Changes in Reg. Z Abound! Are you ready for 2014?     

For most of our clients there is a great deal of energy (worry?) being expended while getting prepared for the new mortgage rules that will come into effect at the beginning of 2014.  Chief among these are the rules that apply to higher priced mortgages also known as “qualified mortgages” or “QM”.  

Ability to Repay and Qualified Mortgages   

Since 2009, Regulation Z has required that creditors assess the ability of a borrower to repay loans that are designated higher price loans[1]  In 2010 the requirement to consider the ability to pay was greatly expanded and now includes almost all closed- in consumer transactions that are secured by a dwelling.  .  

The 2010 regulations also established “qualified loans” and along with, a presumption of compliance for creditors that make qualified loans.  As with many regulations, there is some good news and some bad news.  The good news is that if your bank makes qualified mortgages that are not high priced, there is an irrefutable presumption that the ATR requirements have been met and significantly reduced liability follows. 

When does the Rule “Kick In”?  

The complete set of rules will take effect for any application that is received on or after January 10, 2014.   The CFPB has noted that examiners will start testing for compliance “after a reasonable time” which generally means about six months after implementation. 

The rules apply to all consumer transactions that are closed end and are secured by real estate.  This means that these rules are not limited to first liens or primary residences.   There are a few exceptions to the QM/ATR rules.  These are;   

1.       HELOCS

2.       Time-Shares

3.       Reverse Mortgages

4.       Construction or temporary loans

5.       Consumer loan secured by vacant land

 

For all loan applications accepted after this date, the Bank must keep a record of its documentation of ability to pay for these from the date of receipt.  

  

Ability to Repay    

Although the rules do not specifically state the underwriting guidelines for a bank, there are 8 factors that must be included in credit analysis

                                                               i.            Current or reasonable expected income or assets (not including the property) that the borrower will use to repay

                                                             ii.            Current employment status

                                                           iii.            Monthly mortgage payment for this loan (using the fully indexed rate or full amortizing payments-whichever is higher )

                                                           iv.            Monthly payments on any simultaneous loans securing the property

                                                             v.            Monthly payments for property taxes and insurance that is required by the bank; homeowners fees

                                                           vi.            Debts, alimony and child support

                                                          vii.            Monthly debt ratio as a ration of gross monthly income

                                                        viii.            Credit history 

 

Others factors can be used, but these 8 must be included at a minimum    Verification of this information can be documented by various means, but they must be documented and maintained for three years after the receipt of the application!   There is a list of acceptable documents in the regulation guide including records from government agencies, statements provided by a cooperative or homeowners association, lease agreements, credit reports, etc.  

The guidance in this area is clear that there are many different factors that can be considered when considering whether or the determination of ATR was reasonable.    Two strong factors in determining whether or not a loan decision was reasonable are:

·       You used a standard set of underwriting standards that have been proven to show a low rate of delinquency and/or default

·       The particular borrower has paid on time for a significant part of the loan since the rate adjusted or re-set.  

On the other hand there are considerations that indicate that the ATR decision was NOT in good faith.  These include:

·       Ignored underwriting standards (a large number of exceptions to policy)

·       Inconsistent application of underwriting standards

·       Early defaults in loans (without a catastrophe)  

There are specific guidelines for the way to calculate the DTI ratios for the borrower.  In summary, these rules direct the lender to use the worst case scenario to determine ATR.  That is, use the highest payment that the borrower will have to make under the loan terms as well as the amount of income that can be reasonably established.   

Why Should I care whether the loan is Qualified or not?  

The whole “quid pro quo” in this area is powerful.  In the event that a loan is not determined to be qualified and the borrower defaults, it is the borrower who can sue the Bank.  A successful suit for not properly qualifying a borrower can result in the Bank paying the customer three years’ worth of interest and fees.  This, by the way, is the reason that records must be retained for three years from the date of the loan origination.  

