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Financial Solutions * November 2018 1
2018 COMMERCIAL LENDING COMPLIANCE
Patti Joyner Blenden, CRCMNovember 2018
COMMERCIAL REAL ESTATE LENDING
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Commercial Lending Compliance
Financial Solutions * November 2018 2
FRB ATLANTA: SOUND RISK MANAGEMENT AND COMMERCIAL RE CONCENTRATIONS (FEB 2017)
WWW.FRBATLANTA.ORG/ECONOMY-MATTERS/BANKING-AND-FINANCE/VIEWPOINT/2017/02/14/SOUND-RISK-MANAGEMENT-AND-COMMERCIAL-REAL-ESTATE-CONCENTRATIONS
FRBSR 07-1Jan 2007
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FRB ATLANTA: SOUND RISK MANAGEMENT AND COMMERCIAL REAL ESTATE CONCENTRATIONS
The key to successful commercial real estate (CRE) lending is the development of a robust risk management framework that includes strong underwriting standards and credit administration practices. A January 2013 Government Accountability Office (GAO) study, Financial Institutions Causes and Consequences of Recent Bank Failures, noted that 85% of the 414 financial institutions that failed between January 2008 and December 2011, had less than $1 billion in assets.
The study also found that the failed financial institutions pursued aggressive growth strategies, combined with weak underwriting standards and weak credit administration practices. These actions led to high CRE concentrations that increased the banks' exposure to the sustained real estate and economic downturn that began in 2007. Ten states experienced 10 or more bank failures between 2008 through 2011. Together, failures in these 10 states made up 298 of the 414 bank failures (72%) across all states during this time period.
Feb 2017
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FRB ATLANTA: SOUND RISK MANAGEMENT AND COMMERCIAL REAL ESTATE CONCENTRATIONS
Currently, there is some concern that the credit cycle may be about to change. Community banks that identify, monitor, manage, and control risks arising from CRE lending activity should maintain underwriting discipline and prudent risk management practices. Financial institutions should meet regulatory expectations found in SR 15-17. The regulatory expectations indicate that financial institutions should: Review their CRE policies and practices to ensure consistency with current growth strategies and risk appetite,
Maintain sound risk management practices that support strategic initiatives and portfolio composition, and
Maintain capital levels commensurate with the level and nature of their CRE concentrations risk.
Feb 2017
CRE Guidance is detailed in SR Letter 15-17, Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending, and SR Letter 07-01, Interagency Guidance on Concentrations in Commercial Real Estate.)
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OCC SEMIANNUAL RISK PERSPECTIVE SPRING 2018
The OCC reported credit, operational, compliance, and interest rate risks are key themes for the federal banking system in its Semiannual Risk Perspective for Spring 2018, released May 24, 2018. Highlights include: Competition for quality loans is strong, as examiners note evidence of eased underwriting. The
accommodating credit environment warrants a continued focus on underwriting practices to monitor and assess credit risk and lender complacency.
Operational risk is elevated as banks adapt business models, transform technology and operating processes, and respond to evolving cyber threats.
Compliance risk is elevated as banks manage money laundering risks and implement changes to policies and procedures to comply with amended Bank Secrecy Act and consumer protection requirements.
The continued increase in market interest rates may eventually lead to higher funding costs for banks, as economic growth increases loan demand and competition for funding pressures banks to raise deposit yields.
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FDIC SUPERVISORY INSIGHTS
Forward-looking credit Management Information Systems (MIS) provide a powerful tool in the risk management and strategic decision-making process. Whereas performance metrics primarily convey what has occurred in the portfolio, forward-looking metrics assist in identifying underlying risks that could potentially affect future performance.
The FDIC conducted a horizontal review of credit MIS programs that identified strong and weak practices. This article illustrates how banks can strengthen credit MIS by incorporating forward-looking risk indicators and establishing a sound governance framework.
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FDIC SUPERVISORY INSIGHTS
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Commercial Lending Compliance
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FDIC SUPERVISORY INSIGHTS
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HVCRE ADC LOANS
Pre-EGRRCPA, a high volatility commercial real estate (HVCRE) exposure is a credit facility that finances, prior to conversion to permanent financing, the acquisition, development or construction (ADC) of real property unless an exception applies.
EGRRCPA redefines HVCRE ADC loan as a RE secured credit that: Primarily finances the ADC of real property;
Provides financing to acquire, develop or improve such real property into income-producing real property; and
Is dependent on future income or sales proceeds from, or refinancing of, such real property for the repayment of the loans
The new law requires a loan to meet both the definition of an HVCRE and an HVCRE ADC loan to be subject to the higher capital requirements.
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EGRRCPA SECTION 214 HVCRE
Prior to the EGRRCPA, banks generally were required to classify facilities financing commercial real estate projects as HVCRE, unless the developer contributed capital of at least 15% of the estimated “as completed value” of the project. Under that rule, capital included cash, unencumbered readily marketable assets, and out of pocket-
expenses.
Being classified as HVCRE means the exposure must be given a risk weight of 150% instead of the 100% weight given to other CRE exposures, requiring banks to hold more capital to finance those projects.
