July 2018 Newsletters

Small Volume Mortgage Lending: S.2155's HMDA Exceptions 

Social Media Promotions

Payday, Payday, Payday—We're Going Down!...Back Into the Land of Payday Lending 

Much Ado About HMDA

Small Volume Mortgage Lending: S.2155's HMDA Exceptions

by Chance Williams, CRCM, Regulatory Compliance Specialist

The Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155) contains amendments to the Home Mortgage Disclosure Act (HMDA). The amendments allow small volume mortgage lenders to be exempted from the expanded reporting of HMDA data. Small volume mortgage lenders will be exempt from the requirements that became effective January 1, 2018 if they meet the following criteria:

  • 500 or fewer closed-end mortgage loans are originated in each of the two preceding years;
  • 500 or fewer Home Equity Lines of Credit (HELOCs) are originated in each of the two preceding years

In conjunction with the aforementioned criteria, the institution must not receive:

  • In the previous two CRA exams a rating of (1) “needs to improve record of meeting community credit needs”; or 
  • In the most recent CRA exam, a rating of (2) “substantial noncompliance in meeting community credit needs.”

The CFPB utilized HMDA data from 2016 and determined small volume mortgage lenders make up 73% of HMDA reporting entities. but only receive 15% of reportable applications. This focuses more on the number of institutions subject to HMDA and less on the percentages of transactions that would be subject to HMDA. The data paints a clearer picture of the role small volume mortgage lenders play in the industry. 

These changes, found in Section 104, will certainly help with the burden imposed on the small volume mortgage lenders; however it will still allow regulators to utilize the traditional HMDA information to determine if the mortgage lending activities warrant a closer look.   

While the intention of the expanded HMDA data was to give regulators a better tool to assess mortgage lending of an institution before asking additional questions; the expanded data would not provide a definite assessment to determine if discrimination is present. To truly determine if discriminatory practices exist in the institution the loan files must be reviewed including underwriting documentation.  Regulators will still have access to pertinent information to make a strong determination once the loan files have been obtained and reviewed. 

One of the most significant results from the S.2155 amendments is the reduction in information that will have to be made public by the small volume mortgage lenders. This will help to put many in the industry at ease—it was a concern that the more information that is put out in the public sector could lead to misuse and false claims of discriminatory practices. Reducing information required for the small volume mortgage lenders will not only lessen the burden while allowing for continued growth. 

Social Media Promotions

by Darlia Fogarty, Director of Compliance and COO

Social media is a very powerful communication tool. Customers can be targeted, support can be provided, and brand attraction can increase with ease. Why not add benefits to get current and potential customers talking? One of the best ways to increase traffic and get customers talking is to give stuff away, right? This does seem to work. However, promoting a giveaway does come with regulations that many don’t understand or even know exist. 

Are banks allowed to promote giveaways? Banks can promote giveaways, as long as the giveaway is not considered a lottery. See 12 USCS §1829a; 12 USCS §339; and 12 USCS §25a.​

Are all giveaways considered lotteries? A lottery consists of three elements: 1) prize; 2) chance (pure luck); and 3) consideration. A prize will always be included. Who enters a giveaway without a prize, right? So this element is never eliminated. One way to avoid accidentally engaging in a lottery is to eliminate chance. In order for participants to win, require some type of skill or put voting requirements in place. However, eliminating chance often limits the number of people who will enter. The alternative and best approach is to eliminate consideration. Typically, “consideration” is money, but it doesn’t have to be. It is possible to push the envelope on this. The number one rule to remember is that no purchase can be required. It’s the law! You must disclose “no purchase necessary” or “no purchase required” or the giveaway will be deemed an illegal lottery. 

How can banks legally promote giveaways using social media? Because interpretations are left open—especially on the issue of consideration. Best practice is to give away prizes for free. Keep this in mind when figuring out what you’ll have people do to participate. The best thing to do, is to always have a means of “free” entry and then consider “optional entries.”

One successful community bank promoted a sweepstakes by asking fans on Facebook to share what they are planning to save money for or what they’re planning to spend less on this year. The sweepstakes was promoted via Facebook, but to enter, the user had to complete a basic form that included a first name, last name, email address, state of residency, and a short narrative about plans to save money for the year. The sweepstakes complied with state laws and Facebook guidelines. It even included the option to share with friends. Savings accounts help customers reach their goals. What better way to create social engagement while increasing brand awareness. 

Are official rules necessary? Yes, every sweepstake, giveaway, drawing, raffle, and contest must have official rules, and they must be easy to find (including a link to the rules in a clear and conspicuous place will satisfy this requirement). Make sure the link is easy to find, and in a place and format that will encourage people to actually read them. 