On the other hand, if the loan is qualified and not a high cost loan, then there is a presumption that the Bank properly considered the borrowers ATR.  The Bank wins! 

What is a Qualified Mortgage?

There are two characteristics that qualified mortgages should have. 

·       The DTI should not exceed 43 percent

·       The points and fees should not exceed 3% [2]

Neither of these characteristics is directly required by the regulation, but these are guidelines that will be used by regulators.   In the event that the loan is considered a high-priced, loan, the presumption that the Bank has established ATR is a rebuttable one.  The borrower would have to meet a high standard to show that Bank did not properly consider ATR 

Conclusion

The CFPB is considering making exceptions for small lenders.  However, we advise that all banks should  prepare to meet the QM/ATR standard as much as possible. 

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[1] Higher-priced loans are generally defined as having an annual percentage rate (APR) that, as of the date the interest rate is set, exceeds the Average Prime Offer Rate (APOR) by 1.5 percentage points or more for first-lien loans and 3.5 percentage points or more for subordinate-lien loans

[2] For loans less than $100,000 there is a schedule of points and fees that will qualify the loan

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[1] Higher-priced loans are generally defined as having an annual percentage rate (APR) that, as of the date the interest rate is set, exceeds the Average Prime Offer Rate (APOR) by 1.5 percentage points or more for first-lien loans and 3.5 percentage points or more for subordinate-lien loans

[2] For loans less than $100,000 there is a schedule of points and fees that will qualify the loan

Introduction

From time to time we find that our clients are confounded by the rules regarding the documentation necessary for beneficial owners of accounts ta their banks.  The fact of the matter is that this will be a point of emphasis in BSA/AML examinations over the next few cycles.  As always, it is our advice to be prepared for this question even if, at the moment, it may not apply to your bank.  The FFIEC has issued guidance in this area that may be helpful

Beneficial Ownership

The first question that has to be addressed is “when we say beneficial ownership, what exactly are we talking about?’   The FFIEC guidance discusses the FINCEN definition which states that the "beneficial owner" is the individual(s) who have a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly, to control, manage, or direct the account.

According to this definition, what the regulators are looking for is information on anyone who can use the funds in an account for their own benefit.   For any person or entity that might benefit from the funds in an account, there should be significant information to determine what that person or entity does and will do with the funds. 

It is worth noting that this definition does NOT include a person or entity that has the right to transfer funds into the account solely or only the right to receive funds is not considered a beneficial owner for purposes of these regulations.  It is the ability of the person or entity to control, manage or direct the account that is controlling.  

The need to fully document the beneficial owners of an account presents itself in several circumstances.  Included in these are:

·         When the customer is acting as an agency for another entity

·         Where the customer is a legal entity that Is not publicly traded

·         When the customer is the trustee

·         Private Banking accounts

·         Foreign Correspondent Accounts

·         An account rated high risk at its inception

For each of these types of accounts, customer identification process should include an element of enhanced due diligence that includes information about beneficial owners and their relationship to the client.  At a minimum, there should be information about how funds may be transferred and used by the beneficial owner of the account.  

What’s the Big Deal? 

If we know our customer, why should we care so much about the beneficial owner?   We can monitor activity on the account and will research any activity that we deem to be suspicious; this is the argument that we hear from our clients.  The answer is context.  What may be totally normal for the bank’s client may be totally out of context for the beneficial owner.  For example, supposed ABC Corporation owns and operates a coin operated laundry.  It is entirely reasonable that the laundry will have regular deposits of cash.   After a reasonable time, cash deposits from this entity would not raise even the slightest suspicion.  However, if ABC Corporation is a medical supplies firm, the context changes.  Now it is important to know the relationship between the beneficial owner and the client.  It is important to actually observe the coin laundry to determine that the number of clients using the laundry matches the deposits.  While it is entirely possible and plausible that the Medical Supplies company keeps itself separate from the laundry, there must be documentation of the relationship and the manner in which the two entities remain separate.  

