Compliance Article
12/19/2007
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Several of our compliance subject matter experts, Jane Jarnis, Jeanne Erickson, Ted Dreyer and Karl Leslie, have been tracking regulatory developments in the banking and mortgage industries. In this article, they share what may be coming down the pike for 2008.
Mortgage Considerations
Generally: As we say goodbye to 2007 and hello to 2008 we look at the some of the regulatory proposals and bills that are currently in Congress. The state of the mortgage industry remains in uncertainty, with the increase in home loan foreclosures and additional subprime mortgage loans resetting in 2008, the mortgage market shake up will likely continue.
Regulatory Changes: The Department of Housing and Urban Development has designed a plan to amend the Real Estate Settlement Procedures Act (RESPA), which on November 2, 2007 was passed onto the Office of Management and Budget. Watch for comments and the proposed ruling to become public early 2008. With the current climate in the mortgage industry, we believe the RESPA overhaul will take a front seat in 2008, along with additional consumer friendly disclosures.
Some other regulations to watch for are: The FHA Modernization Act, looking to keep the dream of home ownership alive, by lowering down payment requirements allowing FHA to insure higher loan amounts and introducing FHA pricing flexibility, FHA could be the answer to many families that have mortgage loans that are due to reset. FHA introduced another initiative in the fall of 2007, the FHA Secure loan. This program allows borrower’s that have had a good credit history, until their mortgage loan had reset, to refinance their current balance into a more affordable payment allowing families the option of staying in their home. There could be another solution on the horizon for borrowers with sub-prime mortgage loans that are due to reset. Treasury
Secretary Henry Paulson, other members of the treasury and key players in the mortgage arena have introduced a temporary rate freeze, “Hope Now”. This proposal is still in the preliminary phases with the details not yet finalized, watch for more discussions on this topic in 2008.
In addition, Federal Reserve Chairman Ben Bernanke promised Congress that his agency would issue rules in 2007 to combat abusive subprime mortgage-lending practices and misleading loan solicitation and advertising. The Federal Reserve Board plans to use its authority under the Home Ownership and Equity Protection Act to address specific practices that are unfair or deceptive. Chairman Bernanke expected that the FRB will propose additional rules under HOEPA in 2007.
Legislative Changes: Congress has introduced a number of bills some of which would provide relief to struggling borrowers. These include the Emergency Home Ownership and Mortgage Equity Protection Act (H.R. 3609) which would allow bankruptcy judges to modify loan terms for borrowers going through Chapter 13 bankruptcy and the Emergency Mortgage Loan Modification Act (H.R. 4178) which would protect mortgage servicers who modify loan terms from legal liability. Other bills such as the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R. 3915) and the Escrow, Appraisal and Mortgage Services Improvement Act (H.R. 3837) seek to reform mortgage practices. H.R. 3915 passed the House in November and was expected to encounter opposition in the Senate. In fact, the Senate has just introduced its own mortgage reform legislation, the Homeownership Preservation and Protection Act, S. 2452.
Lending Considerations
Regulatory Changes: In May 2007, after years of careful consideration, the Federal Reserve Board (FRB) issued proposed amendments to the Truth-in-Lending open-end lending rules. The primary goal of the proposed changes is to make the open-end credit disclosures easier to understand and more useful to the consumer making credit decisions. The changes will affect credit and charge card accounts as well as all other types of revolving open-end credit that is not secured by a home. Revisions to home equity lines of credit (HELOCs) rules will be considered separately.
Specifically, the FRB has proposed changes to credit and charge card application and solicitation disclosures, open-end account opening disclosures, periodic statements, change-in-terms notices and advertising requirements. If adopted as proposed, financial institutions will need time to implement significant changes to policies and procedures, operational systems as well as open-end account documentation.
In addition, the proposal would implement some of the amendments to the Truth in Lending Act passed by Congress as part of the Bankruptcy Reform Act of 2005. For example, periodic statements for all types of plans must disclose the amount of any late fee as well as the earliest date the fee would be imposed.
