November 2016 Newsletters
Last week, federal regulatory agencies (OCC, Federal Reserve, FDIC, FCA, NCUA) finally reissued proposed rules on the acceptance of private flood insurance policies.
Before we review the changes, a little bit of history first. In 2012, Biggert-Waters mandated acceptance of private flood insurance policies if the policies met certain standards, which essentially amounted to being “at least as broad as” an NFIP policy.
In October 2013, agencies issued proposed rulesto implement this along with the new escrow and force placement requirements. Then the Homeowner Flood Insurance Affordability Act came along in March 2014 and amended the escrow and force placement provisions; pushing agencies to move forward with a final rule on those sections in July 2015 and hold back on issuing final rules on private flood insurance until later.
Well, later has come. After considering 81 written comments on the October 2013 Proposed Rule, the agencies have divided the requirements into two different thresholds: 1. If the policy meets the definition of “private flood insurance,” lenders must accept the policy; and 2. if the policy meets only parts of the definition, the lender may accept it but doesn’t necessarily have to.
The proposal begins by clarifying parts of “private flood insurance” as defined by Biggert-Waters and reiterates that lenders must accept any policy that meets all of the definition’s elements. The problem with this approach is it’s particularly burdensome for the lender to review each policy for compliance with every part of the definition.
So the proposal includes a new “compliance aid,” which provides a safe harbor for the lender if it ensures that the following three requirements are met:
1. First, the insurer must include a written summary that describes how the policy meets the definition of private flood insurance. The intent here is to leverage the expertise of the insurer and assist lenders in reviewing what are often lengthy and complicated flood insurance policies.
2. Next, the lender must verify in writing that the policy includes the provisions identified in the summary and that they do satisfy the required criteria. Although this would require lenders to do their own due diligence, it would relieve them from carrying all of the responsibility for determining whether a policy meets all of the definition’s requirements.
3. Finally, the policy must include an “assurance clause,” which basically means that the following sentence has to be included: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
Policies falling short of these requirements would be left up to the lender’s discretion. If the lower-threshold requirements are met, the lender may choose to accept the private policy, but would never be required to. Institutions sensitive to increased implementation costs — which are estimated to be $8,096 on average over the first year — could take advantage of this allowance to cut down on their overall compliance burden.
Even in its revised form, the proposal specifically requests comments on numerous provisions. We encourage our members to review the full proposal here, and submit any comments by the January 6, 2017 deadline.
For additional questions regarding this article, contact Compliance Alliance – and stay tuned to our newsletters and updates regarding PFI. Contact us here at email@example.com
PHH v. CFPB: An Important Precedent
Recently, there has been much discussion in the media about negative interest rates coming to America. Japan, Switzerland and other nations have already implemented negative rates at the government level by telling bond purchasers to take a haircut on the return for government bonds they purchased. With the Federal Reserve yet again refusing to raise interest rates this month, but with the economy also still stagnating, some are left wondering if there’s only a matter of time before the negative rate bug hits our shores. At its worst, negative interest rates could result in a.) banks requiring customers to pay a tax-like premium to hold the customers’ money; b.) banks paying customers a bonus to take out loans or c.) all other manner of horrors … but, in all honesty, these bizarre scenarios probably will remain the stuff of science fiction and interest rates won’t dare dip below zero. Here are a few reasons why:
FDIC Insurance. All accounts have deposits insured by the federal government under statute and regulation for losses up to $250,000. What would happen if U.S. customers were to incur losses due to negative interest rates on existing deposit accounts that have their interest rates tied to an index? True — a loss of funds due to a negative rate is not the same as a loss due to a bank closure — but we are in uncharted territory. Since negative interest rates have never existed in America, nobody could say for certain … it may at the very least result in massive lawsuits against banks and the federal government for failing to honor the central premise of FDIC insurance, which is to protect bank deposits in the event of a loss of funds.
