January 26, 2022
NCUA Letter to Credit Unions 22-CU-08: Risk-Based Approach to Assessing Customer Relationships and Conducting Customer Due Diligence
NCUA has issued LTCU 22-CU-08 as part of a joint statement with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency and the U.S. Department of Treasury’s Financial Crimes Enforcement Network (collectively, the Agencies).
The joint statement clarifies NCUA’s position that credit unions must take a risk-based approach in assessing individual member risk. It also reinforces the NCUA’s position that no single customer type automatically presents a high risk of money laundering, terrorist financing, or other illicit financial activity risk. NCUA also advises against refusing or discontinuing service to an entire class of members based on perceived risk. The Joint Statement refers to the examples of customer (member) types listed in the CDD section of the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual, including, independent ATM owners or operators, nonresident aliens and foreign individuals, charities and nonprofit organizations, professional service providers, cash intensive businesses, nonbank financial institutions, and customers the bank considers politically exposed persons. The agencies reiterate that banks and credit unions should make their own business decisions on business relationships based on their own due diligence.
This statement does not include any changes to the Bank Secrecy Act (BSA) regulations but rather supports the long-standing approach to CDD outlined in the BSA as well as the Federal Financial Institution Examination Council’s BSA/AML Examination Manual.
CFPB Summary re: Advanced Notice of Proposed Rulemaking regarding Credit Card Late Fees and Late Payments
12 CFR Part 1026
The Consumer Financial Protection Bureau (CFPB) is seeking information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. For example, the Bureau is seeking information relevant to certain provisions related to credit card late fees in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) and Regulation Z. Areas of inquiry include: factors used by card issuers to set late fee amounts; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications, harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations.
Comments on the ANPRM are due by July 22, 2022. The ANPRM can be found here.
Summary:
The Bureau is charged with monitoring for risks to consumers in the offering or provision of consumer financial products/services. Specifically, Section 149(a) of the CARD Act provides that the amount of any penalty fee or charge that a card issuer may impose with respect to a credit card account (under an open-end consumer credit plan) in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee, over-the-limit fee or any other penalty fee or charge, must be reasonable and proportional to such omission or violation. Section 149(b) of the Act directs the Bureau to issued rules that establish standards for assessing whether the amount of any penalty fee or charge is reasonable and proportional to the omission or violation to which the fee or charge relates. In issuing such rules, the Act requires the Bureau to consider: (i) the cost incurred by the creditor from an omission or violation; (ii) the deterrence of omissions or violations by the cardholder; (iii) the conduct of the cardholder; and (iv) such other factors that the Bureau may deem necessary or appropriate.
The Act authorizes the Bureau to establish different standards for different types of fees/charges and authorizes the Bureau (in consultation with other agencies) to provide an amount for any penalty fee or charge that is presumed to be reasonable and proportional to the omission/violation to which the fee relates.
Section 1026.52 of Regulation Z, which implements the CARD Act, states that a card issuer must not impose a fee for violating the terms or other requirements of a credit card account, including a late payment, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation or complies with the safe harbor that is consistent with Section 1026.52. This section sets forth a safe harbor of $30 generally for a late payment, except that it sets forth a safe harbor of $41 for each subsequent late payment within the next six billing cycles. The safe harbor dollar amounts are subject to an annual inflation adjustment. A card issuer is not required to use the cost analysis to determine the amount of late fees if it complies with the safe harbor amounts.
Questions Asked
The questions in this notice cover several areas relating to the statutory and regulatory provisions, as well as areas relating more generally to the domestic consumer credit card market. Areas of inquiry include: factors used by card issuers to set late fee amounts, including but not limited to statutory factors described above; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications; card issuers’ use of the late fee safe harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations. In answering the questions, card issuer commenters should base their answers on information relevant to their domestic consumer credit card portfolios. Other commenters should base their answers on information they have about the domestic consumer credit card market.
Questions are divided among the following categories:
- Factors used by card issuers to set existing levels of late fees
- Costs and Losses
- Deterrence
- Cardholder Behavior
- Autopay
- Notifications of Upcoming Due Date
- Courtesy Periods and Fee Waivers
- Staggered Late Fee
- Safe Harbor Provisions
- Cost Analysis Provisions
- Revenue and Expenses
CFPB Summary re: Request for Information Regarding Employer-Driven Debt
Docket No. CFPB-2022-0038
The Consumer Financial Protection Bureau (CFPB) is charged with monitoring markets for consumer financial products and services to ensure that they are fair, transparent and competitive. As part of this mandate, the CFPB is seeking input from the public on debt obligations incurred by consumers in the context of an employment or independent contractor arrangement. Areas of inquiry include prevalence, pricing and other terms of the obligations, disclosures, dispute resolution and the servicing and collection of these debts.
