In the podcast below, Protiviti Risk and Compliance experts Steven Stachowicz and Tom Giltrow elaborate on two of the topics of the July issue of Protiviti’s Compliance Insights newsletter – the OCC’s new guidance on short-term, small-dollar loans and the restoration by Congress of certain tenant protection provisions in foreclosure situations. The full newsletter, which includes additional topics not covered in the podcast, can be downloaded from our website.
Compliance Insights August 7, 2018 [transcript]
Kevin Donahue: Hello and welcome to a new installment of Powerful Insights. This is Kevin Donahue, a Senior Director with our marketing group. I’m pleased to be talking today with Steven Stachowicz, a Managing Director with our Risk and Compliance group and Thomas Giltrow, a Director with our Risk and Compliance group. We’re going to be touching on some of the topics in the latest issue of Protiviti’s Compliance Insights. Steve, thanks for joining me again today.
Steven Stachowicz: It’s always a good chance to talk to you, sir.
Kevin Donahue: And Tom, it’s great to speak with you as well for the first time on our podcast series.
Tom Giltrow: Thanks, Kevin. Very glad to be here.
Kevin Donahue: So Tom, let’s get started with you right away and get you going here. Again, this was covered in the latest, the July 2018, issue of Compliance Insights. We talked a little bit in there about some updates from the Office of the Comptroller of the Currency regarding small-dollar lending. What’s the news here, and what may be some of the concerns that banks have?
Tom Giltrow: Well thanks Kevin, and certainly glad to speak to that today. So I really think there’s a lot to unpack in this new guidance and it really carries some pretty significant implications for financial institutions, especially those that currently offer, or thinking about offering, short-term, small-dollar loans. I think in general, as this audience likely knows, this area has been subject to quite a bit of scrutiny by the regulatory agencies, both the OCC and the Bureau, in terms of issuing guidance, new rulemaking and enforcement activity and really, this past May, the OCC took up that mantle and issued new guidance itself for what it defines as short-term, small-dollar consumer loans.
So, what do we mean by that? This is really consumer installment loans with a maturity of between two and 12 months in equal repayments for the term of that loan, and what’s really interesting to me about this guidance, Kevin, is that the OCC is reflecting a shift in their own positioning on these products. They’ve indicated now that banks can offer these products safely and profitably but that they should be doing so with sound risk management practices.
And so what do they mean by that? Well, they elaborate on this guidance in terms of six specific policies and practices that they consider as reasonable and, what I read as expected, in terms of the practices that they expect financial institutions to employ. And these really apply to different stages throughout that lending life cycle, all the way from the marketing process, to servicing, to furnishing of credit report information to the bureaus.
So the OCC recommends, and I’ll just give a few examples: In marketing materials or consumer disclosures, we need to make sure that those are transparent, they’re fair, they’re readily understandable by consumers all the way to the servicing life cycle and the reporting of consumer report information. The OCC is concerned that consumers have the opportunity to build their credit histories, or rebuild their credit histories, quickly and so they encourage banks to report information accurately and timely to the credit bureaus to help consumers achieve that objective.
In addition to that, we spoke a bit about risk management practices. There’s an array of Federal requirements that apply to short-term, small-dollar loans. That is the Truth in Lending Act, The Equal Credit Opportunity Act, UDAP, FCRA. Institutions, just as they always have, need to ensure that they’re complying with the technical requirements of each of these laws and regulations.
But they can’t stop there. The OCC also expects sound compliance risk management programs. That is to say, supporting policies and procedures, strong risk assessment, monitoring and testing, training to impacted personnel. And so, as financial institutions start to look forward and discuss on these opportunities to offer similar products, they need to ensure that they’re supported by the same compliance risk management principles.
Kevin, the last point that I’ll make on this is that the OCC also specifically encourages banks to talk to the OCC if they’re thinking about offering these products, to meet with their examiners or the supervisory office prior to considering and implementing short-term, small-dollar products.
Kevin Donahue: Great rundown. Thanks, Tom. Hey, Steve, what are your thoughts on this, or have you heard anything in the market yet about it?
Steven Stachowicz: Well, I think the interesting thing around short-term, small-dollar lending which is, you know, also sort of lumped into the category of payday lending, has had a lot of negative association with it among the regulators, and in many cases for good reason, right?
There have been notable instances in which you have non-bank players who have offered products that have had very high interest rates and/or have not had necessarily the best disclosures, or you have consumers who fall into these loans and have a harder time exiting them.
There’s been questionable collections of practices. And so there’s been a history of negative events or activities related to this type of lending and if you dialed us back a few years, you would see the OCC and other agencies be somewhat hesitant about banks being engaged in this type of lending. And you also have the CFPB, or the BCFP now, the Bureau of Consumer Financial Protection, also with a new rule around payday loans. But what you’re starting to see a little bit now with the OCC’s action, and this covers loans that are a little bit different than what’s covered by the Bureau’s rule, you’re starting to see the OCC say, “Maybe this lending really could be done well,” with the appropriate risk management controls, with the appropriate considerations around consumer protection. This can be and should be lending that banks – national banks – could be undertaking. It’s not without risks if it’s done wrong, given the type of loan this is and given the type of customer that may engage in this type of lending, but nonetheless, you’re starting to see the OCC say, “You know, maybe banks should be looking into this type of loans.”