Loss of new deposits, risk of a run. If a customer is presented with the option of either parking her money at a bank and essentially paying the bank to hold onto it or keeping the money herself and not incurring any penalty, which option is more likely? For smaller community banks, it seems pretty clear the latter option would be closer to reality. Obviously, a major loss of new business on the deposit side could result from this. But to take it a step further, what about accounts already on deposit that have interest rates that suddenly turn negative? Lines out the door of customers clutching empty coffee cans and shoeboxes are not completely outside the realm of possibility. The threat of a bank run is likely to make the Fed think twice about dropping rates down to a level that simultaneously ends up penalizing savvy Americans and cratering the amount financial institutions — especially smaller banks — have on deposit.
Bond rates separate from deposit and loan rates. Even if the Federal Reserve ends up lowering central bank rates and/or rates on U.S. government bonds, it’s unlikely to completely trickle down all the way to deposit and loan accounts. This has been the case in other countries that currently have negative or near negative interest rates, such as the U.K. and Germany, and would likely be the case for the U.S. as well. So a temporary dip below 0 in federal rates in order to spur investment from the larger banks may not have any major long-term implications on rates for community bankers at all.
These three major consequences are just a few of the reasons why the Federal Reserve would be wary to try out the unprecedented financial experiment of taking rates negative in the U.S. But stranger things have happened! Make sure to stay vigilant with any news coming out of the Fed about rate decreases in the future, and remember to contact Compliance Alliance with any questions you may have.
Recently, the Consumer Financial Protection Bureau (CFPB) issued its quarterly Supervisory Highlights publication, specifically focusing on the areas of automobile loan originations and servicing; debt collection; mortgage origination and servicing; student loans; and fair lending. (Found at http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13__Final_10.31.16.pdf ) What follows is a summary of the relevant issues the CFPB noted as being regulatory violations.
Regarding automobile lending, the agency was largely complementary, proclaiming that many lenders (including both banks and non-financial institutions) had fairly strong compliance management systems (CMS) in place for these types of loans; these strengths applied both to internal processes as well as the processes of third-party service providers. When it came to servicing, however, the CFPB found that many auto loan servicers were holding or selling off the personal effects of delinquent borrowers that were found inside of repossessed vehicles against the borrowers’ wishes, and often in violation of state law requiring the return of such effects upon the borrowers’ request. This practice was found to be an Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) violation. The CFPB clarified that even if charging a fee for holding such personal effects happens to be authorized by state law, it is a UDAAP violation to “hold those effects hostage” until that fee is paid.
In regard to debt collection, the agency focused on the Fair Debt Collection Practices Act (FDCPA), which chiefly applies to third-party debt collectors rather than institutions attempting to collect their own delinquent debts. Nevertheless, the CFPB found many of these third-party debt collectors were charging unlawful convenience fees for online and telephone payments, and/or were charging fees in excess of state law-required fee caps, both of which violated the FDCPA. The CFPB also found false inquiries into borrowers’ creditworthiness, assertions of fake deadlines, disclosing a borrower’s delinquency status to third parties and failing to provide Regulation E-required preauthorized transfer notices to be FDCPA violations. Then, on the flipside, the agency complimented many debt collectors’ use of established, compliant, telephone scripts and guides.
The CFPB took special note of certain debt collectors’ failure to comply with FCRA requirements. The agency found many institutions did not have adequate FCRA policies and procedures in place as required by Regulation V (12 CFR §1022), particularly when it came to investigating both direct and indirect customer disputes. While this critique is limited to debt collectors in the Highlights, keep in mind that the regulatory requirement for these FCRA dispute procedures extends to both debt collectors and financial institutions alike.
Within mortgage servicing, the CFPB noted a few different practices were found to be in violation of federal regulations. First of all, bankers were failing to adequately verify ability to repay (ATR) for borrowers, as is now required by §1026.43 of Regulation Z for most closed-end mortgages. The agency specifically chastised the use of internet tools that aggregate employer data and income to give a “reasonable” salary figure for a particular profession in lieu of obtaining verifiable third-party records to verify an applicant’s income. Secondly, the agency found certain institutions were not complying with GFE/Loan Estimate timing requirements as required by RESPA and Regulation Z (TRID), and also were violating RESPA by not providing the required list of homeownership counseling organizations. And third, the CFPB noted certain institutions were using a staffing agency to hire loan officers that were not registered as mortgage loan originators (MLO), in clear violation of Regulations G and H, and the SAFE Act.
