By Monica C. MeinertAs anticipated, 2017 was a year of elevated activity in the regulatory space.
As the year drew to a close, the industry scored a major win with Congress’ vote to roll back the Consumer Financial Protection Bureau’s controversial arbitration rule. The dramatic exit of CFPB Director Richard Cordray on the day after Thanksgiving caught national attention and initiated a legal battle for control of the bureau between Acting Director Mick Mulvaney—director of the Office of Management and Budget who was tapped by President Trump to take over the top job on a temporary basis—and CFPB Deputy Director Leandra English.
With a recent court ruling rejecting English’s request for a preliminary injunction the Trump appointee appears set to remain in charge of the bureau until a permanent successor can be appointed, and Mulvaney has already begun a review of current CFPB rulemakings.
The CFPB was not the only agency to undergo leadership changes in 2017; in October, Randal Quarles was confirmed as the first-ever vice chairman for supervision at the Federal Reserve, and in November, the Senate approved the nomination of former bank CEO Joseph Otting as Comptroller of the Currency. In addition, President Trump has also nominated several others to top agency jobs, including Jerome Powell as Federal Reserve chairman and Jelena McWilliams as leader of the FDIC.
As the regulatory roster fills up with Trump appointees, 2018 could finally be the year that the industry sees meaningful regulatory relief, particularly as the agencies work to implement the recommendations put forth by the Treasury Department’s report on financial regulation, which was issued in June.
“What’s important to note is that 70 to 80 percent of those recommendations can be put into motion by regulators through rulemaking, the issuance or revocation of guidance as well as direction to supervisory and enforcement staff,” notes ABA SVP Virginia O’Neill. “As the leadership is changing, we have been working with ABA members to identify both immediate and long-term priorities for regulatory reform.”
Revisiting the mortgage rules
After eight years of heavy rulemaking activity in the mortgage lending and mortgage servicing space, it may be time for some of those rules to come under the microscope. “There will be an expansive and comprehensive review of the mortgage regulatory structure,” predicts ABA SVP Rod Alba. “These rules are voluminous, they’re extremely technical, they’re needlessly prescriptive, and, in many cases, they are defective.” He adds that “we expect to see surgical fixes, but certainly not a repeal and replace of the existing rules.”
In the near term, he advises bankers to focus on the 500 pages of technical corrections and clarifications that the CFPB issued in August 2017 to address problems with the TILA-RESPA integrated disclosures. While banks are not required to comply until with the changes until Oct. 1, 2018, they have the option to phase in the changes over time, Alba notes.
There’s also been progress made toward fixing TRID’s “black hole problem” which has subjected consumers to forced regulatory closing delays because of legitimate fee changes during the origination process.
“The big compliance risk that bankers have had is, how do we fix mistakes and legitimate changes in mortgage transactions without being penalized? How do we tweak legitimate fee modifications when the rules do not permit changes to a closing disclosure in the four business days prior to consummation?” Alba explains. The CFPB “now appears ready to allow lenders to fix these disclosures and reset tolerances using either the loan estimate or the closing disclosure, without regard to the four day waiting period.”
HMDA is here
Bankers received some year-end good news from the regulatory agencies with respect to the new Home Mortgage Disclosure Act rules. Recognizing the significant operational challenges banks face in implementing the data collection requirements, the CFPB, FDIC and OCC announced that examinations of 2018 HMDA data will be “diagnostic to help institutions identify compliance weaknesses,” and the agencies will “credit good faith compliance efforts.” They will not assess penalties for errors in HMDA data collected in 2018 and reported in 2019, and will not require banks to resubmit data for that period unless errors were found to be material.
They did not, however, delay the compliance deadline, meaning that banks were required to begin collecting data under the new, expanded HMDA requirements beginning Jan. 1.
So how will examiners evaluate HMDA data accuracy going forward?