Section 214 allows banks to classify certain credit facilities that finance the acquisition, development, or construction (ADC) of commercial properties as regular commercial real estate exposures instead of high volatility commercial real estate (HVCRE) exposures for the purposes of calculating their risk-weighted capital requirements
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EGRRCPA SECTION 214 HVCRE
Section 214 offers a number of additional avenues for CRE exposures to avoid or shed HVCRE status.
Allows the appraised value of the property being developed to count as a capital contribution, providing another avenue to reach the minimum 15% threshold.
Allows certain credit financing the acquisition or improvement of already-income-producing properties to avoid classification as HVCRE, provided the cash flow is sufficient to support the property’s debt service and other expenses.
A HVCRE could achieve reclassification when the property development is substantially completed or when it begins generating cash flow sufficient to support the property’s debt service and other expenses.
A lower capital requirement gives banks greater incentive to make HVCRE loans, but provides banks with less capital cushion against potential losses on what has been historically a risky credit category.
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Commercial Lending Compliance
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REAL ESTATE APPRAISAL INTERAGENCY GUIDELINES
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REAL ESTATE VALUATIONS
Appraisal
Written factual, accurate and adequately supported statement independently and impartially prepared by a qualified appraiser as to the market value of a property as of a specific date(s), supported by the presentation and analysis of relevant marketing information such as:
Condition of the property, Surrounding neighborhood, Market trends, and Market value of the property
Evaluations
For certain transactions, the agencies have determined that a “formal opinion of market value prepared by a State licensed or certified appraiser is not always necessary. Use appropriate method to obtain valuation:
Sales comparison approach, Cost approach, and Income approach
Anyone with real estate-related training or experience and knowledge of the market relevant to the subject property can perform an “evaluation” and the financial institution is permitted to determine in advance how comprehensive it wishes the evaluation to be.
2010 Interagency Statement
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APPRAISAL & EVALUATION PROGRAM Every bank is responsible for establishing an effective real estate appraisal and evaluation program
Must be reviewed and approved by the Board or a board committee
Review and approve annually
Independence in ordering, performing and reviewing valuations
Establish selection criteria and procedures to evaluate and monitor of evaluators/appraisers
Ensure appraisal compliance
Ensure appraisals contain sufficient info to support credit decision
Maintain criteria for appropriate content and use of appraisals and evaluations
Timely receipt and review of appraisals before credit decision
Assess whether an existing valuation may be used for subsequent transaction
Internal controls, including third party monitoring
Monitor collateral values
Criteria for obtaining valuations for transactions not otherwise covered by regulations and guidelines
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GUIDELINES REQUIRE NEW APPRAISAL
If market value has changed due to various factors, including, but not limited to: Passage of time
Volatility of the local market
Changes in terms & availability of financing
Natural disasters
Limited or oversupply of competing properties
Improvements to the subject property or competing properties
Lack of maintenance of 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
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March 4, 2016
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2016 INTERAGENCY ADVISORY REGARDING USE OF EVALUATIONS
FI required to obtain an appraisal completed by a competent and qualified state-licensed or state-certified appraiser that complies with the Uniform Standards of Professional Appraisal Practice (USPAP) for any real estate-related financial transaction unless an exception applies.
If an exception exists, an appraisal is not required, but an evaluation is required. FI may go beyond the requirements if it deems it necessary or prudent specific to the transaction.
For example, the FI may wish to obtain an appraisal: Due to a credit risk management perspective
If required as a prerequisite for participation in secondary market transaction
The FI’s portfolio risk is increasing
Higher-risk real estate-related financial transactions
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2017 REAL ESTATE APPRAISAL SHORTAGE RELIEF
In response to nationwide cries for help regarding limited availability of state-certified and -licensed appraisers, the FRB, FDIC, NCUA, and OCC released an interagency advisory on May 31, 2017 highlighting two immediately available options to facilitate the timely completion of federally related transaction (FRT) loan applications:
Temporary practice permits allow appraisers credentialed in one state to provide comparable services in another state experiencing a shortage of appraisers, subject to state law. The advisory also encourages reciprocity between states, facilitating streamlined multi-state certification or licensing.
Temporary waivers may be granted when it is determined that there is a scarcity of state-certified or -licensed appraisers leading to significant delays in obtaining real estate appraisals in geographic areas meeting certain conditions.
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2018 INTERAGENCY APPRAISAL GUIDANCE
Collectively, the FRB, FDIC and the OCC adopted a final rule effective April 9, 2018, (83 FR 15019) creating a new definition of, and a separate category for, commercial real estate (CRE) transactions and raised the previous FIRREA Title XI threshold for requiring an appraisal from $250,000 to $500,000 for those transactions.
Remember, the threshold is based on the loan amount (referred to in the regulation as the transaction value), not the estimated value of the real property!
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APRIL 2018 CRE APPRAISAL GUIDELINES
Commercial real estate transactions are mortgage loans NOT secured by a single 1-to-4 family residential property.
An estimated 15.7% reduction in CRE appraisals is anticipated (FDIC FIL-14-2018) by the Agencies, saving time and money for both customers and financial institutions.
Banks must continue to follow the existing 1-to-4 family residential property valuation regulations that require an appraisal performed by a certified or licensed appraiser for all mortgage transactions of $250,000 or more.