The FFIEC guidance points out that money launderers and criminal often use the privacy and confidentiality of banks laws covering accounts as a shield for criminal activity.   While it is impossible to know everything that a client may be doing, it is critically important to have an outline of the business model of the client and to be able to match the activity of that client with its banking activity. 

The Basics

There are some basic guidelines to follow to determine whether your CIP and CDD programs are meeting the standard for beneficial ownership.  

     Step One:   The basic CIP program must be sufficiently sophisticated to determine when a customer should require CDD.  For example, all of the customers on the list mentioned above should draw immediate EDD.   If, at the end of documenting a new account, a  private corporation does not trigger the search for information on the beneficial owners of the account, the CIP process should be enhanced.  

     Step Two:  When an account triggers EDD, there should be policies and procedures in place for each type of account.    For example, 

·      There should be minimal procedures for documenting the source of wealth of a private banking customer;

·       In the case of a privately held corporation there should be a background check that includes an internet search;

·        For a trustee, information about the relationship between the trustee and he beneficiary should be collected;

·         In the case of an agency, the agreement between the customer and the agency should be obtained;

·         For foreign correspondent accounts there are minimum policies and procedures that are fully described in the BSA/AML examination manual

      Step Three:  Once the EDD information is collected, it should be used as a regular part of monitoring accounts for suspicious activity.  This is an area where we see a great deal of concern.  Many times, once the EDD information is collected, it is placed in a file and stored for posterity.  However, it is his information that adds the proper context to the activity that is being reviewed.   As a best practice EDD which includes information from loan and relationship managers is critical for a complete and proper review for suspicious activity. 

     Step Four:  Develop systematic sharing across all business lines.  Too often information about loan customers and other commercial customers does not get shared with the BSA department and vice versa.  In many cases, this information could be used to significantly reduce the risk of loss or alternatively the risk of a BSA/AML violation.  The sharing of information on an enterprise wide basis will significantly reduce risk at a bank.  

Conclusion

The more you know about beneficial owners of accounts, the lower the risk.  Remember, the hand that controls the funds, rules the result! 

CRA Update:  The ever expanding possibilities for Meeting Community Development Needs 

 

One of the more interesting recent developments in the area of Community Reinvestment Act (“CRA”) compliance was the publishing of the Interagency Questions and Answers proposing to clarify issues around how community development loans and investments are treated for purposes of CRA ratings.      While these propose changes received little fanfare, they represent both significant change in the manner in which community development and community service can be considered.  We believe further, that these Q & A’s represented the beginning of something bigger and better for CRA in the near future. 

Community Development - Immediate and Direct Impact

Community development activities are considered for large banks and intermediate small bank CRA reviews.  As an aside, small banks cans can have their community development activities considered for the purpose of receiving an “outstanding rating”; although we are aware of very few institutions that actually pursue this course.  

One of the areas of confusion for community development has come with organizations that operate statewide, or regionally.  In many cases, the services these organizations provide do not necessary confer an immediate and direct benefit on the assessment area of the bank.  The original answer to this question said that these investments would be considered if the bank had “adequately addressed the community developments needs of its immediate community.    It was this language that seems to cause our clients to hesitate.  How do we know whether we have adequately addressed the community development needs of our assessment area?   

The changes to the answer to the questions attempt to address this.  Going forward, community development investments that do not give immediate direct impact to the assessment area must:

·       Be conducted in a safe and sound manner;

·       May not be conducted in lieu of, or to the detriment of activities within the assessment area. 

The FFIEC goes on to state that when agencies examine whether or not activities are being conducted in lieu of or to the detriment  of activities within the assessment area, the performance context and opportunities within the assessment area will be examined. 

Meeting the Test for Activities Not in Lieu or to the Detriment

It is clear form this language that Banks will need to do a clear and convincing job of showing research that indicates that they

·       Know the credit needs of the local assessment area;

·       Have researched the opportunities for community development investments and loans; and

·       Can demonstrate that these opportunities do not exist in significant numbers within the assessment area. 