Comments to this Request for Information (RFI) must be received by September 7, 2022. The RFI can be accessed here.
Summary:
The CFPB has identified a potentially growing market of debt obligations incurred by consumers through employment arrangements. These debts appear to involve deferred payment to the employer or an associated entity for employer-mandated training, equipment and other expenses. Usually they appear in the following form:
- Training repayment agreements that require workers to pay their employers (or third-party entities) for previously undertaken training provided by an employer or an associated entity if they separate voluntarily or involuntarily within a set time period.
- Debt owed to an employer or third party entity for the up-front purchase of equipment and supplies essential to their work or required by the employer but not paid for by the employer.
The Bureau is concerned that this employer-driven debt could pose risks to consumers, including overextension of household finances, errors in servicing and collection, default and inaccurate credit reporting. In addition, errors and misinformation can create heightened risks of consumer harm at each stage of the debt life cycle, from origination through servicing and default or payoff. The Bureau notes that consumers may not understand whether these arrangements involve an extension of credit, whether they have the ability to comparison shop for credit offered by others or whether entering into the debt agreement is a condition of employment. Additional risks, specific to the employment context, may include whether default on the debt threatens continued or future employment, or whether the status of the debt is impacted by a decision to seek alternative employment. These risks might limit competition and transparency in this market for consumer financial products and services.
The Bureau is seeking information on how employer-driven debt has impacted the public and has provided a number of question prompts focusing on a number of topics such as:
- Pre-origination
- Origination
- Servicing and Collections
- Disputes
- Credit Reporting
- Financial Health
The Bureau notes that the public is not required to respond to the questions provided and can feel free to provide any information that would assist it in better understanding the relationship between labor practices and the market for consumer financial products/services.
CFPB Summary re: Debt Collection Practices (Regulation F); Pay to Pay Fees
12 CFR Part 1006
The Consumer Financial Protection Bureau (CFPB) issued this advisory opinion to affirm that this provision prohibits debt collectors from collecting pay to pay or “convenience” fees, such as fees imposed for making a payment online or my phone, when those fees are not expressly authorized
This advisory opinion became effective on July 5, 2022 and the advisory opinion can be found here.
Summary:
Section 808(1) of the Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from collecting any amount (including any interest, fee, charge or expense incidental to the principal obligation) unless that amount is expressly authorized by the agreement creating the debt or permitted by law. This advisory opinion also clarifies this limitation also applies to a debt collector that collects pay to pay fees through a third-party payment processor.
The FDCPA imposes various requirements and restrictions on debt collectors’ debt collection activity. Relevant here is section 808, which provides that a “debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.” Section 808 then states that “without limiting the general application of the foregoing, the following conduct is a violation of this section” and enumerates eight specifically prohibited practices including the “collection of any amount (including any interest, fee, charge or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.
In 2017, the Bureau issued a compliance bulletin that “provides guidance to debt collectors about compliance with the FDCPA when assessing phone pay fees—a type of pay to pay fee. The bulletin summarizes, under Section 808(1), that debt collectors may collect such pay to pay fees only if the underlying contract or state law expressly authorizes those fees. CFPB examiners found that a debt collector “violated Section 808(1) when they charge fees for taking mortgage payments over the phone where the underlying contracts creating the debt did not expressly authorize collecting such fees and where the relevant State law did not expressly permit collecting such fees.
The advisory opinion applies to debt collectors as defined in Section 803(6) of the FDCPA and implemented in Regulation F. Pay to pay fees, sometimes called convenience fees, refers to fees incurred by consumers to make debt collection payments through a particular channel, such as over the telephone or online.
FinCEN ANPRM: No-Action Letters
Prepared by NASCUS Legislative & Regulatory Affairs Department
June 2022
FinCEN has issued an advance notice of proposed rulemaking (ANPRM) soliciting public comment on questions relating to the implementation of a no-action letter process. The no-action letter process at FinCEN may affect or overlap with other forms of regulatory guidance and relief FinCEN currently offers, including administrative rules and exceptive or exemptive relief. Therefore, the ANPRM seeks input from the public on whether a no-action letter process should be implemented and, if so, how the no-action letter process should interact with those other forms of relief.
