August 2017 Newsletters

Notice of Proposed Rulemaking

CFPB Highlights Pay-by-Phone Fees as UDAAP Issue Area


Notice of Proposed Rulemaking

by Elizabeth K. Madlem

Commercial Real Estate Appraisal Thresholds

On July 19, 2017, the Federal Reserve Board, FDIC and OCC issued a notice of proposed rulemaking and request for comment to increase the threshold for requiring an appraisal on commercial real estate loans from the current level of $250,000 to $400,000. This proposal is in hopes of reducing the “number of transactions that require an appraisal” without posing a threat to a financial institution’s safety and soundness. At this time, the proposal is not increasing the threshold for residential real estate. However, comment is being accepted on evaluating the current $250,000 appraisal threshold for one to four family residential transactions on ways to relieve the current regulatory burden.

Current thresholds were established in 1994, exempting real estate-related financial transactions with a transaction value below $250,000 and owner occupied business loans below $1 million. More than 20 years later, these thresholds have not been adjusted. The recent financial crises brought about inconsistencies within bank management on appraisal requirements, including their adherence to the 1994 regulations. Many failed banks were cited by regulatory agencies for lax appraisal oversight.

The proposed $400,000 threshold would apply only to transactions defined as “commercial real estate transactions,” which would include any “real estate-related financial transaction,” as defined in Title XI appraisal regulations. This would exclude any loans secured by a one to four family residential property, but include loans that finance the construction of buildings with one to four dwelling units and that do not include permanent financing.  Additionally, the definition would encompass a loan extended to a borrower to finance the initial construction of the dwelling but exclude construction-to-permanent loans. 

This proposal would capture the following four major categories of loans secured by real estate: (1) loans for construction, land development and other land loans; (2) loans secured by farmland; (3) loans secured by residential properties with five or more units; or (4) loans secured by nonfarm nonresidential properties.  Bear in mind, construction-to-permanent loans and those reported as construction, land development and other land loans during the construction phase would be excluded. 

The agencies are not seeking to increase the $1 million business loan threshold but are inviting comment on the appropriateness of raising the current $1 million threshold. Topics of concern are: (1) the risks associated with qualifying business loans; (2) the percentage of total real estate lending at financial institutions that are comprised of qualified business loans; (3) these loans’ average size and level of default compared to other commercial real estate transactions; and (4) a description of any difficulties banks have faced due to the current threshold and interpreting limitations on source of repayment.

Proponents of the increase say that since prices for commercial real estate have increased since 1994, there are an increased proportion of commercial real estate transactions exceeding the threshold level today as compared to 1994. Based on the CRE Index, a commercial property that sold for $250,000 in June 1994 would sell today for approximately $830,000 as of December 2016. Therefore, by proposing the raise to $400,000 the agencies are conservatively approximating prices at the low point of the most recent cycle, which occurred in 2010. 

However, the question of whether housing and construction volumes have tracked inflation comes into play. The purpose of appraisals is to protect borrowers buying or constructing and taxpayers who support government sponsored enterprises and FDIC-insured institutions. Raising this threshold could undermine both borrower protections and safety and soundness, raising the risk of consumers going “under water” in a transaction and leaving banks holding collateral worth less than the loan.

These proposed changes come in response to feedback received earlier this year from the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). With that being said, comments will be due within 60 days after the proposal is published in the Federal Register. The notice can be found here: https://www.occ.gov/news-issuances/news-releases/2017/nr-ia-2017-81a.pdf. As always, look for a summary on this from Compliance Alliance.

CFPB Highlights Pay-by-Phone Fees as UDAAP Issue Area

By Silvia Garcia Maggio, CRCM, Associate General Counsel

On July 31, 2017, the CFPB issued a bulletin warning companies against charging excessive pay-by-phone fees and listed the ways that actions related to these fees are potential violations of the UDAAP sections of Dodd-Frank (1031 and 1036) and also the FDCPA. The bulletin extends to a large number of consumer service entities and not solely to banks, but it is important to take note if your bank does have pay-by-phone fees for services like loan payments, credit card payments, etc.

The CFPB has noted the following activities as being ripe for possible UDAAP violations and heightened scrutiny:

  • Not disclosing all of the pay-by-phone fees if there are different fees depending on the payment method
  • Not disclosing phone pay fees or other options that don’t have fees
  • Not disclosing the pay-by-phone fee in the first place
  • Not indicating that a pay-by-phone fee is added to the payment (for example, indicating the payment is $50, but it’s a $42 payment with an $8 pay-by-phone fee)
  • Failing to have oversight over employees and third-party service providers that could lead to misrepresentation of fees or just not disclosing fees

In addition, the FDCPA has concluded that mortgage servicers who charged pay-by-phone fees were in violation of the FDCPA for collecting fees over the amount expressly allowed by law. That’s something to be aware of if your bank is a “debt collector” pursuant to the FDCPA definitions. The CFPB also provides a list of expectations in their bulletin which should be familiar to anyone with a solid UDAAP or FDCPA procedure, including knowing your state and federal laws (including FDCPA, if applicable), knowing what fees are in your agreements and allowed by state and federal law, reviewing policies and procedures related to payment processing, ensuring information about such fees are in disclosures and advertisements, regular monitoring and auditing of calls and call scripts, ensuring review of consumer complaints related to see these fees, ensuring any third-party service providers have a procedure with these items or follow the bank’s procedures and utilizing your compliance management system to ensure any issues are dealt with effectively.

 If you’re wondering why the CFPB is still talking about UDAAP after the repeal of Regulation AA, you’re not alone. The confusion stems from the fact that Regulation AA was repealed a year and a half ago which was a full two years after the repeal proposal was published, but the age of UDAAP is far from over. As the CFPB has yet to create a new regulation to replace Regulation AA, banks are subject to the unfair and deceptive provisions in the Dodd-Frank Act and the expectation is that banks will follow 2014 guidance (which also follows the FTC Act and FDCPA even though many banks aren’t subject to those rules). The interagency guidance makes it clear that the agencies have UDAAP enforcement authority and that they have authority to enforce the standards that were in Regulation AA. Compliance Alliance has a UDAAP toolkit which you can check out for any of your UDAAP needs.