August 2016 Newsletters
The CFPB is at it again! That’s right, a new 293 page proposed rule for you to digest – Compliance Alliance will have a summary out for you soon to help you wade through the mess of new rules. Some of the changes are for the better, some for the worse. Let’s start with the bad news first.
The agency has proposed a tolerance rule for the “total of payments.” This new rule will basically mimic the finance charge accuracy rule that we’re all used to. The “total of payments” will be considered accurate if it is understated by no more than ½ of 1% of the face amount of the note or $100, whichever is greater. For refinance transactions with a new creditor for which there is no new advance or consolidation of existing liens, the tolerance is 1% of the face amount of the note or $100, whichever is greater. Overdisclosed “total of payments” will also be considered accurate. Let’s try an example:
Say you have a note for $500,000 and the actual “total of payments” comes out to $850,000. For a normal transaction, the disclosed “total of payments” will be OK so long as it is $847,500 or above. ($850,000 – .5% of $500,000[$2,500]). If this were a straight refinance transaction with no new money or debt consolidation, the “total of payments” would be accurate if disclosed as $845,000 or above ($850,000 – 1% of $500,000).
On the bright side, the CFPB clarified how banks can use a Closing Disclosure to update fees. Under the current law, there is some confusion as to whether you can update tolerance fees after the first Closing Disclosure is sent. While you are allowed to update fees on a Closing Disclosure if there is no time to send an LE (i.e. when the change happens 4 days prior to close), the CFPB commented in a webinar that you may not then send a subsequent Closing Disclosure to update tolerance fees, even if there is a change in circumstance. The proposed rule will explicitly allow for subsequent Closing Disclosures to update the tolerance base when there is a change in circumstance.
There are numerous changes in the proposed rule in addition to those mentioned above – some for the better, some for the worse. Look for an easy-to-digest Compliance Alliance summary coming out soon that will distill and highlight all of the issues presented by the proposed rule.
As we make it through the end of 2016 and into the next couple of years, there’s a lingering issue of which banks should take special note: Home Equity Lines of Credit, more colloquially known as HELOCs. Many institutions have on their books HELOCs originated with 10-year draw periods…meaning many of these loans were originated back in the “good old days” of 2006-2008, and they may be coming due for a term-out soon. As these loans were originated prior to the 2008 financial crisis and therefore might have closed with looser underwriting standards than what is in place today, and as most HELOCs require just an interest-only payment during the draw period, many HELOC borrowers with less solid ability-to-pay credentials could be in for quite the shock when it comes time to term out their loans.
The significance of this issue should not be underestimated. According to the Wall Street Journal, about 840,000 HELOCs are terming out this year, with about a million more anticipated to term out next year. Moreover, Equifax has found that $2.8 billion worth of HELOC balances originated in early 2006 already have been reported as delinquent for more than 30 days —that’s a pretty alarming number when you consider it is likely to be much higher after factoring in loans originated in 2007 and early 2008. It’s also an 84 percent increase over what delinquency rates were prior to terming out.
There are a few things smaller financial institutions can do proactively to insulate themselves from potential HELOC harm. First of all, prudent financial institutions should take a hands-on approach, identifying any HELOC borrowers who may be at risk for increased payments, and then contacting those borrowers directly to consider whether modifications resulting in lower monthly payments are necessary. (Note: it is extremely important to do this prior to when the HELOC note matures. The questions we get at Compliance Alliance regarding situations where ‘modifications’ are needed for already-matured HELOCs are legion and it always turns out the same: it’s messy from a legal standpoint, it’s highly disliked by examiners and it’s something that should be avoided wherever possible.)
Additionally, smaller banks should take the broader approach at gauging the risk to their institution, determining how much of their overall portfolios contain these sorts of loans and working these potentially risky loans into their risk assessments accordingly. The board of directors should be updated on potential HELOC risk on at least an annual basis so nobody is taken by surprise if exposure in this area is greater than initially anticipated. Banks should be in constant contact with any affiliate lenders, servicers, investors or other related parties regarding these loans so, in the event a substantial risk is present, all parties are on the same page and no wires get crossed if an emergency solution becomes necessary.
We’ll be keeping a close eye on this issue over the coming months and years. Should you have any further concerns about HELOCs or the potential compliance threats they may pose for your financial institution, remember to contact our Compliance Alliance Hotline with any questions!
 “Home Equity Loans Come Back to Haunt Borrowers, Banks,” by AnnaMaria Andriotis, published in the Wall Street Journal 08/11/2016; available at http://finance.yahoo.com/news/home-equity-loans-come-back-163000675.html.