CFPB Summary re: CARD Act Rules Review Pursuant to the Regulatory Flexibility Act; Request for Information Regarding consumer Credit Card Market

Docket No. CFPB 2020-0027

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

October 2020

The Consumer Financial Protection Bureau (CFPB) is requesting comment on two related but separate reviews. First, the Bureau is conducting a review of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).  As part of this review, the Bureau is seeking comment on the economic impact of the CARD Act Rules on small entities.  Information gathered for this review will be used to determine whether the rules should be continued without change or should be amended or rescinded, consistent with the stated objectives of applicable statutes to minimize any significant economic impact of the rules upon a substantial number of such small entities.  Additionally, the Bureau is conducting a review of the consumer credit card market, within the limits of its existing resources available for reporting purposes, pursuant to the CARD Act, and is seeking comment on a number of aspects of the consumer credit card market.

Comments are due by October 27, 2020.  The request for information can be found here.

Summary:

The CARD Act was signed into law in May 2009 and was intended to “establish fair and transparent practices related to the extension of credit” in the credit card market.

Regulatory Flexibility Action (RFA) Section 610 Review

The Regulatory Flexibility Act (RFA) requires each agency to consider the effect of certain rules it promulgates on small entities.  Section 610 of the RFA provides that each agency shall publish in the Federal Register a plan for the periodic review of the rules issued by the agency which have or will have a significant economic impact upon a substantial number of small entities.

According to Section 610, the purpose of the review is to determine whether such rules should be continued without change, or should be amended or rescinded, consistent with the stated objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of such small entities.  In each review, the Bureau will consider several factors:

• The continued need for the rule
• The nature of public complaints or comments on the rule
• The complexity of the rule
• The extent to which the rule overlaps, duplicates, or conflicts with Federal, State, or other rules; and
• The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.

Regarding the RFA Section 610 review, the Bureau asked the public to comment on the following:

• The current scale of the economic impacts of the rules on small entities and of their major components on small entities, including impacts on reporting, recordkeeping, and other compliance requirements.
• Whether and how those impacts on small entities could be reduced, consistent with the stated objectives of applicable statutes and the rules
• Current information relevant to the factors that the Bureau is required to consider in completing a Section 610 review under RFA, as directed above.

Where possible, the Bureau ask that commenters please submit detailed comments, data, and other information to support any submitted positions.

CARD Act Section 502(a) Review

Section 502(a) of the CARD Act requires the Bureau to conduct a review, within the limits of its existing resources available for reporting purposes, of the consumer credit card market every two years.  In addition, the Bureau is instructed to seek public comment as a part of this review.  The Bureau has issued four reports in relation to this review and will use the comments received from this Request for Information (RFI) to inform its next review.

The Bureau invites members of the public, including consumers, credit card issuers, industry analysts, consumer groups, and other interested persons to submit information and other comments relevant to the issues expressly identified, as well as any information they believe is relevant to a review of the credit card market.

The public is encouraged to respond generally to any or all of the questions below regarding the topic areas and are asked to indicate in their comments on which topic areas or questions they are commenting.

The terms of credit card agreements and practices of credit card issuers

• How have the substantive terms and conditions of credit card agreements or the length and complexity of such agreements changed over the past two years?
• How have issuers changed their pricing, marketing, underwriting or other practices?
• How are the terms of, and practices related to, major supplementary credit card features (such as credit card rewards, deferred interest promotions, balance transfers and cash advances) evolving?
• How have issuers changed their practices related to deferment, forbearance, or other forms of debt relief or assistance offered to consumers?
• How have creditors as well as third-party collectors changed their practices over the past two years of collecting on delinquent and charged-off credit card debt?
• Has the use of electronic communication (e.g. email or SMS) by creditors and debt collectors in connection with credit card debt grown or otherwise evolved?
• How are the practices of for-profit debt settlement companies changing and what trends are occurring in the debt settlement industry? How are creditors and non-profit credit counseling agencies responding to these changes and trends?

The effectiveness of disclosure of terms, fees, and other expenses of credit card plans

• How effective are current disclosures of rates, fees, and other cost terms of credit card accounts in conveying to consumers the costs of credit card plans?
• What further improvements in disclosure, if any, would benefit consumers and what costs would card issuers or others incur in providing such disclosures?
• How well are current credit card disclosure rules and practices adapted to the digital environment? What adaptations to credit card disclosure regimes in the digital environment would better serve consumers or reduce industry compliance burden?

The adequacy of protections against unfair or deceptive acts or practices relating to credit cards plans

• What unfair, deceptive, or abusive acts and practices exist in the credit card market? How prevalent are these acts and practices and what effect do they have? How might any such conduct be prevented and at what cost?

The cost and availability of consumer credit cards

• How have the cost and availability of consumer credit cards (including with respect to non-prime borrowers) changed since the Bureau reported on the credit card market in 2019? What is responsible for changes (or absence of changes) in costs and availability? Has the impact of the CARD Act on cost and availability changed over the past two years?
• How, if at all, are the characteristics of consumers with lower credit scores changing? How are groups of consumers in different score tiers faring in the market? How do other factors relating to consumer demographics or financial lives affect consumers’ ability to successfully obtain and use card credit?

The safety and soundness of credit card issuers

• How is the credit cycle evolving? What, if any, safety, and soundness risks are present or growing in this market, and which entities are disproportionately affected by these risks?
• How, if at all, do these safety and soundness risks to entities relate to long-term indebtedness on the part of some consumers, or changes in consumers’ ability to manage and pay their debts?
• Has the impact of the CARD Act on safety and soundness changed over the past two years?

The use of risk-based pricing for consumer credit cards

• How has the use of risk-based pricing for consumer credit cards changed since the Bureau reported on the credit card market in 2019? What has driven those changes or lack of changes? Has the impact of the CARD Act on risk-based pricing changed over the past two years?
• How have CARD Act provisions relating to risk-based pricing impacted (positively or negatively) the evolution of practices in this market?

Consumer credit card product innovation

• How has credit card product innovation changed since the Bureau reported on the credit card market in 2019? What has driven those changes or lack of changes? Has the impact of the CARD Act on product innovation changed over the past two years?
• How have broader innovations in finance, such as (but not limited to) new products and entrants, evolving digital tools, greater availability of and new applications for consumer data, and new technological tools (like machine learning), impacted the consumer credit card market, either directly or indirectly? In what ways do CARD Act provisions or its implementing regulations encourage or discourage innovation? In what ways do innovations increase or decrease the impact of certain CARD Act provisions or change the nature of those impacts?

Click on this link for the presentation by John Lass and C. Alan Peppers (members only)

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2020

NCUA and the other federal banking agencies (FBAs) have issued a joint statement updating their guidance regarding how they evaluate enforcement actions that are required by statute when financial institutions fail to meet BSA/AML/CFT obligations.

The statement:

• clarifies that isolated or technical violations or deficiencies are generally not considered the kinds of problems that would result in an enforcement action
• addresses how the agencies evaluate violations of individual BSA components (the Pillars) including examples of violations that would and would not result in a cease and desist order
• describes how the agencies incorporate CDD and recordkeeping requirements into evaluation of the internal controls Pillar of the BSA compliance program

Summary

Section 8(s) of the FDIA and section 206(q) of the FCUA requires FDIC and NCUA (respectively) examination programs include a review of the institution’s BSA/AML compliance program and that reports of examination describe any problem with the program. The statutes require the agencies issue a cease and desist if an institution has failed to establish and maintain a BSA/AML compliance program or has failed to correct any problem with the program previously reported to the institution by the agency.

