IBA Convention The Science of Managing Compliance

Risk

Presented by: Julie Gliha, MBA, CRCM,

VP Compliance

Science of Risk Management

• Science – intellectual and practical activity encompassing the systematic study of a topic – Creates, builds, and organizes knowledge – Testable explanations, predictions about future

Agenda Controlling Risk Starts with Knowledge

• Changing High Risk Areas: – HMDA – TRID Final Rules – Small Business Lending Reporting – Servicing – FCRA/FACTA – Beneficial Owners

2018 HMDA – COVERAGE: Closed-End Reporting

Closed-end Loan secured by dwelling – definition change

“Purpose” is no longer the focus for

consumer transactions

Now includes “pure” home equity loans

Excludes AG purpose and AG secured

loans

Business loans – still “purpose driven”

purchase, refi, home improvement

Threshold – 25 closed-end loans

secured by dwelling in both 2016/2017

2018 HMDA – COVERAGE: Open End Reporting

Open-end Credits secured by dwelling

now reported

Includes Commercial purpose if for

purchase, refinance or home improvement

Excludes Ag secured/Ag purpose

“Purpose” is no longer the focus for consumer

transactions

Includes “pure” home equity lines

500 open-end credits in both 2016/2017

2018 HMDA Data Points • Tons and Tons of Data Points

– 25 New – 14 Revised – 9 No change

• Risks: – What is going to be made public? – Monitoring/Validation – Data Accuracy – New Filing Software - integration with LOS – Competitive pressures created from “transparency”

Increasing Risks - Challenges

• Definitions change from 2017 to 2018 – Training, monitoring, training, monitoring . . . .

• Tracking loans even if not reporter – Count only originations – Report applications, originations, purchases,

preapprovals • Reg. B and Reg. C conflict • ULI/LEI

LEI/ULI • LEI – 20 digit, alpha-numeric code developed by

International Organization for Standardization (ISO) unique to each FI

https://www.gleif.org/en/about-lei/how-to-get-an-lei-find-lei-issuing-organizations

• Universal Loan Identifier (ULI) – Begins w/ reporter’s LEI – Followed by up to 23 charters (numbers or letters or combo of both) – Ends w/ a 2-character “check digit” – Unique to the application – Cannot include identifying applicant information – ULI numbers generally cannot be reused

• Exception for applications reinstated in same calendar year

IBA Solutions

• Disclosure Articles • 4-Part HMDA Webinar • In-Person Full Day Seminars • Tools (over 10 new tools) • HMDA Reviews

TRID Update Final Rule – 500+ pages

Creates Tolerance for Total of Payments – parallel’s

finance charge $100 rule

Now includes cooperative units in rule regardless of

state law definition

Guidance on sharing disclosures with sellers

and other parties involved in origination process (including R/E agents)

TRID Clarifications = Changing Risk Landscape

• Affiliate Charges • Calculating Cash to Close Table • Construction Loans • Decimal places and rounding • Escrow disclosures • Escrow cancellation notices • Expiration dates for closing

costs on LE • Gift Funds • In Five Years calculation

• Lender and Seller credits • List of service providers • Payoffs and Payments table • Payoffs with a purchase loan • Disclosure of property taxes

and property taxes • Rate Locks • Simultaneous Seconds • Total Interest Percentage • Etc., Etc., Etc.

TRID Amendment

• Effective Date: October 10, 2017 • Mandatory Compliance Date: October 1,

2018 • System Changes:

– Some only written confirmation of verbal guidance

– Some Huge Vendor Adjustments

IBA Solutions

• TRID Webinar – 9/28/17 – First Look, more to come

• TRID Forms Reviews • Full Lending Reviews • Customized Training • Updated Tools/FAQs

Small Business Loan Data Collection Pre-Proposal Stage

• Mandated by Section 1071 of Dodd-Frank • No exemption in law/Regulator has discretion • Areas considered:

– Credit products – Recording Systems – Underwriting Approach – Distribution Channel – Types of applicants

Data Points Application Number

Application Date

Type and Purpose of financing

Amount Applied For

Amount Approved

Action Taken and Date

Census Tract of principal place of business

Gross Annual Revenue for Previous Year

Race/Sex/Ethnicity of principal owners

Concerns – Risk of Unknown What is definition of “small business loan” • If consider Business Revenue

<=$1,000,000 • Includes 95% of all companies • 97% of all minority- and women-

owned businesses

What will CFPB add to list

No Standard Products No application

Businesses don’t currently

collect/retain this information

IBA Solutions

• Survey Results • Comment Letter • Continued Monitoring of CFPB Direction

Servicing Update Final Rule

Finally good news – most changes don’t apply to small servicers • Small Servicers: 5,000 or fewer mortgage loans

(including mortgage affiliates) • Small Servicer Changes:

– Definition of “delinquency” – Loss Mitigation – Successor in Interest – Force Placed Hazard Insurance Notices

Definition of Delinquency

Related to 120-day rule for foreclosure

Clarification: • Period of time during which borrower’s

mortgage loan obligation is delinquent • Beginning on date periodic payment

sufficient to cover principal, interest and escrow (if applicable) become due and unpaid and until such time no periodic payment is due and unpaid.