The comment period ended October 12, 2007. After reviewing the comments, the Federal Reserve Board plans to conduct additional consumer testing. We should expect to see final rules in mid-2008.
Deposit Considerations
Regulatory Changes: On September 21, 2007, the Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation and National Credit Union Administration proposed Guidance related to Garnishment of Exempt Federal Benefit Funds (e.g., social security payments). The comment period for the proposal closed November 27, 2007. Financial institutions should incorporate any final guidance that may be issued into their garnishment policies and procedures.
Legislative Changes: The Consumer Overdraft Protection Fair Practices Act (H.R. 946) has been introduced. This bill would: 1) amend the Truth in Lending Act to clarify that overdraft fees are finance charges (i.e., it would require the APR to be disclosed); 2) require written consumer consent (i.e., an “opt in”) before enrollment in an overdraft loan program; 3) require financial institutions to warn consumers when an ATM withdrawal will trigger an overdraft fee—and allow the consumer to cancel the transaction at that time; and 4) prohibit financial institutions from manipulating the order of check clearing. Given industry opposition, as well as some of the technical difficulties in implementing some of these requirements, the likelihood of it passing “as is” seems very low. Possibly for these reasons, interest in the bill has waned in recent months. However, given the amount of industry press it generated over the summer and the relative significance of the proposals, this legislation is worthy of being watched closely.
Individual Retirement Accounts (IRA)/Health Savings Accounts (HSA)
Generally: There are a host of miscellaneous bills that could affect financial institutions engaged in IRA business. For example, there is a bill that makes technical corrections to the Pension Protection Act (S. 1974/H.R. 3361), a bill that makes the charitable contributions rules permanent (S. 819/H.R. 1419), and a couple of bills that address the establishment of automatic IRAs (S. 1141/H.R. 2167, S. 1288). In addition, given the prominence of health care as a national issue there is always the possibility of legislation affecting HSA’s, which, of course, might be very limited given that 2008 is an election year.
Regulatory Changes: On November 27, 2007, the Internal Revenue Service released new model contracts for health savings accounts (HSA). Form 5305-B, Health Savings Trust Account and Form 5305-C, Health Savings Custodial Account have been updated to incorporate changes from the Health Opportunity Patient Empowerment (HOPE) Act of 2006.The changes address increased contribution limits as well as new methods for funding an HSA using dollars from an IRA, a health flexible spending arrangement or a health reimbursement arrangement.
Privacy/Identity Theft
Affiliate Marketing Regs: On October 25, 2007, the banking regulators jointly issued final Affiliate Marketing Regulations which implement Section 214 of the Fair and Accurate Credit Transactions (FACT) Act. These regulations provide model language and guidance for the notices financial institutions are required to send if they share customer information with their affiliates for marketing solicitation purposes. The regulations are effective January 1, 2008 with a mandatory compliance date of October 1, 2008. This requirement is far broader than the existing GLB and FCRA opt-outs, so many institutions that have never had to give those opt-outs may be covered by this new requirement.
Red Flag Regs: On October 31, 2007, the banking regulators jointly issued final Red Flag regulations implementing Section 114 and 315 of the FACT Act. These regulations require all banks, savings associations and credit unions to have an Identity Theft Prevention Program, require users of consumer reports from the major consumer reporting agencies to be able to respond to notices regarding address discrepancies, and require credit a debit card issuers to meet certain requirements regarding changes of address. These regulations are effective January 1, 2008 with a mandatory compliance date of November 1, 2008.
Although the mandatory compliance dates are not until the fall of 2008, institutions will need to act far ahead of that time. Many institutions may include the Affiliate Marketing Notices with their annual privacy notice mailings to save the cost and expense of another mailing. The Identity Theft Prevention Program requirement must be developed and approved prior to the compliance date, and could take time to develop and conduct mandatory staff training, particularly if new tools are required for the detection of Red Flags for Identity Theft.
These two new FACT Act requirements will be a major compliance focus at many institutions in 2008.
