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Still Confused about the New HMDA Law ? Here’s the Latest Help

July 27, 2018 synergy Leave a comment

By Leslie A. Sowers & J. Eric Duncan

January 1, 2018, marked the official start of a new and complex regulatory era for financial institutions subject to the Home Mortgage Disclosure Act (HMDA) and Regulation C. On that day, the majority of the amendments to Regulation C under the Bureau of Consumer Financial Protection’s October 2015 and September 2017 final rules took effect. Those amendments, collectively referred to herein as the “New HMDA Rule,” were sweeping. They dramatically altered the coverage of institutions subject to HMDA, the loan transactions and applications that must be reported, and the data points that must be collected, recorded, and reported to the appropriate federal regulator.

In the six months that have passed since these changes went into effect, mortgage lenders and other covered institutions have faced a number of common implementation issues, from open questions and ambiguities not addressed by the New HMDA Rule to challenges caused by the volume and complexity of the new requirements. We discuss some representative examples of these issues below.

Moving Targets

One of the biggest implementation challenges presented by the New HMDA Rule results from the manner in which the Bureau is issuing instruction and guidance. Unlike the Bureau’s other rules, the statute, implementing regulation, and official staff commentary do not provide all of the information HMDA reporters need in order to comply. Among various other documents and tools issued by the Bureau, HMDA reporters must also consult the Filing Instructions Guide (FIG), a 151-page document that provides the file, data, and edit specifications required for reporting HMDA data, including the possible values and other information that may be reported for each data point. Before the New HMDA Rule, Appendix A to Regulation C and the related commentary contained much of this information, including the various “codes” that related to each data point.

Why is this shift in approach noteworthy? Removing this information from Regulation C allows the Bureau to issue and change this information without going through the time-consuming notice and comment rulemaking process. While this approach allows the Bureau to make adjustments timelier, which is beneficial, these adjustments are made without requesting public comments and without helpful explanation as to the purpose of the changes. In fact, the Bureau has revised the 2018 FIG seven times since it was first issued in January 2016, the most recent of which occurred in February. Is your HMDA team keeping up with each of these revisions and how it may impact your HMDA collection and reporting process?

For example, under the New HMDA Rule, institutions must report the name of the automated underwriting system (AUS) used to evaluate the application and the result generated by the system, if applicable. In cases where a company uses more than one AUS to evaluate an application or the system or systems generate two or more results, the New HMDA Rule lays out a complex waterfall approach for deciding which results to report. Additional questions arise in the context of particular AUS types, such as the USDA’s Guaranteed Underwriting System (GUS). GUS results can be a challenge to report because GUS generates two separate results for each file, and those results may correspond to more than one code available (e.g., Accept/Unable to Determine), but an institution may report only one AUS result per AUS reported.

The Bureau changed the codes available for reporting AUS results in the most recent revision to allow lenders reporting GUS results to use “Code 16 – Other.” The FIG instruction to “Code 16 – Other” states that more than one AUS result may be entered in the free-form text field, as applicable. The Bureau’s only explanation of this change was: “Updated allowable codes for AUS results produced by the Guaranteed Underwriting System (GUS).” This comment fails to explain what prompted this change and what it means for reporters; this is particularly troubling since the Bureau previously gave informal advice to report only one of the GUS results before it issued the February FIG revisions.

Will the Bureau continue to modify the FIG this year? All reporters must record the data collected for HMDA on a loan/application register within 30 calendar days after the end of each calendar quarter in which final action is taken. Therefore, if more changes are made to the FIG, each reporter will be required to update its recorded entries and revise its procedures (and/or systems) going forward for each change.

Regardless, you should be expecting additional changes that may impact your recorded entries and your process. We are still awaiting the Bureau’s release of additional reporting tools, including the geocoding tool, which provides institutions that use it correctly with a safe harbor when reporting the census tract. In addition, the Bureau announced in December 2017 that it intends to open a rulemaking to reconsider various aspects of the New HMDA Rule such as the institutional and transactional coverage tests and discretionary data points, and the latest regulatory agenda indicates that this process is not scheduled to begin until 2019.

Rate-Set Date for Calculating Rate Spread

For loans and approved but not accepted applications that are subject to Regulation Z (other than an assumption, a purchased loan, or a reverse mortgage), institutions must report the Rate Spread, which is the difference between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set. A number of questions arise when trying to determine the appropriate rate-set date to use for purposes of this calculation.

For example, which rate-set date should an institution use for an approved not accepted application that had a floating interest rate? In such cases, the interest rate was arguably never “set.” While some institutions have concluded the most defensible approach is to use the date on which the applicant was provided the early disclosures required under Regulation Z, the New HMDA Rule does not directly address the question. Complications can also arise in identifying the rate-set date for “repriced” transactions and transactions in which a borrower changes from one loan program to another program that is subject to different pricing terms. The requirements for these situations are complex and potentially ambiguous and can trip up companies that have not sufficiently thought through their approach to such scenarios.

What Data to Report

What data an institution must report often depends on the action taken on the file and whether the institution relied on the information as part of the credit decision made. In particular, the reporting requirements associated with counteroffers demonstrate the complexity involved in implementing this aspect of the New HMDA Rule.

Suppose an institution makes a counteroffer to lend on terms different from the applicant’s initial request. If the applicant declines to proceed with that counteroffer or fails to respond, the institution reports the action taken as a denial based on the original terms requested by the applicant. On the other hand, if the applicant agrees to proceed with consideration of the counteroffer, the institution reports the action taken as the disposition of the application based on the terms of the counteroffer. In such cases, how the file is reported may also depend on whether the institution’s conditional approval is subject to only customary commitment or closing conditions or also includes any underwriting or creditworthiness conditions. Companies must have procedures and systems that address all of the potential scenarios to ensure accurate reporting and update them as needed when unique scenarios arise.

Collection of Expanded GMI Data

The New HMDA Rule significantly expanded and complicated the requirements for collecting Government Monitoring Information (GMI) data regarding an applicant’s race, ethnicity, and sex. As a result, institutions have faced certain issues in updating their collection procedures and forms to ensure they offer applicants appropriate options, such as the ability to select one or more race or ethnicity subcategories even if the applicant has not selected a race or ethnicity aggregate category. These requirements can pose challenges depending on how a company’s existing systems or processes were designed, especially in the context of online applications, where forms may be coded to automatically trigger the selection of a main category when a subcategory is selected.

Does the New HMDA Rule require online application forms to allow an applicant to skip these questions entirely? Is it permissible to structure the electronic interface to require the applicant to make at least one selection in order to move on to the next page, even if only by checking a box to specifically indicate they do not wish to provide the information? The New HMDA Rule fails to directly address these questions, and institutions must make decisions on the best way to proceed based on their own operations and the regulatory language and then apply a consistent, reasonable approach.