Comments are due to FinCEN by August 5, 2022.
Summary
Section 6305(a) of the Anti-Money Laundering Act of 2020 (the AML Act) requires FinCEN to assess whether a no-action letter process should be established in response to inquiries concerning AML or countering the financing of terrorism (CFT) laws and how regulations apply to specific conduct.
The “no-action” letter is “a form of an exercise of enforcement discretion wherein an agency issues a letter indicating its intention not to take enforcement action against the submitting party for the specific conduct presented to the agency.” Such letters “address only prospective activity not yet undertaken by the submitting party.”
FinCEN submitted a Report to Congress on June 28, 2021, as required under 6305(b) of the AML Act, concluding that FinCEN should undertake a rulemaking to establish a no-action letter process to supplement the existing forms of regulatory guidance.
Regulatory Relief
FinCEN currently provides two forms of regulatory guidance. It may issue an administrative ruling that applies FinCEN’s interpretation of the Bank Secrecy Act (BSA), or it may provide exceptive/exemptive relief by granting an exception or exemption from BSA requirements in specific circumstances. An example of such a ruling/exception can be found here.
The no-action letter would provide a third form of guidance and would generally permit a submitting party to seek potential guidance from FinCEN indicating whether FinCEN would pursue or recommend enforcement action for specific conduct identified by the submitting party.
The AML Act and the No-Action Letter Report
The primary benefits of the no-action letter process identified in the 2021 Report include “promoting a robust and productive dialogue with the public, spurring innovation among financial institutions, and enhancing the culture of compliance and transparency in the application and enforcement of the BSA.”
Questions for Comment
The ANPRM consists of 48 questions. The questions include general questions related to the findings contained in the Assessment. In addition to the general questions, FinCEN is also seeking comment on several categories:
- The contours and format of a FinCEN no-action letter process;
- FinCEN jurisdiction and no-action letters;
- Changed circumstances; revocation;
- No-action letter denials and withdrawals; confidentiality; and
- Consultation
NASCUS has highlighted some of those questions below.
- While FinCEN has no legal authority to prevent another agency, including a Federal functional regulator or the DOJ, from taking an enforcement action under the laws or regulations that it administers, are there additional points FinCEN should consider in assessing the viability of a cross-regulator no-action letter process? What is the value of establish a FinCEN no-action letter process if other regulators with jurisdiction over the same entity do not issue a similar no-action letter?
- Would a no-action letter process involving FinCEN only be useful? Why or why not?
- To what extent would an institution be able to rely on a no-action letter from FinCEN if the institution is subject to oversight and examination for the same or similar matters by another agency?
- What impact would a FinCEN-only no-action letter process or a cross-regulator no-action process have on State, local, or Tribal regulators?
- Should FinCEN establish via regulation any limitations on which factual circumstances would be appropriate for a no-action letter? If yes, what should those limitations be?
- Should FinCEN limit the scope of no-action letters so that such requests may not be submitted during a BSA or BSA-related examination—including when the subject of the request is already a matter under examination, or when it becomes a matter under examination while the no-action letter process is ongoing?
- Would it be valuable for FinCEN provide to information from a no-action letter request to agencies with delegated examination authority under 31 CFR 1010.810 for the purpose of evaluating specific conduct addressed in a no-action letter request, including, among other things, to obtain information that may inform FinCEN’s response to the request?
- How should the no-action letter process apply to agents, third parties, domestic affiliates, and foreign affiliates that may be conducting anti-money laundering or BSA functions on behalf of a financial institution either inside or outside the United States?
- Should a change in the overall business organization, such as when two entities merge or one entity acquires another, cause a no-action letter to lose its effect? If so, under what circumstances? If not, how would such a no-action letter continue to apply?
- Should FinCEN publicize standards governing the revocation of no-action letters, or should revocation be determined on a case-by-case basis?
- If a no-action letter is revoked, how should FinCEN handle conduct that occurred while the no-action letter was active? In particular, would a rescission result in potential enforcement actions only for conduct after the rescission date, or would an entity also potentially be subject to liability for conduct that occurred while the now-revoked letter was active? Would the answer depend on the basis for the revocation?
- Should FinCEN create an appeals or reconsideration process for no-action letter denials? What factors and procedures should this process involve?
