Compliance Insights - May 2017

Compliance Insights - May 2017

A Call to Streamline State Supervision of MSBs

Call Report (MSB Call Report), a new resource made available in the Nationwide Multistate Licensing System and Registry (NMLS). The NMLS, originally developed as a voluntary system and later codified in the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), is a web-based system of record for state-licensed nondepository licensing and registration.

The MSB Call Report is designed to streamline multistate regulatory oversight, help bring uniformity to licensing requirements, and provide increased transparency and collaboration to state supervision. The use of a standardized Call Report has been successful with other business areas, such as the mortgage industry.

With the adoption of the MSB Call Report, MSBs will be able to complete a single form when submitting periodic financial information to participating state regulators, a much-welcome relief for MSBs subject to state-specific reporting requirements in varying formats. (Development of the MSB Call Report has been underway since 2015, and entities that hold MSB licenses in a state that has adopted the MSB Call Report are required to file their initial quarterly MSB Call Report by May 15, 2017.)

Similar to the key reporting elements required by many states, the MSB Call Report consists of four sections:

  • Financial Condition Report: Collection of financial information at the company level required once per quarter. Financial information of subsidiaries of licensees must also be included in the submission.
  • Transaction Activity Reporting: Collection of transaction details required once per quarter across the entire company, broken down by state. The section is organized by transaction type such as money transmission, check cashing and virtual currencies.
  • Permissible Investment Report: Collection of details for license types. Unless otherwise specified by state regulators, this section is not required for check cashers or currency exchangers.
  • Transaction Destination Country Reporting: This feature is not yet available on NMLS but is expected to be available by the fourth quarter of 2017 to collect information on entities that transmit money from the United States to a foreign jurisdiction.

All data submitted in the MSB Call Report is confidential; however, while the SAFE Act does not specifically indicate that it includes MSBs, it does indicate that information provided in the NMLS can be shared with all state and federal regulatory officials. To help entities prepare for submission of the MSB Call Report, the NMLS provides tools including sample file formats, field definitions, practice worksheets, upload specifications and frequently asked questions.

With the adoption of the MSB Call Report, state regulators may be able to glean and compare more meaningful data across borders, identify regional and national trends, and develop a more acute risk-based model for supervising the MSB industry. Although not all states have adopted the uniform MSB Call Report, it is nonetheless a signal that state regulators are making an effort to coordinate oversight and add consistency to the registration and licensing process, a practice that may result in creation of a comprehensive database storing nationwide MSB activity. To help ensure compliance, MSBs should review the list of state agencies and licenses that have adopted the MSB Call Report and stay apprised of NMLS and state-specific reporting obligations, ensure reporting functions are aware of revised protocols, and review and update control frameworks accordingly.

Key Amendments to the Mortgage Servicing Rules Aim to Strengthen Protections for Borrowers

In August 2016, the CFPB issued a Final Rule amending certain provisions of Regulation X (Real Estate Settlement Procedures Act, or RESPA) and Regulation Z (the Truth in Lending Act). The Final Rule, several hundred pages long, makes significant changes intended to provide greater protections for borrowers. Additionally, the Final Rule provides clarification on several existing regulations that previously caused much confusion with servicers. While some changes have an implementation date of April 2018, many of the changes will be effective in October 2017, fewer than six months away.

The key changes that will impact a servicer’s procedures and technology platforms include:

  • Successors in Interest: Slightly varying, but similar, definitions of “successor in interest” have been added to subpart C of Regulation X and Regulation Z. Under the Final Rule, successors are defined as a very broad class of transferee and receive all protections under the Final Rule. The most noteworthy change in the Final Rule is that successors may now obtain interest in a property while a transferor is still living.
  • Lender-Placed Insurance: The Final Rule amends the lender-placed insurance disclosures and model forms to account for circumstances in which a servicer wishes to place insurance when the borrower has insufficient rather than expiring or expired insurance coverage on the property.
  • Definition of Delinquency: The Final Rule clarifies the definition of “delinquency” to be the day that a periodic payment sufficient to cover principal, interest and escrow (if applicable) is due and unpaid, until such time that no periodic payment is due and unpaid.
  • Loss Mitigation: The Final Rule revises and clarifies several of the loss-mitigation requirements of Regulation X. Among the many important changes, the Final Rule requires that servicers now must meet the loss-mitigation requirements more than once during the life of the loan for borrowers who become current on payments at any time between a borrower’s prior complete loss-mitigation application and a subsequent application. Additionally, the Final Rule clarifies how a servicer must select a “reasonable date” by which a borrower should return documents and information to complete the loss-mitigation application.
  • Borrowers in Bankruptcy: The Final Rule requires servicers to communicate with borrowers who are in bankruptcy. Servicers will now be required to provide modified periodic statements that will identify the consumer’s status as a debtor in bankruptcy and indicate that the periodic statement is provided for informational purposes only.
  • Periodic Statements and Coupon Books: Provided that the servicer meets certain conditions, servicers will not be required to send periodic statements or coupon books if the loan is charged off. Further, there are new requirements for periodic statements and coupon books for borrowers who are in a loss-mitigation trial plan and permanent plan.