We advise our clients to ensure that there is ongoing dialogue with community groups, documentation of the dialogue and substantial economic research on the needs of the community.   In addition, it is a best practice to ensure that the strategic plan of the Bank matches with the economic research that is being performed.  For example, when the strategic plan calls for home equity loans minimums that start at $130K, there should be research that shows that this minimum would not arbitrarily exclude significant portions of the population with the assessment area.   

The upshot here is that you can clearly investment in community development agencies that do not directly and immediately impact the assessment area as long as you can prove that there aren’t viable options. 

Investments in National Funds

A second area that was addressed by the Questions and Answers was the question about community development credit for investing in national of regional CD Funds.  Because these funds tend to provide economies of scale and efficiencies, it is clear that the FFIEC would like to encourage investment in the community development work of these funds.   As a result, the new question and answers give a very similar treatment to these funds above. In those circumstances where a Bank can show that it has researched and considered the credit needs of its assessment area and has gone as far as it can within that area, investments in national funds can be a good alternative. 

The real rub is in documenting your research in the local assessment area first.  You cannot replace local investment with national unless you can demonstrate that there simply are not appropriate opportunities in the local area. 

Regional Area

A final question that was addressed was the definition of “regional area”.  The answer here was expanded to include areas that have some economic interdependency.  Therefore regional areas can include multistate and interstate areas.   

More Changes Coming

We believe that these questions and answers demonstrate that there are positive changes coming in the manner in the area of CRA evaluations.  Stay tuned!

Self- Policing- An excellent way to control your own destiny!

So you are the compliance officer and while doing a routine check on disclosures, you notice a huge error that the Bank has been making for the last year.  The beads of sweat form on your forehead as you realize that this mistake may impact several hundred customers.   Real panic sets in as you start to wonder what to do about the regulators.  To tell or not to tell, that is indeed the question! 

Many of our clients struggle with the question of what to do when your internal processes discover a problem.  We have always believed that the best policy is to inform the regulators of the problem and now we have confirmation that this is indeed the case!    CFBP Bulletin 2013-06 discusses what it calls “responsible business conduct” and details the grounds for getting consideration for getting enforcement consideration from the CFPB.  In this case, “consideration is somewhat vague and it clearly depends on the nature and extent of the violation, but the message is clear.  It is far better to self-police and self-report than it is to let the examination team discover a problem!    

Why Disclose a Problem if the Regulators Didn’t Discover it?  

It is easy to make the case that financial institutions should “let sleeping dogs lay”.  After all, if your internal processes have found the issue, the thing is that you can correct it without the examiners every knowing, move on and everybody is happy!  Right?  In fact, nothing could be further from the truth.   We admit there was a time when the relationship between regulators and the banks they regulate was collegial, but that is most certainly not the case any longer.   Part of the process of rehabilitating the image of banks is to ensure that they are being well regulated and that misbehavior in compliance is being addressed. 

Self- Policing

It is not enough that a bank discovers its own problems and addresses them.  In the current environment, there is a premium placed on the idea that a bank has compliance and/or audit systems in place that are extensive enough to find problems, determine the root of the problems and make recommendations for change.  An attitude that compliance is important must permeate the organization starting from the top.  T impress the regulators that an organization is truly engaged in self-policing, there has to be evidence that senior management has taken the issue seriously and has taken steps to address whatever the concern might be.  For example, suppose during a compliance review, the compliance team discovers that commercial lenders are not consistently given a proper ECOA notification.  This finding is reported to the Compliance Committee along with a recommendation for training for commercial lending staff.   The Compliance Committee accepts the recommendation and tells the Compliance Officer to schedule Reg. B training for commercial lenders.  This seems like a reasonable response, right?  