Communicating Supervisory Concerns about BSA/AML Program

If FDIC or NCUA identify any supervisory concerns relating to an institution’s BSA/AML compliance program, the agency may communicate those concerns by various formal and informal means including:

• informal discussions between examiners and management during the examination or the supervisory process
• formal discussions between examiners and the board of directors as part of or following an examination, or as part of the ongoing supervision processes
• written communications from examiners or the Agency to the board of directors or senior management communicating concerns regarding the BSA program
• inclusion of a finding in the Report of Examination (ROE) or in other formal communications from an Agency to the institution’s board or management

The Joint Statement reiterates that BSA program deficiencies must be identified in a ROE or other written document reported to an institution’s board of directors or senior management as a violation of law or a matter that must be corrected. Certain isolated or technical violations of law and other issues or suggestions for improvement may be communicated through other means.

Program Failure Rising to Cease and Desist

The agencies provide the following examples of program violations that would rise to the level of the issuance of a cease and desist order:

• The institution fails to have a written BSA compliance program, including a customer identification program, that adequately covers the required program components or pillars
• The institution fails to implement a BSA compliance program that adequately covers the required program components or pillars
• The institution has defects in its BSA compliance program in one or more program components or pillars that indicate that either the written BSA/AML compliance program or its implementation is not effective, for example where the deficiencies are coupled with other aggravating factors such as:
  • highly suspicious activity creating a potential for significant money laundering, terrorist financing, or other illicit financial transactions
  • patterns of structuring to evade reporting requirements
  • significant insider complicity
  • systemic failures to file CTRs, SARs, or other required BSA reports

The agencies note that other types of deficiencies, including a deficiency in implementing a Pillar may not result in a cease and desist, unless the deficiencies are so severe they render the BSA program ineffective. The Joint Statement provides as an example an institution with deficiencies in its procedures for providing required BSA training could be subject to examiner criticism and/or supervisory action other than the issuance of a cease and desist order, unless the training program deficiencies are so severe or significant that the overall BSA program, taken as a whole, is not effective.

Failure to correct a previously reported problem with the BSA Program

The Joint Statement notes the agencies shall issue cease and desist orders when an institution fails to correct a BSA program problem previously reported to the institution by the agency. The 2 important determinations if a cease and desist would be issued are:

• The previously reported “problem” should involve substantive deficiencies in one or more of the required components or pillars of the BSA program; and
• To be “previously reported” the deficiency should have been communicated to the institution’s board or senior management in a ROE or other supervisory communication as a violation of law or regulation that is not isolated or technical, or as a matter that must be corrected.

The previously reported problem should be substantially the same as those previously reported to the institution to result in a cease and desist pursuant to this policy. The agencies acknowledge that certain types of problems with an institution’s BSA/AML compliance program may not be fully correctable before the next examination or within the planned timeframes for corrective actions due to unanticipated issues/developments. The Joint Statements notes that in such cases the agency need not issue a cease and desist if it determines the institution has made acceptable substantial progress toward correcting the problem.

Enforcement Actions for Other BSA/AML Requirements

The agencies may take formal or informal enforcement actions to address violations of BSA requirements other than the BSA compliance program or the Pillars such as CDD, beneficial ownership, foreign correspondent banking, and CTR/SAR requirements. Consistent with the treatment of program violations, isolated or technical violations of these non-program requirements are generally would not result in enforcement actions.

Suspicious Activity Reporting Requirements

The agencies will cite a violation of the SAR regulations, and will take appropriate supervisory action, if the institution’s failure to file SARs evidences a systemic breakdown in its policies, procedures, or processes to identify and research suspicious activity, involves a pattern or practice of noncompliance with the filing requirement, or represents a significant or egregious situation.

Other BSA Reporting and Recordkeeping Requirements

Finally, the Joint Statement notes other BSA reporting and recordkeeping requirements including requirements applicable to cash and monetary instrument transactions and funds transfers, CTR filing and exemption rules, due diligence, certification, and other requirements that may be applicable to customer accounts and foreign correspondent and private banking accounts. These additional regulatory requirements are evaluated as a part of the internal control component or Pillar of the institution’s BSA/AML compliance program.

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2020

FinCEN has issued a final rule applying BSA compliance program requirements to privately insured credit unions (PICUs) and other financial institutions without a functional federal regulator.  The Final Rule requires minimum standards for anti-money laundering programs for PICUs and extends customer identification program requirements and beneficial ownership requirements to those banks not already subject to these requirements.

NASCUS Note: As a practical matter, state regulators had already required under state rules that PICUs comply with the BSA in the same manner and to the same extent as all other covered banks and credit unions.

The Final Rule may be read here. The rule is effective November 16, 2020. 

Summary

The final rule formally  extends the following BSA/AML requirements to privately insured credit unions and other entities lacking a functional federal regulator.

AML Programs – Section 352 of the USA PATRIOT Act requires financial institutions to establish AML programs that, at a minimum, include:

1. the development of internal policies, procedures, and controls
2. the designation of a compliance officer
3. an ongoing employee training program
4. an independent audit function to test programs

CIP – Section 326 of the USA PATRIOT Act requires FinCEN to prescribe Customer Identification Program (CIP) regulations requiring financial institutions to establish procedures for account opening that:

1. verify the identity of any person seeking to open an account
2. provide for maintaining records of the information used to verify the member’s/customer’s identity, including name, address, and other identifying information
3. determine whether the person appears on government lists of known or suspected terrorists or terrorist organizations

Correspondent Accounts – Section 312 of the USA PATRIOT Act requires financial institutions that administer correspondent or a private banking accounts in the United States for a non-U.S. person to subject the accounts to certain AML measures designed

to detect and report possible money laundering through the accounts. Section 5318(i)(2) of the BSA specifies additional standards for correspondent accounts maintained for certain foreign banks and sets minimum due diligence requirements for private banking accounts for non-U.S. persons.  Specifically, covered financial institution must:

1. ascertain the identity of the beneficial owners of, and sources of funds deposited into, private banking accounts
2. conduct enhanced scrutiny of private banking accounts related to senior foreign political figures and their families and associates

Joint Statement Summary

Joint Statement on Additional Loan Accommodations Related to COVID-19

August 2020

The Federal Financial Institutions Examination Council (FFIEC) has issued a Joint Statement to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans near the end of initial loan accommodation periods  applicable during the COVID-19 pandemic. The FFIEC intends the principles in the joint statement to be tailored to a financial institution’s size, complexity, and loan portfolio risk profile, as well as the industry and business focus of its customers/members.

Background

To address the impact of the COVID-19 crisis, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) providing several forms of relief to businesses and borrowers. In addition, some states and localities have provided similar credit accommodations and many financial institutions have voluntarily offered other credit accommodations to their borrowers.

At issue is that some borrowers will be unable to meet their obligations at the end of these initial COVID-19 related accommodations due to continuing financial challenges.  Furthermore, some financial institutions will have difficulty assessing credit risk going forward due to difficulty in distinguishing between the unique impact of COVID, the impact of government intervention programs, and lasting financial deterioration.

The FFIEC encourages institutions to consider prudent accommodation options that can benefit borrowers while facilitating the institution’s ability to collect on the loan.

FFIEC identifies the following principles to guide institutions in working with borrowers as loans near the end of the initial accommodation period:

• Prudent Risk Management Practices

Prudent risk management means measuring and monitoring the credit risks of loans that receive accommodations to identify any deterioration in credit worthiness and potential loss exposure in a timely manner. This may include applying and adjusting loan risk ratings or grades and making appropriate accrual status decisions on loans affected by the pandemic. The FFIEC notes that following a loan accommodation, institutions generally re-evaluate the loan’s risk ratings based on the borrower’s current debt level, current financial condition, repayment ability, and collateral.  A reasonable accommodation need not result in an adverse risk rating solely because of a decline in the value of underlying collateral.

