Compliance Hot Topics Glory LeDu Director of League System Relations Glory.LeDu@mcul.org

Home Mortgage Disclosure Act Thus, under the final rule, the disclosure of HMDA data is shifted entirely to the agencies; financial institutions will no longer be required to provide their HMDA data directly to the public, but 30 Proposed § 1003.5(b)(2). 31 Proposed § 1003.5(c). 32 79 FR 51731, 51742-43, 51816 (Aug. 29, 2014). 20 only a notice advising members of the public seeking their data of where it may be obtained online. Consumers will now go to the FFIEC website to obtain information regarding the credit unions LAR.

CFPB - HMDA Effective dates: Key Changes to the HMDA rules: Definition of Financial Institution (January 1, 2017) Additional changes to Financial Institution and requirement to report new data fields (January 1, 2018) Key Changes to the HMDA rules: Types of financial institutions that are subject to the regulation; Types of transactions that are subject to the rule; The data that financial institutions are required to collect, record and report; and The process for reporting and disclosing HMDA data. There are additional effective dates – for example beginning on January 1, 2019 – changes to enforcement provisions and amendments to reporting provisions become effective. On January 1, 2020 the effective date for quarterly reporting – for large reporters become effective.

CFPB - HMDA Effective January 1, 2017 to determine HMDA reporting for 2017. The CFPB added an additional prong to the definition of a “financial institution.” “Financial Institution” means: The credit union, on the preceding December 31st, had assets in excess of $44 million for 2016 data reporting (adjusts annually), had a home or branch office in a metropolitan statistical area (MSA), originated at least one home purchase loan (excluding temporary refinancing such as a construction loan) or refinancing of a home purchase loan, secured by a first lien on a one-to-four-family dwelling; The credit union is federally insured or regulated; AND In each of the two preceding years, originated at least 25 home purchase loans, including refinancings of home purchase loans, that are not otherwise excluded (1003.4(d)).

CFPB - HMDA Effective January 1, 2018 to determine HMDA reporting for 2018. “Financial Institution” means: The credit union, on the preceding December 31st, had assets in excess of the threshold established and published annually, had a home or branch office in a metropolitan statistical area (MSA), originated at least one home purchase loan (excluding temporary refinancing such as a construction loan) or refinancing of a home purchase loan, secured by a first lien on a one-to-four-family dwelling in the preceding calendar year; The credit union is federally insured or regulated; AND In each of the two preceding years, originated at least 25 closed-end mortgage loans that are not otherwise excluded (1003.3(c)) OR originated at least 100 open-end lines of credit (secured by a lien on a dwelling) that are not otherwise excluded (1003..3(c)). HMDA Institutional Coverage Charts Exemptions (examples): A Closed-End Mortgage Loan or an Open-End Line of Credit that a Financial Institution originates or purchases in a fiduciary capacity, A Closed-End Mortgage Loan or an Open-End Line of Credit secured by a lien on unimproved land. The 2015 HMDA Rule also lists Closed-End Mortgage Loans and Open-End Lines of Credit secured only by vacant or unimproved land as Excluded Transactions. However, a loan or line of credit secured by a lien on unimproved land is deemed to be secured by a Dwelling (and not might not be excluded) if the Financial Institution knows, based on information that it receives from the applicant or borrower at the time the Application is received or the credit decision is made, that the proceeds of that loan or credit line will be used within two years after closing or account opening to construct a Dwelling on, or to purchase a Dwelling to be placed on, the land. A Closed-End Mortgage Loan or an Open-End Line of Credit that is temporary financing. A transaction is excluded as temporary financing if it is designed to be replaced by permanent financing at a later time.

CFPB - HMDA Transactional Reporting Coverage: Credit unions will no longer include home improvement loans that are not secured by the dwelling. Credit unions will be required to report HELOCs. The rule moved to a “dwelling secured standard” for all loans or lines of credit for personal, family or household purposes. Applies to closed-end loans and open-end lines of credit that are secured by a dwelling. Applies to business-purpose, closed-end loans and open-end lines of credit that are dwelling secured and are home purchase loans, home improvement loans or refinancing.

