Your monthly compliance news roundup
- OCC Issues Guidance for Short-Term, Small-Dollar Consumer Installment Lending
- OCC Provides Insight into 2018 BSA/AML Priorities and Publishes Updates to BSA/AML Guidance in Comptroller’s Handbook
- Congress Restores Provisions of the Protecting Tenants at Foreclosure Act
- Bureau Issues TILA-RESPA “Know Before You Owe” Amendments
In May 2018, the Office of the Comptroller of the Currency (OCC) issued new guidance for its supervised banks regarding short-term, small-dollar consumer installment loans, which it defines as those repaid in equal amortizing payments, usually over a period of two to 12 months. The guidance encourages financial institutions to consider certain core lending principles when offering these loans and to manage applicable risks prudently and consistently with the organization’s overall compliance risk management program and strategy.
The OCC previously issued guidance related to deposit advance products, or short-term loans that are linked to and repaid from consumers’ deposit accounts following a qualified deposit, such as a consumer’s paycheck. The guidance was rescinded in October 2017 after it was determined that it might conflict with the Bureau of Consumer Financial Protection’s (BCFP) final Payday, Vehicle Title, and Certain High-Cost Installment Loans rule (Payday Rule), issued in October 2017 and effective in August 2019, which covers loans with terms of less than 45 days and certain longer-term loans with a balloon payment option.
The new guidance establishes a schedule of policies and practices that the OCC defines as reasonable – and which are likely expected – for financial institutions offering short-term, small-dollar installment loans. The guidance includes specific considerations for operational and risk management practices throughout the lending lifecycle, from loan marketing, underwriting and pricing to servicing and the furnishing of consumer report information. Key regulatory compliance considerations include but are not limited to the:
- Equal Credit Opportunity Act (ECOA), in particular technical compliance associated with the application, processing and underwriting functions, and fair and equal treatment considerations associated with the above functions, plus marketing/advertising and servicing
- Truth in Lending Act (TILA), in particular complete and accurate disclosures, including proper calculation of the annual percentage rate (APR), treatment of credit balances and advertising
- Unfair or Deceptive Acts or Practices (UDAP) and Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), in particular processes such as advertising, disclosures and servicing, including debt collection
Additionally, the OCC makes clear that it expects not only technical compliance with applicable legal and regulatory requirements, but also sound compliance risk management and governance practices. Financial institutions should anticipate examinations based on the standards set forth in this guidance.
As whenever considering a new or revised product or service, a best practice for financial institutions is to perform an initial risk assessment which considers all potential risks and affected lines of business/departments to identify gaps in policies, processes, procedures, systems, etc., and determine the financial feasibility of the new product or service. Due to regulatory focus and inherent risks historically associated with short-term, small-dollar installment loans, institutions’ regulatory compliance functions should be included throughout the end-to-end risk assessment and change management process. National banks should note that the OCC specifically encourages financial institutions to proactively discuss any plans to begin offering new short-term, small-dollar loans with their respective examiners or supervisory office prior to implementation.
OCC Provides Insight into 2018 BSA/AML Priorities and Publishes Updates to BSA/AML Guidance in Comptroller’s Handbook
In June 2018, the Comptroller of the Currency discussed in testimony before the Senate Committee on Banking, Housing, and Urban Affairs the key priorities for the OCC. During this testimony, the Comptroller expressed the OCC’s desire to become more efficient in safeguarding the nation’s financial system from criminals and terrorists and in his remarks noted the following priorities:
- Allowing flexibility for regulators to schedule and scope Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) examinations in a risk-based manner and to tailor oversight to the risks and business models of supervised institutions;
- Revising Suspicious Activity Report (SAR) thresholds and simplifying required forms; and
- Exploring new technologies to reduce the reporting burden imposed on financial institutions and enable more effective access by law enforcement.
In addition, the OCC published updates to the Comptroller’s Handbook that include revised guidance for assessing BSA/AML and Office of Foreign Assets Control (OFAC) risks. The updates, among several published by the OCC in this release, revise the Community Bank Supervision booklet to include a framework of qualitative and quantitative factors to be considered when evaluating BSA/AML and OFAC risks and define the characteristics of low, moderate or high risk within each indicator.
Quantitative risk indicators defined include, among others, the bank’s customer base, product and servicing offerings, and geographic location. The updates also include guidance for assessing the risk of certain qualitative risk indicators, such as the strength of the compliance culture, number and management of compliance deficiencies, and strength of the BSA/AML and OFAC compliance programs. The revisions borrow from guidance included in the Federal Financial Institutions Examination Council’s (FFIEC) BSA Examination Manual (Appendix J and Appendix M) and further align the examination frameworks.