When executing accommodations, institutions should provide borrowers clear, accurate, and timely information regarding the accommodation.

• Well-Structured and Sustainable Accommodations

When a borrower continues to experience financial challenges after an initial accommodation, it may be prudent to consider additional accommodation options to mitigate potential losses for both the borrower and the institution. A well designed and effective accommodation will be based on an evaluation of how the borrower has been affected by financial hardship and the potential for future performance.

 

The decision to offer additional accommodations to a borrower should be based on the risk assessment and potential collectability of the specific credit. For both consumer and commercial credit, the FFIEC notes that such an evaluation typically includes assessing:

• the borrower’s financial condition and repayment capacity
• whether conditions have affected collateral values or the strength of guarantees

For commercial credits, this would also include:

• evaluating both actual and projected cash flows of a borrower’s business

Because the pandemic may have a long-term adverse effect on a borrower’s future earnings, underwriting decisions may have to rely more heavily on projected financials in the absence of traditional documentation.

• Consumer Protection

The FFIEC Statement includes the following principles for effective consumer compliance risk management:

1. Provide accommodation options that are affordable and sustainable
2. Provide clear, conspicuous, and accurate communications and disclosures to inform the borrowers of the available options
3. Provide communications and disclosures in a timely manner to allow adequate time for both the borrower and the institution to consider next steps, which may include:
4. payment deferral, loan modification, or loan extension
5. Base eligibility and payment terms on consistent analyses of financial condition and reasonable capacity to repay
6. Ensure policies and procedures reflect the accommodation options offered by the institution and promote consistency with applicable laws and regulations such as:
7. Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Servicemembers Civil Relief Act (SCRA), Truth in Lending Act (TILA), and UDAP rules
8. Provide appropriate training to staff
9. Ensure risk monitoring, audit, and consumer complaint systems are adequate to evaluate compliance with applicable laws, regulations, policies, and procedures
10. Provide complete and accurate information to borrowers and servicers and ensure post-transfer servicing is consistent with the loan agreement

Accounting and Regulatory Reporting

The FFIEC stresses the importance of following applicable accounting and regulatory reporting requirements for all loan modifications (as the term is used in GAAP and regulatory reporting instructions), including maintaining appropriate allowances for ALLL and ACL. Appropriate methodologies for calculating ALLL or ACL consider all relevant information such as changes in borrower financial condition, collateral values, lending practices, and economic conditions resulting from the pandemic.

Institutions should review the CARES Act § 4013 (NASCUS note: See helpful OCC Guide) and the Interagency Statement on Loan Modifications & Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (TDR) for a limited period of time to account for the effects of the pandemic and the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013.

• If an institution electing to account for a modification under § 4013, an additional loan modification could also be eligible if each modification is 1) related to COVID; 2) on a loan not more than 30 days past due as of 12/21/2019; and (3) executed between 3/1/2020 and the earlier of 60 days after the end of the National Emergency or 12/31/2020.
• For non-CARES Act § 4013 loan modifications, any additional modifications should be viewed cumulatively in determining whether the additional modification is a TDR.

 

For example, if modifications for a loan are all COVID event related, in total represent short-term modifications (e.g., 6 months or less combined), and the borrower is contractually current (i.e., less than 30 days past due on all contractual payments) at the time of the subsequent modification, management may continue to presume the borrower is not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and the subsequent modification of loan terms would not be considered a TDR.

 

• For all other subsequent loan modifications, institutions can evaluate subsequent modifications by referring to applicable regulatory reporting instructions and internal accounting policies to determine whether such modifications are accounted for as TDRs under ASC Subtopic 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” For additional guidance, institutions can reference Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings.

The FFIEC notes that the loan’s payment date is governed by the due date stipulated in the loan agreement and therefore past due status should be reported in accordance with the revised contractual terms of a loan.

• Internal Control Systems

Institutions should periodically test internal controls related to managing accommodations to ensure they are functioning properly to mitigate risk. Such testing typically confirms:

• Accommodation terms are extended with appropriate approvals
• Accommodations offered to borrowers are presented and processed in a fair and consistent manner and comply with applicable laws and regulations
• Servicing systems accurately consolidate balances, calculate required payments, and process billing statements for the full range of potential repayment terms that exist once the accommodation periods end
• Staff involved in all aspects of lending, collections and making accommodations are qualified and can handle expected workloads
• Borrower and guarantor communications, and legal documentation, are clear, accurate, and timely, and in accordance with contractual terms, policy guidelines, and federal and state laws and regulatory requirements
• Risk rating assessments are timely and appropriately supported

The members of the FFIEC are the FRB, FDIC, NCUA OCC, CFPB, and state regulators.

 

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Joint Statement Summary

Federal and State Financial Regulatory Agencies Issue Interagency Statement on Supervisory Practices Regarding Financial Institutions Affected by Hurricane Laura and California Wildfires

September 2020

NCUA, the Federal Bank Regulators (FBAs), and state regulators issued this Joint Statement in recognition of the serious impact of Hurricane Laura and the California wildfires on the customers/members and operations of many financial institutions in affected disaster areas. The Statement highlights several areas where institutions might be affected and the corresponding supervisory perspective:

• Lending – Prudent efforts to modify existing loans in affected areas should not be subject to examiner criticism. Loan modifications should be evaluated on a case-by-case basis to determine whether they are classified as a TDR.
•  Temporary Facilities – For institutions in affected areas facing disruptions in staffing, power, and other operational challenges, regulators will expedite, as appropriate, requests to operate temporary facilities to provide more convenient availability of services to consumers/members affected by the disasters. 
•  Publishing Requirements – Damage in the disaster areas may affect compliance with publishing and other rules related to branch closings, relocations, and temporary facilities. Affected institutions experiencing disaster-related difficulties in complying with these rules should contact their regulators.
•  Regulatory Reporting Requirements: Affected institutions anticipating difficulty meeting the agencies’ reporting requirements should discuss their situation with their primary federal and/or state regulator. to discuss their situation. The agencies do not expect to assess penalties or take other supervisory action against disaster affected institutions that take reasonable and prudent steps to comply with the agencies’ regulatory reporting requirements.
•  Community Reinvestment Act (CRA): Institutions may receive CRA consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas in their assessment areas or in the states or regions that include their assessment areas. See this CRA Q&A.
•  Investments: The agencies realize local government projects may be negatively affected by Hurricane Laura and California wildfires. Institutions should monitor municipal securities and loans affected by these disasters.

For more information, refer to the Interagency Supervisory Examiner Guidance for Institutions Affected by a Major Disaster.

 

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FinCEN                                             

Advance Notice of Proposed Rulemaking (ANPR)

Anti-Money Laundering Program Effectiveness             

Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department

September 2020

 The Financial Crimes Enforcement Network (FinCEN) has issued an ANPR to make substantial changes to the BSA regulatory framework with the potential to provide institutions greater flexibility in administering their BSA programs. FinCEN seeks comments on whether to establish a standard that BSA compliance programs be “effective and reasonably designed” and defined as programs that:

• assesses and manages risk as informed by a financial institution’s own risk assessment process, including consideration of AML priorities to be issued by FinCEN consistent with the proposed amendments
• provides for compliance with BSA requirements
• provides for the reporting of information with a high degree of usefulness to government authorities

FinCEN also seeks comment on whether to impose an explicit requirement for a risk assessment process and for the Director of FinCEN to issue a list of national AML priorities every two years.

In addition to these general comments, FinCEN asks 11 specific questions for commenters to address.

The proposed rule may be read here. Comments are due to FinCEN November 16, 2020.  