Payday, Payday, Payday—We're Going Down!...Back Into the Land of Payday Lending 

by Sarah Sauceda, Associate General Counsel

Banks and payday lending – much like cats and people who are allergic to our feline friends - these two things do not usually go together in this day and age. Under President Obama, banks were prohibited from making payday loans—they were viewed under that administration as predatory and, ultimately, harmful to consumers. Currently, payday lending operations are perpetuated by small store-fronts and online providers. However, the current head of the Office of the Comptroller of the Currency (OCC), Joseph Otting, a former bank executive, wants to change this and add banks back into the mix. 
I know, I know – some of you are saying: “Whoa, back up. What exactly is a ‘payday loan’?” Well, my compliance fellows, a payday loan can be summed up as a very expensive cash advance on a person’s paycheck. Often an individual gets a payday loan for happenstances like unforeseen car repair, or another circumstances of the unexpected variety. These loans are often short term-loans and are only for a few hundred dollars at a time. Generally, they carry very high interest rates and are fairly expensive to take out.
So, how expensive is “expensive?” The Federal Trade Commission gives a great example
“Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. … The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent.”  
With this example in mind, these loans can be seen dangerous for consumers in that they have the potential to leave a consumer in a very bad spot.  ​ 

Now that we have covered the basics, what is Otting proposing? During his testimony before the House Financial Services Committee on June 13, he stated that “by getting banks back in that space, I think they get fair, more economically efficient for them, pricing on loans…” His pitch is that if banks get back in the payday game, that rates will be fairer to consumers, and the terms much less predatory. He also expressed the notion that consumers could benefit from a boost to their credit scores if banks were to practice payday lending. 
Like usual in these types of things, there are two sides to every story. The opposition on the other side of the aisle worries that the OCC is engaging in loosening important consumer protections. All in all, it is very early, and the new head of the OCC’s game plan is not fully revealed as of yet, but it certainly is shaping up to be a very interesting year in the world of banking compliance. 

Much Ado About HMDA

By John Berteau, Associate General Counsel

Many of us were excited to see the FDIC’s guidance on HMDA that came out on July 6, 2018. After the Economic Growth Act (S. 2155) passed, we knew a couple things; First, that reporting 2018 HMDA data would change for banks under the reporting threshold; and Second, that because the HMDA section had no effective date, it was effective upon signing – May 24, 2018. However, as the Economic Growth Act is an Act of Law, it “trumps” Regulation C. That being said, there’s been no clear path to reporting because all the impacted regulations will need to be addressed and updated to meet the requirements set forth in this bill. 

As a refresher, section 104 of S.2155 states that banks that make less than 500 closed-end loans will not have to report the new HMDA data points from 2018 on the LAR (Loan Application Register) for closed-end loans. Banks that make less than 500 open-end loans will not have to report the new data points for open-end loans on the HMDA LAR. In addition, the Comptroller General will look at the impact of this threshold change within two years and make suggestions within the next three years.

So, what does FIL 36-2018 (Financial Institution Letter) tell us? Actually, not much more than we already knew. The guidance reiterates the changes made in S.2155. However, there are a couple important take-aways from the scant guidance. First, that the partial exemptions are available now. There’s been some questions as to whether we revert back to old rules or how do we fill out the LAR? And what about exam standards that were specifically set out for 2018? First, we still have the 2018 rules – related to covered loans and thresholds, and submitting to the CFPB (Consumer Financial Protection Bureau). If you’re required to report under this rule, you will continue updating your LAR as you have been since January 1, 2018. If you can utilize this exemption, we at least know that the format of the LAR won’t change per this FIL. How and when reporting will be adjusted to explain whether data collected from January to the end of April will be removed for LAR reporting, or if half the year will have 2018 data points and half won’t, is still completely unclear. 

In addition, in December, the FDIC made a statement about examiner expectations related to the major HMDA changes for 2018. Because of the vast amount of changes, the FDIC indicated they were looking for good faith compliance efforts. For banks no longer having to report it hasn’t been clear as to whether the 2017 standards apply for exams, but this FIL does make it clear the December exam standards still apply in light of this amendment to HDMA. 

Finally, we get an important update about when we’re scheduled to get more complete guidance. The FIL indicates that the CFPB plans to have comprehensive guidance some time before the end of the summer. In the meantime, it’s best practice to touch base with your regulator when looking for guidance on making comprehensive guidance on any of the various regulations impacted by S.2155. You can find our federal regulatory summary of S.2155 on the website and find the full FDIC FIL Home Mortgage Disclosure Act here.