MLO NMLSR Identifier

The New HMDA Rule added a requirement to report an individual mortgage loan originator’s (MLO) National Mortgage Licensing System & Registry identifier (NMLSR ID) for a loan or application. Questions often arise in this context when multiple MLOs are involved in a single transaction because, for example, an MLO leaves the company or multiple MLOs work on an application together as part of a team. In those cases, which individual’s NMLSR ID must be reported? The New HMDA Rule requires the company to report the NMLSR ID of the MLO with primary responsibility for the transaction as of the date of action taken. The regulation does not provide additional guidance with respect to what constitutes primary responsibility, but instead provides a company some discretion to develop reasonable policies to make that determination.

In order to address these situations, an institution should establish and follow a reasonable, written policy for determining which individual MLO has primary responsibility for the reported transaction as of the date of action taken. When creating that policy, companies should also consider the requirements under various other federal and state laws that have requirements for identifying the MLO(s) for a transaction, such as Regulation Z’s requirement to disclose the primary loan originator’s name and NMLSR ID (if any) on certain loan documents, as those other requirements may influence this determination.

Final Thoughts

As the common issues described above illustrate, there is still much to consider and work through in implementing the New HMDA Rule during its first year. You should be putting in the extra time and dedicating extra resources to audit your information and to identify questions and pain points. Institutions should have already recorded their first quarter data for 2018 under the new requirements. Use this opportunity to carefully test and review that data and the relevant internal processes for the issues above as well as any other potential gaps or questions unique to your own operations.

In situations where there are open questions and multiple reasonable interpretations, the key is consistency. Develop a well-reasoned, consistent approach based on the language in Regulation C, the commentary, and the FIG. Review the other guidance available on the Bureau’s website, submit questions to the Bureau, and consult with counsel. Document your analysis process to demonstrate your good faith efforts to comply. Any identified issues should be addressed as soon as possible so you can have a consistent approach moving forward and only have a few months of past entries to correct. If you wait until 2019 to review, you will have to correct an entire year’s worth of entries retroactively should you find any issues.

Source: http://www.mortgagecompliancemagazine.com/compliance/first-six-months-of-the-new-hmda-rule-common-issues-and-challenges/

Regulatory Updates

HUD Publishes Semiannual Regulatory Agenda

June 13, 2018 synergy Leave a comment

Vol. 83 Monday, No. 112 June 11, 2018 Part IX Department of Housing and Urban Development Semiannual Regulatory Agenda VerDate Sep<11>2014 20:24 Jun 08, 2018 Jkt 244001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\11JNP9.SGM 11JNP9 daltland on DSKBBV9HB2PROD with PROPOSALS3 27148 Federal Register / Vol. 83, No. 112 / Monday, June 11, 2018 / Unified Agenda DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Subtitles A and B [Docket No. FR–6087–N–01] Semiannual Regulatory Agenda AGENCY: Department of Housing and Urban Development. ACTION: Semiannual regulatory agenda. SUMMARY: In accordance with section 4(b) of Executive Order 12866, ‘‘Regulatory Planning and Review,’’ as amended, HUD is publishing its agenda of regulations already issued or that are expected to be issued during the next several months. The agenda also includes rules currently in effect that are under review and describes those regulations that may affect small entities, as required by section 602 of the Regulatory Flexibility Act. The purpose of publication of the agenda is to encourage more effective public participation in the regulatory process by providing the public with advance information about pending regulatory activities. FOR FURTHER INFORMATION CONTACT: Aaron Santa Anna, Assistant General Counsel for Regulations, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW, Room 10276, Washington, DC 20410–0500; telephone number 202–708–3055. (This is not a toll-free number.) A telecommunications device for hearingand speech-impaired individuals (TTY) is available at 800–877–8339 (Federal Relay Service). SUPPLEMENTARY INFORMATION: Executive Order 12866, ‘‘Regulatory Planning and Review’’ (58 FR 51735, October 4, 1993), as amended, requires each department or agency to prepare semiannually an agenda of: (1) Regulations that the department or agency has issued or expects to issue, and (2) rules currently in effect that are under departmental or agency review. The Regulatory Flexibility Act (5 U.S.C. 601–612) requires each department or agency to publish semiannually a regulatory agenda of rules expected to be proposed or promulgated that are likely to have a significant economic impact on a substantial number of ‘‘small entities,’’ meaning small businesses, small organizations, or small governmental jurisdictions. Executive Order 12866 and the Regulatory Flexibility Act permit incorporation of the agenda required by these two authorities with any other prescribed agenda. HUD’s regulatory agenda combines the information required by Executive Order 12866 and the Regulatory Flexibility Act. HUD’s complete Unified Agenda is available online at www.reginfo.gov, in a format that offers users a greatly enhanced ability to obtain information from the Agenda database. The Department is subject to certain rulemaking requirements set forth in the Department of Housing and Urban Development Act (42 U.S.C. 3531 et seq.). Section 7(o) of the Department of Housing and Urban Development Act (42 U.S.C. 3535(o)) requires that the Secretary transmit to the congressional committees having jurisdictional oversight of HUD (the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services), a semiannual agenda of all rules or regulations that are under development or review by the Department. A rule appearing on the agenda cannot be published for comment before or during the first 15 calendar days after transmittal of the agenda. Section 7(o) provides that if, within that period, either committee notifies the Secretary that it intends to review any rule or regulation that appears on the agenda, the Secretary must submit to both committees a copy of the rule or regulation, in the form that it is intended to be proposed, at least 15 calendar days before it is to be published for comment. The semiannual agenda posted on www.reginfo.gov is the agenda transmitted to the committees in compliance with the above requirements. HUD has attempted to list in this agenda all regulations and regulatory reviews pending at the time of publication, except for minor and routine or repetitive actions, but some may have been inadvertently omitted, or may have arisen too late to be included in the published agenda. There is no legal significance to the omission of an item from this agenda. Also, where a date is provided for the next rulemaking action, the date is an estimate and is not a commitment to act on or by the date shown. In some cases, HUD has withdrawn rules that were placed on previous agendas for which there has been no publication activity. Withdrawal of a rule does not necessarily mean that HUD will not proceed with the rulemaking. Withdrawal allows HUD to assess the subject matter further and determine whether rulemaking in that area is appropriate. Following such an assessment, the Department may determine that certain rules listed as withdrawn under this agenda are appropriate. If that determination is made, such rules will be included in a succeeding semiannual agenda. In addition, for a few rules that have been published as proposed or interim rules and which, therefore, require further rulemaking, HUD has identified the timing of the next action stage as ‘‘undetermined.’’ These are rules that are still under review by HUD for which a determination and timing of the next action stage have not yet been made. The purpose of publication of the agenda is to encourage more effective public participation in the regulatory process by providing the public with early information about the Department’s future regulatory actions. HUD invites all interested members of the public to comment on the rules listed in the agenda. J. Paul Compton, Jr., General Counsel. OFFICE OF HOUSING—COMPLETED ACTIONS Sequence No. Title Regulation Identifier No. 137 ……………….. 24 CFR 3280 Manufactured Home Construction and Safety Standards 3rd Set (FR–5739) ……………………. 2502–AJ34 VerDate Sep<11>2014 20:24 Jun 08, 2018 Jkt 244001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 E:\FR\FM\11JNP9.SGM 11JNP9 daltland on DSKBBV9HB2PROD with PROPOSALS3 Federal Register / Vol. 83, No. 112 / Monday, June 11, 2018 / Unified Agenda 27149 DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) Office of Housing (OH) Completed Actions 137. Manufactured Home Construction and Safety Standards 3rd Set (FR–5739) E.O. 13771 Designation: Regulatory. Legal Authority: 42 U.S.C. 5401 et seq.; 42 U.S.C. 3535(d) Abstract: This proposed rule would amend the Federal Manufactured Home Construction and Safety Standards by adopting certain recommendations made to HUD by the Manufactured Housing Consensus Committee (MHCC). The National Manufactured Housing Construction and Safety Standards Act of 1974 (the Act) requires HUD to publish all proposed revised construction and safety standards submitted by the MHCC. This proposed rule is based on the third set of MHCC recommendations to update and improve various aspects of the Manufactured Housing Construction and Safety Standards. HUD has reviewed those proposals and has made several editorial revisions to the proposals which were reviewed and accepted by the MHCC. This rule proposes to add new standards that would establish requirements for carbon monoxide detection, stairways, fire safety considerations for attached garages, and for duplexes. Completed: Reason Date FR Cite Withdrawn ……….. 04/04/18 Regulatory Flexibility Analysis Required: Yes. Agency Contact: James Martin, Phone: 202 708–6423. RIN: 2502–AJ34 [FR Doc. 2018–11248 Filed 6–8–18; 8:45 am] BILLING CODE 4210–67–P VerDate Sep<11>2014 20:24 Jun 08, 2018 Jkt 244001 PO 00000 Frm 00003 Fmt 4701 Sfmt 9990 E:\FR\FM\11JNP9.SGM 11JNP9 daltland on DSKBBV9HB2PROD with PROPOSALS3