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QBL APPRAISAL THRESHOLD
The Qualifying Business Loan (QBL) appraisal threshold remains unchanged, requiring a formal appraisal for any transaction amount in excess of $1 million.
This is applicable to real estate secured business loans that are not dependent on the sale of, or rental income derived from, the securing real estate as the primary source of repayment.
As a result, banks must now consider three general RE transaction value (loan amount) thresholds ($250,000, $500,000 and $1 million) when deciding if a real estate appraisal or an evaluation is required.
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Real Estate Appraisal
Thresholdsas of
April 9, 2018
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BENEFICIAL OWNERSHIP
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CUSTOMER DUE DILIGENCE (CDD): BENEFICIAL OWNERSHIP
FinCEN’s final rule was effective May 11, 2018
Enhances CDD requirements by mandating that financial institutions identify and verify the identity of the beneficial owners of their legal entity customers
Two-Pronged Test Ownership – Identify up to 4 individuals with 25% or more direct or indirect ownership in the
entity’s equity
Control – Identification of one individual with significant responsibility to control, manage, or direct a legal entity
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LEGAL ENTITY CUSTOMER
An entity that files a public document with a Secretary of State, or similar state official or office, including any similar entity formed under the laws of a foreign jurisdiction. Charitable organizations and other specified entities are subject only to the Control Prong
Other excepted entities as specified by FinCEN
Financial institutions are NOT required to collect beneficial owner information for a number of “legal entity customers,” including, but not limited to: Banks and bank or savings and loan holding companies
Certain pooled investment vehicles
State-regulated insurance companies
Entities registered with SEC and CFTC
Financial market utilities (as designated by the Financial Stability Oversight Council)
Foreign financial institutions (to the extent a foreign regulator collects beneficial owner information relating to the ownership of the foreign financial institution)
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FIVE PILLARS OF AN EFFECTIVE AML PROGRAM?
Board approved policies and procedures
A designated compliance officer
An ongoing training program
An independent audit function
Conduct customer due diligence Understand the nature and purpose of customer relationships for the purpose of developing a
customer risk profile
Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information, including beneficial owner information
27Note: FinCEN uses “Five Pillars” and prudential regulators do not!
LEGAL ENTITY CUSTOMER ENHANCED TRANSPARENCY
Identify and verify customer identity
Identify and verify beneficial owners
(Individuals!!)
Understand the nature and purpose of customer
relationship
Conduct ongoing monitoring to identify and
report suspicious activity
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BENEFICIAL OWNERSHIP
Must verify the identity of the individual identified as a beneficial owner, but NOT his or her status as a “beneficial owner.”
Required identity information can be obtained by any means, and records of the information can be kept in any manner that satisfies the applicable recordkeeping rules. Recommend using a format similar to FinCEN’s sample certification form
The CDD Rule is not retroactive; it does not require a “lookback” to obtain beneficial ownership information from existing customers, unless those customers experience a triggering event. Customer information should be updated on an event-driven basis in the course of normal monitoring
activity. For example, opening a new account, applying for a new loan, requesting signature card or transaction authorization updates, replacing existing guarantors with new individuals, etc.
FinCEN has released two Frequently Asked Questions (FAQ) documents and a follow-up clarification statement regarding automatically renewing accounts
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NATURAL PERSON REQUIRED INFORMATION
Natural person (“individual”) opening the account – name and title
Legal entity customer – full legal name and principal address
Beneficial owners: Name (plus title for the controlling individuals)
Date of birth
Address
Identifying number Social Security Number for US Persons or
Passport number and country of issuance or similar documentation for non US Persons
New CDD rule does not require that beneficial verification steps be identical to CIP requirements We caution you NOT to pull a credit report on a beneficial owner.
Okay to utilize documentary evidence or non-documentary such as a consumer non-credit report.
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CREDIT INQUIRIES & APPLICATIONS FOR CREDIT
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COMMERCIAL CREDIT APPLICATIONS
ECOA and Reg B do not require written applications for business credit.
Unfortunately, the lack of a written application frequently makes it very unclear as to who the applicants actually are.
Reg B prohibits a creditor from presuming that the submission of joint financial information constitutes an application for joint credit.
A person's intent to be a joint applicant must be evidenced at the time of application. Separately acknowledge intent to apply jointly.
Signatures at bottom of application itself does not comply.
Get the acknowledgement AGAIN at refinance or modifications
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WRITTEN COMMERCIAL APPLICATION?
Traditionally many financial institutions have not required formalized, written applications for commercial borrowers
Frequently use informal conversation with borrowers, emails, acceptance of financial statements of the business principals or owners, and financial statements of the business
Should you mandate the use of a written commercial application?
Best practice to protect your lenders and the bank is require a written application to mitigate the risk of: Fair lending discrimination issues,
Equal Credit Opportunity Act (ECOA) requirement to provide notice and valuation copies for all 1st lien mortgage loans secured by dwelling
Home Mortgage Disclosure Act (HMDA) compliance violations, and
In anticipation of still outstanding Dodd Frank Act Section 1071 Small Business Lending Data Collection
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TRID: HIDDEN CONSUMER LOANS?