Financial institutions should continue to monitor indications by the OCC regarding its rulemaking, examination and enforcement agendas. While the Comptroller’s remarks before Congress hint at the potential for some regulatory relief, institutions should continue to maintain robust BSA/AML and OFAC compliance programs. In the meanwhile, financial institutions should take tactical steps to address the updates to the Comptroller’s Handbook. Specifically, financial institutions should evaluate BSA/AML and OFAC risk assessment methodologies to ensure that the revised quantitative and qualitative risk factors are appropriately included and are evaluated consistently with the risk characteristics as defined in the updated Handbook.
On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law, consequently restoring certain provisions of the Protecting Tenants at Foreclosure Act of 2009 (PTFA). The PTFA, which was originally enacted in 2009 and subsequently sunset in December 2014, extended certain federal protections to tenants, which have not been permanently restored. Previously, protections for tenants were principally governed by individual state laws.
A “tenant” refers to a person who has been given the right to use and occupy rental property owned by another person, usually through a lease or rental agreement. A tenant’s right to exclusive enjoyment of the property is typically granted in exchange for an agreed-upon amount of money and is limited to a fixed time period, as set forth in the lease agreement. The PTFA addresses a tenant’s right to remain in the property after the property has gone through foreclosure.
Consistent with its original enactment, the PTFA applies to mortgage loans secured by a first or subordinate lien on a residential real estate property. The PTFA is intended to protect “bona fide” tenants and tenancies in residential single-or multi-family properties. Under the PTFA, a tenant is not “bona fide” if the following criteria are met:
- The tenant is the borrower or the borrower’s spouse, child or parent;
- The tenancy was not the result of an arms-length transaction; or
- The tenant is paying substantially less than the fair market rent, unless the rent is reduced or subsidized pursuant to applicable law.
Bona fide tenants are granted certain rights and protections under the PTFA, and the successor-in-interest, or the party assuming ownership following foreclosure, is responsible for appropriately implementing these protections.
The protections offered to tenants under the PTFA include requirements to provide advanced written notice of eviction and lessee rights to occupy a property until the term of a previously originated lease expires. The immediate successor-in-interest of a foreclosed property must provide to a tenant written notice of its requirement to vacate the property 90 days in advance of the date that title is transferred to the successor-in-interest. Further, if a bona-fide tenant entered into a lease prior to the date title is transferred to the successor-in-interest, the tenant has the right to remain in the property until the lease term expires unless the successor will occupy the property as a principal residence.
When a residential property goes through foreclosure and ownership reverts to the financial institution, the property is typically referred to as “other real estate owned” (OREO) and the institution must comply with the PTFA. Financial institutions with OREO properties in their portfolio should take steps to evaluate internal policies, procedures and practices to ensure compliance with these provisions. In anticipation of regulatory examinations and increased litigation regarding these requirements, financial institutions should ensure that:
- Tools and processes have been established to easily identify OREO properties;
- Policies and procedures are updated timely and completely to comply with PTFA;
- Training is provided to all personnel with relevant responsibilities; and
- Compliance reviews and internal audits appropriately evaluate compliance with restored provisions of the PTFA.
In April 2018, the BCFP finalized amendments to its TILA-RESPA Integrated Disclosures (TRID) rules for mortgage disclosures. The amendments aim to address instances in which a mortgage lender may pass increased costs on to a customer and the appropriate disclosure of such costs on the Closing Disclosure provided to their borrower.
The TRID rule, which is often referred to as “Know Before You Owe,” originally took effect in October 2015 and combined certain loan disclosures into the newly established Loan Estimate and Closing Disclosure. Under the rule, creditors are to provide consumers with a good faith estimate of the charges related to the loan three days following application in the loan estimate, and three days prior to consummation in the closing disclosure. The TRID requirements allow for the revision of estimated charges to consumers prior to consummation; however, creditors were prohibited from providing revised loan estimates later than four days prior to consummation to avoid confusing consumers with concurrent or nonsequential disclosures.
The result of these restrictions created what the BCFP and creditors have referred to as the “black hole” effect. Certain instances existed in which creditors have identified the need to update estimates of closing costs previously disclosed to a borrower on a Loan Estimate or Closing Disclosure in order to more accurately reflect the costs associated with the loan; however, the mechanics of the original rule limited a creditor’s ability to do so if a Closing Disclosure had already been provided and the time frame between the re-disclosure date and the loan consummation date was four or more business days. A creditor’s inability to provide updates to consumers resulted in situations in which the creditor would be required to absorb the increased closing costs for the loan, because the creditor would be unable (per the old rule) to provide a revised disclosure to the borrower informing the borrower of these changes. The final amendments to TRID now permit a creditor to provide an updated Closing Disclosure to include otherwise-permissible changes to the creditor’s Loan Estimates regardless of when the initial Closing Disclosure was provided.
These amendments become effective on October 1, 2018. Creditors should evaluate policies, procedures and practices to validate that loan origination and disclosure protocols effectively comply with the revised requirements.
It is important to note that this newsletter is provided for general information purposes only and is not intended to serve as legal analysis or advice. Companies should seek the advice of legal counsel or other appropriate advisers on specific questions and practices as they relate to their unique circumstances.