Source: https://www.gpo.gov/fdsys/pkg/FR-2018-06-11/pdf/2018-11248.pdf

Regulatory Updates

Fannie Mae Selling Guide Announcement SEL-2018-05

June 13, 2018 synergy Leave a comment

Selling Guide Announcement SEL-2018-05

June 5, 2018

Selling Guide Updates The Selling Guide has been updated to include changes to the following:

MH Advantage™ Properties

Inspection of Manufactured Homes with Structural Modifications

Project Standards Updates

Flash Settlement for MBS

Desktop Underwriter® (DU®) Bankruptcy and Mortgage Delinquency Assessment

HomeStyle® Energy in DU

HomeStyle Renovation Forms

Miscellaneous Selling Guide Updates

Each of the updates is described below. The affected topics for each policy change are listed on the Attachment. The Selling Guide provides full details of the policy changes. The updated topics are dated June 5, 2018. The highlighted Selling Guide PDF is back by popular demand! Beginning with the June 2018 Selling Guide update, Fannie Mae is again providing a highlighted version of the Selling Guide PDF to enable a simple way to quickly identify the most recent significant updates made to the Selling Guide. The topic title and edited paragraphs are highlighted in yellow to help you identify where changes were made. (Note that deleted topics and paragraphs are not identified.) The highlighted Selling Guide PDF is intended to be used as a companion tool in conjunction with your review of the corresponding Selling Guide Update Announcement. MH Advantage Properties We are pleased to introduce the MH Advantage initiative. MH Advantage is manufactured housing that is designed to meet specific construction, architectural design, and energy efficiency standards that are more consistent with site built homes. The goal of this initiative is to help bridge the gap in affordable housing by encouraging more consumers to consider manufactured homes as an alternative to site built homes. Loans secured by MH Advantage properties are afforded a number of flexibilities over standard manufactured housing, including higher LTV ratios, standard mortgage insurance, and reduced loan-level price adjustments. Examples of the physical characteristics for MH Advantage include  specific architectural and aesthetic features, such as distinctive roof treatments (eaves and higher pitch roofline), lower profile foundation, garages or carports, porches, and dormers;  construction elements including durability features, such as durable siding materials; and  energy efficiency standards (minimum energy ratings apply). MH Advantage is open to all manufacturers. Participating manufacturers will enter into an agreement with us allowing them to attach an “MH Advantage Sticker” to the home in proximity to the home’s HUD Data Plate. The Sticker identifies the home as having been designed to accommodate the physical characteristics for an MH Advantage property. The lender will confirm the presence of the Sticker, and additional information about site improvements to the property, but is not responsible for confirming the physical characteristics of the home.

