The next question is what happens if the insurance lapses. Hopefully, the service member will have made arrangements to keep the insurance payments current while he or she is away. However, for any number of reasons, the insurance might lapse and most car loan agreements include a clause to address situations when a borrower fails to maintain adequate insurance. First, the bank may have the option to force-place insurance. In that case, you would follow the standard procedures you use for force-placing insurance. One word of caution, though: if you force-place insurance, make sure you don’t exceed the SCRA’s 6 percent interest rate cap in the process.
Another common outcome when a borrower fails to maintain adequate insurance on a car loan is that this causes the loan to be in default. Here, protections do apply under the SCRA. If the loan is in default because the borrower failed to maintain insurance and if the borrower is also on active duty, then the bank must go into court and get a court order to repossess the car or to take any other action. In doing so, the bank or its representative must explain to the court that the borrower is a service member on active duty protected by the provisions of the SCRA. (Response provided June 2016)Q: The Homeowners Protection Act (12 U.S.C. 4902 (d)) allows the recalculation of the cancellation date, termination date and final termination date if the borrower and lender agree to a modification of terms. In a situation where a new appraisal is required during the application process leading to the modification, would the “original value” used in the loan-to-value calculation then be based on the lesser of the sales price or the new appraisal, or would we continue to rely on an “original value” based on the lesser of the sales price and the original appraisal? A: “Original value” is defined as the lesser of the sales price of the secured property as reflected in the purchase contract; or, the appraised value at the time of loan consummation. In the case of a refinancing, the term means the appraised value relied upon by the lender to approve the refinance transaction. (Response provided June 2016) Q: Our loan department is wanting to push a new product that will market mortgage loans to new doctors, business people, etc. They want to make in-house loans (not Fannie or Freddie) to allow us to make higher-loan-to-value-ratio loans without requiring private mortgage insurance. Should I have any concerns about this program? A: Yes. Although “targeted marketing” is not prohibited, it is good that your radar went up, as this could, if not handled appropriately, subject your institution to fair lending and other risks. I would suggest performing a fair lending risk assessment to identify any potential issues or concerns, as well as documenting the mitigation efforts to ensure that such a program does not cause unintentional disparate impact on a prohibited basis. As an example, if most of the “new doctors, business people, etc.” are white males, then such a program could appear to have a disparate impact on other races or sexes. For additional guidance, see the ABA Toolbox on Fair Lending. (Response provided June 2016) Q: We are considering several options for approving a “guidance line” (a type of preapproved loan that will allow the borrower to purchase as-yet to-be-identified property, equipment or other items up to a pre-determined aggregate amount) for one of our directors, yet I wonder how the prior approval requirements under Regulation O would affect which option we should use. The first option would be similar to a “line of credit,” whereby we would approve the entire amount of the line and set certain term limitations of the underlying loans, such as rate, payment type, maximum term, etc., that may be used for subsequent loans (i.e., when a draw is made that creates a closed-end loan under the guidance line). The second option would be to approve each underlying loan individually at the point in time when the borrower finds a property and requests a draw. My preference is to use the first option, as the second option would require approval of the board prior to making each loan, and the borrower wants the ability to move fast when properties become available. What are the issues that we should consider? A: It may be possible to have the guidance line be an open-end line of credit, but if so, then per 215.4(b)(3) it would need to be reviewed at least every 14 months. Additionally, should the collateral change over time, such as when collateral is purchased or sold, then the line may require prior approval each time this takes place. For example, if or when a draw or extension is made and collateral is acquired or when that draw is paid off collateral is released, the loan terms and conditions have essentially changed and as such would likely trigger the requirement to again obtain board approval.
The second option you offered was reviewing and approving each underlying draw or extension individually as if they were separate loans. While in theory it could be argued that the board should be allowed to approve the transaction and place certain criteria for the collateral and/or terms, such as commercial property with an appraised value of $X, it is not clear whether this would pass regulatory scrutiny. We therefore suggest discussing this approach with legal counsel and your primary regulator to ensure they do not take exception with whichever option is chosen, as well as the methods used to ensure that compliance with the regulatory requirements is appropriate.
See fdic.gov/regulations/laws/rules/4000-920.html, which states that the board should know the terms of the loan in order to be able to adequately serve its purpose of approving the loan. (Response provided June 2016)
Answers are provided by Leslie Callaway, CRCM, CAFP, director of compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, 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.