Summary

The BSA/AML/CFT compliance regime today is built upon several foundational laws:

• The Currency and Foreign Transactions Reporting Act of 1970 (The BSA)
• The Money Laundering Control Act of 1986 (MLCA)
• The Annunzio-Wylie Anti-Money Laundering Act of 1992 (Annunzio-Wylie)
• The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act)

As the financial sector has continued to innovate and embrace emerging technological advances, FinCEN has sought to ensure the BSA regime keeps base with the rapidly changing financial services marketplace as well as to evolving threats of illicit finance, such as money laundering, terrorist financing, and related crimes.

One way in which FinCEN works to keep apace with changes in the marketplace and threat landscape is through the work of the Bank Secrecy Act Advisory Group’s (BSAAG) AML Effectiveness Working Group. The BSAAG was created by the 1992 Annunzio-Wylie Act for the purpose of facilitating dialogue between the private sector and FinCEN.

BSA Advisory Group Recommends Changes

 In June, 2019, the BSAAG created an Anti-Money-Laundering Effectiveness Working Group (AMLE WG) to develop recommendations for strengthening the BSA by increasing its effectiveness and efficiency in order to allow financial institutions to reallocate resources to better focus on national BSA/AML/CFT priorities set by the government. The AMLE WG developed the following recommendations for improving the BSA (many of which form the basis for this ANPR):

1. Developing and Focusing on AML Priorities

The AMLE WG recommended that the BSA/AML regime be refocused to place greater emphasis on having institutions provide useful information to authorities in line with national AML priorities over focusing on auditable processes. This approach also favors promotion of clearer standards for evaluating the effectiveness of AML programs. The AMLE WG recommended that the relevant government agencies consider:

• Publishing a regulatory definition of AML program effectiveness
• Developing and communicating national AML priorities as set by government authorities
• Issuing clarifying guidance for financial institutions on the elements of an effective AML program

2. Reallocation of Compliance Resources

To facilitate BSA compliance, the AMLE WG recommended that activities that are not required by law/regulation be eliminated and the agencies consider:

• Clarifying current requirements and supervisory expectations with respect to risk assessments, negative media searches, customer risk categories, and initial and ongoing customer due diligence
• Revising existing guidance or regulations in areas such as PEPs and the application of existing model-risk-management guidance to AML systems to improve clarity, effectiveness, and compliance

3. Monitoring and Reporting

The AMLE WG recommended that AML monitoring and reporting practices be

modernized and streamlined to maximize efficiency, quality, and speed while still giving due consideration for privacy and data security.  The AMLE WG recommended:

• Clarifying expectations and updating practices for keep-open letters and suspicious activity monitoring, investigation, and reporting, including SARs based on grand jury subpoenas or negative media
• Supporting potential automation opportunities for high-frequency/low-complexity SARs and CTRs and possibly streamlining continuing SARs

4. Enhancing Information Sharing

To enhance communication of national AML priorities, typologies, and emerging threats, the AMLE WG recommended:

• Establishment of a working group with stakeholders (law enforcement, regulators, and financial institutions) to identify, prioritize, and recommend national AML priorities and communication of typologies, red flags, and other information related to national AML priorities
• Leveraging existing public/private information-sharing initiatives between the public and private BSA information sharing protocols and provisions
• Assessing options for institutions to receive feedback on BSA reports they file

5. Advance Regulatory Innovations

The AMLE WG recommended continuing to encourage financial institutions to utilize

innovation and pursue more effective and efficient BSA compliance practices.  The AMLE WG also recommended studying the impact of financial technology and other emerging non-bank financial service providers on the AML regime.

Specific Proposals in the ANPR

• Defining an “Effective and Reasonably Designed” AML Program

FinCEN seeks comment on whether it should clearly define a requirement for an “effective and reasonably designed” AML program in BSA regulations. FinCEN believes that incorporating an “effective and reasonably designed” AML program requirement with a clear definition of “effectiveness” would allow financial institutions to more efficiently allocate resources. Existing regulations already require AML programs be “reasonably designed” but do not define the term.

Specifically, FinCEN is considering defining an “effective and reasonably designed” AML program as one that contains the following 3 elements:

1. Identifies, assesses, and reasonably mitigates the risks resulting from illicit financial activity — including terrorist financing, money laundering, and other related financial crimes — consistent with both the institution’s risk profile and the risks communicated by relevant government authorities as national AML priorities;
2. Assures and monitors compliance with the recordkeeping and reporting requirements of the BSA; and
3. Provides information with a high degree of usefulness to government authorities consistent with both the institution’s risk assessment and the risks communicated by relevant government authorities as national AML priorities.

A. Identifying and Assessing Risks

FinCEN is considering whether to make a risk assessment an explicit regulatory requirement. FinCEN notes that a Federal Banking Agency Joint Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision issued in 2019 underscored the importance a risk-based approach to compliance. Comments are sought on whether such a requirement would complicate compliance efforts.

B. Consideration of the Strategic AML Priorities in the Risk-Assessment Process

FinCEN also seeks comments on whether the proposed definition of an “effective and reasonably designed” AML program would require financial institutions to consider and integrate national AML priorities into their risk-assessment processes.  Specifically, FinCEN askes for feedback on whether:

1. The Director of FinCEN should issue national AML priorities, to be called its “Strategic Anti-Money Laundering Priorities,” every two years.
2. Those priorities should be considered, among other information, in a financial institution’s risk assessment.

C. Risk Management and Mitigation Informed by Strategic AML Priorities

In addition to asking whether FinCEN should publish Strategic AML Priorities and whether those priorities should be incorporated into the risk assessment, FINCEN seeks comments on whether an “effective and reasonably designed” AML program should require that financial institutions reasonably manage and mitigate the risks identified in the risk-assessment process by taking into consideration the Strategic AML Priorities.

D. Assuring and Monitoring Compliance with the Recordkeeping and Reporting Requirements of the BSA

FinCEN seeks comment on whether BSA program obligations should be based on the risks identified by the financial institution. The agency notes that nothing in the ANPR would change BSA recordkeeping or reporting requirements.

E. Providing Information with a High Degree of Usefulness

In the ANPR, FinCEN discusses the importance of the BSA providing information with a high degree of usefulness to government authorities and notes that proposed changes would explicitly define providing information with a high degree of usefulness to government as a goal of the AML program.

 

Specific Questions

 In addition to the discussion of proposed changes above, FinCEN included a list of 11 specific questions:

Question 1	Does this ANPR make clear what FinCEN is considering for an “effective and reasonably designed” AML program? If not, how can the concept be modified to provide greater clarity?
Question 2	Are the ANPR’s 3 proposed core elements and objectives of an “effective and reasonably designed” AML program appropriate? Should FinCEN make any changes to the 3 proposed elements of an “effective and reasonably designed” AML program in a future notice of proposed rulemaking?
Question 3	Are the changes to the AML regulations under consideration in the ANPR an appropriate mechanism to achieve the objective of increasing the effectiveness of AML programs? If not, what different or additional mechanisms should FinCEN consider?
Question 4	Should regulatory amendments to incorporate the requirement for an “effective and reasonably designed” AML program be proposed for all financial institutions currently subject to AML program rules? Are there any industry-specific issues that FinCEN should consider in a future notice of proposed rulemaking to further define an “effective and reasonably designed” AML program?
Question 5	Would it be appropriate to impose an explicit requirement for a risk-assessment process that identifies, assesses, and reasonably mitigates risks in order to achieve an “effective and reasonably designed” AML program? If not, why? Are there other alternatives that FinCEN should consider? Are there factors unique to how certain institutions or industries develop and apply a risk assessment that FinCEN should consider? Should there be carve-outs or waivers to this requirement, and if so, what factors should FinCEN evaluate to determine the application thereof?
Question 6	Should FinCEN issue Strategic AML Priorities, and should it do so every two years or at a different interval? Is an explicit requirement that risk assessments consider the Strategic AML Priorities appropriate? If not, why? Are there alternatives that FinCEN should consider?
Question 7	Aside from policies and procedures related to the risk-assessment process, what additional changes to AML program policies, procedures, or processes would financial institutions need to implement if FinCEN adds the requirement for an “effective and reasonably designed” AML program, as described in this ANPR? Overall, how long of a period should FinCEN provide for implementing such changes?
Question 8	As financial institutions vary widely in business models and risk profiles, even within the same category of financial institution, should FinCEN consider any regulatory changes to appropriately reflect such differences in risk profile? For example, should regulatory amendments to incorporate the requirement for an “effective and reasonably designed” AML program be proposed for all financial institutions within each industry type, or should this requirement differ based on the size or operational complexity of these financial institutions, or some other factors? Should smaller, less complex financial institutions, or institutions that already maintain effective BSA compliance programs with risk assessments that sufficiently manage and mitigate the risks identified as Strategic AML Priorities, have the ability to “opt in” to making changes to AML programs as described in this ANPR?
Question 9	Are there ways to articulate objective criteria and/or a rubric for examination of how financial institutions would conduct their risk-assessment processes and report in accordance with those assessments, based on the regulatory proposals under consideration in this ANPR?
Question 10	Are there ways to articulate objective criteria and/or a rubric for independent testing of how financial institutions would conduct their risk-assessment processes and report in accordance with those assessments, based on the regulatory proposals under consideration in this ANPR?
Question 11	A core objective of the incorporation of a requirement for an “effective and reasonably designed” AML program would be to provide financial institutions with greater flexibility to reallocate resources towards Strategic AML Priorities, as appropriate. FinCEN seeks comment on whether such regulatory changes would increase or decrease the regulatory burden on financial institutions. How can FinCEN, through future rulemaking or any other mechanisms, best ensure a clear and shared understanding in the financial industry that AML resources should not merely be reduced as a result of such regulatory amendments, but rather should, as appropriate, be reallocated to higher priority areas?

-End-

 

 

 

Summary: CFPB Proposed Rule re: TILA Definition for Seasoned Qualified Mortgage Loan Definition

12 CFR Part 1026

The Consumer Financial Protection Bureau

Prepared by the Legislative & Regulatory Affairs Department

September 2020

The Consumer Financial Protection Bureau (CFPB) is issuing this proposal to create a new category of Qualified Mortgages (QMs) because it seeks to encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are only rebuttable presumption QMs under the existing QM categories.

Comments must be received by October 1, 2020.  The proposed rule can be accessed here.

Summary:

With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any residential mortgage loan.  Loans that meet Regulation Z’s requirements for “qualified mortgages” (QMs) obtain certain protections from liability.  Regulation Z contains several categories of QMs, including the General QM category and a temporary category (Temporary GSE QM loans) of loans that are eligible for purchase or guarantee by government-sponsored enterprises (GSEs) while they are operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA).

The Bureau is issuing this proposal to create a new category of QMs (Seasoned QMs) for first lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period. The Bureau’s primary objective with this proposal is to ensure access to responsible, affordable mortgage credit by adding a Seasoned QM definition to the existing QM definitions.

Under the proposal, a covered transaction would receive a safe harbor from Ability to Repay (ATR) liability at the end of a 36-month seasoning period as a Seasoned QM if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements and it meets performance and portfolio requirements during the seasoning period.  Specifically, a covered transaction would have to meet the following product restrictions to be eligible to become a Seasoned QM:

• The loan is secured by a first lien;
• The loan has a fixed rate, with fully amortizing payments and no balloon payment;
• The loan term does not exceed 30 years; and
• The total points and fees do not exceed specified limits.

For a loan to be eligible to become a Seasoned QM, the proposal would require that the creditor consider the consumer’s DTI ratio or residual income and verify the consumer’s debt obligations and income.  The proposal would not specify a DTI limit nor would it require the creditor to use appendix Q to Regulation Z in calculating and verifying debt and income.

Under the proposal, the loan generally would only be eligible to season if the creditor holds it in portfolio until the end of the seasoning period.  To become a Seasoned QM, a loan would have to meet certain performance requirements at the end of the seasoning period.  Specifically, seasoning would be available only for covered transactions that have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period.

Funds taken from escrow in connection with the covered transaction and funds paid on behalf of the consumer by the creditor, servicer or assignee of the covered transaction would not be considered in assessing whether a periodic payment has been made or is delinquent for purposes of the proposal.  However, creditors could (generally) accept deficient payments within a payment tolerance of $50 on up to three occasions during the seasoning period without triggering a delinquency for purposes of the proposal.

The proposal generally defines the seasoning period as a period of 36 months beginning on the date on which the first periodic payment is due after consummation.  Failure to make full contractual payments would not disqualify a loan from eligibility to become a Seasoned QM if the consumer is in a temporary payment accommodation extended in connection with a disaster or pandemic-related national emergency, as long as certain conditions are met.  However, time spent in such a temporary accommodation would not count towards the 36-month seasoning period, and the seasoning period could only resume after the temporary accommodation if any delinquency is cured either pursuant to the loan’s original terms or through a qualifying change as defined in the proposal.

The Bureau proposes that the final rule relating to this proposal would take effect on the same day as a final rule amending the General QM definition.  The Bureau proposed that the effective date of a final rule relating to the General QM Proposal would be six months after publication in the Federal Register.  The revised regulations would apply to covered transactions for which creditors receive an application on or after the effective date, which aligns with the approach the Bureau proposed to take in the General QM Proposal.

Comments Requested

The Bureau requests comment generally about any aspect of the proposed rule in addition to the specific questions posed below:

• The Bureau requests comment on all aspects of the proposed rule that would be applicable to determining whether, by meeting the requirements of Section 1026.43(e)(7) for a particular loan, a creditor has demonstrated that the consumer had a reasonable ability to repay the loan according to its terms and the loan should be accorded safe harbor QM status.
• The Bureau requests comment on whether there are other approaches to providing QM status to seasoned loans that would accomplish the Bureau’s objectives, such as providing a rebuttable presumption to non-QM loans that meet the requirements after a seasoning period, perhaps with a further seasoning period to gain safe harbor status.
• The Bureau requests comment on whether the proposed Seasoned QM definition should exclude other subsets of covered transactions that might pose heightened consumer protection risks, or should be extended beyond first-lien mortgages in a manner that improves access to credit without introducing undue complexity in application.
• The Bureau requests comment on whether and to what extent it should allow covered transactions that qualify as QMs under existing QM categories, including the EGRRCPA QM loan definition, to qualify for QM status under the proposed Seasoned QM category.
• The Bureau invites comment on whether allowing other types of loans and payment schedules would facilitate appropriate access to credit while assuring protection of consumers’ interests covered by ATR requirements. Commenters who recommend alternative approaches are encouraged to submit data and analyses to support their recommendations.
• The Bureau requests comment on whether the final rule, in addition to or instead of this approach, should cross-reference the “consider and verify” requirements for General QMs such as those in any final rule stemming from the General QM Proposal.
• The Bureau requests comment on the general requirements that would be established for Seasoned QMs under proposal as well as any areas in which commentary may further clarify the proposed general requirements.
• The Bureau requests comment on whether no more than two 30-day delinquencies and no 60-day delinquency is the appropriate standard for the number and duration of delinquencies that a covered transaction may have at the end of the seasoning period for purposes of proposed Section 1026.43(e)(7).
• The Bureau requests comment on whether it is appropriate to impose a portfolio requirement on creditors considering the other proposed consumer protections in the proposal and the existing risk retention requirements for asset-backed securities.
• The Bureau requests comment on whether the proposed requirements regarding consideration of the consumer’s DTI ratio or residual income and verification of the consumer’s debt obligations and income would be sufficient to ensure a similar outcome.
• The Bureau additionally seeks comment on the duration of the portfolio requirement and arguments for and against the proposed requirement that creditors hold loans in portfolio until the end of the seasoning period in order for such loans to be eligible to become Seasoned QMs.
• The Bureau solicits comment on all of the definitions it proposes in Section 1026.43(e)(7)(iv).
• The Bureau seeks comment on whether it should include other sources of funds in proposed Section 1026.43(e)(7)(iv)(A)(5) as an additional measure to ensure payments in fact reflect ability to repay.
• The Bureau is interested in whether it should include funds from subordinate-lien credit transactions made to the consumer by the creditor, servicer, or assignee of the covered transaction, or a person acting on such creditor, servicer, or assignee’s behalf, the reasons for or against treating such funds in the same way as proposed Section 1026.43(e)(7)(iv)(A)(5) would treat funds paid on behalf of a consumer by such persons; and how such a provision could be structured so as not to impact negatively consumers’ ability to access credit.
• The Bureau solicits comment on its proposal to define the seasoning period generally as a period of 36 months beginning on the date on which the first periodic payment is due after consummation.
• The Bureau also requests comment on alternative lengths that the Bureau should consider from the seasoning period; considerations and data that the Bureau should consider in determining the length of the seasoning period; and whether the length of the seasoning period should depend on the type of loan or QM status at origination (for example, whether the Bureau should provide a longer seasoning period for loans that are non-QM at origination than for loans that are rebuttable presumption loans at origination).
• The Bureau invites comment on the proposal to exclude from the seasoning period the period of time during which a loan is subject to a temporary payment accommodation extended in connection with a disaster or pandemic related national emergency.
• The Bureau invites comment generally on the proposed definition of a temporary payment accommodation in connection with a disaster or pandemic-related national emergency.
• The Bureau seeks additional information or data that could inform quantitative estimates of PMI costs or APRs for these loans
• The Bureau seeks additional information or data which could inform its quantitative estimates of the effects of the proposal
• The Bureau seeks further information about whether litigation risks from non-QM status impedes depositories’ sale of non-QM loans to the secondary market
• The Bureau seeks comment as to whether these effects can be ascertained
• The Bureau requests comment on its analysis of the impact of the proposal on small entities and requests any relevant data

 

 

 

 

 

 

 

 

 

 

 

 

 

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January 2020

Summary:  CFPB Proposed Rule re: Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition

12 CFR Part 1026

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

August 2020

In this notice of proposed rulemaking, the Bureau proposes certain amendments to the General QM loan definition in Regulation Z.  Among other things, the Bureau proposes to remove the General QM loan definition’s 43 percent DTI limit and replace it with price-based threshold.  Another category of QMs are loans that are eligible for purchase or guarantee by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporate (Freddie Mac) otherwise known as “government sponsored enterprises” or GSEs, which operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA).  The GSEs are currently under Federal conservatorship.

The Bureau established a category of Temporary GSE QMs as a temporary measure that is set to expire no later than January 10, 2021 or when the GSEs exit conservatorship.  The Bureau’s objective with this proposal is to facilitate a smooth and orderly transition away from Temporary GSE QMs loan definition and to ensure access to responsible, affordable mortgage credit upon its expiration.

Comments must be received by September 8, 2020.  The proposed rule can be accessed here.

Summary:

With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any residential mortgage loan.  Loans that meet Regulation Z’s requirements for “qualified mortgages” (QMs) obtain certain protections from liability.  The Rule defines several categories of QMs.  One category is the General QM loan category.  General QM loans must comply with the rule’s prohibitions on certain loan features, its points-and-fees limits, and its underwriting requirements.  For General QMs loans, the ratio of the consumer’s total monthly debt to total monthly income (DTI) ratio must not exceed 43 percent.  The rule requires that creditors must calculate, consider, and verify debt and income for purposes of determining the consumer’s DTI ratio using the standards contained in appendix Q of Regulation Z.

The Bureau is proposing a price-based General QM loan definition to replace the DTI-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction, is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.  A loan would meet the General QM loan definition only if the APR exceeds APOR for a comparable transaction by less than two percentage points as of the date the interest rate is set.  The proposal would provide higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions and would retain the existing product-feature and underwriting requirements and limits on points and fees.

Although the proposal would remove the 43 percent DTI limit, it would require that creditors consider the consumer’s income or assets, debt obligations, and DTI ratio or residual income and verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling that secures the loan and the consumer’s current debt obligations, alimony, and child support.  The proposal would remove appendix Q.  However, to prevent uncertainty, the proposal would clarify the requirements to consider and verify for these items.

 

In conjunction with this proposal, the Bureau has also issued a related proposal regarding a second, temporary category of QM loans commonly referred to as the “GSE patch.  The group of mortgages (i) comply with the same-loan-feature prohibitions and points-and-fees limits as General QM loans and (ii) are eligible to be purchased or guaranteed by the GSEs while under the conservatorship of the FHFA.   Unlike the General QM loans, the rule does not prescribe a DTI limit for temporary GSE QM loans.  Thus, a loan can qualify as a temporary GSE QM loan even if the consumer’s DTI ratio exceeds 43 percent, so long as the loan is eligible to be purchased or guaranteed by either of the GSEs.  In addition, the rule does not require creditors to use appendix Q to determine the consumer’s income, debt or DTI ratio for temporary GSE QM loans.

The GSE patch loan definition expires when either the GSEs exit conservatorship or on January 10, 2021.  The Bureau is issuing this proposal to update the definition of “General QM loans” to address concerns that GSE patch loans would not qualify as General QM loans either because the consumer’s DTI ratio is above 43 percent or because the creditor’s method of documenting and verifying income or debt does not comply with appendix Q.  Additionally, in the related GSE Patch proposal, the Bureau is proposing to extend the Temporary GSE QM loan definition to expire upon the effective date of final amendments to the General QM loan definition or when the GSEs exit conservatorship, whichever comes first.

The Bureau proposes that the effective date of the final rule relating to this General QM loan proposal would be six month after publication in the Federal Register.

Comments

• The Bureau does not intend to issue a final rule amending the General QM loan definition early enough for it to take effect before April 1, 2021. The Bureau requests comment on this proposed effective date and seeks comment on whether there is a day of the week or time of the month that would most facilitate implementation of the proposed changes?

 

• The Bureau requests comment on certain alternative approaches that would retain the DTI limit but would raise it above the current 43% limit and provide a more flexible set of standards for verifying debt and income in place of Appendix Q.

 

• Bureau requests comment on whether the rule should retain the current thresholds separating the safe harbor from rebuttable presumption General QM loans and whether the Bureau should adopt higher or lower safe harbor thresholds? The Bureau encourages comments to suggest specific rate spread thresholds for the safe harbor.

 

• Bureau requests comment on whether it may be appropriate to set the safe harbor threshold for first-lien transactions lower than 1.5 percentage points over APOR in light of the comparatively lower delinquency rates associated with high DTI loans at lower rate spreads, as reflected in Tables 5 and 6.

 

• Bureau requests comment on whether it may be appropriate to set the safe harbor threshold for first liens higher than 1.5 percentage points over APOR?

 

• Bureau requests comment on whether a safe harbor threshold of 2 percentage points over APOR would balance considerations regarding access to credit and ability to repay?