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WATCH OUT FOR CONSUMER DISCLOSURE TRIGGERS
Commercial lenders often coordinate accommodation loans for their business customers. The loan may be a home equity line, a closed-end mortgage, an unsecured consumer loan, or other types of loans that are actually consumer loans.
Depending on how much info collected by commercial lender, you may trigger Real Estate Settlement Procedures Act (RESPA) definition of a completed application
Completed application triggers early disclosures to be provided within 3 business days for consumer purpose residential real-estate secured credit under RESPA & TILA
ECOA right to copy of appraisal notice is also triggered, among other disclosures, for both consumer and commercial purpose
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TRID TILA APPLICATION MINIMUM 6 Borrower’s name
Borrower’s monthly income
Borrower’s Social Security Number to obtain a credit report
Property address
Estimate of the property value
Mortgage loan amount sought
Commercial loan officers must ensure they can spot consumer real estate mortgage applications lurking in their commercial customer applications ASAP!!! Collection of the 6 items above constitutes an application trigger early disclosures within 3 business days of collecting the minimum information.
Failure to launch the TRID covered transaction disclosures = Potential tolerance violations for anything the bank knew about (or should have known about) within that first 3 business day period!!!
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TRID SCOPE Closed-end consumer loans primarily for personal or household use secured by real property regardless of lien position
(no dwelling required as collateral)
Loans not previously covered by RESPA are now covered: Trusts as borrowers (e.g., tax or estate purposes)
Construction only loans and Lot loan (vacant land)
Residential land parcels of 25 or more acres
Timeshare loans (only some of the TRID provisions apply)
Exemptions: Non-owner occupied investment property loans to individuals (business purpose)
Rental property where natural person owners do not occupy > 14 days per year
Reverse mortgages
Home equity lines of credit (HELOCs)
Mortgages secured by dwellings that are personal property (e.g. mobile homes without real estate)
Small lenders (5 or fewer covered loans per year)
Partial exemption for certain no-interest housing assistance program transactions
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IS IT “INVESTMENT PROPERTY” OR NON-OWNER OCCUPIED RENTAL PROPERTY?
“Investment property” is a generic industry term that we frequently use to refer to property that will be held for consumer or business investment purposes Could be for either consumer or business purposes
Look to the 5 factors provided in Reg Z’s commentary
“Non-owner occupied rental property” is far more specific and is defined – Rental property in which the owner will not stay for more than 14 calendar days in the coming year and is
for business purposes
EXCLUDED FROM REG Z COVERAGE!
Note that the new HMDA takes a far more specific stance on Investment as a “catch-all” occupancy status
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INVESTMENT PROPERTY
Don’t make the common mistake of confusing “investment property” with “non-owner occupied rental property!”
Commentary to 1026.3(a)-3 FACTORS In determining whether credit to finance an acquisition—such as securities, antiques, or art—is primarily for business or commercial purposes (as opposed to a consumer purpose), the following factors should be considered:
GENERAL The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more
likely it is to be business purpose.
The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
The transaction size. The larger the transaction, the more likely to be business purpose.
The borrower's statement of purpose for the loan.
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TRID COVERED TRANSACTION?
1st Is the
applicant an
individual or covered
trust?
2nd Is the loan
primarily for
consumer purpose?
3rd Is the loan
secured by any real property
(dirt)?
4th
TRID covered loan!
Yes YesYes
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TRID LOAN PURPOSE
Describe the consumer’s intended use for the loan
Purpose is disclosed using 1 of 4 descriptions, in this hierarchy order!
Purchase: Loan will be used to finance the acquisition of the identified Property (collateral property)
Refinance: Loan will be used to refinance an existing obligation that is secured by the identified Property (even if creditor is not holder or servicer of original obligation)
Construction: Loan will finance initial construction of a dwelling on property disclosed on Loan Estimate
Home Equity Loan: Loan will be used for any other purpose not listed in the categories above (Consider this the catch-all category!)
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HOME MORTGAGE DISCLOSURE ACT (HMDA)
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HOME MORTGAGE DISCLOSURE ACT (HMDA)
Commercial loan transactions that are most frequently HMDA reportable on the Loan Application Register (LAR): Refinances secured by a dwelling
All refinances where the old note and the new note are each secured by a dwelling (not necessarily the same dwelling) are reportable, regardless of loan purpose, on HMDA LAR.
A business purpose loan originated in 2015 was secured by the small business owner’s 1-4 family property and was not HMDA reportable in 2015.
The refinance in 2016 of the same loan is now reportable simply because both the old loan and the new loan are secured by the dwelling.
Multifamily properties – qualify as dwellings and loans to purchase, improve, repair or refinance are reportable
Business Investment Property – 1-4 family or multi-family properties used for rental purposes for business income
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S. 2155 HMDA DISCLOSURE RELIEF
Small volume originators (less than 500 mortgages or 500 open-end lines of credit for each of the two preceding years) are exempt from new HMDA disclosures added by the Dodd-Frank Act (DFA).
However, compliance with the additional HMDA disclosures is still required for banks receiving the following exam ratings:
A “needs to improve” CRA rating during each of the last 2 most recent exams, or
A “substantial non-compliance” rating on the one most recent exam must still comply with the additional HMDA disclosures.
