By Leslie Callaway, CRCM, CAFP and Terry L. Hollinger, CRCM
Q/ I understand that bank-owned life insurance risk assessments must be presented to the board or a committee of the board annually, but I am not sure whether that means once each calendar year or once every 12 months, or something else.
A/ You are correct that while the guidance specifies that this assessment must be done annually, it does not explicitly state whether this means once each calendar year or once every 12 months. However, it is generally interpreted as once every 12 months to ensure continuous and consistent oversight. See the Interagency Statement on the Purchase and Risk Management of Life Insurance for more information about the regulatory requirements for an annual BOLI risk assessments. (Response provided April 2025.)
Q/ During compliance reviews, “human error” is often the reason for compliance violations. Because human error is often attributable to the bank’s mortgage loan originator, to reduce errors, management is considering adopting a policy of “clawing back” a mortgage loan originator’s compensation when the originator was responsible for the error. Are there any regulatory issues with this practice?
A/ Whether the LO’s compensation may be decreased depends on the type of error and whether it was foreseeable.
Under §1026.36(d)(1), a loan originator’s compensation may not be based on any of the terms of a credit transaction or a proxy of a term of a credit transaction. For example, “[w]hen the creditor offers to extend credit with specified terms and conditions (such as the rate and points), the amount of the originator’s compensation for that transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated.” (Comment 5 to §1026.36(d) (1).) This means that a “creditor and a loan originator may not agree to set the loan originator’s compensation at a certain level and then subsequently lower it in selective cases.” (Comment 4 to 1026.36(d)(1).) The regulation does, however, allow for a limited exception where an LO’s compensation may be reduced to pay for a tolerance violation provided the violation was unforeseen. An increase is unforeseen if it occurs even though the estimate provided to the consumer is consistent with the best information reasonably available to the disclosing person at the time of the estimate. (Comment 7 to §1026.36(d)(1).)
Thus, generally, creditors may not hold LOs financially responsible for losses due to “human error” — clerical mistakes or noncompliance with the regulation.
That being said, the regulation allows LO compensation to be linked to the quality of loan files. Specifically, Comment 2 to §1026.36(d)(1) provides that “the quality of the loan originator’s loan files (e.g., accuracy and completeness of the loan documentation) submitted to the creditor” is “not compensation based on a term of a transaction or a proxy for a term of a transaction.” While this may not authorize clawbacks, it allows LO compensation to be linked to quality of performance. See the Consumer Financial Protection Bureau’s Supervisory Highlights stating that LOs compensation may not be reduced due to LO’s clerical errors. (Response provided April 2025.)
Q/ We are trying to close a loan quickly for a borrower and the flood determination shows the property is in a flood zone. Do we have to make the borrower wait ten days to close?
A/ Not necessarily. The FRB’s, OCC’s and FDIC’s flood regulations (12 CFR Parts 208, 22 and 339, respectively) require that the notice of special flood hazards be provided “within a reasonable time” before the completion of the transaction. While their examination procedures indicate that 10 days is assumed to be a “reasonable” time, what is a “reasonable time” will depend on the particular circumstances. The examinations procedures note that borrowers should have enough time to become aware of their responsibilities under the National Flood Insurance Program, and where applicable, can purchase flood insurance before completion of the loan transaction.
The bank should document the particular facts and circumstances supporting the reasonableness of periods less than 10 days, along with an assessment of how often and under what circumstances the bank settles loans in a shorter period. (Response provided April 2025.)
Answers are provided by ABA Regulatory Policy and Compliance team members Leslie Callaway, CRCM, CAFP, senior director, compliance outreach and development, and Terry Hollinger, CRCM, senior analyst. Answers do not provide, nor are they substitutes for, professional legal services.