The CFPB appears to have taken a microscope to student loan lending and collection practices, finding many small instances of what it deems to be UDAAP violations. In particular, the CFPB has taken issue with: improperly denying income-driven repayment applications; failing to properly acknowledge borrower choice for payment allocation among multiple accounts; poor communication regarding interest accrual and payment allocation when loans are paid ahead; and computer/system errors. It’s important for financial institutions to keep close watch on any student loans they may have in their portfolios, as they are clearly a hot-button product and a high-priority for the CFPB.
Finally, the CFPB addressed what it found to be clear issues with fair lending, particularly in regard to non-English speakers and redlining. Regarding non-English customers, the CFPB took umbrage with practices such as exclusive marketing of certain products to non-English customers, the exclusion of non-English customers from things like debt-relief products, and inadequate provision of non-English disclosures and terms to those customers. For redlining, the CFPB did not note any specific violations per se, but provided a helpful guide that generally describes how redlining analyses at a bank should work, based on HMDA/CRA data and other relevant factors.
While none of these concerns are particularly shocking or unexpected, it is vital for financial institutions to stay on their toes regarding what is demanded by the CFPB and the other regulatory agencies in the next couple months, especially in light of the looming change with presidential administrations. Be sure to stick with Compliance Alliance for all updates and answers to your questions during this transitional period!
Contact us here at firstname.lastname@example.org with any questions regarding this article–and click on The Compliance Minute to catch up with our new consumer and regulatory compliance video series.Flood: Insurable Value
One of the most common flood questions we get here at Compliance Alliance is: How much flood insurance do we need to get?
Seemingly a simple question. However, bankers often get lost in the weeds trying to figure this one out, especially in complex transactions involving condominium units or multiple buildings. Really, it comes down to three questions: 1) does the building need to be insured? 2) What is the maximum National Flood Insurance Program (NFIP) amount available for this deal? and 3) Is my loan more or less than the maximum NFIP amount available?
Let’s tackle the first question. You need insurance if it is a “designated loan,” which is defined as a “loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.” In other words, if the building is in a flood zone AND there is an NFIP insurance policy available to cover the structure, then you need insurance. Let’s take the following illustration where a loan is secured by 3 buildings:
In this situation, building #1 and #2 are in a flood zone, but building #3 is not. So, even though Bldg. #3 secures the loan, you don’t need flood insurance on that building.
Next, we now have to determine if flood insurance is available under the Act for buildings #1 and #2 – i.e. can I get an NFIP policy on this? Most of the time the answer is yes; however, there are exceptions. For example, if the building is located in a non-participating community, then NFIP insurance is not available and therefore you don’t need to obtain flood insurance. You can require it, but the borrower would have to go out in the private marketplace to find insurance since it isn’t available through the NFIP.
There are also structures that are specifically not insurable by the NFIP. For example, if Bldg #2 were a “pole barn,” then there would be no policy available for that building under the Act and therefore you wouldn’t need insurance. Other examples of uninsurable structures include: boat repair docks, boat storage over water, certain decks, fuel pumps, gazebos, open stadiums, storage tanks, tents, buildings that are more than 50% underground (per actual cost value), or buildings entirely over water.
Now that we know whether or not we need insurance, we now must calculate how much insurance we need. The regulation provides you need the lesser of either 1) the loan amount or 2) the maximum available under the NFIP. The maximum available under the NFIP is the lesser of $250k ($500k for commercial and multifamily), the “replacement cost value” (RCV) for 1-4 owner-occupied properties, and the “actual cash value” (ACV ) for all other properties. So, for example, a 1-4 dwelling with an RCV of $600,000 would have a maximum NFIP insurance coverage of $250,000. A 1-4 dwelling with an RCV of $200,000 would have a maximum NFIP insurance coverage of $200,000. Remember, the NFIP will not cover losses more than the RCV or ACV.