The above highlights several of the key changes but certainly is not inclusive of all changes as outlined in the Final Rule. It is important for all mortgage servicers to review and understand the Final Rule and how the changes will affect daily operations, compliance oversight and technology platforms.

CFPB Issues 2016 Fair Lending Report

In April 2017, the Consumer Financial Protection Bureau (CFPB) published its 2016 Fair Lending Report (Report), which shares enforcement and supervisory activity for the previous year, details how the agency will prioritize fair lending efforts for 2017, and provides rulemaking updates.

The Report notes that through 2016, the CFPB’s supervisory and enforcement activities have covered significant portions of the nation’s lending markets, including:

  • Institutions that provide more than 85 percent of outstanding credit card balances
  • Institutions responsible for more than 60 percent of Home Mortgage Disclosure Act (HMDA) reportable transactions
  • Institutions representing roughly 60 percent of auto lending market by volume
  • Institutions responsible for approximately 10 percent of small-business lending (nonagricultural).

Supervision and enforcement efforts for the year prompted remediation to harmed consumers of approximately $46 million. Public enforcement actions were taken in two mortgage and two indirect auto lending cases. Specifically noted in the report were the following:

  • A mortgage company was fined for discriminatory mortgage lending practices that harmed African Americans and other minorities. Among the practices identified were redlining in Memphis, higher charges for African American consumers and an explicitly discriminatory denial policy. This was the first CFPB investigation in which it employed mystery-shopping testers to support an allegation of discrimination.
  • An automobile credit corporation had an unfair lending practice in place that resulted in thousands of minority borrowers paying higher interest rates than similarly situated non-Hispanic white borrowers for their auto loans.While $21.9 million in restitution to affected borrowers was ordered, no penalties were assessed because of the proactive steps the corporation took to address its fair lending risks related to discretionary pricing.

The CFPB’s efforts noted above have achieved significant progress in its previous areas of focus and have identified areas of emerging risks. Using its risk-based prioritization process, the CFPB has decided to increase its focus during 2017 on the following areas:

  • Redlining: The CFPB will evaluate whether lenders have avoided lending in neighborhoods with high minority populations
  • Mortgage and Student Loan Servicing: The CFPB will evaluate whether some delinquent borrowers have a more difficult time negotiating a solution with the servicer based on their race, ethnicity, sex, or age
  • Small-Business Lending: The CFPB will conduct supervisory reviews to enhance its knowledge related to the management of fair lending risks faced by woman-owned and minority-owned businesses, lending processes, and data collection.

In addition to highlighting the CFPB’s focus for 2017, the Report included fair lending rulemaking-related activities undertaken during 2016, including:

  • A Request for Information (RFI) was issued related to HMDA resubmission guidelines
  • Technical corrections were proposed to clarify certain key terms in HMDA Regulation C along with other minor changes
  • Official approval was granted under the Equal Credit Opportunity Act (ECOA) Regulation B to begin to utilize a recently updated Uniform Residential Loan Application (URLA)
  • Amendments to the ECOA Regulation B were proposed to facilitate collection of information related to ethnicity, sex and race of mortgage applicants.

The 2016 Fair Lending Report highlights the CFPB’s continued emphasis on fair lending. Accordingly, lenders should continue to strengthen their fair lending compliance management systems to provide broad coverage over their fair lending risks. Specific enhancements to a lenders program noted in the report are special purpose credit programs (SPCP) to promote credit for any class of underserved persons, and language services for Limited English Proficient (LEP) consumers. These are two programs that, if executed appropriately, could illustrate to the CFPB that the financial institution took steps to improve its fair lending programs. Lenders should also consider increasing the priority of monitoring and testing related to redlining, mortgage and student loan servicing, and small business lending.

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