Exemption of some community banks from the expanded HMDA reporting will require some rewriting of the HMDA reporting regulations to ensure they harmonize with the statutory changes.
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HMDA Loan Origination Volume
Reporting Test
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HMDA COVERED TRANSACTIONS
ALL HMDA transactions must now be secured by a dwelling.
Purpose DOES NOT determine whether to report a consumer purpose dwelling-secured transaction.
Purpose DOES determine whether to report a commercial purpose dwelling-secured transaction.
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HMDA Dwelling Examples
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COMM. §1003.2(F)-2 MULTIFAMILY COMMUNITY
A manufactured home community-related loan is secured by a dwelling for HMDA purposes even if it is not secured by any individual manufactured homes and only secured by the land including sites for manufactured homes in the community.
The same principle is NOT true for a non-manufactured home community!
Example: A loan secured only by property including a multifamily complex’s common areas or secured only by an assignment of rents or dues is NOT secured by any individual dwelling and is therefore NOT HMDA reportable!
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STAFF COMMENTARY: BUILDER TEMPORARY FINANCING CLARIFICATION (§1003.3(C)(3)-2)
Clarifies that a construction-only loan or LOC is temporary if the loan or LOC is extended to a person exclusively to construct a dwelling for sale.
This eliminates reporting for building temporary loans used by builders to construct inventory for sale.
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COMMERCIAL §1003.2(F) MIXED-USE PROPERTIES
A property used for both residential and commercial purposes, such as a building containing apartment units and retail space, is a dwelling if the property’s primary use is residential.
An institution may use any reasonable standard to determine the primary use of the property, such as by square footage, by relative fair market value per square foot x square footage, or by the income generated (more reliable in a refinance).
An institution may select the standard to apply on a case-by-case basis for any mixed-use property.
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2018 HMDA PURPOSE – ALL DWELLING SECURED!NEW HMDA HIERARCHY EFFECTIVE JANUARY 1, 2018
• For the purpose, in whole or in part, to purchase a dwellingHome Purchase
• Old note replaces and satisfies an existing note by at least one of the same borrowersRefinance
• If the institution treats/prices cash-out refinances differently, then report this sub-category for HMDACash-Out Refinance
• For the purpose, in whole or in part, to improve a dwelling or the real property on which it is locatedHome Improvement
• The catch-all category if none of the other purposes fit for consumer loans. N/A to commercial loans.Other
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DEMOGRAPHIC INFORMATION OF APPLICANT & CO-APPLICANT
In PersonAsk applicant to provide after
disclosure; report whatever applicant selects.
Bank is required to select categories based on visual observation or surname if applicant does not provide and does not state no wish to report. Report
bank observation, if appropriate.
TelephoneRequest the information verbally from applicant after reading the disclosure. Highly recommend using a script. If
applicant declines, record that on form.Bank is not to report based on voice, surname or later visual observation if
applicant declined to provide.
Internet with VideoTreat the application as if it was taken in
person. Ask the applicant after disclosure and report whatever
applicant selects. Bank must select on behalf of the
applicant based on visual observation or surname if applicant does not provide
and indicate bank reported.
Mail or InternetIf Bank never meets with applicant
during application process and no info was provided, Bank must indicate not
reported. If bank meets with applicant during application process, report as if in
person.
Applicants must be informed of option to select more than one ethnicity or race. 59
EQUAL CREDIT OPPORTUNITY ACT (ECOA)
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ECOA IS A KEY FAIR LENDING LAW
The Fair Housing Act Broader in transaction scope than ECOA
Covers all housing transactions, not just credit
Narrower in credit scope than ECOA
Covers only housing credit
Few specific requirements
ECOA and Regulation B Detailed, specific rules follow the life of loan, from application through payment and payoff
Covers all consumer and credit, regardless of purpose or collateral
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ECOA’S PROHIBITED PRACTICES
Regulation B contains two basic and comprehensive prohibitions against discriminatory lending practices:
1. A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction. Measure discrimination by borrowers, owners, employees, products, location, etc.
Regardless of whether consumer or business purpose. All business purpose credit, regardless of size of loan, size of business or borrower, is subject to ECOA and Regulation B.
2. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.
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APPLICATIONS FOR JOINT CREDIT
When taking applications from married co-applicants, most creditors combine the income and obligations of the co-applicants.
When taking applications from unmarried co-applicants, you must treat them the same way you treat married applicants.
When two people apply for credit, we consider the combined income, assets and debts in the same way whether the applicants are married to each other or not.
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ECOA SIGNATURE RULES: COSIGNERS & GUARANTORS Cosigners and Guarantors
Applicants choose how and with whom they apply for credit. The creditor decides whether or not the application presented qualifies for the loan requested.
If additional party is needed, you may request (but not specify) a co-signer or guarantor
You may not impose discriminatory requirements on cosigners. Treat cosigners under the same rules as applicants, except no notices.
You may not impose signature requirements on a cosigner or guarantor that you cannot impose on the applicant.
There is no exemption for business purpose loans. Business loan applicants have same protections and obligations as consumer applicants.
There are special rules for providing adverse action notices to commercial loan applicants – but nothing else!
For additional support take a security interest in the business or personal property, but limit signatures to the security instrument.
All signature rules apply to business-purpose loan applications.