Requirements for Loans Secured by MH Advantage Properties The following table describes the requirements for delivery of loans secured by MH Advantage properties. Requirements Property Eligibility The lender must confirm the following by reviewing photographs in the appraisal report:  the property is MH Advantage as evidenced by MH Advantage Sticker;  the HUD Data Plate and HUD certification labels are present;  the presence of a driveway leading to the home (or to the garage or carport, if one is present); and  the presence of a sidewalk connecting either the driveway, or a detached garage or carport Appraisal  Manufactured Home Appraisal Report (1004C), and  Completion Report (1004D), if applicable Eligible Transactions  MH Advantage loans follow the same DU eligibility requirements as manufactured homes, with the exception that the maximum LTV ratio is increased to 97% for certain purchases and limited cash-out refinances. All requirements that pertain to loans with LTV ratios 95.01 – 97% apply.  The CLTV ratio may be up to 105% with Community Seconds.  Loans may be originated as HomeReady and subject to all HomeReady requirements.  HomeStyle Renovation and HomeStyle Energy may also be combined with MH Advantage. Underwriting  Lenders must use DU to underwrite.  The “Manufactured Home: MH Advantage” Subject Property Type must be used (even if the property is in a project). Mortgage Insurance MH Advantage loans are subject to standard mortgage insurance coverage requirements; the deeper coverage required for manufactured homes does not apply. Delivery A new Special Feature Code (SFC) 859 is required at delivery in addition to SFC 235. There are no other new requirements related to loan delivery. MH Advantage loans are delivered using:  ConstructionMethodType (Sort ID 51): “Manufactured”  ManufacturedHomeWidthType (Sort ID 33): “MultiWide” or “SingleWide”  If the property is located in a condo, co-op, or PUD, the related project data points are also required. Loan-Level Price Adjustments (LLPA) The 50 basis point LLPA that is applicable to manufactured housing does not apply to MH Advantage. All other standard requirements that apply to manufactured housing apply to MH Advantage. NO T E : The Eligibility Matrix, Loan-Level Price Adjustment Matrix, and Special Feature Codes documents have all been updated to reflect these changes. For more information about MH Advantage, see our website. Effective Dates Beginning today, lenders can:  underwrite MH Advantage loans in DU Version 10.2,  submit MH Advantage loans to EarlyCheck to validate the data via a new set of MH Advantage edits,  deliver whole loans to us, and © 2018 Fannie Mae. Trademarks of Fannie Mae. SEL- 2018-05 3 of 8  deliver loans in an MBS with pool issue dates after May 1, 2018. Inspection of Manufactured Homes with Structural Modifications Currently, the Selling Guide requires that when a manufactured home has an addition or a structural modification and is not located in a state with an agency responsible for inspecting these modifications, then the property must be inspected by a licensed professional engineer. The engineer must certify that the addition or structural change was completed in accordance with the HUD Manufactured Home Construction Safety Standards. With this update, if the state does not have this requirement, then the structural modification must be inspected and the structural modifications be deemed structurally sound by a third party who is regulated by the state and is qualified to make the determination. Certification of compliance with HUD Manufactured Home Construction and Safety Standards is no longer required. Effective Date Lenders can take advantage of this change immediately. Project Standards Updates In response to lender feedback, we have made several updates to our condo, co-op, and PUD project policies. These updates will simplify our policies and increase flexibilities when originating loans secured by units in a project. The following table describes the updates. Refer to the Selling Guide for additional details and clarifications. Summary of Project Standards Updates Single-Entity Ownership  Waive the single-entity ownership requirement when the purchase transaction will result in a reduction in the single-entity ownership concentration (maximum single entity ownership 49%, no delinquent dues, no pending or active special assessments)  Exempt units held by non-profits, affordable housing programs (including units subject to non-eviction rent regulation codes), or institutions of higher education from the percentage of single entity ownership calculation  Allow single-entity ownership in projects with 21 or more units to increase to 20% Commercial Space  Exempt commercially owned or operated parking spaces from the project’s commercial space calculations  Increase commercial space to 35% Established Project Definition  Allow a new condo project to be reviewed as an “established” project if it meets all the requirements for an established project other than the 90% unit conveyance policy. Allow 80% conveyance if the developer is holding back units as rental stock if additional requirements are met. Investment Property Transactions  Allow investor transactions to be eligible for Limited Review for LTV, CLTV, and HCLTV to 75% FHA Project Review  Allow delivery of conventional loans secured by units in established condo projects approved by FHA’s HUD Review and Approval Process (HRAP) Two-to Four-Unit Condo Projects  Waive project review requirements, with the exception of some basic requirements that apply Projects Consisting of Manufactured Homes  Allow Full Review of established condo projects  Condo and PUD projects subject to community land trusts, deed restrictions, leasehold estates, or shared equity arrangements may be eligible under the Fannie Mae Project Eligibility Review Service (PERS) Legal Non-Conforming Zoning  Align project standards policy to standard appraisal policy that requires the appraiser to comment on the market response to legal non-conforming zoning © 2018 Fannie Mae. Trademarks of Fannie Mae. SEL- 2018-05 4 of 8 Projects Operating as a Hotel or Motel (“Condotel” Policy) Clarify criteria for identifying projects that operate as hotels or motels. The HOA and/or project cannot:  be licensed or managed/operated as a commercial hotel, motel, resort, or hospitality entity  restrict owners ability to occupy the unit during any part of the year  require owners to make their unit available for rental pooling (daily or otherwise)  require that the unit owners share profits from the rental of units to the HOA, management company, or resort or hotel rental company Live-Work Condo Projects  Simplify current policy with the requirement that live-work projects be primarily residential in nature and must be in compliance with local zoning or development regulations for live-work projects Limited Equity Co-ops  Allow limited-equity co-ops to be evaluated through the PERS process for project approval (both streamlined PERS and standard PERS) – limited equity feature must be related to an affordable housing preservation program and is in compliance with our requirements on resale restrictions when applicable In addition to these changes, we also took the opportunity to streamline and reorganize some of the content. For example, we removed the topic pertaining to detached condos. It was replaced with a new topic that clearly describes the requirements that apply to projects and transactions for which a project review is waived. We also removed duplicate content that appeared in multiple topics, such as Project Type Codes. These are now listed in their entirety in only one topic. Effective Dates Lenders may apply these changes when reviewing projects immediately. The weekend of June 23, 2018 the following systems will be updated to support these changes:  DU Version 10.2,  Collateral Underwriter® (CU®),  Uniform Collateral Data Portal® (UCDP®),  EarlyCheck™, and  Loan Delivery – Whole loans can be delivered beginning June 23, 2018, and loans in MBS with pool issue dates on or after July 1, 2018 Condo Project Manager (CPM) will be updated to align with these changes in August 2018. In the interim, lenders may continue to use CPM for projects that do not require the additional flexibilities described in this announcement. For projects that are newly eligible under these expanded eligibility requirements, lenders may complete the applicable project review outside of CPM. Flash Settlement for MBS Last year we eliminated Flash MBS processing fees and instead offered Flash MBS as an acceptable, standard, and no cost delivery option. This has reduced selling costs and increased flexibility for same month pooling and allowed lenders to receive book-entry delivery on Fannie Mae MBS as soon as 72 hours. In our continuing effort to increase pooling flexibility, we will now allow lenders to receive book-entry delivery on Fannie Mae’s published Majors as soon as 48 hours after we receive the Loan Delivery submission. This reduced time-line for book-entry turnaround is only applicable for Fannie Mae’s published Majors. Single issuer MBS must still be delivered 72 hours prior to book-entry. © 2018 Fannie Mae. Trademarks of Fannie Mae. SEL- 2018-05 5 of 8 Additionally, we are updating the Pool Settlement Calendars to reflect the 5 th business day before the end of the month as the last date to submit Single Family MBS, allowing for an additional day of pooling. Effective Date The change to Flash Majors will occur with MBS delivered on or after July 1, 2018. The change to the Pool Settlement Calendars will begin with the July Calendar. Desktop Underwriter Bankruptcy and Mortgage Delinquency Assessment The Selling Guide has been updated to include the policies related to bankruptcy and mortgage delinquency assessment that were described in the DU Version 10.2 June Update Release Notes. When inaccurate information exists in a credit report, lenders will have the ability to instruct DU to disregard (in the eligibility assessment) inaccurate bankruptcy or mortgage delinquency information, or disregard a bankruptcy that was due to extenuating circumstances. Effective Date These changes will apply to new loan casefiles submitted or resubmitted to DU on or after the weekend of June 23, 2018. See the DU Version 10.2 June Update Release Notes for additional information. HomeStyle Energy in DU The Selling Guide has been updated to align with updates to DU regarding HomeStyle Energy mortgage loans. Because these updates will allow DU to identify transactions having energy-related improvements, the Selling Guide policy requiring lenders to manually confirm HomeStyle Energy requirements outside of DU has been removed. Effective Date These changes will apply to new loan casefiles submitted or resubmitted to DU on or after the weekend of June 23, 2018. See the DU Version 10.2 Release Notes for additional information. NO T E : As specified in the DU Version 10.2 Release Notes, two new fields are being added to DU to identify HomeStyle Energy loan submissions: Energy Improvement Amount and PACE Loan Payoff Amount. An amount must be entered in one or both of these fields for DU to be able to underwrite the loan casefile as HomeStyle Energy. If a lender’s loan origination system cannot be updated with these two new fields by June 23, the lender can access the DU user interface to enter the data. Alternatively, we will allow lenders to continue to manually apply the HomeStyle Energy policies to DU loan casefiles until their systems have been updated. HomeStyle Renovation Forms We have posted model Renovation Loan documents and related Summary Pages that may be used in connection with HomeStyle Renovation Loans. The following special purpose model documents are now available:  Multistate Renovation Contract – Fannie Mae Model Document (Form 3730), and  Multistate Renovation Loan Agreement – Fannie Mae Model Document (Form 3731). Also, the following model riders are now available:  Multistate Renovation Loan Rider to Security Instrument – Fannie Mae Model Document (Form 3732), and  Multistate Renovation Loan Investor Rider to Security Instrument – Fannie Mae Model Document (Form 3733). © 2018 Fannie Mae. Trademarks of Fannie Mae. SEL- 2018-05 6 of 8 The Selling Guide has been updated to include references to these new forms. Effective Date These documents may be used immediately; however, because they are model documents, usage is strictly optional. Miscellaneous Selling Guide Updates Multiple Appraisals. Earlier this year, we clarified the policy in B4-1.3-12, Quality Assurance regarding second appraisals. With this update, we moved a similar policy that existed in B4-1.1-02, Lender Responsibilities, to a more appropriate location in the Guide, B4-1.2-02, Appraisal Age and Use Requirements. The multiple appraisal policy is now clearly described in the two topics where lenders are most likely to look for that information. Primary Mortgage Insurance Absence Reason Code 97. Currently, if a loan is delivered without mortgage insurance, one of two codes is required:  MI Code 95 – No MI Based on Original LTV  MI Code 97 – MI Canceled Based on Current LTV We have updated the Approved Mortgage Insurers and Related Identifiers, published on our website and referenced in the Selling Guide, to reflect that Primary MI Absence Reason Code 97 may only be used for non-flow deliveries. This code is only appropriate for non-flow deliveries because it indicates that even though the original LTV ratio was greater than 80%, no mortgage insurance is required because mortgage insurance was canceled based on a new value obtained after origination. (Note that this update did not result in a direct change to the Selling Guide text.) ***** Lenders who have questions about this Announcement should contact their Customer Delivery Team. Carlos T. Perez Senior Vice President and Chief Credit Officer for Single-Family © 2018 Fannie Mae. Trademarks of Fannie Mae. SEL- 2018-05 7 of 8 Attachment Section of the Announcement Updated Selling Guide Topics MH Advantage Properties  B2-1.2-01, Purchase Transactions  B2-1.2-02, Limited Cash-Out Refinance Transactions  B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction  B2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built Housing  B4-1.2-01, Appraisal Report Forms and Exhibits  B4-1.4-01, Factory-Built Housing: Manufactured Housing  B4-1.4-10, Property Inspection Waivers  B4-2.2-05, Requirements for Review of Detached Condos (Topic deleted)  B4-2.2-08, Additional Requirements for Review of Condo, Co-ops, and PUD Projects Comprised of Manufactured Homes (Topic deleted)  B5-2-01, Manufactured Housing  B5-2-03, Manufactured Housing Underwriting Requirements  B5-2-04, Manufactured Housing Pricing, Mortgage Insurance, and Special Feature Code Requirements  B5-5.1-02, Community Seconds Loan Eligibility  B5-6-02: HomeReady Mortgage Loan and Borrower Eligibility  B7-1-02, Mortgage Insurance Coverage Requirements Inspection of Manufactured Homes with Structural Modifications  B2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built Housing Project Standards Updates  B2-3-01, General Property Eligibility  B2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built Housing  B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates  B4-1.4-01, Factory-Built Housing: Manufactured Housing  B4-2.1-01, General Information on Project Standards  B4-2.1-02, Waiver of Project Review  B4-2.1-03, Ineligible Projects  B4-2.2-01, Limited Review Process  B4-2.2-02, Full Review Process © 2018 Fannie Mae. Trademarks of Fannie Mae. SEL- 2018-05 8 of 8 Section of the Announcement Updated Selling Guide Topics  B4-2.2-03, Full Review: Additional Eligibility Requirements for Units in New and Newly Converted Condo Projects  B4-2.2-04, Geographic-Specific Condo Project Considerations  B4-2.2-05, FHA-Approved Condo Review Eligibility  B4-2.2-06, Project Eligibility Review Service (PERS)  B4-2.3-01, Eligibility Requirements for Units in PUD Projects  B5-2-02, Manufactured Housing Loan Eligibility  B5-5.1-04, Community Land Trusts Flash Settlement for MBS  C3-7-06, Settling the Trade Desktop Underwriter® Bankruptcy and Mortgage Delinquency Assessment  B3-5.3-09, DU Credit Report Analysis HomeStyle Energy in DU  B4-1.4-10, Property Inspection Waivers  B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties HomeStyle Renovation Forms  B5-3.2-06, HomeStyle Renovation: Renovation Contract, Renovation Loan Agreement, and Lien Waiver  B8-4-01, Riders and Addenda  B8-5-03, HomeStyle Renovation Mortgage Documentation Requirements