• Starts with day after payment is due (not after grace period)

Example

Borrower’s mortgage loan requires borrower to make periodic payments of principal, interest, and escrow by the first of each month. • Borrower does not make the payment that is due on Jan. 1. • On Jan. 31, borrower is 30 days delinquent. • On Feb. 3, borrower makes a periodic payment. The servicer applies

payments to the oldest outstanding periodic payment (i.e., the periodic payment that was due on Jan. 1).

• On February 4, borrower is 3 days delinquent for purposes of the 2016 Servicing Rule.

Loss Mitigation

Existing Rule: •Can’t file first notice/filing for any

judicial or non-judicial foreclosure process unless customer is more than 120 days delinquent

•May join a subordinate lienholder’s foreclosure action

May NOW also join a superior lienholder’s

foreclosure action even if not 120 days delinquent.

Successor In Interest

• Occurs when borrower transfers ownership interest in property securing mortgage loan to a person by means of one of the types of transfers in Rule (death of borrower, divorce, etc.)

• Treats “successor in interest” as borrower for servicing requirements under Reg. X and Z

Risk Abound!

Includes: • Responding to notice of

error or request for information

• Force-place insurance notices

• Transfer of servicing notices

• Escrow related notices • Interest rate/payment

adjustments • Payoff statement requests

Complications: • Modified notices:

Successor-in-interest may not be liable on debt. Notices/communication cannot imply such.

• Identifying/validating successor-in-interest

• Privacy issues related to debt

• Etc., Etc., Etc.

Force-Placed Insurance Notices

• Initial and reminder notices before assessing premium/charge/fee for force-placed hazard insurance

• Addressed failure to maintain insurance only

• Now addresses insufficient coverage – Amends model notices to include such language

IBA Solutions

• Disclosure Articles • Hotline for questions • Review of notices for compliance with rule

FCRA/FACTA Data Integrity

More complaints to FTC on Data Integrity than any other reason!

Furnisher Requirements – Reg. B

• Designate accounts to reflect both spouses’ participation (authorized signers or are liable, or by written request) – Except guarantors, surety, endorser or similar party

• Information send in way to enable CRA to provide access to info in name of each spouse

• Violations: civil liability for actual and punitive damages, possible referral to DOJ or HUD

Furnisher Requirements – FCRA

Negative Information

Identity theft

Provide notice of Delinquency of accounts

Provide notice of Closed Account

Provide notice of Dispute to CRA

Must investigate disputes of completeness and accuracy of information after receiving notice from CRA (correct/update)

Prohibition on furnishing inaccurate consumer information

Accuracy and Integrity

• Identify right consumer • Reflect terms/liabilities • Reflect consumer performance • Is substantiated by records at time

furnished • Process designed to minimize

inaccuracy • Does not omit any information that if

left out that could materially mislead user

Required to establish

policies and

procedures

How do you:

• Test your system • Validate your Data • Disclose disputes • Disclose bankruptcy process • Document “first delinquency date”

FCRA – Data Integrity Help

• FACT Act updated FCRA – added Furnisher Requirements in 2010

• Consumer Compliance Outlook – second quarter 2012 https://consumercomplianceoutlook.org/2012/second-quarter/furnishers-compliance-obligations/

• FTC – provided tips and advice June 2013 https://www.ftc.gov/news-events/blogs/business-blog/2013/06/fcras-furnisher-rule-its-all-about-accuracy-integrity

Beneficial Owners Rule – NEW RISK!

• Mandatory Effective Date: May 1, 2018 • Legal Entity Customer:

– Formed under SOS or similar office (Corporations, LLC) – General Partnerships – Any similar entity – Exclusion: Most trusts, DBAs, Personal Accounts,

Unincorporated associations, Publicly Traded Entities, Government, SEC regulated entities, Public Accounting Firms

• Charities/Non-Profits only excluded from ownership prong

Beneficial Owner Requirement

For EVERY New Account (loans, deposits, safe deposit boxes, trust, etc.)

• Determine living/breathing person who OWNS 25% or more of legal entity

• Determine 1 person with CONTROL • Perform CIP on identified persons • “See Through” Business Ownership to person

• Exception: • Ownership: If Trust owns legal entity, stop at trustee • Non-Profit/Charity: Only determine control

Challenges

• Systemic challenges: – Every New Account including Loans (may include

renewal) – When alerted to change in business structure

• Obtaining accurate information on ownership • Documentation – Like CIP but NOT CIP • Retention of Information

AML Requirements – New Fifth Pillar

Cust

omer

Due

Dili

genc

e

CDD Program – No Longer Expectations, now Violation of Law!

Identify & Verify your customers at

the time of account opening

Gather information on the customer & their anticipated account needs &

activity

Develop customer risk profile

Implement monitoring based

on risk profile

Evaluate monitoring results

IBA Solutions

• Beneficial Owner Sample Forms • Webinars • FinCEN CDD FAQs • IBA FAQs • Hotline

Management’s Role – Control/Manage Risk • Resources

– Staffing levels • System Changes • Internal Training • Monitoring/Correction

– Training – Software – New, Update, Vendor Relationships – Tools – Dedicate TIME to learn/implement/validate/monitor

Balls in the Air – Risk of Unknown • ADA Website Compliance – DOJ will not address

• TRID Proposals • Arbitration Rule • Small Business Lending Data Collection • Small Loan Proposal • Overdrafts • Appraisal Rule Proposal • Treasury Recommendations • Flood Program Re-Authorization

Risks

Stay Vigilant!

Thank You! • Hotline 844-734-7411 • Compliance@iowabankers.com