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JOINT APPLICATION OR NOT?
§1002.7(d) Signature of spouse or other person (1) Rule for qualified applicant.Except as provided in this paragraph, a creditor shall not require the signature of an applicant's spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.
§1002.2(e) Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of §1002.7(d), the term includes guarantors, sureties, endorsers, and similar parties.
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ADDITION OF A GUARANTOR If the guarantor is requested as an underwriting requirement after the application
was made, then demonstration of joint intent would not be required.
Commentary to §1002.7(d)(1) - 2. Joint applicant. The term “joint applicant” refers to someone who applies contemporaneously with the applicant for shared or joint credit. It does not refer to someone whose signature is required by the creditor as a condition for granting the credit requested.
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REFRESHER: REG B ADVERSE ACTION
What is considered Adverse Action?
A refusal to grant credit in “substantially the terms requested” unless the creditor makes a counter-offer that the applicant accept
A termination of an account or unfavorable change in terms that does not affect a substantial portion of a class of a creditor’saccounts; or
A refusal to increase the amount of credit in response to a request.
What is NOT adverse action?
A change in terms of an account expressly agreed to by an applicant
Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account;
A refusal or failure to authorize an account transaction at point of sale or loan except when the refusal is a termination or anunfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts or when the refusal is a denial of an application for an increase in the amount of credit available under the account;
A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or
A refusal to extend credit because creditor does not offer type requested.
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REG B ACTION TAKEN NOTICE
Consumer and Business Transactions: Regulation B defines an applicant broadly, incorporating businesses as well as individuals. Reg B does NOT consider guarantors as applicants.
For every application that we take, we must make a decision unless customer actually withdraws application.
There are several different types of notices, based on whether we approve the application, make a counter-offer, take adverse action or the applicant withdraws the application.
A creditor must notify the applicant of adverse action within:
30 days after receiving a complete credit application
30 days after receiving an incomplete credit application
30 days after taking action on an existing credit account
90 days after making a counteroffer to an application for credit if the applicant does not accept the counteroffer
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ACTION TAKEN NOTICE: BUSINESS LOAN APPLICATIONS
For businesses with gross revenues of $1,000,000 or less:
Disclose at time of application that applicant has a right to a written notice of ECOA rights and reasons for adverse action.
We may give the applicant a statement of action orally – it need not be in writing.
For businesses with gross revenues in excess of $1,000,000: we may give the applicant an oral notification.
Communicate within a reasonable time of making the decision.
If the applicant requests written notice within 60 days of our oral notice, we must provide a written statement of reasons.
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FURNISHING OF CREDIT INFORMATION, §1002.10
This rule applies only to creditors that voluntarily report credit information. The purpose of the rule is to ensure that anyone who is contractually liable on a credit account has the credit reported in their name. The result is that for a single account, you may have to make two reports.
You can report on individual borrowers, cosigners or guarantors Only report on guarantors when creditor has exhausted all efforts to collect from borrowers or cosigners and have
demanded payment from guarantors – check with your legal counsel for his or her interpretation!!
Creditors that furnish credit information shall designate: New accounts to reflect the participation of both spouses if the applicant’s spouse is permitted to use or is
contractually liable on the account (or other than as a guarantor, surety, endorser, or similar party); and
Existing accounts to reflect such participation, within 90 days after receiving a writing request to do so from one of the spouses.
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REG B § 1002.14 (A) APPRAISAL RULEONLY COMMERCIAL 2014 MORTGAGE REFORM RULE
A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling.
A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier.
A creditor shall provide a copy of an appraisal report used in connection with an application for credit that is to be secured by a dwelling lien.
A creditor shall comply with either paragraph (a)(1) or (a)(2)
(a)(1) Routine delivery. A creditor may routinely provide a copy of an appraisal report to an applicant (whether credit is granted or denied or the application is withdrawn). --OR--
(a)(2) Upon request. A creditor that does not routinely provide appraisal reports shall provide a copy upon an applicant's written request.
OLD RULENEW RULE
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ECOA’S APPRAISAL RULESFundamental Issue
Whatever the Creditor uses to establish the collateral property’s value and the effect that value has on loan terms is of interest to the borrower (appraisal or evaluation)
Must share with applicant even if you don’t use the appraisal or valuation or you only use it for a limited purpose
Covered Transactions
Business or consumer credit when secured by a first lien on a dwelling (as opposed to TILA, business credit is covered by ECOA and Regulation B).
Open- or closed-end loans
Reverse mortgages
Temporary loans (i.e., bridge and construction loans)
Loss mitigation activities (to the extent otherwise subject to Reg. B)
Renewals (unless using a previously developed valuation)
Reg B allows applicants to waive the right to early copy, but requires copy at or before closing
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MULTIPLE VALUATIONS AND/OR APPLICANTS
Multiple Valuations:
A copy of each valuation must be provided to applicant New rule: “developed in connection with”
Multiple Applicants:
Allowed to send notice and copy of appraisals or valuations only to primary applicant
One applicant may waive early delivery, but it must be primary applicant if readily apparent which is the primary
Best Practice: Designate in your procedures which applicant is to be considered the primary applicant –e.g., first one listed on application
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SMALL BUSINESS LOAN DATA COLLECTION
Dodd-Frank § 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.