 This does not rise to the level of self- policing that is discussed in the CFPB memo; a further step is necessary.  What is the follow-up from senior management?   Will senior management follow up to make sure that the classes have been attended by all commercial lending staff?  Will there be consequences for those who do not attend the classes?  The answers to these questions will greatly impact the determination of whether there is self-policing that is effective.   Ultimately, the goal of a Bank should be to show that the effort at self-policing for compliance is robust and taken seriously at all levels of management.  The more the regulators trust the self-policing effort, the more the risk profile of bank decreases and the less likely enforcement action will be imposed. 

Self-Reporting

While at first blush self-reporting seems a lot like punching oneself in the face, which is not the case at all!   The over-arching idea from the CFPB guidance is that the more the institution is willing to work with the regulatory agency, the likely that there will be consideration for reduced enforcement action.  The truth is, compliance failures will eventually be discovered and the more they are self-discovered and reported, the more trust that the regulators have in the management of the bank in general and the effectiveness of the compliance program in particular.   The key here is to report at the right time.  Once the extent of the violation and the cause of it have been determined, the time to report is imminent.  While it may seem that the best time to report is when the issue is resolved, this will generally not be the case.  In point of fact, the regulators may want to be involved in the correction process.  In any event, you don’t want to wait until it seems that discovery of the problem was imminent (e.g. the regulatory examination will start next week!).

It is important to remember here that the reporting should be complete and as early as possible keeping in mind that you should the extent and the root cause of the problem.  It is also advisable to have a strategy for remediation in place at the time of reporting. 

Remediation

What will the Bank do to correct the problem?  Has there been research to determine the extent of the problem and how many potential customers have been affected?      How did the Bank make sure that whatever the problem is has been stopped and won’t be repeated?  What practices, policies and procedures have been changed as a result of the discovery of the problem?  These are all questions that the regulators will consider when review the Banks efforts at remediation.  So for example, if it turns out that the Bank has been improperly disclosing transfer taxes on the GFE, an example of strong mediation would include:

·       A determination if the problem was systemic or with a particular staff member

·       A “look back” on loan files that for the past 12 months

·       Reimbursement of any all customers who qualify

·       Documentation of the steps that were taken to verify the problem and the reimbursements

·       Documentation of the changed policies and procedures to ensure that there is a clear understanding of the requirements of the regulation.

·       Disciplinary action(if appropriate for affected employees)

·       A plan for follow-up to ensure that the problem is not re-occurring

Cooperation

Despite the very best effort at self-reporting and mediation, there may still be an investigation by the regulators.  Such an instance calls for cooperation not hunkering down.  The more the bank is forthcoming with the information about its investigation, the more likely that the regulators will determine that there is nothing more for them to do. 

At the end of the day, it is always better to self-detect report and remediate.  In doing so you go a long way toward controlling your destiny and reducing punishment! 

UDAAP- What is in a name? 

Among the many new regulations that have been passed in the banking world in the last two-three years, one of the most feared and miss-understood is the Unfair, Abusive or Deception Acts or Practices regulation of UDAAP for short.  The truth is that these laws allow the regulatory fairly broad authority to criticize, halt, prevent or even punish a ban for practices that are deemed unfair or abusive.  The ugly truth about this area of regulation is that the definitions included in it are vague.  Regulators are left to interpret what is and is not an unfair practice.  To paraphrase the words of Supreme Court Justice Potter Stewart-the regulators may not be able to define it, but they know abusive and deceptive practices when they see them!

Although the question about what is and is not a deceptive or abusive act or practice comes up quite a bit from our clients, there is rarely a clear answer.   Instead we currently base our advice on the enforcement actions that have been published under the Act, “stories from the road” and well established best practices. 

Abusive?  Our Bank?  Never!  

For many of our clients the mere names included in the act are too much to bear!  Abusive and deceptive sound incredibly sinister and dark hearted.  AS a result, many believe that this law and the implementing regulations do not apply.  Surely these rules were designed for some cartoonish character who preys on poor unsuspecting customers and cheats them out of their houses, cars or other valuable possession!