- Should FinCEN publish denials on its website? If so, what level of detail and type of information should be included? For example, should denials be anonymized?
- Should FinCEN maintain the confidentiality of no-action letters for a period of time, or indefinitely, after granting them? Under what circumstances should FinCEN maintain confidentiality?
- Should no-action letters be used as published precedents? If so, under what circumstances and conditions should they be precedential? Should no-action letters be applicable beyond the requesting institutions, and under what circumstances and conditions?
- If no-action letters and their underlying requests are made public, how should FinCEN handle content that is confidential or sensitive, such as triggering mechanisms for suspicious activity report (SAR) reviews?
- What procedures should be put in place for FinCEN to consult with other relevant regulators or law enforcement agencies regarding no-action letter requests?
- How can FinCEN best balance the need to consult other regulators or law enforcement with the desires of submitting parties for confidentiality and expediency?
- Should FinCEN require a submitting party that is seeking a no-action letter to identify all of its regulators? Should FinCEN require that institution to identify all of the regulators of its parent or subsidiary corporations?
- Under what circumstances other than consultation should information FinCEN obtains through the no-action letter process be shared with other Federal, State, local, and Tribal agencies, including the U.S. Department of Justice?
- What value or benefit does a no-action letter bring that is distinct from an administrative ruling, or from exceptive or exemptive relief?
CFPB Summary re: Request for Information Regarding Relationship Banking and Customer Service
Docket No. CFPB 2022 0040
The Consumer Financial Protection Bureau (CFPB) is seeking comments from the public related to relationship banking and how consumers can assert the right to obtain timely responses to requests for information about their accounts from banks and credit unions with more than $10 billion in assets, as well as from their affiliates.
Comments must be received by August 22, 2022. The request for information (RFI) can be found here, https://www.govinfo.gov/content/pkg/FR-2022-06-21/pdf/2022-13207.pdf.
Summary:
Section 1034(c) of the Consumer Financial Protection Act (CFPA) gives consumers a legal right to obtain information from the approximately 175 largest banks and credit unions in the country with more than $10 billion in assets, as well as from their affiliates. Through this statutory authority, consumers are able to gain valuable insight into their accounts by requesting certain account information from their depository institution.
This request for information seeks feedback from the public on what customer service obstacles consumers face in the banking market and, specifically, what information would be helpful for consumers to obtain from depository institutions pursuant to Section 1034 of the CFPA. The Bureau encourages the public to submit stories, data and information related to this RFI. To assist in the development of responses, the CFPB has provided the following prompting questions:
- What types of information do consumers request from their depository institution? How are consumers using the information?
- What types of information do consumers request from their depository institutions, but are often unable to obtain?
- How does the channel (phone, in-writing, online, in-person) through which consumers request information impact their ability to obtain information?
- How do consumers’ customer service experiences differ depending on the channel through which they interact with their depository institution (phone, in-writing, online, in-person)?
- How are customer service representatives evaluated and compensated, and how might compensation structure and incentives impact the service provided?
- What customer services obstacles have consumers experienced that have adversely affected their ability to bank?
- What unique customer service obstacles do immigrants, rural communities, or older consumers experience?
- What are typical call wait times?
- How often are calls dropped or disconnected? How often do companies use automated and digital communication channels such as interactive voice response (IVR) systems and online chat functions?
- Are there any fees associated with customer service or requests for information?
- What are the most important customer service features or experiences that help produce satisfactory banking relationships between financial institutions and consumers?
- Please explain the value of consumers having access to the following information pertaining to their accounts:
- Internal or external communications about an account
- A listing of all companies that are provided with information about an account.
- The purposes for which information about a consumer’s account are shared.
- Any compensation that a depository institution receives for sharing information about an account.
- Any conditions placed on the use of information about an account.
- A listing of all companies with authorization to receive automatic reoccurring payments from an account.
- Information reviewed or used in investigating a consumer’s dispute about an account.
- Any third-party information used to make account decisions about consumers, including but not limited to consumer reports and credit or other risk scores.
- What information would be helpful for consumers to obtain from depository institutions in order to improve their banking experience?
- How have methods of customer engagement changed as a result of the COVID-19 pandemic?
NCUA Letter to Credit Unions 22-CU-07: Federally Insured Credit Union Use of Distributed Ledger Technologies
NCUA has issued LTCU 22-CU-07 to address the increased use of financial technology by credit unions in their operations and clarify its expectations for credit unions contemplating the use of new or emerging distributed ledger technologies (DLT). This is NCUA’s second LTCU on this issue, as LTCU 21-CU-16 was issued December 2021.