Dodd Frank Act § 1071 mandates at least this information be collected and reported for commercial loan applications: Application number and the date on which the application was received;
Type and purpose of the credit applied for;
Amount of the credit applied for, and the amount of the credit approved;
Type of action taken on the application, and the date of that action;
Census tract in which the principal place of business of the loan applicant is located;
Gross annual revenue of the business in the last fiscal year of the business loan applicant preceding the date of the application;
Race, sex, and ethnicity of the principal owners of the business; and
Any additional information that the Bureau determines would aid in fulfilling the purposes of this section.
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Commercial Loan Application…
HMDA LARFair Lending AnalysisECOA Small Business Data Reporting
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FAIR CREDIT REPORTING ACT (FCRA)REGULATION V
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PROTECTS CONSUMERS
Individuals are the focus of the FCRA rules and regs
Applicants
Borrowers
Insured Consumers
Employees
Guarantors (limited coverage)
Does not generally apply to transactions with business entity or non-personal purposes, but treats everyone who has his or her credit pulled as a consumer
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FAIR CREDIT REPORTING ACT (FCRA)
Governs the collection, assembly, and use of consumer report information and provides the framework for the credit reporting system in the United States
Implements disclosure obligations on users of consumer reports
Requires fair, timely, and accurate reporting of consumer credit information
Restricts the use of consumer reports and requires the deletion of certain obsolete information
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FCRA PERMISSIBLE PURPOSE
In response to court order or Federal Grand Jury subpoena
In accordance with consumer’s written instructions Provides written authorization where you may not otherwise have permissible purpose
To persons the CRA has reason to believe: Intends to use the report in a credit or insurance transaction, employment decision, eligibility for a
government license or other benefit, or otherwise legitimate business need for the information
In connection with a State or local child support enforcement agency
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https://www.ftc.gov/reports/40-years-experience-fair-credit-reporting-act-ftc-staff-report-summary-interpretations
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FAIR CREDIT REPORTING – REGULATION V
A credit bureau report on an owner or signer of the business is a “consumer report” subject to all FCRA protections, even if the report is pulled for a business purpose loan.
Users of the report must meet the legitimate business purpose tests. Business loan applicants denied on the basis of the report must be given an FCRA adverse action notice.
Information reported on the business owner to a consumer reporting agency (credit bureau) is subject to all requirements relating to accuracy and error corrections. All consumer protections, including identity theft and medical information use, apply to the individual on whom information is requested or reported.
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FAIR CREDIT REPORTING – REGULATION V
Credit reports are an important source of information for business loans – but they remain “consumer” reports.
Must have legitimate business purpose.
Follow limits on which “consumer’s” reports may be obtained.
ECOA and Spousal Signature Rules
Send adverse action notices in the right way to the right consumer (ECOA and FCRA adverse action provisions for borrowers, but not for guarantors)
Accurate reporting of information to bureaus – and investigating errors.
Identity theft can involve individuals connected to the business.
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GUARANTORS AND CO-SIGNERS
ECOA §701(d)(6) and Reg B §1002.2(c) grant that only an applicant can experience adverse action. A guarantor or co-signer is not deemed an applicant under § 1002.2(e).
FCRA § § 603(k)(1)(A) and 603(k)(1)(B)(2) mandate that adverse action has the same meaning for purposes of the FCRA as is provided in the ECOA and Regulation B in the context of a credit application.
A guarantor or cosigner would not be entitled to receive an adverse action notice under the ECOA or the FCRA.
The credit applicant is entitled to receive an adverse action notice, even if adverse action decision is made solely based on information in the guarantor’s or cosigner’s consumer report.
A guarantor or cosigner’s credit score should never be disclosed to an applicant in an adverse action notice.
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UpdatedJuly 2014
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FLOOD DISASTER PROTECTION ACT (REG H)
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FLOOD HAZARD INSURANCE - REGULATION H
Any loan to be secured by improved real property, a “designated loan,” is covered by the Flood Hazard Insurance requirements. The level of flood hazard risk for the improvements on the property must be determined.
If the flood hazard risk is high (Flood Zones A or V), the lender must require proof of flood hazard insurance before a triggering event. Sufficient insurance must be maintained for the life of the loan.
For commercial loans, there can be additional concerns about insurance for contents, if contents secure the loan.
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KEY LENDER RESPONSIBILITIES
1. Determine if structure in high-risk zone (SFHA) a. Flood Zones beginning with an “A” or a “V”
b. Lender is responsible for accurate determination
c. If using vendor, they must guarantee their determination
2. Document determination on standard form (SFHDF)
3. If in SFHA, notify borrower flood insurance is required
4. If in SFHA, require adequate flood insurance
5. Require escrow of flood insurance premiums if other items (e.g., taxes, hazard insurance, etc.) are escrowed
6. Mandatory escrow for closed-end consumer purpose 1st lien residential properties as of 1/1/16a. Small creditor exemption (assets < $1 billion, doesn’t regularly escrow)
7. During term of loan, ensure sufficient amount of flood insurance continuous coverage is maintained
8. Force place flood insurance, if appropriate
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FLOOD HAZARD INSURANCE - REGULATION H
The challenges:
Waiting until the last minute – or even later – to determine status of the flood hazard zone
Illegally waiving or adjusting the insurance requirement
Failing to track whether insurance is maintained
Allowing inadequate insurance amounts
Structure and contents issues
New insurance coverage and deductibles
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FLOOD INSURANCE REGULATIONS
Standard Flood Hazard Determination Form (SFHDF) Evidences the fact the determination was performed
Must be in file before loan closes
Doesn’t have to be signed or even given to the borrower, but retained for as long as lender owns the loan
Notice of special flood hazards Provided when borrower must obtain insurance (property is in the flood hazard area)
Must be acknowledged (signed) by the borrower
Provided a reasonable time before closing (10 days?)
