director or principal shareholder of its affiliates.”
So, Regulation O would not compel the bank to return the item. Beyond that, it is up to bank policy and procedures or management discretion (in the absence of such policy and procedure).
PMI. Q: We modified a mortgage loan that had private mortgage insurance (PMI). The scheduled termination date is upon us and the loan-to-value (LTV) ratio is not at 78%.
Should we send a new amortization schedule and an explanation of why the cancellation date will not be met? Or, in light of the bank modifying the loan to help the customer, is this even necessary?
A: The modification does not enter into consideration for PMI coverage/termination. If the customer is current on their payments at this time and — under the original amortization schedule for the loan — it has reached the point at which the loan was first scheduled to reach 78% of the original value of the property, then the bank “shall” (read this word as “must”) terminate the PMI and the borrower owes no more PMI payments.
If the borrower is not current on their payments at this time, then the PMI must be terminated at the time the customer brings their payments current.
Record retention. Q: We keep a paper copy of a loan for five years in a physical file. We are also scanning those copies into our core system. As long as we have a copy somewhere that we can access at any time, are we okay to just scan them and not keep a hard paper copy? We can always print the scanned document in the future, if need be.
A: To satisfy the record retention requirements of the various federal consumer rules, scanned/e-copies are just fine.
However, I cannot speak to any rules or expectations that may impact legal documents (e.g. notes, mortgages, account agreements, etc.). For those, you will need to consult with the bank’s legal counsel. The federal E-Sign Act may have overridden all that kind of thing, but that is a legal issue and I must defer to your attorney.
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