Source:https://www.fanniemae.com/content/announcement/sel1805.pdf

Regulatory Updates

VA Provides Lender’s Certification Requirement for VA-Guaranteed Loans

June 13, 2018 synergy Leave a comment

Lender’s Certification Requirement for VA-Guaranteed Loans 1. Purpose. The purpose of this Circular is to provide clarification on the regulatory requirement that all Department of Veterans Affairs (VA) guaranteed loans require lender certifications. 2. Background. Recently, VA Regional Loan Centers and Lenders have inquired as to the validity of the Lender Certification in conjunction with Interest Rate Reduction Refinance Loans (IRRRLs). The Lender Certification is required on IRRRLs whether or not underwriting is required. This is supported in 38 CFR 36.4340(k). This section states that: “Lenders originating loans are responsible for determining and certifying to VA on the appropriate application or closing form that the loan meets all statutory and regulatory requirements. Lenders will affirmatively certify that loans were made in full compliance with the law and loan guaranty regulations as prescribed in this section.” 3. Action. Lender’s certification applies to all VA-guaranteed loans, and is not contingent upon the type of VA loan. 4. Rescission: This Circular is rescinded July 1, 2020. By Direction of the Under Secretary for Benefits Jeffrey F. London Director Loan Guaranty Service Distribution: CO: RPC 2021 SS (26A1) FLD: VBAFS, 1 each (Reproduce and distribute based on RPC 2021)

Source: https://www.benefits.va.gov/homeloans/documents/circulars/26_18_14.pdf

Mortgage Banking

The Latest on Home Flipping and FHA Buyers

June 13, 2018 synergy Leave a comment

Home flippers often claim that the renovations and repairs they do on homes before selling them preps the property for a new first-time homebuyer, but that’s becoming less and less the case.

