New rules from the Consumer Financial Protection Bureau (CFPB) will drastically alter the compliance landscape for home-secured loans.
To implement these rules, credit unions must amend policies and forms, train staff, and adopt new procedures.
Before addressing these sweeping changes, however, credit unions should make sure their current home-secured lending compliance program is strong. Although the CFPB changes are significant, the slate isn’t being wiped clean. No matter how well you implement the new rules, if your program is built on a shaky foundation it could lead to future problems.
Many areas that give rise to common violations aren’t changing. Fair lending and the Equal Credit Opportunity Act (ECOA), for example, remain the same.
The most common fair lending/ ECOA violation pertains to spousal signatures and failing to obtain evidence of joint intent at the time of application. Signatures on the promissory note don’t establish joint intent.
Review your applications and make sure you’re consistently obtaining separate initials or signatures to establish joint intent.
Risk-based pricing and adverse action notices also are areas the CFPB left unchanged in its recent final rules. Deciding which riskbased pricing model notice to send in a given situation can be complicated. Many credit unions also are unclear about when to send an adverse action notice versus a riskbased pricing notice and how to fill them out correctly.
To mitigate the risk of violations, make sure your procedures on riskbased pricing and adverse action notices are clear and concise.
The notice of the borrower’s right to rescind three days aft er closing is also driven by a model form and requires clear procedures to avoid undue compliance risk. The notice of right to rescind likely won’t be changed and will continue to have a big impact if you don’t handle it correctly. Failure to comply can result in an extension of the rescission period to three years.
Credit unions should ensure they have strong procedures in place and adequately train staff on the notice of right to cancel.
Even if the new rules do change a certain area, it’s not a waste of time for credit unions to review their compliance with the current rule.
Most of the current mortgage rules will remain in effect until January 2014. The time period from March 2013 to January 2014 leaves too big of a window to ignore potential violations. And a review of current practices and procedures could reveal weaknesses that, even though the rule is changing, likely will carry over to the new rules.
For example, the proper timing in providing disclosures—whether it’s the three-day timing for early Truth in Lending disclosures after application or the seven-day timing prior to closing—is a common violation. Although many of the disclosures are changing, if your credit union has trouble complying with the current timing requirements it likely won’t change with the new rules.
Another example has to do with properly filling out the Good Faith Estimate (GFE) form. Although the GFE will undergo significant changes, those that understand and properly fill out the current GFE will have a much easier time implementing the new forms.
The CFPB has given credit unions 12 months to implement most of its new rules. This should give credit unions ample time not only to prepare for and implement the new rules, but also to review compliance with current rules.
If you implement the new rules on top of a strong foundation, it will be a more effective and efficient process. Just because the second floor is being renovated doesn’t mean you should neglect the first floor and basement.