Each primary regulator, at some point during the year, publishes overviews of the consumer compliance supervision activities and the issues identified during their exams. No matter which regulator is your primary, you can use the highlights to understand the landscape, proactively review your institution, and make changes to avoid criticism in your own program.
This week we’re digging into the Spring 2021 Consumer Compliance Supervisory Highlights from the FDIC. What are the most common lending compliance violations examiners are seeing and what can your institution do to guard against making the same mistakes?
Read on to find out. (Spoiler alert: It includes RESPA, TILA, and fair lending.)
Truth in Lending/Real Estate Settlement Procedures Integrated Disclosure (TRID) Rule
The TRID Rule replaced the requirements to provide the RESPA Good Faith Estimate and HUD-1 Settlement Statement and Truth in Lending disclosures for most closed-end mortgage loans with two documents, the Loan Estimate (LE) and the Closing Disclosure (CD).
Identified Issue:
When providing Veterans Administration (VA) Loans, institutions failed to comply with the “best information reasonably available” and due diligence standards under TRID requirements. Institutions were identified issuing Loan Estimates (LE) based on unavailable interest rates and loan terms. Additionally, examiners observed potentially deceptive practices when institutions represented certain terms for loans that were not generally available.
Solution:
Provide role-specific training to executives, senior management, and staff responsible for and involved in mortgage lending operations. Management, marketing teams, and loan officers need to understand the importance of representing accurate loan terms. Loan officers, processing teams, and other lending operations teams need to understand how to properly fill out and disclose “reasonably available” fees on the LE to avoid misrepresentation or tolerance issues.
As part of your compliance management system (CMS), make sure testing includes the evaluation of policies and procedures to make sure disclosures are properly completed and delivered. If errors are identified, remediate the issues and update policies and procedures to assure they will provide proper direction to staff in complying with regulatory requirements.
Related: How Robust Is Your Lending Compliance Program?
Real Estate Settlement Procedures Act (RESPA)
RESPA provides consumers with disclosures related to the home purchase and settlement process and prohibits certain real estate settlement practices. Section 8(a) of RESPA prohibits giving or accepting a thing of value for the referral of settlement service business involving a federally related mortgage loan.
Identified Issue:
Payment of illegal kickbacks, disguised as above-market payments for lead generation, marketing services, and office space or desk rentals.
Solution:
Provide role-specific training to executives, senior management, and staff responsible for and involved in mortgage lending operations. It is important they understand the difference between paying for a lead (which is in most cases acceptable) or paying a referral fee (which is prohibited).
Performing due diligence when considering new third-party relationships is key. Life-cycle management begins with understanding who your institution is contracting with. Staff also needs to know how lead generation works, including acceptable compensation.
As part of your CMS, make sure your monitoring programs include identifying, assessing, documenting, and reporting these risks to executive and senior management.
Fair Lending
The fair lending review evaluates a supervised institution’s compliance with the anti-discrimination laws and regulations, including the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).
Identified Issue:
The FDIC referred three fair lending matters to the DOJ.
- Referral #1. An institution was originating unsecured loans through a third-party partner, contracting with the third party to operate a website where applicants could apply for credit directly. However, underwriting criteria included automated denials on the basis of age and the receipt of public assistance income.
- Referral #2. An institution used credit-scoring models developed by a third party to offer consumers unsecured lines of credit. However, the developed model was designed to score younger applicants more favorably and less favorably if the application indicated the borrower was on maternity leave, and/or relied on public assistance income.
- Referral #3. An institution’s lending policy that stated the loan officer for unmarried joint applicants should use the highest credit score of the two applicants to price the loan. Additionally, loan officers should use the primary applicant’s credit score. The institution considered the main applicant to be the person listed first on the credit application. However, the institution used a tiered scoring methodology based on credit score.
Solution:
Policy management is a key mitigating factor for each of these DOJ referrals. Regular reviews by testing, monitoring, and using data analytics should alert institutions to challenges with policy directives that have unintended consequences.
Download our free on-demand webinar: Policies as a Power Tool: Creating Policies That Get the Job Done
Strong second and third lines of defense that review, monitor, and test any filters or other criteria used for online leads, website applications, or credit scoring models can help identify regulatory risk. Reporting to management for proactive remediation is key to correcting the issues.
Utilizing the lending issues identified by the FDIC can help any compliance officer when evaluating their own institution’s program. The good news is that compliance risk can be managed. Financial institutions with strong lending compliance programs, which include clearly defined policies and procedures, employee training, monitoring, and consumer complaint response are well positioned to mitigate risk.
Want to learn more about building a strong compliance management system? Download our free whitepaper What is a Compliance Management System.
Related: Creating Reliable Risk Assessments
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