Section 103 of the Economic Growth, Regulatory Relief and Consumer Protection Act, which was signed on May 24, 2018, provides limited relief from appraisal requirements for certain loans. An appraisal in connection with a federally related transaction involving real property or an interest in real property is not required if:

*   the real property or interest in real property is located in a rural area;

*   not later than 3 days after the date on which the Closing Disclosure Form is given to the consumer, the mortgage originator, directly or indirectly—

>   has contacted not fewer than 3 State certified appraisers or State licensed appraisers; and

>   has documented that no State certified appraiser or State licensed appraiser, as applicable, was available within 5 business days beyond customary and reasonable fee and timeliness  standards for comparable appraisal assignments;

*   the transaction value is less than $400,000; and

*   the mortgage originator is subject to oversight by a Federal financial institutions regulatory agency.

Section 103 was effective upon enactment, but regulatory guidance is expected. It is expected that the Federal financial institutions regulatory agencies will develop guidance to clarify the “three appraiser” requirement and “five day” period.

To provide more information about the new law Compliance Resource is conducting a webinar entitled the Economic Growth, Regulatory Relief and Consumer Protection Act Immediate Compliance Concerns. More information about the webinar is available at:

https://www.jackscomplianceresource.com/event-registration/?ee=180

To provide more information about recent revisions to appraisal rules Compliance Resource is conducting a webinar entitled Real Estate Valuation in Today’s Marketplace . More information about the webinar is available at:

https://www.jackscomplianceresource.com/event-registration/?ee=174

On May 30 the Federal Reserve Board approved provisions to simplify the Volcker Rule. The revisions keep the core of the Volcker Rule intact and continue to prevent banks from trading with depositors’ money. The rule, which was enacted as part of the 2010 Dodd-Frank law, took five regulatory agencies more than three years to write.

After five years of experience the agencies have proposed a three-tiered approach that places the heaviest burden on those with the highest volume of trading and the highest risk. The recently enacted Economic Growth, Regulatory Relief and Consumer Protection ACT completely removes certain smaller institutions included in the bottom tier. A separate rule making will deal with this later issue.

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission are expected to take similar action in the next few days. Once all of the agencies have approved the proposal, the notice with be published in the Federal Register with a 60-day comment period.

On January 13, 2017 the Department of Justice (DOJ) filed a lawsuit against KleinBank alleging that the bank engaged in unlawful “redlining” of majority-minority neighborhoods in the Minneapolis-St. Paul metropolitan area.  The lawsuit, filed in the U.S. District Court for the District of Minnesota, alleges that KleinBank violated the Fair Housing Act and Equal Credit Opportunity Act, which prohibit financial institutions from discriminating on the basis of race and color in their mortgage lending practices.  The complaint alleges that from 2010 to at least 2015, KleinBank structured its residential mortgage lending business in such a way as to avoid serving the credit needs of neighborhoods where a majority of residents are racial and ethnic minorities.

DOJ’s Allegations

According to DOJ the bank’s alleged redlining practices include:

• Excluding majority-minority neighborhoods from the area it serves;
• Locating branch offices and mortgage loan officers in majority-white neighborhoods, but not in majority-minority neighborhoods; and
• Targeting marketing and advertising exclusively toward residents of majority-white neighborhoods.

From 2010 to 2015, comparable lenders generated applications in majority-minority neighborhoods at over five times the rate of KleinBank and made loans in majority-minority neighborhoods at over four times the rate of KleinBank.

KleinBank’s  Counter-Argument

KleinBank vigorously disputes the DOJ complaint that alleges the 110-year-old bank has engaged in “redlining,” asserting in this case that it has intentionally not served the mortgage credit needs of minority borrowers in Minneapolis and St. Paul.

“The government’s claim of ‘redlining’ has absolutely no basis in fact,” said Doug Hile, president and CEO. He added that the facts are that, “Minneapolis and St. Paul are not part of KleinBank’s market, and we have virtually no business there. These are highly competitive markets and they are comprehensively served by well-established financial institutions with numerous branches and many years of history.”

The complaint alleges, however, that KleinBank had a proactive duty to expand beyond its century-old roots in Carver County and western Minnesota to build branches in Minneapolis and St. Paul, which Hile termed “a baseless and unprecedented reach by the government.”

Like all banks, KleinBank is subject to extensive and rigorous examinations by federal and state regulators. “Year after year, the results of these examinations have found that KleinBank has well served all of its constituents’ needs. ” Hile said.

Outcome

KleinBank fought DOJ and survived. The parties agreed to a settlement on May 8, 2018. KleinBank did not pay damages or penalties. They agreed to expand services in Minneapolis by establishing a $300,000 loan subsidy fund, and allocating $300,000 for advertising, outreach, financial education and credit repair.

KleinBank’s counterargument was compelling. They have always served the area west of Minneapolis and St. Paul. The bank never attempted to serve Minneapolis and St. Paul.

It is not clear if the result was based on the merits of KleinBank’s case or if DOJ refused to fight. In any event the settlement appears to be a victory for the bank.