The LTCU identifies the agency’s expectations related to DLTs and explains that credit unions may appropriately use DLT as an underlying technology. The following areas are considerations and NCUA’s expectations for FICUs, however, the NCUA notes this list should not be construed as all inclusive. Federally insured state-chartered credit unions should also look to their own state laws for permissibility prior to adopting DLT for existing operations.
Governance, Oversight and Planning
Project plans and risk assessments surrounding the implementation of a product, platform, or service using DLT should include the following at a minimum:
- Credit union board of director awareness and oversight of all changes in technology, purposes of and how it aligns with the credit union’s strategic plan and approved risk tolerances.
- Credit union staff and third parties using and managing the technology are complying with applicable laws and regulations and acting in a safe and sound manner.
- Effective risk management practices are followed to identify, assess, and mitigate risks associated with DLT and the specific activities for which it will be deployed.
- Risk assessment and audit functions can validate and attest to the effectiveness of risk-mitigation practices in accordance with internal policy and industry practices.
Risk and Risk-Mitigation Strategies
The LTCU also provides the specific questions that credit unions should consider as part of their due diligence efforts to ensure activities are permissible and in compliance with applicable laws and regulations.
- What are the primary characteristics of the DLT network architecture?
- Does the DLT exist within a private or public network?
- Has the risk of compromise related to many points of entry (nodes) been assessed?
- Are consensus mechanisms build into the DLT architecture immune to external exploitation?
- How are permissions and identity management credentials managed?
- By whom and how is governance over the network conducted?
- What are the data quality control expectations among participants within the network?
- Are DLT solutions deployed within a strictly governed coding process in accordance with industry leading practices?
Legal and Compliance Risk
- Have the potential legal and compliance risks been assessed, including those related to maintaining confidentiality, privacy, data security, recordkeeping, and consumer and fraud protections?
- When deploying the DLT, will the credit union comply with applicable laws and regulations, such as requirements of the Bank Secrecy Act (BSA), including customer due diligence, “Know Your Customer,” and anti-money laundering requirements?
- Are each of the nodes on the DLT network BSA compliant?
- If the application involves the use of smart contracts, is testing of the underlying architecture in place and documented? Has the credit union confirmed with whom and to what extent oversight, governance, and maintenance of the smart contract application reside and exist?
Strategic and Reputation Risk
- Have potential strategic and reputational risks related to the DLT been identified, assessed, and mitigated?
- Are consensus mechanisms built into the DLT architecture well understood by management?
- Is a process in place to monitor emerging risks and changes in technology? Can the credit union or third-party apply changes in deployment and internal controls in response?
- Do contracts with third-party vendors provide reasonable “exit strategies” in the event of deterioration in financial condition or service delivery by the vendor?
Liquidity Risk
- Have potential liquidity risks been identified, assessed, and mitigated?
Third-Party Risk
- Have potential legal and compliance risks associated with new-entry participants and third-party agreements been assessed?
- Have the appropriate due diligence steps been taken in the selection of the third party before entering a DLT arrangement? Has NCUA’s existing guidance on evaluating third-party relationships and third-party due diligence been reviewed?
Summary Guidance:
Interagency Question and Answers Regarding Flood Insurance
Prepared by NASCUS Legislative & Regulatory Affairs Department
May 2022
NCUA, together with the OCC, Federal Reserve Board, the FDIC, and FCA (together, the Agencies) have published revised guidance to assist lenders in meeting their responsibilities under Federal flood insurance law and increase public understanding of the Agencies’ respective flood insurance regulations.
In the 2021 proposed Q&A regarding private flood insurance and request for comment the Agencies indicated a plan to publish a final document in the Federal Register consolidating the proposed private flood insurance questions and answers, and the July 2020 questions and answers into one set of guidance. Those two documents have now been consolidated into one set of Interagency Questions and Answers Regarding Flood Insurance. The new guidance replaces the previously published versions from 2009 and 2011.
Click here to download a pdf version of this summary. [PDF]
Summary
The newly consolidated guidance consists of 144 Questions and Answers (including 24 private flood insurance questions and answers). The full Q&A begins on page 153 covering a broad range of topics. Some key topics addressed by the revisions include guidance related to amendments to the flood insurance laws as they apply to the escrow of flood insurance premiums, certain exemptions for detached structures, procedures for the force placement of insurance, and the acceptance of flood insurance policies issued by private insurers.
