Answers to three tricky, real-world compliance conundrums
By Mary Thorson
The ICBA Compliance HelpDesk provides practical, hands-on, real-world advice on compliance for community bankers. Below are recent questions on single-premium insurance, escrow requirements and Home Mortgate Disclosure Act reporting posed by community bankers through the HelpDesk and the responses from compliance experts.
Q In new rules from the Dodd-Frank Wall Street Reform and Consumer Protection Act for single-premium insurance, Section 1414(d) in the rule states, “No creditor may finance, directly or indirectly, in connection with any residential mortgage loan or with any extension of credit under an open-end consumer credit plan secured by the principal dwelling of the consumer, any credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss of income, life or health insurance, or any payment directly or indirectly for any debt cancellation or suspension agreement or contract.” What does this include?
A Single-premium credit insurance requires the borrower to make a large, one-time payment at the start of the loan. Effectively, this becomes a prepaid credit insurance policy. If the borrower decides to refinance the loan in a couple of years, the premium is not refundable. Consumers purchasing single premium insurance may not understand that and lose all the benefits of purchasing credit insurance.
Credit property insurance protects the borrower’s personal property from theft, accidents and even perils such as earthquakes and floods. The Dodd-Frank Act credit property insurance prohibition applies to transactions that meet the following criteria:
– the residential mortgage loan or open-end consumer credit plan is secured by the principal dwelling of the consumer;
– the borrower is charged a large, one-time payment for insurance coverage that applies to the entire life of the loan; and
– the insurance premium is financed directly or indirectly by the creditor.
If a creditor does not charge a single, upfront payment for hazard insurance, casualty insurance or other coverage for home-secured loans, the loans would not be covered by the prohibition. The bank may still provide credit insurance for which the premium is paid on a monthly basis added to the monthly payment amount.
Q We have a loan customer for whom we are escrowing funds for taxes, property insurance and flood insurance on a business purpose loan. The collateral on the loan does not include any residential real estate. The customer would like to remove the property insurance from the escrow process. Can our bank do that?
A Because the loan is for commercial purposes, the escrow the bank uses for taxes, property insurance and flood insurance is not subject to restrictions on escrow accounts under RESPA or Regulation Z. Although the customer is requesting the change, the bank should consider what documentation it would want in the file to confirm the customer’s agreement to the change.
Home Mortgage Disclosure Act
Q Our bank is a HMDA reporter. We sometimes receive an application for a HMDA reportable loan by mail, fax or email with the government-monitoring information section not completed. When the applicant shows an ID to close the loan, should we fill out the missing information?
A The HMDA instructions say you must ask the applicant for government-monitoring information. But if the applicant declines to answer these questions or fails to provide the information on an application form, the data need not be provided.
To properly document the file, the lender should indicate that the application was received by mail, telephone or Internet. No further action is required.
Mary Thorson is vice president of Chartwell Compliance, an ICBA Compliance & Risk Management service provider.