On May 11, 2018, the effective date of the Beneficial Ownership requirements, the Federal Financial Institutions Examination Council (FFIEC) issued new examination procedures on the final rule, “Customer Due Diligence Requirements for Financial Institutions,” issued by the Financial Crimes Enforcement Network (FinCEN) on May 11, 2016.

The examination procedures apply to banks, savings and loan associations, savings associations, credit unions, and branches, agencies, and representative offices of foreign banks.

The new examination procedures replace those in the current “Customer Due Diligence — Overview and Examination Procedures” section of the FFIEC’s Bank Secrecy Act/Anti-Money Laundering Examination Manual. In addition, a new overview and examination procedures were developed for the beneficial ownership requirements for legal entity customers.

The FFIEC member agencies created these procedures in close collaboration with FinCEN and the U.S. Department of the Treasury.

FinCEN’s 2016 final rule clarifies customer due diligence requirements and also includes a new requirement for covered financial institutions to identify and verify the identity of beneficial owners of certain legal entity customers. Banks and other covered financial institutions were required to comply with the rule beginning on May 11, 2018.

For more information regarding the new procedures please refer to the following sections of the FFIEC BSA/AML Examination Manual:

• Customer Due Diligence – Overview and Examination Procedures https://www.ffiec.gov/press/pdf/Customer%20Due%20Diligence%20-%20Overview%20and%20Exam%20Procedures-FINAL.pdf
• Beneficial Ownership for Legal Entity Customers – Overview and Examination Procedures https://www.ffiec.gov/press/pdf/Beneficial%20Ownership%20Requirements%20for%20Legal%20Entity%20CustomersOverview-FINAL.pdf

On May 10, 2018 the Consumer Financial Protection Bureau (CFPB) published its semi-annual regulatory agenda. The agenda includes rulemaking actions in pre-rule, proposed rule, final rule, long-term, inactive, and completed stages. Priorities are clearly changing.

The agency’s Acting Director has decided to reclassify as “inactive” certain rulemakings that had been listed in previous editions of the agenda in the expectation that final decisions on whether and when to proceed with such projects will be made by the  next permanent director. The CFPB claims that the changes in designation is not intended to signal a substantive decision on the merits of the projects.

The CFPB is:

• Issuing a final rule to implement changes to the Privacy Rules. The final rule is expected in June 2018
• Conducting follow-up rulemakings as warranted to address issues that have arisen during the process of implementing various mortgage requirements under the Dodd-Frank Act.
• Working to implement section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to collect, report, and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses. Pre-rule activities are scheduled to begin in March 2019.
• Tweaking Regulation CC, which implements the Expedited Funds Availability Act. Action is expected in June 2018.
• Engaging in research and pre-rulemaking activities regarding the debt collection market, which continues to be a top source of complaints to the CFPB. A proposed rule will focus on Fair Debt Collection Practices Act (FDCPA) collectors may address issues such as communication practices and consumer disclosures. A Notice of Proposed Rulemaking is expected in March 2019.
• Reconsidering various aspects of a 2015 final rule that amended regulations implementing the Home Mortgage Disclosure Act. The reconsideration could involve such issues as the institutional and transactional coverage tests and the rule’s discretionary data points. A Notice of Proposed Rulemaking is expected in January 2019.
• Reconsidering the 2017 rule titled Payday, Vehicle Title, and Certain High-Cost Installment Loans. At present most of the provisions of that rule are not effective until August 2019. A Notice of Proposed Rulemaking is expected in February 2019.

The agency has moved to the long-term action list a review of subparts B and G of Regulation Z, which implement provisions related to open-end credit generally and credit cards in particular. The CFPB had announced in 2017 that it had decided to engage in a series of reviews of existing regulations inherited from other agencies through the transfer of authorities under the Dodd-Frank Act. The CFPB has reclassified its review of subparts B and G of Regulation Z (the first review in the planned series of reviews) as a long-term action.

Also included on the long-term action list are changes to the Fair Credit Reporting Act, regulations to implement the amendments made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) concerning appraisals (AVMs), and modernization of Regulation E and the Electronic Fund Transfer Act.

Clarification of regulatory expectations for overdraft protection plans apparently has been completely dropped from the agenda.

On April 28, 2018 the Consumer Financial Protection Bureau (CFPB) finalized an amendment to its Truth in Lending/Real Estate Settlement Procedures Act Integrated Disclosures (TRID) that addresses when a creditor may compare charges paid by or imposed on the consumer to amounts disclosed on a Closing Disclosure, instead of a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith.

Under the current rule, circumstances may arise in which a cost increases but the creditor is unable to use an otherwise permissible revised estimate on either a Loan Estimate or a Closing Disclosure for purposes of determining whether an estimated closing cost was disclosed in good faith. This situation, which may arise when the creditor has already provided a Closing Disclosure to the consumer when it learns about the cost increase, occurs because of the intersection of timing rules regarding the provision of revised estimates. This has been referred to in industry as a “gap” or “black hole” in the TILA-RESPA Rule.

