April 2016 Newsletters

Legislative Update

Federal Agencies Issued Guidance on Customer Identification Program (CIP)

Demystifying the Revised Loan Estimate

Qualified Mortgages, State Taxes, and DTI

Legislative Update

While it may seem that congress is at a standstill, there are still House and Senate members trying to push through bills. Below are some recent noteworthy bills snaking their way through the 114th Congress. They are by no means guaranteed to be enacted, but worth keeping an eye on.

H.R. 2121: Summaries for the SAFE Transitional Licensing Act of 2015

Provides a temporary license of 120 days to a registered loan originator moving from a financial institution to a state-licensed non-bank originator, or moving interstate to a state-licensed loan originator in another bank.

Will allow an MLO who is moving from one state to another a grace period in which to obtain registration before acting as an MLO in the new state. This will provide some flexibility for community bankers hiring.

Community Bank Impact: Low

Reported by the House Financial Services Committee on March 2, 2016

H.R. 2901: Flood Insurance Market Parity and Modernization Act

Yes, yet another flood bill. This bill would make technical corrections to the Flood Disaster Protection Act. In particular, it would incorporate a definition of “private flood insurance” and  make flood insurance requirements applicable to US territories.

Community Bank Impact: Low

Reported by Committee on March 2, 2016

H.R. 766: Financial Institution Customer Protection Act of 2016

Establishes new requirements for federal regulators requesting a bank to close a consumer account. Regulators will be required to provide an explanation of why such termination is needed and provide detailed reports on the number of requests to close accounts. The bill will also require either a court order or authorization through a delegation no lower than the Deputy Attorney General to issue subpoenas. The bill was introduced as part of an initiative to prevent certain federal programs, such as “Operation Choke Point,” which are seen as a federal overreach.

Community Bank Impact: Low-Moderate

Passed House on Feb 4, 2016

H.R. 1737: Reforming CFPB Indirect Auto Financing Guidance Act

Will nullify the CFPBs Bulletin 2013-02 regarding indirect auto lending and compliance with the ECOA. Will also require the CFPB to publish a public notice and comment period before issuing any guidance in final form.

Community Bank Impact: Moderate-High

Passed House on Nov 18, 2015

H.R. 1210: Portfolio Lending and Mortgage Access Act

This bill will provide that any portfolio loan – that is any loan originated and held on the balance sheet of the creditor – will have safe harbor QM status.

Community Bank Impact: High

Passed House on Nov. 18, 2015

Federal Agencies Issued Guidance on Customer Identification Program (CIP)

On March 2, 2016, federal agencies jointly issued Guidance on the Customer Identification Program (CIP) rule’s applicability to certain prepaid cards. The Guidance doesn’t expand or otherwise change the current rule, but it does clarify that banks must apply their CIP to certain prepaid cards they issue. Although this seems to already be the current practice, it’s helpful to have the Agencies conclusively establish this interpretation.
The Agencies begin by noting that the functionalities that make prepaid cards attractive to consumers are the very things that pose risks for banks. The attributes they highlight are: 1. the easy accessibility to prepaid cards; 2. the ability to use them anonymously; and 3. the potential for high volumes of funds to flow through accounts. These factors, among several others, make prepaid cards especially vulnerable to criminal abuse.
In 2003, the Agencies issued the CIP rule, which generally requires banks to collect enough information to form a reasonable belief about the identity of each “customer” opening a new “account.” In order to determine if CIP requirements apply to those who purchase prepaid cards, the bank has to first determine whether issuing the prepaid card creates an account and, if so, who the bank’s customer is.
An “account” is defined in the rule as “a formal banking relationship established to provide or engage in services, dealings, or other financial transactions, including a deposit account, a transaction or asset account, a credit account or other extension of credit.” The definition also includes “a relationship established to provide…cash management, custodian, or trust services.” The Guidance points out that certain prepaid cards have characteristics that make them analogous to checking or other deposit accounts.
The basic conclusion is that prepaid cards should be treated as accounts if the cardholder has:
1.              The ability to reload funds on the card; or
2.              Access to credit or overdraft features.
A relatively obscure point is that this must be continually considered, and not just determined once at issuance. This means that if the card is sold without either of these features, but one of these features is later activated, the bank would have an account at that point. Also worth noting is that even though the Agencies refer only to prepaid “cards,” the Guidance applies to any prepaid access product that meet the criteria. They offer as examples, “certain prepaid access products offered through mobile phones or Internet sites that are used to access funds.”

New Guidance on Applying CIP to Holders of Prepaid Cards

Once the bank has established that there is an account, it has to identify its customer. Under the CIP rule, a person that opens a new account is considered a customer. Thus, the cardholder will typically be the bank’s customer when the bank issues a prepaid card. The Agencies also clarify that even if the cardholder is not the named accountholder and has obtained the card from a third party who uses a pooled account, the cardholder is still considered the customer. The third-party program manager, however, will be considered the customer if it establishes a pooled account in its name and issues non-reloadable prepaid cards that do not have any of the features that would establish an account. The Guidance covers several other types of specific prepaid cards, including payroll cards, government benefit cards, and HSA cards. 
Finally, the Guidance reminds banks to be mindful of the contracts they engage in with third-party program managers. Agreements should be well-constructed and clearly define the expectations, duties, rights, and obligations of each party. The Agencies recommend that a contract should, at a minimum:

  1. Outline CIP obligations of the parties;
  2. Ensure the bank has the right to transfer, store, or otherwise obtain immediate access to all CIP information collected by the third-party program manager;
  3. Provide the bank the right to audit the third-party program manager and monitor its performance; and

If applicable, indicate that, pursuant to the Bank Service Company Act (BSCA) or other appropriate legal authority, the relevant regulatory body has the right to examine the third-party program.