 

• The Bureau requests comment on an appropriate threshold to separate QM loans from non-QM loans

 

• The Bureau requests comment on its tentative determination not to amend the grounds on which the presumption of compliance can be rebutted.

 

• Bureau requests comment on whether to amend the grounds on which the presumption of compliance can be rebutted, such as where the consumer has a very high DTI and low residual income. Whether and how to define “very high DTI.”

 

• The Bureau requests comment on all aspects of the proposed approach for the presumption of compliance.

 

• The Bureau requests comment, including data or other analysis, on whether a safe harbor for QMs that are not higher priced is appropriate and, if so, on whether other requirements should be imposed for such QMs to receive a safe harbor?

 

• Bureau requests comment on whether an approach that increases the DTI limit to a specific threshold within a range of 45 to 48 precent and that includes more flexible definitions of debt and income would be a superior alternative to a price-based approach.

 

• Bureau requests comment on whether an alternative approach that adopts a higher DTI limit and a more flexible standard for defining debt and income could mitigate these concerns and provide a superior alternative to the price-based approach?

 

• Bureau requests comment on whether such an approach would adequately balance considerations related to ensuring consumers’ ability to replay and maintaining access to credit.

 

• Bureau requests comment on whether to retain a specific DTI limit for the General QM loan definition, rather than or in addition to the proposed price-based approach

 

• Bureau requests comment on whether increase the DTI limit to a specific percentage between 45 and 48 percent would be a superior alternative to the proposed price-based approach and, if so, what specific DTI percentages would be expected to affect access to credit and would be expected to affect the risk that the General QM loan definition would include loans for which the Bureau should not presume that the consumers who receive them have the ability to repay

 

• Bureau requests comments on whether increasing the DTI limit to a specific percentage between 45 to 48 percent would better balance the goals of ensuring access to responsible, affordable credit and loan definition with a 43 percent DTI limit, 90.6 percent of conventional purchase loans were safe harbor QM loans and 95.8 percenter were safe harbor QM or rebuttable presumption QM loans.

 

• The Bureau requests comment on the macroeconomic effects of a DTI-based approach as well as whether and how the Bureau should weigh such effects on amending the General QM loan definition.

 

• Bureau requests comments on whether, if the Bureau adopts a higher specific DTI limit as part of the General QM loan definition, the Bureau should retain the price-based threshold of 1.5 percentage points over APOR to separate safe harbor QM loans from rebuttable presumption QM loans for first-lien transactions.

 

• Bureau requests comment on whether to adopt a hybrid approach in which a combination of a DTI limit and a price-based threshold would be used in the General QM loan definition.

 

• Bureau requests comment on whether a DTI limit of up to 50 percent would be appropriate under these hybrid approaches that incorporate pricing into the General QM loan definition given that the pricing threshold would generally limit the additional risk factors beyond the higher DTI ratio.

 

• Bureau requests comment on whether these hybrid approaches or a different hybrid approach would better address concerns about access to credit and ensuring that the General QM criteria support a presumption that consumers have the ability to repay their loans.

 

• Bureau requests comment on whether the approach in proposed Section 1026.43(e)(2)(v) could be applied with a General QM loan definition that includes a specific DTI limit.

 

• Bureau requests comment on whether the alternative method of defining debt and income in proposed Section 1026.43(e)(2)(v)(B) could replace appendix Q in conjunction with a specific DTI limit.

 

• Bureau requests comment on whether allowing creditors to sue standards the Bureau may specify to verify debt and income, as would be permitted under proposed Section 1026.43(e)(2)(v)(B), as well as potentially other standards external stakeholders develop and the Bureau adopts would provide adequate clarity and flexibility while also ensuring that DTI calculations across creditors and consumers are sufficiently consistent to provide meaningful comparison of a consumer’s calculated DTI to any DTI ratio threshold specified in the rule.

 

• Bureau requests comment on what changes, if any, would be needed to proposed Section 1026.43(e)(2)(v)(B) to accommodate a specific DTI limit. For example, the Bureau requests comment on whether creditors that comply with guidelines that have been revised but are substantially similar to the guides specified above should receive a safe harbor, as the Bureau has proposed.

 

• Bureau seeks comment on its proposal to allow creditors to “mix and match” verification standards, including whether the Bureau should instead limit or prohibit such “mixing and matching” under an approach that incorporates a specific DTI limit.

 

• Bureau requests comment on whether these aspects of the approach in proposed Section 1026.43(e)(2)(v)(B), if used in conjunction with a specific DTI limit, would provide sufficient certainty to creditors, investors, and assignees regarding a loan’s QM status and whether it would result in potentially inconsistent application of the rule.

 

• Bureau requests comment on all aspects of the proposed special rule that would be required in proposed Section 1026.43(b)(4) to determine the APR for certain loans for which the interest rate may or will change

 

• Bureau requests comment on whether additional clarifications may be helpful with respect to cash flow underwriting and verifying whether inflows are income under the rule.

 

• Bureau requests comment on whether the proposed commentary for Section 1026.43(e)(2)(v)(A) provides sufficient clarity as to what creditors must do to comply with the requirement to consider income/assets, debt obligations, alimony, child support, and DTI or residual income, and whether it creates impediments to consideration of other factors or data in making an ATR determination.

 

• Bureau requests comment on whether it should retain the monthly payment calculation method for DTI, which it is proposing to move from Section 1026.43(e)(2)(vi)(B) to proposed Section 1026.43(e)(2)(v)(A).

 

• Bureau requests comment on whether proposed Section 1026.43(e)(2)(v)(A) and its associated commentary sufficiently address the risk that loans with a DTI that is so high or residual income that is so low that a consumer may lack ability to repay can obtain QM status

 

• Bureau requests comment on whether the rule should provide examples in which a creditor has not considered the required factors and, if so, what may be appropriate examples

 

• Bureau requests comment on whether the rule should provide that a creditor does not appropriately consider DTI or residual income if a very high DTI ratio or low residual income indicates that the consumer lacks ability to repay but the creditor disregards this information and instead relies on the consumer’s expected or present equity in the dwelling.

 

• Bureau requests comment on whether the rule should specify which compensating factors creditors may or may not rely on purposes of determining the consumer’s ability to repay.

 

• Bureau seeks comment on the tradeoffs of addressing these ability to repay concerns with undermining the clarity of a loans’ QM status.

 

• Bureau seeks comment on the impact of the COVID-19 pandemic on how creditors consider income or assets, debt obligations, alimony, child support and monthly DTI ratio or residual income.

 

• Bureau seeks comment on proposed Section 1026.43(e)(2)(v)(B) and related commentary, including on whether it should retain appendix Q as an option for complying with the Rule’s verification standards.

 

• Bureau seeks comment on whether proposed Section 1026.43(e)(2)(v)(B) and related commentary would facilitate or create obstacles to verification of income, assets, debt obligations, alimony and child support through automated analysis of electronic transaction data from consumer account records

 

• Bureau seeks comment on whether the rule should include a safe harbor for compliance with certain verification standards, as the Bureau proposes in proposed comment 43(e)(2)(v)(B)-3, and, if so, what verification standards the Bureau should specify for the safe harbor.

 

• Bureau requests comment about the advantages and disadvantages of the verification requirements in each possible standard the Bureau could specify for the safe harbor

 

• Bureau requests comment on whether creditors that comply with standards that have been revised but are substantially similar should receive a safe harbor, as the Bureau proposes.

 

• Bureau seeks comment on whether the rule should include examples of revisions that might qualify as substantially similar, and if so, what types of examples would provide helpful clarification to creditors and other stakeholders

 

• Bureau seeks comment on whether it would be helpful to clarify that a revision might qualify as substantially similar where it is a clarification, explanation, logical extension or application of a pre-existing proposition in the standard.