In response, in July 2017 the Bureau proposed an amendment removing that particular timing restriction. The final rule specifically allows creditors to use Closing Disclosures to reflect changes in costs for purposes of determining if an estimated closing cost was disclosed in good faith, regardless of when the Closing Disclosure is provided relative to consummation.

The final rule will take effect 30 days after publication in the Federal Register.

A copy of the 65-page final rule is available at:  https://files.consumerfinance.gov/f/documents/cfpb_tila-respa_final-rule_amendments-to-federal-mortgage-disclosure-requirements.pdf

A copy of a CFPB Executive Summary is available at:  https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_2018-TILA-RESPA-rule_executive-summary.pdf

On April 19, 2018 the Federal Reserve Board published a Consumer Affairs Letter (CA 18-3) regarding Revised Interagency Examination Procedures for Regulation X and Regulation Z.

The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council recently developed the interagency examination procedures for the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The revised examination procedures supersede the examination procedures transmitted with CA Letter 15-6.

The procedures reflect the following amendments to Regulation Z and Regulation X published by the Consumer Financial Protection Bureau (CFPB):

• Amendments to Regulation Z and Regulation X related to mortgage servicing that were effective in October 2017, unless otherwise specified; and
• Other amendments to Regulation Z published through April 2016, including rules related to mortgage lending by small creditors serving rural and underserved areas.

The procedures do not incorporate the 2017 amendments to Regulation Z regarding the CFPB’s TILA-RESPA integrated disclosure rule or regarding prepaid accounts. Those amendments will be addressed in a future update.

The revised procedures are available at

• Revised Interagency Examination Procedures for Regulation Z
• Revised Interagency Examination Procedures for Regulation X

On April 9, 2018 the Office of the Comptroller of the Currency (OCC); Board of Governors of the Federal Reserve System (Board); and Federal Deposit Insurance Corporation (FDIC) published a final rule to amend the agencies’ regulations requiring appraisals of real estate for certain transactions. The final rule increases the threshold level at or below which appraisals are not required for commercial real estate transactions from $250,000 to $500,000 and makes other changes. The final rule was effective upon publication in the Federal Register on April 9th.

For more information see: https://www.jackscomplianceresource.com/change-in-appraisal-threshold/

A copy of the rule is available at https://www.gpo.gov/fdsys/pkg/FR-2018-04-09/pdf/2018-06960.pdf

On April 3, 2018 the U.S. Department of the Treasury released recommendations to modernize the Community Reinvestment Act (CRA). The recommendations were issued to the primary CRA regulators, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation.  Treasury’s objective in developing these recommendations is to better align CRA activity with the needs of the communities that banks serve, while being conducted in a manner consistent with a bank’s safety and soundness.

Treasury’s recommendations include:

• Updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors;
• Increasing clarity and flexibility of CRA examinations to increase transparency and effectiveness of CRA rating determinations;
• Improving the examination process to increase timeliness of evaluations and increasing accountability for banks’ planning of their CRA activity; and
• Incorporating performance incentives to better serve the CRA’s intended purpose of encouraging banks to meet the credit and deposit needs of their communities.  Treasury’s recommendations will incentivize bankers to do more for low- and moderate-income communities, especially in cases where the bank has underperformed in prior assessment periods.

A copy of Treasury’s Memorandum to the primary CRA regulations is available at: https://home.treasury.gov/sites/default/files/2018-04/4-3-18%20CRA%20memo.pdf

Information about Compliance Resources’ upcoming webinar entitled Identifying and Documenting Community Development Activities is available at: https://www.jackscomplianceresource.com/event-registration/?ee=169

On March 20, 2018 the FDIC board of directors approved a final rule to raise the appraisal thresholds for commercial real estate transactions from $250,000 to $500,000. The threshold for loans secured by one-to-four family residential properties will remain at $250,000.

The final rule increases the commercial real estate appraisal threshold with three modifications from the proposal.

• First, the agencies have increased the commercial real estate appraisal threshold to $500,000 rather than $400,000 as proposed.
• Second, the final rule also makes a conforming change to the section requiring state certified appraisers to be used for federally related transactions that are commercial real estate transactions above the increased threshold.
• Third, the final rule changes the definition of commercial real estate transaction, which no longer includes construction loans secured by a single 1-to-4 family residential property, regardless of whether the loan is for initial construction only or includes permanent financing. Thus, under the final rule, a loan that is secured by a single 1-to-4 family residential property, including a loan for construction, will remain subject to the $250,000 threshold. A loan that is secured by multiple 1-to-4 family residential properties (for example, a loan to construct multiple properties in a residential neighborhood) would meet the definition of commercial real estate transaction and thus be subject to the higher threshold.

The final rule continues to require regulated institutions entering into commercial real estate transactions at or below the commercial real estate appraisal threshold to obtain evaluations that are consistent with safe and sound banking practices unless the institution chooses to obtain an appraisal for such transactions.

The final rule must be approved by the Federal Reserve and the OCC; once approved by the other agencies, it will be effective on the date it is published in the Federal Register.

A copy of the final rule is available at:  https://www.fdic.gov/news/board/2018/2018-03-20-notice-sum-c-fr.pdf.