According to new data from ATTOM Data Solutions, the percentage of home flips that were sold to homebuyers who secured financing through the Federal Housing Administration (FHA)—which are predominantly first-time homebuyers—dropped to 15.9 percent in the first quarter of 2018, a 10-year low.

Rising home prices have made home flipping a lucrative practice, as the total dollar volume of home flips has been more than $10 billion every quarter since 2016. But it’s also gradually priced out many of the first-time homebuyers home flippers claim to serve. The median price of a home flip rose to $215,000 in the first quarter of 2018, the highest since prior to the housing bust in 2008.

The FHA, a division of the Department of Housing and Urban Development (HUD), provides insurance on mortgages for qualified borrowers, typically people with lower credit scores or those without the means for a down payment. The FHA insures mortgages with as little as a 3.5 percent down payment. This helps expand credit to lower income buyers or first-time buyers.

FHA buyers aren’t always first-time homebuyers, and first-time homebuyers aren’t always FHA buyers, but there’s considerable overlap. So far in 2018, 82 percent of buyers who purchased single-family homes through the FHA were first-time buyers, according to the HUD.

So while the percentage of home flippers who sold to FHA borrowers isn’t a perfect measure for first-time homebuyers, it serves as a good barometer, particularly when looking at the general trend.

The percentage of home flippers who sold to FHA buyers fell below 5 percent during the housing bubble in 2005, as the same easy credit that inflated the bubble and caused it to burst made securing FHA insurance on a mortgage unnecessary; mortgage lenders were more than willing to offer financing to practically anyone with a pulse.

After the bubble burst in 2008 and mortgage lending ground to a halt, home flippers sales to FHA buyers peaked at 34 percent in the second quarter of 2010, as FHA insurance was one of the few ways to lure a lender into a mortgage.

The steadily declining rate at which home flippers sell to FHA buyers certainly has something to do with mortgage credit getting more relaxed over the past few years. If borrowers have other attractive financing offers, some will take it. But as home prices rise, so does the premium home flippers can charge, and many first-time buyers will inevitably get left behind.

Source: https://www.curbed.com/2018/6/7/17435202/home-flips-first-time-buyers

Mortgage Banking

The Latest Developments at the CFPB

June 13, 2018 synergy Leave a comment

The acting director of the Consumer Financial Protection Bureau (CFPB) often says that the only reason he hasn’t burned the agency down is because it’s illegal.

Mick Mulvaney, the staunchly conservative White House budget director, has taken extensive steps to restrain and reform the CFPB while insisting he would do just enough to meet its legally mandated actions. He has worked to undo years of the bureau’s most controversial rules while laying the groundwork for a massive reduction in the CFPB’s reach and authority, including calling on Congress to strip its powers.

Just this week, Mulvaney dismissed the members of three CFPB advisory boards, including a consumer advocate panel he’s legally required to meet with twice each year.

Here are five ways that Mulvaney, who fought against the CFPB’s creation as a member of the House, has transformed it from within during his six months atop the agency.

Structural changes and political hires

Mulvaney has used his vast power and independence to sway the CFPB by pairing career bureau staffers hired for policy chops with highly paid political appointees. He’s also rearranged the bureau’s structure, making a broad array of powers subject to his appointees’ control.

Mulvaney’s top aides have overseen efforts to slim down the bureau and make it more responsive to the financial services industry.

The acting director brought on Brian Johnson and Kirsten Sutton Mork in senior roles, giving them oversight of most day-to-day bureau functions. The former aides to Rep. Jeb Hensarling (R-Texas), the House Financial Services Committee chairman, were key to his legislative and investigative efforts to tame the CFPB.

Hensarling led the House GOP’s push to repeal most of the CFPB’s powers and launched probes of the bureau’s regulatory actions through his subpoena power.

Mulvaney, a former Financial Services panel member, said the arrangement mirrored other federal agencies and balanced out a staff composed mainly of Democratic Sen. Elizabeth Warren’s (Mass.) acolytes.

Mulvaney also stoked rage among the CFPB’s progressive supporters and some small financial institutions when he dismissed this week the members of three key advisory groups.

CFPB officials downplayed the furor among consumer advocacy groups and insisted that board members only cared about “their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau.”

Board members called the claim outrageous and some offered to cover their own expenses.

“We give two days of our time working, sitting at our table from morning until night, digging into these weighty issues,” Josh Zinner, the CEO of the Interfaith Center on Corporate Responsibility, said Wednesday. “They have no actual rationale for dismissing these boards, and now they’re just resorting to name calling. It’s absurd.”

Retreat on payday lending crackdown

Mulvaney has reversed the CFPB’s wide crackdown on short-term, high-interest loans.

The acting director opposes the bureau’s October 2017 rule targeting “payday” loans and sought to delay it through several means. He delayed the compliance date for the first portion of the rule in January, and started the lengthy regulatory process to rewrite it.

The CFPB filed a joint motion with a group of payday lenders suing against the rule, asking the court to delay its effective date until their case is completed.

Mulvaney has also dropped several cases against payday lenders but insists the bureau is pursuing several others under its legal mandate to enforce fair lending laws.

But his step back from the CFPB’s efforts to tackle payday lending has enraged the bureau’s liberal allies and its former director, Richard Cordray, who issued the payday rule shortly before stepping down to run for Ohio governor.

Call for complaints about CFPB’s own actions

The CFPB has issued several formal requests for complaints on almost every aspect of its own regulatory and enforcement actions.

Banks, lenders and financial services firms have griped for years about the bureau’s aggressive oversight. But the official call for complaints will give the CFPB a wealth of documented rationale meant to justify major reversals in bureau policy.

The requests target the ways the CFPB crafts regulations, begins investigations, issues subpoenas and penalizes firms it believes have violated laws.

“Regulation by enforcement is done,” Mulvaney said in April. “Financial services providers should be allowed to know what the law is before being accused of breaking it.”

Cost-cutting measures

The 2010 Dodd-Frank Act empowers the CFPB director to request from the Federal Reserve as much money as they deem necessary each fiscal quarter, and the Fed is obligated to provide the funding.

Mulvaney requested $0 during his first fiscal quarter in charge of the bureau, saying he’d instead use the CFPB’s $177 million emergency reserve account with the Fed’s New York branch.

The fiscal hawk former congressman is mulling ways to slash the CFPB’s expenses, including personnel changes or relocations. He’s also floated reducing the amount of outside scholarship conducted by CFPB employees the bureau sponsors.

Rebranding push

Mulvaney has tried to drag the CFPB as far as possible from its roots as Warren’s brainchild. He’s insisted the agency should be called by its formal legal name, the Bureau of Consumer Financial Protection, despite the frequent use of shorter names by other federal entities.

The acting director has said he wants to bring the CFPB in line with noncontroversial regulators, such as the Federal Deposit Insurance Corporation.