Demystifying the Revised Loan Estimate (LE)

One of the most common questions we receive at Compliance Alliance is, “Does this require us to issue a revised Loan Estimate?” It’s important to keep in mind that revised Loan Estimates are almost never required—for the most part, they are an optional tool the regulation allows banks to use at their discretion to more accurately disclose costs to the borrower during closing, and to reset the fee tolerance levels for the Closing Disclosure. (The one exception to this appears to be when a rate is locked or re-locked after the first Loan Estimate is issued, though this is debatable due to poor drafting of the regulation.) Often it is perfectly acceptable to simply continue on with the original Loan Estimate and then disclose any updated fees, along with any cures that may be necessary, on the Closing Disclosure.

That being said, if an institution chooses to use a revised Loan Estimate to reset fee tolerances, there must be a change in circumstance that gave rise to the reason for the revised LE. Moreover, in order to reset tolerances, the revised LE must be provided within three business days of these changed circumstances. Remember that a revised Loan Estimate only resets fees that are altered by the change in circumstance—any fees that may have changed for other reasons will need to remain the same as they were on the original LE.

The 8 ‘changed circumstances’ listed in the regulation are:

  • An extraordinary event beyond the parties’ control takes place (ex: meteor strikes the home).
  • Information about the borrower or the property that the bank relied on for the first LE turned out to be inaccurate or changed (ex: the borrower lied about their monthly income, or the rich uncle paying the downpayment passed away).
  • New information specific to the transaction that the bank didn’t rely on for the first LE comes along (ex: angry neighbor files a claim disputing the property line).
  • The borrower becomes ineligible or less eligible for the loan because of a change listed above.
  • The borrower requests a change that causes charges to increase.
  • The rate becomes locked or re-locked, causing a change in “points or lender credits” (revised LE is mandatory).
  • The borrower didn’t give intent to proceed within 10 business days after getting the original LE.
  • On a construction-to-permanent loan, construction won’t be done any time sooner than 60 days out.

Note that if the bank just wants to get a revised Loan Estimate out to the borrower to update him or her on what’s going on, and not to reset fee tolerance levels or reflect a rate lock, that’s completely acceptable and is not forbidden by the rule. In fact, TRID’s preamble notes that, “The Bureau believes . . . § 1026.19(e)(3)(iv) does not prohibit a creditor from providing updated disclosures. Rather, § 1026.19(e)(3)(iv) provides an exception to the general rule . . . that a charge paid by or imposed on the consumer must be compared to the amount in the original Loan Estimate.” Just make sure that if you provide the borrower a courtesy revised Loan Estimate, you still use the fees on the original Loan Estimate for comparison with the Closing Disclosure in calculating your fee tolerances.

All in all, the revised Loan Estimate is not something to be feared! It is a tool that financial institutions can utilize to effectively limit their costs due to unforeseen events and provide the borrower with greater clarity on what they will owe at closing.


Qualified Mortgages, State Taxes, and DTI

Not all QMs are created equal. Where a borrower lives and the property tax rate they pay plays a significant role on their debt to income ratio and whether or not they fall below the 43% threshold required for a general QM. As an example, we will examine the difference between a borrower in California and a borrower in Texas. Let’s assume both borrowers make $250,000 a year and they both are applying for a $1 million loan to purchase a $1.25 million house. In our example, the borrower in California will pay a 1% property tax whereas the borrower in Texas is subject to a 2.23% tax on the value of their home. Finally, let’s assume they also have a $500 monthly car payment.

San Mateo County, California:                      
Monthly Income: $20,833                                
Monthly Mortgage Payment: $6,000                   
Monthly Property Taxes $1,041                
Monthly Homeowner’s Insurance: $400   
Car Payment: $500                                     
Total Monthly Obligations: $7,941             
DTI: 38%                                                   

Travis County, Texas:
Monthly Mortgage Payment: $6,000 
Monthly Income: $20,833
Monthly Mortgage Payment: $6,000     
Monthly Property Tax: $2,321
Monthly Homeowner's Insurance: $400
Car Payment: $500
Total Monthly Obligations: $9,221
DTI: 44%

Not surprising, the Texan has a higher DTI by about 6% due to the higher taxes and throws the loan out of QM status. But here is the kicker – the Californian actually pays MORE in state taxes every year! Why? Whereas Texas has no state income tax, California has one of the highest. The Californian will end up paying roughly $20,000 in state income tax based on a $250,000 taxable income.  If we sum up what each borrower pays in both property and income taxes, the CA borrower ends up paying roughly $32,000 compared to the Texans $27,800. The Californian pays $4,000 more in annual state taxes than the Texan, but is deemed to be a more qualified borrower under the ATR rule.

The difference in the ratios comes down to how the rule choses to treat different forms of taxes. The rule grosses up income, which essentially ignores income tax, but it debt services local real estate taxes. This isn’t that uncommon, in fact most banks and underwriters took this approach even before the ATR rule, but it does highlight the impact of higher real estate taxes on the perceived quality of a loan.

All other things being equal, the Texan in the above scenario is arguably the better credit since they have a higher cash flow after taxes. Lenders shouldn’t ignore ratios by any means; they provide a pivotal role in your underwriting analysis. However, as the above example points out, it is important to have a robust underwriting program to help determine what is and what isn’t a quality credit. An effective underwriting program is especially important for lender’s originating non-QM or small creditor QM loans which are not bound by strict 43% DTI ratio.