By Leslie Callaway, CRCM, CAFP, and Rhonda Castaneda, CRCM
Q/ My bank has an employee loan program for real estate secured loans. Although the bank uses risk-based pricing for real-estate secured loans offered to its non-employee customers, because employees get a special rate as an employee benefit, the bank does not utilize risk-based pricing. Is the bank required to provide the credit score exception notice since it does not use risk-based pricing for its employee loans?
A/ No. Under §1022.70(a)(ii) of Regulation V (which implements relevant section of FCRA, §640) a risk-based pricing notice or credit score exception notice is required only if the creditor uses a credit report (or credit score) to determine a material term, i.e., the APR, in most cases. Of course, for mortgage loans, a separate provision requires that mortgage applicants receive a credit score. (Answer provided November 2023.)
Q/ I have two questions regarding real time payments. First, for the sending bank, do the ACH payment rules apply? Second, are RTPs subject to OFAC screening?
A/ To answer the first question, no. The RTP network offered by the Clearing House is subject to its own RTP rules. The Federal Reserve’s FedNow Service will have its own rules. NACHA rules governing ACH payments do not apply to either.
To answer the second question: OFAC applies to all financial transactions conducted by the bank. The relevant OFAC excerpt from the rules is: “A participant must have a written OFAC compliance program reasonably designed to promote and monitor compliance with OFAC sanctions programs and regulations.”
Chances are good that banks have interdiction software that scrubs the bank’s customer database for “hits” on its own customers, but banks must still screen the recipients. (Answer provided November 2023.)
Q/ When investigating multiple disputed debit card transactions contained in a single dispute notice, the bank can sometimes conclude that some transactions are reimbursable (or not) while others in the notice are still under investigation. Does the requirement under §1005.11(c)(2)(iv) of Regulation E (Electronic Fund Transfer Act) that the bank report the results of its investigation within three business days after completing its investigation apply to each individual transaction, or may the bank wait until it completes its investigation of all of the items identified in the notice before reporting the results to the consumer?
A/ This is not clearly addressed in the regulation, but §1005.11 and its commentary, including the section regarding the requirement to report the results of an investigation, consistently refer to error in the singular — that is, “an error.” Accordingly, the prudent course of action is probably to notify the consumer as the bank makes its determination about each transaction, even if all claims have not yet been decided. (Answer provided November 2023.)
Q/ Federal Reserve Regulation O (12 CFR §215) requires that a majority of the board of directors approve loans to principal shareholders, directors and executive officers for loan amounts over a certain loan amount threshold. (§215.4(b)). This can delay the process when, for example, a director wishes to obtain a loan to purchase a new car and has to wait for the next board meeting. May a bank’s board of directors preapprove loans to covered persons up to a specified dollar amount?
A/ Yes. See the Federal Reserve Board’s Federal Reserve Regulatory Service Board Rulings and Staff Opinions Interpreting Regulation O, specifically section 3-1091: PRIOR APPROVAL-Blanket Resolution for Approving Loans. It states a blanket resolution passed by the board of directors approving loans satisfies the prior approval requirement “if the Board makes a good faith assessment of the creditworthiness of each person covered by the resolution and the credit limits are no greater than the person’s credit would warrant.” Therefore, if the board evaluates the creditworthiness of each person and the loan otherwise complies with applicable provisions such as lending limit, the board may “preapprove” such loans. (Answer provided August 2023.)
Q/ Flood regulations (12 CFR §§22, 208.25 and 339) require adequate flood insurance coverage when a bank makes a loan secured by a building or buildings located in a special flood hazard area (SFHA). The Interagency Questions and Answers Regarding Flood Insurance clarifies in Q&A Amount 6 that when more than one building securing a loan is located in a SFHA, then the amount of flood insurance required is to be allocated among the buildings “so long as each is covered in accordance with the statutory requirement.”
Is there a minimum amount of flood insurance required on a building? For example, if my bank makes a loan secured by two buildings located in a SFHA, may the borrower obtain as little as $1,000 in coverage on the second building?
A/ It depends. While the regulation and related guidance do not explicitly specify a minimum amount for a flood insurance policy, there may be other provisions that effectively create such a requirement. For example, the National Flood Insurance Program may have a minimum amount required to obtain a policy and typically offers policies with deductibles ranging from $1,000 to $50,000. However, Q&A Amount 9 indicates that borrowers may not use a deductible amount equal to the insurable value of the building to avoid the mandatory purchase requirement. Combined, this may mean that the flood policy be more than $1,000 on the second building to meet the regulatory requirements. (Answer provided August 2023.)
Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice.