But even though the words sound awful, it is possible to engage in a deceptive or abusive act, simply by failing to disclose fees completely or properly.   For example, suppose your bank offers a “free” checking account on its website.  In fact the product has no month to month charges, but there is a cost to the Bank for setting up the account.  If your bank passes that cost on to the customer, then the account is not free and your advertising is deceptive.  You enticed customers in with the promise of free checking when in fact, it was not free.  RELATIVELY free is not the same thing as free!  

5 Steps to a UDAAP Free-Zone

In our opinion there is nothing that you do to absolutely guaranty that there will be UDAAP violations at your bank.  However, there are some steps that you can take to significantly reduce UDAAP risk.  The motto for avoiding problems in this area is that consistency is key!   

Step 1. - Get Compliance Involved; Recognize that that advertising and marketing must get the blessing of the compliance department before going to the public.  The largest area of enforcement action under UDAAP has been in the areas of false of deceptive advertising.   It is often the case that advertising is classified as deceptive when the information on account disclosures does not exactly match the advertising on the website or on print media.  By getting the compliance department to review advertising ahead of time, a great deal of pain and suffering can be avoided.  As a best practice, it is a great idea to have the compliance department be involved with the development of products so that fair lending and UDAAP concerns can be addressed at the time a product is being developed not after all of the marketing materials have been delivered!  

Step 2. –Formalize the customer compliant system; it is obvious that the regulators have been directed to pay close attention to the manner in which banks handle customer complaints.  In the past this simply meant making sure that all complaints were answered within a reasonable time.  However, in the future examiners will explain that the bank will track the complaints to make a determination of the nature and quality of complaints.  If, for example several complaints are received about a fee or billing from customers, the examiners will expect that the Board will discuss the complaints and make the necessary charges to the product.  Failure to address complaints puts the Bank in the position of willfully violating UDAAP  

Step 3. - Incorporate UDAAP into the Compliance Management program;    When the compliance department is preparing its annual risk assessment and determining what areas of the bank require review for compliance, make sure that UDAAP is part of the considerations.  An ongoing review to ensure that not only are complaints tracked and answered, that all disclosures match, but also to ensure that products being offered are yielding their intended results.  In some cases, what can seem like a fee that is meant to discourage activity (overdraft fee); can have the result of a UDAAP violation.   Compliance must ensure that all staff is trained about UDAAP and the potential for trouble.

Step 4. – Internal Audit for UDAAP; Make sure that you internal auditor or audit provider includes UDAAP compliance in its scope.  Although there is not an established UDAAP template, the scope should reflect that overall size and complexity of the bank and the potential for UDAAP violation  

STEP 5. - Vendor management; when your bank uses vendors for the delivery of products, it is critically important to work with the vendors to ensure that the information disseminated to the customer matches the desires of the Board and senior management of your bank.  It is important to perform at least an annual due diligence for vendors of products to determine whether there has been any quality control issues.  Remember the Bank is ultimately responsible for compliance.

 

Remember, deception, abuse and general bad acts are in the eyes of the regulator that beholds the bank!   By incorporating these steps in the overall compliance effort, the bank can keep what is seen clean!  

Adverse Actions- Time is NOT on your side!   

One the most prominent parts of the Equal Credit Opportunity Act is section 202.9 AKA the notifications section.   It is this section that requires that within 30 days of receiving a completed application, a bank will send notice of action taken.  Put in other terms, a bank has 30 days from the time they receive enough information to make a credit decision to tell an applicant that their loan is being declined.  Of course a Bank can make a counter offer rather than an outright decline, but the time limitation is the same.  

On phenomenon that we are seeing is a tendency for banks to draw out this equation.  Reg. B allows a bank to go beyond the 30 day limitation if there is ongoing contact with the borrower.  For example, in the case where a borrower is missing financial information, the Bank can notify the borrower and ask for the missing information.  While the Bank is waiting for the customer to respond the 30 day clock stops ticking.  And while this provision of the regulation can be used to the advantage of both the borrower and the bank, there are potential concerns with extending the application process.  