“I don’t want us to be Elizabeth Warren’s baby, because as long as you’re associated with one person, be it me or her, you’re never going to be taken as seriously as a bureaucracy, as an oversight regulator as you probably should,” Mulvaney said in April.

The bureau has also adopted a less flashy, more traditional logo, though its website still sports Cordray-era neon green.

Source: http://thehill.com/regulation/finance/391443-five-ways-mulvaney-is-cracking-down-on-his-own-agency?amp

Mortgage Banking

Loan Officer Back to Basics Refresher

June 13, 2018 synergy Leave a comment

Low numbers of homes for sale have made the current housing market very competitive. For prospective buyers, this has meant it is more important than ever to be in the strongest position possible when making an offer.

Unfortunately, the market isn’t always the only barrier to home ownership. Nearly one in 10 borrowers gets denied for a mortgage, according to recent analysis by LendingTree. We pinpointed the biggest reasons mortgage applications were denied.

Here are five things that can torpedo your mortgage application.

1. Your past credit history

A poor credit history is the overarching reason that can lead to your mortgage loan being denied. In our study, one in four denied borrowers (26%) were turned down because of their credit history. The good news is that you are continually updating your credit history and can take steps to improve it if there are disadvantageous items.

Review your credit report on Annualcreditreport.com or through a monitoring service like My LendingTree to ensure it is accurate. Work to address any adverse records before applying for the loan.

2. Cutting it too close on debt-to-income

A lot of the trouble from the financial crisis was because borrowers were put into homes they could not pay for on a sustainable basis. As a result, mortgages since then have adhered very strictly to income requirements. Stretching to buy your dream home is not advisable. Lenders are unlikely to approve borrowers whose debt-to-income ratios exceed 36%. DTI is your total monthly debt obligations divided by your gross monthly income. It was the cause of 26% of mortgage denials in our study.

3. Taking out new credit before closing

Most borrowers know to avoid applying for new accounts in the run-up to their mortgage application. That advice still applies once you are approved and are on the way to closing on a home. The length of time between initial application and closing is about 45 to 60 days. Lenders will check your credit again just prior to closing, and material changes could affect the cost of the loan or even lead to an approval being reversed. Avoid new applications for other credit during this time.

4. The property is not worth the price

The lending decision evaluates two things: the borrower and the property, which is the collateral the lender will receive in the event the borrower defaults. In our analysis, collateral was the third-leading cause of mortgage denials, indicating the home was not worth enough to justify the financing requested. Make sure you have a look at the property and have a trusted home inspector look it over, too.

5. Sloppiness and lack of documentation

The days of loans with little to no documentation are long gone. Make sure everything in your application, from your tax records to your employment history, is accurate and you have documentation. Be proactive and gather all the typical documentation you’ll need before you apply, so you aren’t denied a loan or delayed in closing.

Tendayi Kapfidze is LendingTree’s chief economist. He oversees the online lending exchange’s analysis of the U.S. economy with a focus on housing and mortgage market trends.

Source:https://www.cbsnews.com/news/5-things-that-can-torpedo-your-mortgage-application/

Commercial Banking

Risks and Compliance in Commercial Banking Today

June 13, 2018 synergy Leave a comment

In today’s news cycle, it seems barely a week goes by before another headline flitters across a social news feed about a data breach at some major U.S. or foreign company. Hackers and scams seem to abound across the marketplace, regardless of industry or any defining factor.

Cybersecurity itself has become an increasingly important issue for bank boards—84 percent of directors and executives responding to Bank Director’s 2018 Risk Survey earlier this year cited cybersecurity as one of the top categories of risk they worry about most. Facing the industry’s cyber threats has become a principal focus for many audit and risk committees as well, along with their oversight of other external and internal threats.

Technology’s influence in banking has forced institutions to come to terms with both the inevitability of not just integrating technology somewhere within the bank’s operation, but the risk that’s involved with that enhancement. Add to that the percolating influence of blockchain and cryptocurrency and the impending implementation of the new current expected credit loss (CECL) standards issued by the Financial Accounting Standards Board, and bank boards—especially the audit and risk committees within those boards—have been thrust into uncharted waters in many ways and have few points of reference on which to guide them, other than what might be general provisions in their charters.

And lest we forget, audit and risk committees still face conventional yet equally important duties related to identifying and hiring the independent auditor, oversight of the internal and external audit function, and managing interest rate risk and credit risk for the bank—all still top priorities for individual banks and their regulators.

The industry is also in a welcome period of transition as the economy has regained its health, which has influenced interest rates and driven competition to new heights, and the current administration is bent on rolling back regulations imposed in the wake of the 2008 crisis that have affected institutions of all sizes.

These topics and more will be addressed at Bank Director’s 2018 Audit & Risk Committees Conference, held June 12-13 at Swissôtel in Chicago, covering everything from politics and the economy to stress testing, CECL and fintech partnerships.

Among the headlining moments of the conference will be a moderated discussion with Thomas Curry, a former director of the Federal Deposit Insurance Corp. who later became the 30th Comptroller of the Currency, serving a 5-year term under President Barack Obama and, briefly, President Donald Trump.

Curry was at the helm of the OCC during a key time in the post-crisis recovery. Among the topics to come up in the discussion with Bank Director Editor in Chief Jack Milligan are Curry’s views on the risks facing the banking system and his advice for CEOs, boards and committees, and his thoughts about more contemporary influences, including the recently passed regulatory reform package and the shifting regulatory landscape.

Source: https://www.bankdirector.com/index.php/issues/risk/good-and-bad-facing-audit-and-risk-committees-today/

Commercial Banking

Commercial Banks and Their Share of the Mortgage Industry

June 13, 2018 synergy Leave a comment

The five largest U.S. banks originated residential mortgages worth less than $87 billion in Q1 2018. This marks a sharp reduction from the figure of $110 billion in the previous quarter, and is also well below the $96 billion in mortgages originated a year ago. In fact, this was one of the worst quarters on record for these banks in the last twenty years. The only instance where these banks fared worse was in Q1 2014, when the end of the mortgage refinancing wave resulted in total originations dropping to $75 billion.

The sharp decline is primarily because of the reduction in overall activity levels across the mortgage industry from an increase in interest rates – something that can be attributed to the Fed’s ongoing rate hike process. While total mortgage originations for the industry also fell to $346 billion from $361 billion a year ago, a sharper decline in origination activity for the largest banks led their market share lower to 25% from 27% in Q1 2017.

We capture the impact of changes in mortgage banking performance on the share price of the banks with the largest mortgage operations in the U.S. – Wells Fargo, U.S. Bancorp, JPMorgan Chase and Bank of America – in a series of interactive dashboards. Total U.S. Originations includes fresh mortgages as well as mortgage refinances as compiled by the Mortgage Bankers Association

The mortgage industry in the U.S. witnessed a sharp reduction in origination volumes since Q4 2016, as a series of interest rate hikes by the Fed weighed on mortgage refinancing activity even as an increase in mortgage rates hurt the number of fresh mortgage applications. This led to total mortgage originations falling from $561 billion in Q3 2016 to just $346 billion in Q1 2018. There was a notable uptick in mortgage activity over Q2-Q3 2017, though, as a small reduction in long-term mortgage rates helped boost demand over this period.