For ease of reference, the Agencies have reorganized the Q&As to provide a more “logical flow of questions through the flood insurance process for lenders, servicers, regulators, and policyholders.” Rather than numbering the Q&As successively through each category, each Q&A is designated by the category to which it belongs and then designated in numerical order for that category.
Furthermore, the Agencies have added three new Q&As, Applicability, Amount, and Condo and Co-op, to better address comments received and for organizational purposes.
The following table outlines the newly organized Section, specific category within that section and the number of questions per section.
| Section | Category | No. of Questions |
|---|---|---|
| I | Determining the Applicability of Flood Insurance Requirements for Certain Loans [Applicability] | 15 |
| II | Exemptions from the Mandatory Flood Insurance Purchase Requirements [Exemptions] | 7 |
| III | Private Flood Insurance – Mandatory Acceptance [Mandatory] | 9 |
| IV | Private Flood Insurance – [Discretionary] | 4 |
| V | Private Flood Insurance – General Compliance [Private Flood Insurance] | 11 |
| VI | Required Use of Standard Flood Hazard Determination Form [SFHDF] | 4 |
| VII | Flood Insurance Determination Fees [Fees] | 2 |
| VIII | Flood Zone Discrepancies [Zone] | 3 |
| IX | Notice of Special Flood Hazards and Availability of Federal Disaster Relief | 7 |
| X | Determining the Appropriate Amount of Flood Insurance Required [Amount] | 9 |
| XI | Flood Insurance Requirements for Construction Loans [Construction] | 6 |
| XII | Flood Insurance Requirements for Residential Condominiums and Co-Ops [Condo and Co-Op] | 6 |
| XIII | Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an SFHA [Other Security Interests] | 12 |
| XIV | Requirement to Escrow Flood Insurance Premiums and Fees – General [Escrow] | 7 |
| XV | Requirement to Escrow Flood Insurance Premiums and Fees – Small Lender Exception [Escrow Small Lender Exception] | 7 |
| XVI | Requirement to Escrow Flood Insurance Premiums and Fees – Loan Exceptions [Escrow Loan Exceptions] | 5 |
| XVII | Force Placement of Flood Insurance [Force Placement] | 16 |
| XVIII | Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights [Servicing] | 7 |
| XIX | Mandatory Civil Money Penalties [Penalty] | 2 |
The following highlights pertinent sections of the Q&A for ease of reference.
Escrow of Flood Insurance Premiums
Requirement to Escrow Flood Insurance Premiums and Fees – General (Escrow)
Establishment of Escrow Accounts
- Requirement for any designated loan secured by residential real estate or a mobile home that is made, increased, extended or renewed on or after 1/1/2016
- A lender must escrow for flood insurance under the Regulation even if it does not escrow for taxes and insurance.
- Lenders must escrow force-placed insurance – unless the lender qualifies for an exception.
Loan-related exceptions:
- A loan is an extension of credit primarily for business, commercial, or agricultural purposes;
- A loan that is in a subordinate position to a senior lien secured by the same property for which the borrower has obtained adequate flood insurance coverage;
- A loan that is covered by a condo association, cooperative or homeowners association or other applicable group’s adequate flood insurance policy;
- A loan that is a home equity line of credit;
- A loan that is a nonperforming loan that is 90 days or more past due; or
- A loan that has term not longer than 12 months.
- Small lender exception
- If a lender no longer qualifies for the small lender exception, it must escrow all premiums and fees for any flood insurance required
Subordinate Lienholder
- Subordinate lienholders are not required to escrow for flood insurance as long as the borrower has obtained flood insurance coverage that meets the mandatory purchase requirement. The junior lienholder or its servicer must ensure that adequate flood insurance is in place.
- If adequate insurance has not been obtained by the first lienholder and insurance must be purchased in connection with the second mortgage to meet the mandatory purchase requirement, the junior lender or its servicer would need to escrow the insurance obtained in connection with the second mortgage.