 

• Bureau seeks comment on its proposal to allow creditors to “mix and match” requirements from verification standards, including whether examples of such “mixing and matching” would be helpful and whether the Bureau should instead limit or prohibit such “mixing and matching” and why

 

• Bureau seeks comment on whether the Bureau should specify in the safe harbor existing stakeholder standards or standards that stakeholders develop that define debt and income.

 

• Bureau seeks comment on whether the potential inclusion or non-inclusion of Federal agency or GSE verification standards in the safe harbor in the future would further encourage stakeholders to develop such standards.

 

• Bureau seeks comment on whether the final rule should establish in Section 1026.43(e)(2)(vi)(A) a different rate spread threshold and, if so, what the threshold should be.

 

• Bureau seeks comment on whether the General QM rate spread threshold should be higher than 2 percentage points over APOR. The Bureau requests commenters provide data or other analysis that would support providing QM status to such loans, which the Bureau expects would have higher risk profiles.

 

• Bureau seeks comment on whether the General QM rate spread threshold should be set lower than 2 percentage points over APOR.

 

• Bureau seeks comments on whether creditors may be expected to change lending practices in response to the addition of any rate spread threshold in the definition of General QM and how that would affect the size of the QM market.

 

• Bureau seeks comment on whether the Bureau should consider adjusting the pricing thresholds in emergency situations and, if so, how the Bureau should do so.

 

• Bureau seeks comment, including data or other analysis, on whether the final rule in Section 1026.439(e)(2)(vi)(B) through (C) should include different rate spread thresholds at which smaller loans would be considered General QM loans, and if so, what those thresholds should be.

 

• Bureau seeks comments on whether the General QM rate spread threshold for first-lien loans should be higher or lower than the rate spread ranges set forth in Table 9 for such loans with loan amounts less than $109,987 and greater than or equal to $65,939 and for such loans with loan amounts less than $65,939.

 

• Bureau requests commenters to provide data or other analysis that would support providing General QM status to such loans taking into account concerns regarding the consumer’s ability to repay and adverse effects on access to credit.

 

• Bureau requests comments including data or other analysis, on whether the final rule in Section 1026.43(e)(2)(vi)(D) through (E) should include different rate spread thresholds at which subordinate lien loans would be considered General QM loans, and, if so, what those thresholds should be.

 

• Bureau requests comment on whether the General QM rate spread threshold for subordinate lien loans should be higher or lower than the rate spread ranges set forth in Table 10 for such loans with loan amounts greater than or equal to $65,939 and for such loans with loan amounts less than $65,939.

 

• Bureau requests commenter provide data or other analysis that would support providing General QM status to such loans taking into account concerns regarding the consumers’ ability to repay and adverse effects on access to credit.

 

• Bureau requests comment, including data and other analysis, on whether the rule should include a DTI limit for smaller loans and subordinate lien loans.

 

• Bureau requests comment on all aspects of the proposed special rule in proposed Section 1026.43(e)(2)(vi)

 

• Bureau requests data regarding short-reset ARMs are those step-rate mortgages that would be subject to the proposed special rule, including default and delinquency rates and the relationship of those rates to price.

 

• Bureau requests comment on alternative approaches for such loans, including the ones discussed above, such as imposing specific limits on annual rate adjustments for short-reset ARMs, applying a different rate spread, and excluding such loans from General QM eligibility altogether.

 

 

 

 

 

 

NCUA Risk Alert: 20-Risk-02 COVID-19 Fraud Schemes

August 2020

NCUA issued Risk Alert 20-RA-02 to inform credit unions about fraud risks associated with the COVID-19 pandemic. The economic dislocation resulting from the pandemic, the various government programs implemented to mitigate those effects, and the altered operations of credit unions managing the pandemic present opportunities for criminal elements to exploit vulnerabilities and compromise credit unions and their members.

Financial Institution Fraud

NCUA recommends credit unions review risks related to:

• New account fraud, identity theft, cybersecurity risks (NCUA)
• Imposter scams and money mule schemes (FinCEN)
• Mobile banking application fraud (FBI)

Other federal agencies are good resources on evolving pandemic related fraud trends:

• FinCEN’s COVID-19 page
• FBI’s Internet Crimes Complaint Center
• FTC’s IdentityTheft.gov page
• Department of Health and Human Services OIG COVID-19 page

Small Business Administration Loan Fraud

The SBA is administering 2 loan programs, the Paycheck Protection Program and the Economic Injury Disaster Loans, to provide relief to business impacted by the pandemic. The most common red flags for fraud related to these programs are:

• PPP applications with manipulated or fraudulent supporting documentation.
• PPP applications w/different names that contain nearly identical application information & supporting documentation originating from the same IP address.
• Recently established fake businesses with no internet presence & having minor differences between names on the application & business registration documents.
• Existing accounts always have low balances with no history of payroll expenses.
• New accounts that appear to have been created solely to apply for or receive SBA funds. The accounts had no previous business activity and funds are quickly transferred after receipt of SBA loan proceeds.
• After loan advances or proceeds are deposited into an account, funds are immediately withdrawn in cash, wired out, transferred to an investment account, used to purchase luxury assets not associated with typical business-related expenses, or used to start an entirely new business.

Credit unions should report suspected fraud to the SBA Office of the Inspector General (SBA OIG). Additional guidance on PPP loans is available in SBA Procedural Notice 5000-20036. The SBA OIG has also published a lender alert regarding EIDL.

Business Tax Credits Fraud

NCUA’s Risk Alert provides information on the CARES Act Employee Retention Credit and the Credit for Sick and Family Leave. Both programs provide for eligible employers to receive an advance of the credits to help meet weekly payroll. Suspected fraud related to the programs should be reported to IRS Criminal Investigation. Red flags of fraud related to these programs include:

• U.S. Treasury check deposits while receiving loan proceeds from SBA programs. Businesses are only allowed to take advantage of the Employee Retention Credit or the PPP program. They may not take advantage of both programs.
• Inflated wages or numbers of employees to increase the amount of tax credits or advances received through a U.S. Treasury check.
• U.S. Treasury check deposits into accounts with no indication of business or payroll activity.
• U.S. Treasury check deposits used to pay personal expenses.

Unemployment Insurance Fraud

The CARES Act provides additional unemployment insurance funding for eligible individuals through multiple unemployment assistance programs including the Pandemic Unemployment Assistance (PUA) program. These programs disburse their benefits by various means are attractive targets for fraud. The most common red flags associated with these programs include:

• Account receives unemployment benefits from another state without a reasonable explanation or from multiple other states.
• A single account receives unemployment benefits for multiple individuals.
• New accounts are opened, or existing accounts lack transactional activity, then suddenly used to collect unemployment benefits.
• Imposter schemes, where a fraudster poses as an official entity to defraud victims, such as obtaining personally identifiable information to fraudulently file for unemployment insurance benefits.
• Money mules, where an individual knowingly or unknowingly obtains money on behalf of, or at the direction of, someone else to improperly obtain unemployment insurance benefits.

Suspected fraud related to these programs should be reported to the Department of Labor Office of the Inspector General.

Reporting Fraud

In addition to reporting suspected fraud to the appropriate federal agency, credit unions may also contact NCUA’s Fraud Hotline (800.827.9650), an NCUA Regional Office or their SSA.

As appropriate, credit unions should also file SARs with FINCEN with suspected COVID-19 related fraud. SAR filings should include:

• The type of fraud or scam (by name if possible; i.e imposter scam)
• affected programs
• identifying information when possible such as IP addresses