“They’ve given themselves a few options on how to do this,” says Rick Freer, senior director for exam and compliance programs at ABA’s Center for Regulatory Compliance. “Examiners have the option of creating a test sample from your entire Loan Application Register, or if you’re an institution that has collected data from different systems, they may pick LARs from each of the systems, or they may take one system where they think there’s a lot of risk and focus on that.”
While the prudential regulators have designated 37 “key fields” out of the total 110 data fields bankers are required to report, Freer cautions that examiners still have the option to look outside those key fields to see if there are any issues.
“The other thing you need to know is that they’re going to look at your policies and procedures and look at your system to see how well you are processing the HMDA data, the accuracy, how you’re controlling and monitoring, and so forth,” he adds.
Redlining concerns ramp up
Redlining and inclusion continue to be hot items on the regulatory radar.
“For many years, when you looked at redlining, it was the traditional idea of geocoding where loans actually were being made and looking at the census track and geographies where loans actually existed,” says ABA VP Rob Rowe. “What we’ve found over recent years that is that the bureau particularly—but also the Department of Justice—has been focusing on more than just actual lending patterns and loan applications. Instead, they’re looking at where banks have a presence, where banks are doing outreach, what kind of efforts banks make to reach underserved communities.”
Regulatory scrutiny is also ramping up around loan servicing, Rowe adds. “When you are servicing loans, particularly where you get into a situation where you have a workout or a default, the one thing they are being particularly sensitive to is whether there are any kind of distinctions between how you are treating people based on race, ethnicity, sex or age.”
It’s a similar situation with loan pricing. “One thing that raises [examiners’] antenna is if they come into a bank and see that individual loan officers have a great deal of discretion in pricing, rates or terms of a loan.”
Rowe emphasizes that banks should have well-defined policies and take care to be consistent with how exceptions to those policies are granted. “As you do a fair lending review, you should be incorporating any kind of exceptions or waivers of policy in that review,” he says.
ADA guidance delayed
A proposal from the Department of Justice on website accessibility requirements under Title III of the Americans with Disabilities Act—which had been expected to be released sometime this year—appears to be delayed for the foreseeable future, reports ABA senior research assistant Toni Cannady. In late December, DOJ formally withdrew its previously issued Advance Notices of Proposed Rulemaking and is “evaluating whether promulgating regulations about the accessibility of Web information and services is necessary and appropriate.” However, Cannady notes that businesses—including banks—continue to receive demand letters from plaintiffs’ law firms.
In the absence of formal regulations, there are still steps banks can take in the meantime to ensure they are ADA compliant.
“If you have not already done so, you are going to want to look into building an ADA governance program,” which should include an accessibility policy and standard, Cannady advises. “You’re going to want to have an accessibility webpage with information on accessibility and have a process for customers to report web access problems and get help. You’re also going to want to train your website personnel and appoint them to oversee accessibility issues.”
She also recommends that banks consider having their websites audited to comply with the WCAG 2.0 AA standard, which the DOJ has required companies to comply with in previous settlement agreements.
Be prepared for the beneficial ownership rule
In the Bank Secrecy Act/anti-money laundering space, bank compliance teams should be focusing in the near term on the Financial Crimes Enforcement Network’s beneficial ownership rule, which has a mandatory compliance date of May 11, 2018. The rule requires banks to collect information on beneficial owners—individuals who own more than 25 percent of the equity interests in a company, or a single individual who exercises control—when an account is opened.
Rob Rowe notes that bankers can expect a second set of frequently asked questions to be issued by the agency sometime this year that will provide additional guidance addressing issues that have cropped up since the first set was issued in 2016. Regulators will also be releasing exam procedures for the rule, as well as working on updates to the FFIEC BSA/AML examination manual.
For more on these and other compliance priorities—including the Community Reinvestment Act, third-party risk management, small-dollar lending, overdraft, the Military Lending Act, sales practices and incentive compensation, the Telephone Consumer Protection Act, debt collection and flood insurance—download a recording of ABA’s webinar on 2018 compliance priorities.