- Does not apply to subordinate lien if subordinate lien is a HELOC
Requirement to Escrow Flood Insurance Premiums and Fees – Escrow Small Lender Exception (Escrow Small Lender Exception)
Small Lender Exception Applicability – on or after July 6, 2012
- Lender was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and
- Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees or other charges in an escrow account for any loans secured by residential improved real estate or a mobile home
HMPL Loans
- Federal law in effect on or before July 6, 2012, permitted a borrower to request cancellation of the escrow rather than apply for the entire term of the loan – therefore HPML escrow requirements would not result in the loss of the escrow exception for a small lender that made an HPML – covered loan prior to 1/6/ 2012
USDA/FHA Loans
Such loans under Federal law, require the deposit of taxes, insurance premiums, fees, and other charges in an escrow account for the entire term of the loan – therefore the small lender exception would not apply.
Option to Escrow Notice
- Loans outstanding as of 1/1//2016, must receive notice only to lenders who have a change in status & no longer qualify for the small lender exception
- Such lenders are required to provide the option to escrow notice by September 30 of the first calendar year in which the lender has had a change in status pursuant to the regulation.
- The notice does not apply to outstanding loans or lenders that are excepted from the general escrow requirement under the regulation.
- Option to escrow notice does not apply to loans that are not subject to the mandatory flood insurance purchase requirement.
- Lenders that qualify for the small lender exception are not required to provide borrowers the escrow notice or the option to escrow unless the lender no longer qualifies for the small lender exception.
Waiver of Escrow
- If a borrower waives escrow of flood insurance premiums and fees, the lender exception for sending a notice no longer applies. The Regulation does not exclude loans for which borrowers have previously waived escrow from the requirement to offer and make available the option to escrow flood insurance premiums and fees.
- Lenders/Servicers must send a notice of the option to escrow to borrowers who waived escrow
Requirement to Escrow Flood Insurance Premiums and Fees – Escrow Loan Exceptions
Exceptions
- Extensions of credit primarily for business, commercial or agricultural purposes are not subject to the escrow requirement for flood insurance premiums and fees, even if such loans are secured by residential improved real estate or a mobile home.
- Escrow requirements would not apply to a loan secured by a particular unit in a multi-family residential building if a condo association, cooperative, homeowners association, or other applicable group provides an adequate policy and pays for the insurance as a common expense.
- Construction to permanent loans do not qualify for the 12-month exception from escrow, even if one phase of the loan is 12 months or less, given that these loans are generally 20 – 30-year loans. A 12-month phase is not considered a true closing.
- If at any time during the term of the loan a lender determines that a subordinate lien exception no longer applies, the lender must begin escrowing flood insurance premiums and fees as soon as reasonably practicable (unless another exception applies).
- Lenders should ensure that loan documents for subordinate liens permit the lender to require an escrow if the loan takes a first lien position.
Exemptions for Detached Structures
Exemptions from the Mandatory Flood Insurance Purchase Requirements
Detached Structures
- The Regulation does not apply a structure that is detached from the primary residential structure and does not serve as a residence.
- A borrower may still elect to purchase flood insurance
- The lender does not have to take a security interest in the primary residential structure for detached structures to be eligible for exemption.
- The term “a structure that is part of a residential property” in the detached structure exemption applies only to structures for which there is a residential use and not to structures for which there is a commercial, agricultural or business use.
- A flood hazard determination is required even when the secured property contains detached structures for which coverage is not required, in order to determine whether a building or mobile home securing a loan is or will be located in an SFHA.
- If a borrower has flood insurance on a detached structure that is part of the residential property but does not serve as a residence, the lender is no longer mandated by the Act to require flood insurance on that structure and may allow the borrower to cancel the policy.
- If a triggering event occurs the lender is required to examine the status of detached structures to determine whether the structure exemption still applies.
Procedures for Force Placement of Insurance
Force Placement of Flood Insurance – Force Placement
Force Placement
- When a lender makes the determination that the collateral securing the loan is uninsured or underinsured, it must begin the force placement process. The lender or servicer must notify the borrower that the borrower must obtain flood insurance, at the borrower’s expense, in an amount at least equal to the minimum amount required under the regulation.
- If the borrower fails to obtain appropriate insurance within 45 days of the lender’s notification the lender must purchase flood insurance on the borrower’s behalf.
- It must be the full amount required under Regulation
- The lender must provide notice to the borrower of force placement of insurance upon making the determination that the loan is not covered by flood insurance or in an amount less that the amount required
- When force placement occurs, the Regulation requires a minimum amount of flood insurance to be “at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act.”
Charging for Force Placed Insurance – What is considered a triggering event?
- Capitalizing the premium and fees into outstanding principal balance
- If the lender’s loan contract with the borrower includes a provision permitting the lender to advance funds for flood insurance as additional debt to be secured by the building/mobile home – such an advancement would be considered part of the loan and would not be considered a triggering event.