Keeping the Home Fires Burning

For commercial lending in particular, it is often the case that a deal develops slowly.  A potential borrower may be unsure of what she actually wants or needs in terms of a financial product for her business.   In the meantime, the ever vigilant commercial loan or business development officer doesn’t want to lose the client to another institution be appearing to be uninterested.   The result is that an “application” that is not truly an application will be taken by a bank.  Minimal information is often taken to open a file, but as time goes on, the loan officer will make a series of requests for information to stop the 30 day clock from running out and to keep the prospect active.  Using this process a bank could theoretically keep a loan application open in perpetuity and not violate Reg. B.  

When is an application an application? 

One of the ongoing questions that vex banks and financial institutions about Reg. B is “when is an application a complete application for purposes of the regulation?” Our advice on this question is that once there is enough information to say “no” the application is complete!  For example, after a credit report on a business is run and the report shows an unacceptable record, you know enough to make a credit decision.  This is not to say that an optimistic loan officer may not attempt to work around poor or questionable credit.  It simply means that she has to do so expeditiously!   Unfortunately, what happens in many situations we see is that the officer continues to ask for additional information from the customer, stops the 30 day clock and eventually- 90 days later- sends an adverse action based upon the poor credit report.   The truth is that the bank could and should have closed the account and sent the notification much earlier. 

 The compliance concern with keeping an application open

So what’s the big deal? Is there really a problem or concern with keep loan applications open for time period longer than 30 days?  In a word, YES!   There are several concerns with this practice.  The two largest concerns center on fair lending.  

First, leaving accounts open and eventually denying the application or allowing the applicant to withdraw after a long period of time, can give the impression of discouragement.  Consider a situation where a loan officer is attempting to work with a group of borrowers form a traditionally underserved community.  In an attempt to accommodate unsophisticated borrowers, the officer makes a habit of keep applications open and requesting information on a step by step basis.  As a result of this practice about 25% of the applicants withdraw their loans after 45 days.  Moreover, another 40% of the applicants are denied, after an average wait of 60 days.   In this case, the bank’s regulators can (and did!) make the argument that the bank was in the practice of discouraging borrowers in protected classes.  The regulators’ concerns were heightened when they compared the average time for completion of loan applications for persons in non-protected classes, which was 20 days.   In this particular case, even though the motive was a good one, the outcome was very negative.     

The potential for complaints from the borrower that lead investigations from regulatory agencies is also a concern.  Consider an applicant that receives a notice of adverse action after 60 days; the reason for the denial is “lack of credit history”.  If the applicant is bank savvy they will realize that the credit report is part of the very early stages of processing an applicant. They will know that the bank had this reason for denial within days of the initial application.  We have seen complaints to regulators based upon the idea that the Bank was “stringing me along”.  These are the sort of complaints that can also lead to fair lending investigations and orders from the regulator to do a file search!   

The longer a file stays open, the greater the likelihood that it can be overlooked.  We have seen several cases when a file has been kept open for additional financial information and for various reasons; the loan officer overlooks that file.  In one extreme case, a file was open for an entire year with ne resolution due a re –assignment of officers!  

For compliance purposes, it is always better to bring an application to its conclusion as soon as possible.  If the bank will be unable to loan to the applicant, then that idea should be communicated at the first possible chance.   

Some suggestions for balance

So how do you balance the desire to keep a client relationship open with the need to protect the bank from compliance issues?  A best practice is to give the borrower a specific number of days to respond to the request for information.  Language in the communication requesting information should indicate to the customer that if the information is not received by the stated date, the Bank will consider the matter closed.  

Further, it is more effective to have a member of compliance staff review the files that have information requests and to work with loan officers to determine whether the requested information will truly enhance the possibility of an applicant to be completed successfully.  Working together, compliance and business development can effectively balance the interests of both departments.