Replacement Cost Value
This is NOT the market value as listed on the appraisal minus the land value. Rather, you must look at the cost approach to value on the appraisal (usually on page 3 of residential appraisals). To get the RCV, just add up the opinion of value in the cost approach for each building you need to insure. Do NOT deduct for depreciation. You need to insure for the cost of what it would be to replace the building as new – not what it is worth today.
Make sure your appraiser includes a cost-approach as a best practice. If you don’t have a cost-approach, you’ll have to rely on some other valuation, such as the replacement cost on the hazard insurance (and be sure it includes the foundation in the calculation).
Actual Cash Value
For non-owner occupied rental properties and commercial properties, you only need to insure up to the “actual cash value.” It is the same approach as above with the replacement cost, only this time you get to deduct the depreciation. For example, suppose the cost to build the dwelling is $200,000, but the appraiser lists $50,000 depreciation. The “replacement cost” for this building is $200,000; however, you would only need to insure for $150,000, or the “actual cash value,” if this were a non-owner occupied rental or commercial structure.
A final note on multiple structures. The easiest way to determine total coverage is to calculate the minimum insurance you need for each building first, then add it up at the end. Suppose the example above is a commercial deal and we have the following: Bldg #1 has a $650,000 ACV, Bldg. #2 has a $300,000 ACV, and Bldg. #3 has a $1,000,000 ACV. What is the max NFIP in this situation?
Bldg #1: Max for this would be $500,000 – it is the max the NFIP will go, even though the ACV is higher.
Bldg #2: Max for this would be $300,000 – the NFIP will not insure for more than the ACV, so therefore the ACV is the maximum insurance you can get under the NFIP.
Bldg #3 isn’t in a flood zone, so we don’t need insurance for that. So, the maximum NFIP coverage possible for this deal is a total of $800,000 split between $500k on Bldg. #1 and $300k on Bldg. #2.
After this calculation, you now need to look at the loan amount. If the loan is $800,000 or more, then you insure at the max NFIP amount available as described above. (NOTE: You can’t take the value of Bldg. #3 and reduce the insurance – doesn’t work that way).
What if the loan is less than $800,000? Remember, you need the lesser of the loan amount or max NFIP. If the loan is less than $800k (i.e. the max NFIP), then you just prorate the insurance. For example, suppose the loan is for $500k. In this situation, you would split the coverage between Bldg. #1 and #2 in a reasonable manner, say, for example, by pro-rating it by value. In the scenario described above, you could insure Bldg #1 for $361k and Bldg #2 for $139k.
Really, this boils down to three easy steps:
Does this structure (and its contents, if applicable) need flood insurance?
What is the max NFIP for each structure (and contents) in the flood zone?
Add up the max NFIP for all buildings and contents—is this more or less than my loan amount?
Follow these three steps and you should be all set with the proper amount of required flood insurance for each of your real estate loans.
For questions regarding this article, you can contact us here at email@example.com – and click on The Compliance Minute to catch up with our new consumer and regulatory compliance video series.
Last week, a federal judge in Texas blocked the Department of Labor's final rule doubling the salary level used to determine whether employees are classified as exempt from overtime under the Fair Labor Standards Act (FLSA). The rule, which increases the salary level for exemptions from $23,660 to $47,476, was set to take effect tomorrow. District Judge Amos Mazzant issued his ruling in a lawsuit brought by 21 states and several business groups. The injunction prevents the rule from taking effect nationwide pending the court's decision on the merits of the case against DoL.
Regardless of repeal, the ruling will still have a lasting impact on the Department of Labor’s power in relation to setting overtime rules. Specifically, the court ruled that the DOL overstepped its rulemaking authority under the FLSA when it set a “de facto” salary requirement. The DOL rule, the court argues, sets a minimum salary test that effectively supplants the duties test.
The court did not go so far as to say that anysalary requirement violates FLSA. The prior salary rule is still effective at $455 per week. The court argues that the original salary level was purposefully low so as to screen out employees who were clearly non-exempt without having to go through the exercise of determining if the employee meets the duties test.
A copy of the ruling can be found here: www.txed.uscourts.gov/d/26042
For questions regarding this article, you can contact us here at firstname.lastname@example.org – and click on The Compliance Minute to catch up with our new consumer and regulatory compliance video series.