- IF there is no explicit provision permitting this type of advancement of funds in the loan contract the capitalization of premiums would be considered an “increase” in the loan amount and thus considered a triggering event because no advancement of funds was contemplated as part of the loan.
- Adding the premium and fees to a separate account
- If the lender accounts for and tracks the amount owed on force placed insurance premiums and fees in a separate account, this is not considered a triggering event
- Advancing funds from the escrow account to pay for the premium and fees
- If the lender’s contract permits the advancement of premiums from the borrower’s escrow account – this is not considered a triggering event
- Billing the borrower directly for the premiums and fees
- If the lender bills the borrower directly for the cost of force placed insurance, this is not considered a triggering event
Refunding premiums
- The Regulation requires the refund of force placed insurance premiums and any related fees charged to the borrower for any overlap period within 30 days of receipt of a confirmation of a borrower’s existing flood insurance coverage without exception.
Expiration
- The Regulation does not require a lender to send a notice to the borrower prior to renewing a force placed policy. The lender may notify the borrower if they are planning to renew or have renewed the policy.
Monitoring Coverage
- There is no regulatory requirement to monitor coverage over the life of the loan. For purposes of safety and soundness many lenders choose to monitor for continuous coverage.
Acceptance of Private Flood Insurance
Private Flood Insurance – Mandatory Acceptance
- Lenders are only required to accept flood insurance policies issued by a private insurer that meet the definition of private flood insurance under the Regulation, as long as the policy meets the amount of insurance required.
- A lender is not required to accept flood insurance that only meets the criteria set forth in discretionary acceptance.
- Lenders are not required to originate a loan that does not meet their underwriting criteria, e.g., a loan in non-participating communities or coastal barrier regions where the NFIP is not available.
Use of Compliance Statement
- A lender may choose to rely upon the compliance aid statement and would not need to review the policy further to determine if the policy meets the definition of “private flood insurance.”
- A lender may not reject the policy solely on the lack of the compliance aid statement and not required to accept it on the statement alone, but rather may choose to review the policy in its entirety to determine if it meets the definition of “private flood insurance.”
- In order for the lender to rely on the compliance aid statement without further review of the policy, the language of the statement must be stated in the policy, or as an endorsement to the policy.
- If the language is different the lender cannot rely on the protections of the compliance aid statement.
Private Flood Insurance – Discretionary Acceptance
Policy acceptance
- Lenders are not required to accept flood insurance policies that only meet the discretionary criteria. Discretionary criteria are set forth in the Regulation
- It is at the lender’s discretion to accept a policy that meets the discretionary acceptance criteria
- If a lender accepts a policy that they determine meets the discretionary criteria the lender must document its conclusion in writing that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles.
Factors to consider:
- A policy’s deductible is reasonable based on the borrower’s financial condition;
- The insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force-placement of flood insurance, if necessary
- The terms and conditions of the policy, with respect to payment per occurrence or per loss and aggregate limits, are adequate to protect the regulated lending institution’s interest in the collateral;
- The flood insurance policy complies with applicable State insurance laws; and
- The private insurance company has the financial solvency, strength, and ability to satisfy claims.
Private Flood Insurance – General Compliance
Maximum Deductible
- For purposes of compliance with the mandatory acceptance provision, the Regulation provides that a policy must provide coverage at least as broad as the coverage provided under an SFIP for the same type of property, including a deductible that is no higher than the specified amount under an SFIP for any total coverage amount up to the maximum available under the NFIP at the time the policy is provided to a lender.
- The lender should consider whether the deductible is reasonable based on the borrower’s financial condition and other factors.
- If a lender is accepting a private flood insurance policy under the mandatory acceptance provision, the Regulation requires that the private flood insurance policy be at least as broad as an SFIP, which includes a requirement that the private flood insurance policy contain a deductible no higher than the specified maximum deductible for an SFIP
Private Flood Insurance & Secondary Market Investors
- The requirements for secondary market are separate from Regulation and lenders must comply with Federal flood insurance requirements.
- Lenders should carefully review the separate requirements for secondary market investors to determine what is acceptable regarding private flood insurance if the lender plans to sell the loan to such investors.
New Policy
- Any time a borrower presents the lender with a new flood insurance policy issued by a private insurer the lender must review the policy to determine whether it meets the private flood insurance requirements.