CFPB - HMDA Reportable Activity Generally, the credit union is required to report information for actions taken on an application for covered loans, originations of covered loans and purchase of covered loans. Application is an oral or written request for a covered loan that is made in accordance with procedures the credit union uses for the type of credit requested. Similar to Reg B, but prequalification requests are not applications. A request for pre-approval may be treated differently than a request for prequalification for certain types of loans. Pre-approval is an application if the request is: For a home purchase loan; Not secured by a multifamily dwelling; Not for an open-end line of credit or for a reverse mortgage; and Reviewed under a Preapproval Program. A Preapproval Program for purposes of the 2015 HMDA Rule is a program in which the Financial Institution: 1. Conducts a comprehensive analysis of the applicant’s creditworthiness (including income verification), resources, and other matters typically reviewed as part of the Financial Institution’s normal credit evaluation program; and then 2. Issues a written commitment that: (a) is for a Home Purchase Loan; (b) is valid for a designated period of time and up to a specified amount, and (c) is subject only to specifically permitted conditions. 12 CFR 1003.2(b)(2). The written commitment issued as part of the Preapproval Program can be subject to only the following types of conditions: 1. Conditions that require the identification of a suitable property; 2. Conditions that require that no material change occur regarding the applicant’s financial condition or creditworthiness prior to closing; and 3. Limited conditions that (a) are not related to the applicant’s financial condition or creditworthiness and (b) the Financial Institution ordinarily attaches to a traditional home mortgage application. Examples of conditions ordinarily attached to a traditional home mortgage application include requiring an acceptable title insurance binder or a certificate indicating clear termite inspection and, if the applicant plans to use the proceeds from the sale of the applicant’s present home to purchase a new home, a settlement statement showing adequate proceeds from the sale of the present home. 12 CFR 1003.2(b)(2); comment 2(b)-3.

CFPB - HMDA Data Points Summary of Reportable HMDA Data There are 48 total data points to collect. In addition to amendments of existing data points, below are the new data points credit unions must collect: Property address, age, credit score, total loan costs or total points and fees, origination charges, discount points, lender credits, interest rate, prepayment penalty term, DTI ratio, combined LTV ratio, loan term, introductory rate period, non-amortizing features, property value, manufactured home secured property type, manufactured home land property interest, total units, multifamily affordable units, application channel, MLO NMLSR identifier, automated underwriting system, reverse mortgage, open-end line of credit, and business or commercial purpose.

CFPB - HMDA Applicant Information Changes made to applications that will require the collection of information regarding the ethnicity, race, and sex of an applicant. Appendix B provides instructions on how to collect ethnicity, race and sex information. Must indicate whether the information is collected on the basis of visual observation or surname or whether the applicant provided the requested information. The CFPB issued a proposal to amend Regulation B (ECOA) to be consistent with the changes made to HMDA. With some exceptions, Regulation B §1002.5(b) prohibits a creditor from inquiring about the race, color, religion, national origin, or sex of an applicant or any other person (protected applicant- characteristic information) in connection with a credit transaction. Any time from January 1, 2017 – December 31, 2017 a credit union can permit applicants to self identify using disaggregated ethnic and racial categories and will be considered in compliance with Regulation B.

CFPB - HMDA Credit unions will need to amend their applications.