Wells Fargo Maintains Its Lead

Wells Fargo has remained the largest mortgage originator in the country since before the economic downturn. While the bank was always focused on the mortgage business, it tightened its grip in the industry after the recession thanks to its acquisition of Wachovia – originating one in every four mortgages in the country in early 2010. Although weak conditions in the mortgage space dragged down Wells Fargo’s market share to a low of 11% in Q4 2015, the bank’s market share has largely remained around 12.5% over recent quarters.

That said, the combined market share of these five banks has fallen drastically from over 50% in 2011 to around 25% now. This was primarily due to a sizable reduction in mortgage operations by Bank of America and Citigroup to curtail losses they incurred in the wake of the recession. In fact, Bank of America’s mortgage banking division has shrunk to an insignificant part of its business model – leading to a decision by its management to no longer report mortgage banking revenues separately starting in Q1 2018.

s://www.forbes.com/sites/greatspeculations/2018/06/07/largest-u-s-commercial-banks-continue-to-lose-market-share-in-the-mortgage-industry/#72ac9d1d9e86

Commercial Banking

Regulation Compliance Bruden Now Quantified

June 13, 2018 synergy Leave a comment

How much does your bank spend on regulatory compliance?

A recent Fed district bank study found that community bank compliance costs averaged 7.2% of non-interest expense. While significant by itself, that average hides a trend with significant implications—but let’s not get ahead of the story.

When S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law, the industry breathed a big sigh of relief. But getting rid of some of the Dodd-Frank Act rules, or easing them, won’t solve the totality of the regulatory burden banks face—not by a long shot. There was plenty to do before Dodd-Frank came about, and most previous relief laws merely nibbled around the edges of compliance duties.

Compliance isn’t fading away

In fact, it has been pointed out by some in the compliance fraternity that, in the wake of S. 2155, banks initially will face additional costs in unwinding systems and procedures built at a significant cost to handle the rules that have been eliminated or amended.

Indeed, in an analysis of S. 2155 on BankingExchange.com by Zach Fox of S&P Global Market Intelligence, “Still engulfed by regs,” the writer states:

“For smaller banks, the relief appears more modest. Some of the law’s provisions meant to ease regulatory burden will have little impact for a simple reason: Small banks were already exempt. Provisions, such as qualified mortgage status for loans held in portfolio, higher leverage at bank holding companies, a lengthier exam cycle, and a shorter call report, were already available to banks with less than $1 billion of assets.”

The hopes for further relief through Senate consideration of other financial legislation sent over by the House remain just that—hopes. Political promises from Senate leadership to House Financial Services Commission Chairman Jeb Hensarling have been made in a midterm election year that may exert unusual gravitational pull on legislation.

Burden’s costs and implications

And that makes the findings of a Federal Reserve Bank of St. Louis study about community banks’ regulatory costs especially interesting.

For those who predict that compliance costs will continue to encourage consolidation at the small end of the industry spectrum, the study provides more evidence.

Indeed, the study reports that 85% of bankers in the most-recent sampling in its database indicated that regulatory costs were important in considering acquisition offers.

The project makes it clear that regulatory burden hits smaller community banks harder than larger community banks, and that the impetus to merge for compliance efficiency will not go away, even though the recent regulatory reforms may help some institutions.

Major findings

The Fed study, entitled Compliance Costs, Economies Of Scale, And Compliance Performance, was published in April. The project was based on survey data compiled from among nearly 1,100 community banks by the Conference of State Bank Supervisors in 2015, 2016, and 2017. (All institutions in the sample were under $10 billion in assets.) Interestingly, the researchers also referenced multiple studies of banking compliance costs that have been performed in recent years by agencies, academics, and associations to give a full picture around their own findings and arguments.

The survey looked at regulatory costs in multiple ways and at multiple levels. Among the findings:

• Economies of scale exist in compliance.

Many forms of compliance have incremental costs—suspicious activity reporting, mortgage transactions, etc., cost more with increasing volume—but the ongoing fundamental systems costs and the costs of keeping current apply to all institutions.

“Banks with assets of less than $100 million reported compliance costs that averaged almost 10% of non-interest expense,” the study reports, “while the largest banks in the study reported compliance costs that averaged 5%. In other words, the compliance cost burden for the smallest community banks is double that of the largest community banks.” [Emphasis added.] The largest banks referred to were those with between $1 billion and $10 billion in assets.

• Bank Secrecy Act compliance costs lead the way among expenses tied to specific regulations.

In the 2017 survey results, based on 2016 numbers, BSA expenses dwarfed all other compliance costs, with the exception of those related to RESPA, TILA, and Regulation Z. This is interesting because Comptroller of the Currency Joseph Otting, a former banker, identified BSA costs early on as a priority. While banking agencies can’t directly change the rules, Otting has spearheaded efforts to discuss these issues with the agency that does, the Financial Crimes Enforcement Network, or FinCEN.

As the exhibit below indicates, mortgage-related rules would supplant BSA as the leading categories if the RESPA, TILA, and Regulation Z, Qualified Mortgage, and Ability to Repay rule bar were combined into one, totaling almost 36%.

Source: Compliance Costs, Economies Of Scale, And Compliance Performance

• Personnel expenses account for the majority of community bank compliance costs.

The study found that this was followed, in order, by data processing, accounting, consulting, and legal expenses. The report states that personnel costs—coming to 5.1% of average non-interest expense—represent almost seven times more than the other four categories combined.

Source: Compliance Costs, Economies Of Scale, And Compliance Performance

“Compliance expenses for personnel appear to be more subjective than expenses in the other categories,” the report says. “For example, it may be difficult to estimate just how much time a loan officer spends filling out compliance forms versus drumming up new business. Respondents may account differently for the time and attention devoted to compliance by chief executive officers or boards of directors.”

• Compliance spending and compliance ratings bear little relationship to each other.

For this analysis, the researchers looked at both compliance ratings and the M—for management—component of the CAMELS ratings, which includes consideration of the management and board oversight of the compliance function.

Source: Compliance Costs, Economies Of Scale, And Compliance Performance

The analysis found that “within a given size category, compliance expenses as percentages of non-interest expense do not appear to vary systematically for banks with different performance ratings. For banks with assets of less than $100 million, for example, relative compliance expenses at the highest-rated banks were lower than for other banks, while for banks with assets between $500 million and $1 billion, relative compliance expenses were higher for the highest-rated banks than for other banks. This suggests that compliance performance is based on factors other than what is spent on it.”

Source: http://m.bankingexchange.com/news-feed/item/7605-reg-burden-hits-small-hardest?Itemid=638