By Leslie Callaway, Mark Kruhm and Rhonda Castaneda
ABA Center for Regulatory Compliance
Q I have a question about Regulation B adverse action requirements on existing accounts. Our promissory note clearly spells out the default rate of interest (and conditions of default), and it also states that we have no obligation to advance funds on a line of credit under certain conditions (i.e. default, insolvency, etc.). If we invoke any of these provisions, is the bank required to send an adverse action notice or are we covered if this is clearly spelled out in our promissory note?AIt depends on the reason for the action. Regulation B at section 1002.2(c)(1)(ii) states that adverse action means a termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts. If, for example, you decided to reduce all overdraft lines of credit to $300 across the board, that would not trigger the adverse action requirements, but if you only reduced the LOCs for individual customers whose credit deteriorated in the past year, then it would.
Regulation B at 1002.2(c)(2)(ii) addressing default states that the term adverse action does not include any action or forbearance relating to an account taken in connection with inactivity, default or delinquency as to that account. Therefore, your action based on those contract provisions addressing default or insolvency, would not require you to send an adverse action notice. (Response provided April 2015)
Q Is an insider allowed to have two first liens on two different properties under Reg O? If yes, how do you determine which one qualifies as the residence exception and which one falls under the $100,000 rule?AThe short answer is it may be possible; however, there are certain caveats. For example, only one loan may qualify for the “in any amount” exception under 215.5(c)(2), while additional loans that could have qualified for the exception will be subject to the “other purpose” limit under 215.5(c)(4). In addition, and perhaps specifically related to your second question, the purpose of the loan under .5(c)(2) can only be “to finance or refinance the purchase, construction, maintenance, or improvement” of a residence of the executive officer and, as such, a HELOC, which permits draws for any other purposes (e.g., to take a vacation, consolidate credit card debt or purchase an automobile), would not qualify. (FYI: The same applies for loans to finance the education of the executive officer’s children, yet it is theoretically possible for the exception under .5(c)(3) to apply.) (Response provided April 2015)
Q Our mortgage lenders would like to add a link to our mortgage website on some local realtors’ websites. Could this be seen as a RESPA violation?AYes, it could if it is based in any way on the referral of business from one entity to the other. See OCC Bulletin 2003-15, where, for example, on page 5 it states: “The compliance risk to an institution linking to a third party’s website depends on several factors. These factors include the nature of the products and services provided on the third party’s website, and the nature of the institution’s business relationship with the third party. This is particularly true with respect to compensation arrangements for links. For example, a financial institution that receives payment for offering advertisement-related weblinks to a settlement service provider’s website should carefully consider the prohibition against kickbacks, unearned fees, and compensated referrals under the Real Estate Settlement Procedures Act (RESPA).” This also would be the case if the location of the link is based on the number of referrals (e.g., those placed first or at the top are those that refer more business). (Response provided April 2015)
QMy bank provides consumer credit applications online. The applications are neither approved nor denied online; they are only a mechanism of convenience for the consumer. Once completed, the online application is emailed to a loan officer for review. We do have an insurance affiliate, and we do refer applicants to that affiliate as part of the online application process. My question is, are we required to have the Consumer Protections in Sales of Insurance disclosure online with the application, or should we be mailing it out within three days?ARegardless of whether or not the application is provided online as a convenience or not, the Consumer Protections in Sales of Insurance credit disclosure must be made orally (oral disclosures are not applicable to electronic applications) and in writing at the time the consumer applies for an extension of credit in connection with which insurance is solicited, offered or sold. It cannot be provided at a later date. (There are exceptions, such as in the case of phone applications, but those exceptions do not apply to electronic media.) The notice must also be provided in accordance with E-Sign.
In addition, you must obtain from the consumer, at the time the consumer receives the required disclosures, a written acknowledgment by the consumer that the consumer received the disclosures. You may permit a consumer to acknowledge receipt of the disclosures electronically or in paper form. (Response provided April 2015)
Q I have a question regarding the ECOA appraisal rules and renewals. We have dwelling secured loans that we renew on a periodic basis. Sometimes we order an appraisal in connection with these renewals. Are we subject to the Regulation B appraisal rules for these types of transactions?AMaybe. The Reg B appraisal rule applies only if there is an application involved. Section 1002.14(a) states that the rule applies “…in connection with an application for credit that is to be secured by a first lien on a dwelling.” If you require your customer to “apply” for a renewal, and the other parts of the definition under Reg B are applicable as well (secured by a first lien on a dwelling), then yes, the appraisal rule applies. If, however, your loan contract allows for renewals automatically and no application is required, then the Reg B appraisal rule does not apply. (Response provided April 2015)
Answers provided by Leslie Callaway, CRCM, director, compliance outreach and development; Mark Kruhm, CRCM, senior compliance analyst; and Rhonda Casteneda, compliance analyst, ABA Center for Regulatory Compliance. Answers do not provide, nor are they intended to substitute for, professional legal advice. Answers were current as of the response date shown at the end of each item.