CFPB - HMDA Annual Reporting HMDA data is required to be reported electronically by March 1st following the calendar year for which data is collected. Credit unions will have to use the new web-based tool for data submission for their March 1, 2018 reporting. Beginning in 2020, large-volume reporters will report data quarterly (60,000 originated covered loans for the preceding calendar year). CFPB website – resources for HMDA filers

CFPB - HMDA Disclosure Statement Lobby notice disclosure language changes. Credit unions will have to make data available (disclosure statement and/or LAR) to the public upon request. Also, required is a written notice that clearly conveys that the credit union’s disclosure statement and LAR may be obtained on the CFPB’s website. This is the lobby notice. A similar notice should be available to be provided to members upon request –in addition to the required language to provide to members. The disclosure statement and Loan application/register (LAR) can be provided in paper or electronically. At its discretion, a Financial Institution may also provide its LAR, as modified by the Bureau, and impose a reasonable fee for any costs incurred to reproduce or provide the data. 12 CFR 1003.5(d)(2). Even if it decides to provide the modified LAR, a Financial Institution must comply with the notice requirement.

FFIEC Consumer Compliance Rating System

FFIEC Compliance Rating Effective March 31, 2017 Revised by the Federal Financial Institutions Examination Council (FFIEC) which is comprised of multiple agencies, including the NCUA. Rating system was established in 1980 and was in need of revisions to reflect the regulatory, examination, technological and market changes that have occurred since then.

FFIEC Compliance Rating The Consumer Compliance Rating System (CC Rating System) is a supervisory policy for evaluating financial institutions’ adherence to consumer compliance requirements. Framework is provided to evaluate compliance factors and assign a consumer compliance rating. The review for the CC Rating System, will be risk-based, tailored to the size, complexity, and risk profile of each credit union. NCUA Examiners will be incorporating their assessment of a credit union’s ability to manage compliance risk into the Management component of the overall CAMEL rating.

FFIEC Compliance Rating The CC Rating System emphasizes the importance of compliance management systems – which should be how the credit union manages consumer compliance risk, supports compliance and prevents consumer harm. All credit unions should maintain an effective compliance management system (CMS). The sophistication and formality will increase commensurate with size, complexity and risk profile.

FFIEC Compliance Rating Numeric Rating Scale (1-5): Highest rating, lowest degree of supervisory concern. Credit union maintains a strong CMS and takes action to prevent violations of law and consumer harm. Credit union maintains a CMS that is satisfactory at managing consumer compliance risk in products and services and at substantially limiting violations of law and consumer harm. CMS is deficient at managing consumer compliance risk in products and services and at limiting violations of law and consumer harm. CMS is seriously deficient (indicates fundamental and persistent weaknesses in crucial CMS elements and severe inadequacies in core compliance areas necessary to operate within the scope of statutory and regulatory consumer protection requirements and to prevent consumer harm). CMS is critically deficient (indicates an absence of crucial CMS elements and a demonstrated lack of willingness or capability to take the appropriate steps necessary to operate within the scope of statutory and regulatory consumer protection requirements and prevent consumer harm).

FFIEC Compliance Rating The CC Rating System is organized under three categories: Board and Management Oversight Oversight of and commitment to the CMS; Effectiveness of the credit union’s change management process, including responding timely and satisfactorily to any variety of change (internal or external); Comprehension, identification, and management or risks arising from the institution’s products, services, or activities; and Self-identification of consumer compliance issues and corrective action undertaken as such issues are identified.

FFIEC Compliance Rating Compliance Program Whether the credit union’s policies and procedures are appropriate to the risk in the products, services and activities; The degree to which compliance training is current and tailored to risk and staff responsibilities; The sufficiency of monitoring and if applicable, audit to encompass compliance risks; and The responsiveness and effectiveness of the consumer complaint resolution process.

FFIEC Compliance Rating Violations of Law and Consumer Harm The root cause (or causes), of any violations of law identified during the examination; The severity of any consumer harm resulting from violations; The duration of time over which the violations occurred; and The pervasiveness of the violations.

FFIEC Compliance Rating The consumer compliance rating will be a comprehensive evaluation of the credit union, specific numeric ratings will not be assigned to any of the 12 assessment factors. Greater weight will apply to the credit union’s management of material products with significant potential consumer compliance risk.

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