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LENDER MONITORING REQUIREMENTS
What must be monitored? Insurance policies (to make sure they’re current and in a sufficient amount)
Different types of flood policies
NOT flood maps or loans already made
Insure contents only if building they are in is also taken as collateral (and taking the contents as collateral, too)
Must force place a policy if borrower refuses (statutory duty) 45 days from lapse and collect from borrower on Day 46 after notice
Send warning letter and refund premiums for overlapping coverage
Escrow requirement only for first lien consumer loans! If lender requires escrow for anything else, must also escrow for flood premiums
If lender does not regularly escrow, may wait until January 1, 2016 if under $1 billion in assets and as of 7/6/12 was not required to escrow
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FLOOD INSURANCE COVERAGE AMOUNT
The minimum required coverage for flood insurance whether purchased by the borrower or force placed by the lender is the lesser of
Insurable Value of the structure(s)
Outstanding principal balance of the loan(s) or
Maximum available through the NFIP
*Federal Register (Oct 2011) Interagency Q & As Regarding Flood Insurance http://www.gpo.gov/fdsys/pkg/FR-2011-10-17/pdf/2011-26749.pdf
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NFIP MAXIMUM COVERAGE LIMITS
Building Coverage Emergency Program Regular Program
Single Family Dwelling $35,000 $250,000
2 – 4 Family Dwelling $35,000 $250,000
Other Residential(5+ Family Dwelling)
$100,000 $500,000
Non-Residential $100,000 $500,000
Contents Coverage
Residential $10,000 $100,000
Other Residential $10,000 $100,000
Non-Residential $100,000 $500,000
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BWA §100244: FORCE PLACEMENT OF FLOOD INSURANCE
Agencies clarified BWA Amendments that: Provide that the premiums and fees that a lender may charge the borrower include premiums
or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage amount;
Require the lender, within 30 days of receiving a confirmation of a borrower’s existing flood insurance coverage, to terminate any force-placed insurance and refund to the borrower all force-placed insurance premiums and any related fees paid for by the borrower during any period of overlap between the borrower’s policy and the force-placed policy; and
Require a lender to accept as confirmation of a borrower’s existing flood insurance policy a declarations page that includes the existing flood insurance policy number and the identity and contact information for the insurance company or agent.
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FORCE PLACEMENT OF INSURANCE
Force-place insurance.
May charge borrower premiums and fees for coverage beginning on date the insurance lapsed or provided insufficient insurance.Lender must terminate overlapping coverage within 30 days of confirmation of borrower’s coverage.
Allow Borrower time to purchase insurance.Lender or servicer must purchase the insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees incurred by
the lender or servicer.
Send 45 day letter.
Force placement applies to any loan, residential (first and junior liens) or commercial, whether or not escrow is required when lender determines sufficient flood insurance coverage is not in place.
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INSURANCE FORCE PLACEMENT
Force placement of coverage is designed for use at any time during the term of a loan in uninsured and underinsured situations following loan closing.
It is NOT intended for use at loan origination. If a borrower refuses to obtain flood insurance coverage as a condition of obtaining a loan, the loan is deficient and is not to be made.
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GOLDEN OLDIES
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ADDITIONAL APPLICABLE LAWS & REGULATIONSNOT COVERED IN DETAIL IN THIS PRESENTATION
Many laws, regulations and guidance directives apply to commercial loans than you might expect at first glance.
Equal Credit Opportunity Act (ECOA)
Fair Housing Act (FHA)
Home Mortgage Disclosure Act (HMDA)
Community Reinvestment Act (CRA)
Flood Disaster Protection Act (FDPA)
Fair Credit Reporting Act (FCRA)
Servicemember Civil Relief Act (SCRA)
Insider Credit (Regulation O)
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ADDITIONAL APPLICABLE LAWS & REGULATIONSNOT COVERED IN DETAIL IN THIS PRESENTATION
Bank Secrecy Act (BSA), Anti-Money Laundering (AML) and USA PATRIOT Act requirements in addition to CDD
Office of Foreign Assets Control (OFAC) Securities Lending (Regulation U) Right to Financial Privacy Act (Regulation S) Bank Bribery Act (18 USC 215) Foreign Corrupt Practices Act (FCPA)
NOTE: Dodd Frank Act added §704 B to ECOA to require the collection of data reporting for small business loans and loans to minority- and women-owned businesses. This provision has yet to be implemented.
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PATTI JOYNER BLENDEN, CRCM
WWW.FINSOLINC.COM