BCC’s Common Lending Violations – Part 2

Banker’s Compliance Consulting writes and trains based on their experience in the field.  They have an intimate knowledge of the issues that face Banks and Credit Unions.  Check out this second edition on their “Top Lending Violations”.  This article as well as many more were featured in their monthly magazine, Banking on BCC.  Once you subscribe, you have access to the archives.

See part 1 here – https://www.bankerscompliance.com/bccs-common-lending-violations-part-1/

Sometimes the best way to learn is from other people’s mistakes.  With that in mind, we put together a list of frequently-cited lending violations, compiled from our in-bank reviews.  Hopefully, these will help reassure you that you are on the right track; if not, they might be the heads-up you need to fix any deficiencies you have. 

TRID Good Faith Effect

For purposes of TRID’s “Good Faith Effect”, establishing what you knew and when you knew it is really only the first step.  Another major consequence of TRID 2.0 was how you calculate tolerances.

The Rule allows “information-only” Loan Estimates to be provided [See the Commentary to §1026.19(e)(3)(iv) #4].  However, any disclosure must be based on the best information reasonably available to the creditor at the time it is provided.  While any fee changes must generally be reflected on revised Loan Estimates, any change not related to a valid changed circumstance may NOT be used for tolerance purposes.  [Commentary to §1026.19(e)(3)(iv) #5]

As a result, whenever there are multiple Loan Estimates or Closing Disclosures, TRID 2.0 made it almost impossible to do tolerance calculations based on those disclosures, since they are to be updated each time.  Many systems continue to struggle with this “good faith effect”. Again, we have a number of resources available in our Free Lending Tools on our website to help explain this.

2.  Fair Lending

From a compliance perspective, Fair Lending is one of the biggest things going!  Most have attempted to address fair lending risk with policy changes and risk assessments, but in many cases, there is still room for improvement.

One of the biggest areas of risk here is discretion, particularly when it comes to loan pricing.  More discretion equals greater risk.  When discretion is allowed, there needs to be monitoring in place to make sure there is not an unfair impact on any protected group.  Whether it be through file reviews or other tracking and monitoring of pricing deviations, you need to get a handle on the risk. 

Training is vital for not only a clear understanding of the fair lending rules and associated risks, but also of your policies, procedures and practices that help mitigate that risk!

3.  ECOA Appraisal Copy and Notice

To comply with the Regulation B/ECOA appraisal notice and copy requirements, step one is making sure the appraisal notice goes out within three business days of the initial ECOA “application date”, whenever a request will be secured by a first lien on a 1-4 family dwelling.  Step two is giving that appraisal and any other type of valuation and ensuring you are documenting when you’re doing so.

Three separate issues can easily come up, solely with just documenting delivery of the free copy.  First, the fact this requirement applies to both consumer AND commercial loan applicants gets overlooked.  We often see that consumer mortgage files have this step well-documented but the commercial and/or agricultural loan files do not.

Second, the rule applies to “all appraisals and other written valuations”.  In other words, coverage is not limited to a third-party appraisal…”valuation” means any estimate of the value of a dwelling developed in connection with an application for credit.  This could be an internal valuation, an automated valuation model, real estate broker price opinion or government-sponsored enterprise report.

Finally, it must be documented that the consumer received the copy “promptly” upon completion of the valuation AND at least three business days prior to consummation.  This can only be documented if you show both when: 1) the valuation is complete; and 2) the copy is delivered.  Only documenting that all valuations were received three business days before closing does not fully satisfy the requirement.

4. Red Flags

The requirements for an Identity Theft Prevention Program are found in 12 CFR 334.90 (which apply to every account…not just consumer accounts…but that’s beside the point).  One of the required elements for the program is that institutions identify red flags for potential identity theft and incorporate them into the program. 

Policies and procedures must be designed to:

Identify red flags that indicate the potential for identity theft; 

Detect those red flags when they are encountered during the day-to-day operations of the bank;

Respond appropriately to any detected red flags; and,

Ensure that the Program is periodically updated.

Files often lack documentation to show that all four steps are happening.  Most struggles are associated with red flags that come from “Alerts, Notifications or Warnings from a Consumer Reporting Agency.”  Most institutions’ policies identify such alerts as Red Flags but, when presented, the alerts are not documented appropriately.  It is a vital part of your program to make sure the detection and response are occurring as well as being documented.

5. TRID Coverage

You need to make sure that the TRID requirements are being applied to all appropriate applications.  Since the very beginning, the TRID requirements have applied to any consumer-purpose, closed-end loan application that is secured by real property.  There are still many misconceptions here, particularly with commercial and/or agricultural lending areas. 

Before TRID came along, there were several exemptions from TIL/RESPA for certain loan types (e.g.,  construction-only loans, bridge loans, loans to be secured by bare land or 25 acres or more).  NONE of these exemptions apply to TRID.

Significant time and effort goes into making sure that TRID disclosures are technically accurate and delivered in a timely manner.  If coverage is misunderstood, however, you risk having a consumer who did not receive any of the required disclosures at all!  It’s not that uncommon for us to see these closed-end, consumer-purpose loans being missed, usually due to a misunderstanding as to what is and is not covered by TRID.  Just one oversight like this could lead to bigger issues, so make sure lenders understand when TRID applies!

We hope you find these to be good reminders of some of the trickier regulatory requirements and a good list to use going forward when auditing and training.

Part 1 of 2

Published
2021/12/03