Pub. 3 2015 Issue 3

15 Fall 2015 The Community Banker COMPLIANCE Q&A By Bill Showalter, Senior Consultant, Young & Associates, Inc. Young & Associates provides banks and thrifts with support for their compliance programs, independent reviews, and in-bank training, as well as a full menu of management consulting, loan review, IT consulting, and policy systems. TILA/RESPA. Q: Our bank is doing a loan for the purchase of a second home in South Carolina. Purchase price is $6.3 million. The borrower has adequate collateral by pledging a $5 million security against the loan amount need- ed. However, so he can claim the interest on the loan for tax purposes, he wants to give a mortgage on his principal dwelling in town. Our questions are: (1) Is this loan subject to RESPA and TILA? (2) If that’s the case, is this loan rescindable? A: Yes on both counts. Having the real property/dwelling as col- lateral brings it under TILA/RESPA (coverage is not limited for such loans) and having a non-purchase money security interest in the con- sumer’s principal dwelling brings it under rescission. Reserve Requirements. Q: Is it accurate that a bank can- not pay interest to a limited liability corporation (LLC) on a business checking/transaction account? A banker has indicated a com- petitor lured away a customer and is paying interest on the LLC's transaction account. A: The Dodd-Frank Act did away with the Depression-era prohibition on paying interest on demand deposit accounts (checking), so the Federal Reserve Board rescinded Regulation Q. However, untouched is the prohibition against a for-profit entity (other than a sole proprietor- ship) holding a negotiable order of withdrawal (NOW) account. A NOW account looks like an interest-bearing checking account, except it is really a formof “savings deposit” (for call report and reserve purposes under Regulation D) and the bank reserves the right to require at least seven days’ advance notice of any withdrawal (a right no one ever invokes). So, interest-bearing checking is allowed now for LLCs (and other corporations and partnerships), but NOW accounts are still not permit- ted for these for-profit entities. TILA/RESPA. Q: Do we need to obtain an Intent to Proceed from the borrower on a con- struction loan? A: As of October 3, 2015, yes. This is because construction loans are subject to the TILA-RESPA rule’s integrated disclosure (TRID) re- quirements, so an intent to proceed is required. A consumer indicates intent to proceed with the transaction when the consumer communicates, in any manner, that the consumer chooses to proceed after the Loan Estimate (LE) has been delivered, unless a particular manner of communication is required by the creditor. This may include: • Oral communication in person immediately upon delivery of the LE • Oral communication over the phone • Written communication via email, or • Signing a pre-printed form after receipt of the LE in person A new comment in the Official Staff Commentary makes it clear that the consumer’s silence is not indicative of intent to proceed. The creditor must document this communication in some manner to satisfy the record retention require- ments of the rule. EFTA. Q: The bank is institut- ing a new checking account product. The parameters of the product are no service charge, but all transactions must be electronic (no checks or drafts) and the customer must set up online banking. Management wants to send no statements (in order to keep it free, no postage or paper cost to the bank). We could do e-statements, but management determined that the program is too expensive (about $20,000) to purchase and install. If a customer states (or maybe signs something stating) that they do not want the periodic statement, could that be an “out” for this rule? Maybe some sort of opt-out? A: No, no opt outs would have any effect. Regulation E mandates statements – either hard-copy or e-versions, some statement meet- ing the minimum standards set in the rule. No exceptions (except, of course, for true passbook accounts with only e-credits/deposits). The statements must be sent monthly when some electronic transaction occurs, and at least quarterly when no e-transactions occur. Flood Insurance. Q: We have a loan requiring flood insurance and wonder if we need to wait a full 10 days after providing notice to the customer? In this case, the borrower already has flood insurance in place and can provide proof immedi - ately. A: No, there is no need for an artificial delay in closing tomeet the 10-day guideline for reasonable advance notice of flood hazards. As you note, the customer already has flood insurance and does not need to go looking for a provider and procuring the coverage. That is the whole reason for the requirement to give reasonable advance notice – so the customer can have adequate time to get the required coverage before closing. BSA. Q: We have a situation and are unsure if we should file a Suspicious Activity Re - port (SAR). From a commercial loan application, it was discov - ered that the limited liability corporation (LLC) members had not filed tax returns since 2011. It is a husband and wife. Is discovering this information a reason to file a SAR? A: Yes, not filing US income tax returns and not paying US income tax is a federal crime. And one of the triggers for filing a SAR is detection or suspicion of a federal criminal violation. FCRA. Q: We are implementing a new software system and the vendor has indicated to us we need to issue only one turndown with both appli- cants’ information on the one credit denial. I had told them that was not the case, the Fair Credit Report Act (FCRA) states that each applicant must receive a credit denial with only their information on it. Please clarify as I have looked and looked and don't see where that is stated. A: Yes, you are correct. While Regulation B (ECOA) permits sending just one adverse action notice (to the primary applicant) when there are joint applicants, the FCRAmandates that each person whose credit file is accessedmust be sent their own FCRA adverse action notice. This was clearly spelled out in July 2000 by Federal Trade Commission staff in a written opinion known as the Keller-Stinne- ford letter.