June 2014 Newsletters

Are Mobile Banking Regulations on the Horizon?

Appraisals on Renewals, Extensions and Modifications

Are Mobile Banking Regulations on the Horizon?

As mobile banking increases in popularity the CFPB is looking into how mobile technologies impact underserved consumers who have little or no access to traditional banking services.

“In a world where people can manage their money on the go, there is great potential to serve more consumers and allow them to take greater control of their finances,” said CFPB Director Richard Cordray in a press release. “But we need to make sure all consumers are protected whether they are opening their wallets or scanning the screen on their smartphones.”

The CFPB issued a request for information (RFI) June 11 to find out how consumers, especially low-income consumers, are using mobile financial services to access products and services and manage finances. While the RFI does not involve mobile point-of-sale payments, the CFPB does want information on how mobile payment products targeted at low-income and underserved consumers benefit or harm them.

The CFPB said mobile financial services can potentially expand access to a large percentage of unbanked and under-banked consumers, many of whom own smartphones.

For example, these consumers may not have a bank in their community, but they can use their smartphones to access traditional banking services. Or making bill payments by accessing their bank account from their smartphones may actually be cheaper for them than an in-branch transaction. The RFI cited an industry estimate that said an in-branch transaction costs $4.25 on average, but a mobile transaction costs only 10 cents.

Plus, these consumers can check balances, get account alerts, transfer funds and make remote deposits more quickly and cheaply. The RFI cited a 2014 Federal Reserve Board survey that said 69 percent of mobile banking users reported checking their account balance before deciding on making a large purchase. Half of those consumers who checked their balances online before making a large purchase decided not to complete the purchase.

Overall, that same Federal Reserve study found that one-third of cellphone users, up from 21 percent in 2011, and more than half of smartphone users, up from 42 percent in 2011, used mobile banking services.

The comment period on this RFI ends Sept. 9, 2014.

Keep in mind when you are considering the mobile banking products what may be coming as a result of the CFPB inquiry, in the way of disclosure requirements, as well as the concerns with security and privacy and how those areas will be addressed via a regulatory requirement. Be proactive with your product development and take the consumer compliance issues into consideration as you develop or continue to offer the mobile banking product suite.

Appraisals on Renewals, Extensions and Modifications

Can the bank rely on an old appraisal when all the lender is doing is renewing, extending or modifying a loan without adding new money? This is a commonly asked question posed by lenders who want to minimize the cost of the transaction, and the answer is YES – but with a caveat.

There is actually a two part test to consider – whether the current appraisal/evaluation is valid, and whether the subsequent transaction requires a NEW evaluation. Let’s tackle the latter test first.

The FDIC, FRB and OCC provide that an appraisal is not required if:

(7)  The transaction involves an existing extension of credit at the lending institution, provided that:

(i)  There has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or

(ii)  There is no advancement of new monies, other than funds necessary to cover reasonable closing costs;

However, even though a new appraisal is not required, you will still need to have an evaluation done under this exception. Specifically, the regulation provides:

(b)  Evaluations required. For a transaction that does not require the services of a state certified or licensed appraiser under paragraph (a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain an appropriate evaluation of real property collateral that is consistent with safe and sound banking practices.

What does this mean? Even if you are exempt from obtaining an appraisal, your institution is still required to obtain an evaluation. Which brings us to the next question; is your existing appraisal/evaluation “valid”, and can it be used as the evaluation for the subsequent transaction?

The interagency guidelines provide:

XIV. Validity of Appraisals and Evaluations

The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. Therefore, an institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid). Such criteria will vary depending upon the condition of the property and the marketplace, and the nature of the transaction. The documentation in the credit file should provide the facts and analysis to support the institution's conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as:

Passage of time.

Volatility of the local market.

Changes in terms and availability of financing.

Natural disasters.

Limited or over supply of competing properties.

Improvements to the subject property or competing properties.

Lack of maintenance of the subject or competing properties.

Changes in underlying economic and market assumptions, such as capitalization rates and lease terms.

Changes in zoning, building materials or technology.

Environmental contamination.

So while the bank may not be required to request a full blown evaluation if you have an existing appraisal, you still need to do an analysis that includes the factors listed above. This is particularly important for transactions that don’t involve any new money. While the transaction is clearly exempt from the appraisal requirement, you would only be able to circumvent the “full blown” evaluation if you considered, analyzed and verified the factors showing the old appraisal is still valid.