And that’s, I think, maybe a shift. There’s a shift as well by the Bureau to reevaluate its payday lending rule. Certainly, the industry has concerns around that. The FDIC has a history of encouraging banks to offer this type of lending product and, certainly, you see in the market all of these events are not probably unrelated. You see in the market as well a number of market place lenders or FinTech, non-bank FinTech type companies getting involved in this type of lending, and profitably so.
So, I think you’re seeing maybe a shift. A little bit of a shift here from the traditional prudential banking regulators and possibly even the Bureau, which remains to be seen, to maybe dial back a little bit on their initial hesitations around the type of lending and we’ll see maybe more of this potentially.
It is notable, obviously, that points at the end, that the OCC has encouraged national banks to consult with the OCC if in fact they’re going to engage in this. So, there’s obviously still some concern that it needs to be done well and done correctly but nonetheless, you’re starting to see a shift in opinions and feelings about this type of lending in the market.
Kevin Donahue: Thanks, Steve. I want to remind our audience now that you can visit protiviti.com/compliance-insights to find our latest issue of Compliance Insight as well as prior issues where we cover these and many other regulatory topics. Tom, I want to ask you next about a move Congress has made to restore provisions of protecting tenants in the the Foreclosure Act. What’s behind this and what prompted this action by Congress? And then, also in there, can you add what steps should banks be taking to comply with this?
Tom Giltrow: Yes certainly, Kevin, and I think that’s a great question. In fact, you know, it’s a bit of a history question in this case. I think, really to answer that, we have to go back to really the origins of the financial crisis and at that time as you’ll recall certainly, millions of residential properties were foreclosed upon. And in many cases, we typically think of that impact to the homeowner directly but so many of those properties were also rented out to tenants, and so tenants would be evicted even after paying a month’s rent for a lease that they’ve engaged in for a given property and face eviction on short notice and in some cases, even homelessness.
And so, the Protecting Tenants at Foreclosure Act, or the PTFA, was enacted back in 2009, shortly after the financial crisis to help to protect tenants at a Federal level from exactly that scenario. To give them adequate notice and the chance to find suitable alternative housing before being evicted. The PTFA that was originally enacted had a sunset provision, that the Act expired at the end of 2014.
And so since then, while there are certain state requirements that do offer similar protections to consumers, tenants have been exposed to the same risk that they were exposed to during the financial crisis – to a much smaller degree certainly, given the lower number of foreclosures these days, but again, Congress has taken steps through restoring this Act to protect consumers at a Federal level and give them those exact provisions. Those protections include giving them adequate notice; if they haven’t entered into a formal lease, they have 90 days before they’re forced to evict a given property; if they have entered into a lease, they have a right to remain in that property until the expiration of the lease. So, all great protections for consumers and really, there’s such a large number of tenants that occupy these properties that it’s really a huge consumer protection measure and I think one that’s been applauded by the industry across the board.
However, it does have impacts to financial institutions that are the owners of these foreclosed properties filing foreclosure. They need to make sure that they are allowing consumers to stay in those properties until the end of their lease or that 90 days. There are certain notice requirements, and these are requirements that financial institutions previously had to comply with, so processes, systems, technology, and tools hopefully are already in place or are readily available to reimplement – to comply with these provisions. But again, it’s a new step that financial institutions are going to have to incorporate into their loss mitigation processes. They need to take steps to update those policies and procedures, train their personnel, update their systems to easily track, flag and provide those notices as required. So, certainly a good move for consumers but not without impacts to financial institutions here, as they consider their loss mitigation strategies.
Kevin Donahue: Yes, thanks, Tom. Let’s wrap up our podcast today with a question regarding the aforementioned BCFP. Steve, the Bureau has amended its “Know before you owe” disclosure rules. This is viewed to be regulatory relief by the industry. How is that so and what does that mean for today’s consumer?
Steven Stachowicz: So, call it TRID 2.0 if you are so inclined. There are certain things about the TRID rules that are being addressed. So these rules, when they were implemented a few years back were pretty substantial changes to The Truth in Lending Act and to the Real Estate Settlement Procedures Act and Reg Z and Reg X to provide no longer the good faith estimate and the HUD-1 disclosures but now the loan estimates and the closing disclosures, and there is a lengthy set of very proscriptive requirements around those disclosures in what they need to contain and when they need to be provided and to whom they need to be provided and how and what changes you can make to the information that’s in those disclosures after they have been provided.
And that piece in particular has caused maybe some of the most consternation amongst the lending industry because, once you have provided a disclosure, there are restrictions on what you can change after it’s been provided. And certain costs that has been estimated cannot change at all after a disclosure has been provided to a consumer.
Others can change within a reasonable range, and some are more fluid, but the whole purpose of this is to prevent consumers from being surprised again at the end of the day when they close on their loan, right? That the disclosures that are being provided along the way are more than just good faith, that they are more rock-solid to enable consumer planning.
But that said – you talk to anybody in the real estate industry from lending to the real estate agents and whatnot – changes are the name of the game in real estate. Everyone thinks things are going to work a certain way, and then there’s a change, right? So, a consumer’s income is not substantiated as originally disclosed, or an appraisal comes in and is valued less than what the consumer might have offered, or the consumer wants to make a change to the loan type, or what have you. There’s any number of reasons why things change during the application process and, historically, not that big of a deal to make those changes on the fly.
But with the TRID rule, there are some technicalities which would take me half an hour to go into but frankly, they are such that there were restrictions or limitations on lenders’ abilities to make changes to previous disclosures in the event that certain disclosures had already been provided, and people referred to it as sort of a black hole because there was almost no way out. If cost changed, the options were pretty minimal. I mean you could delay closing on customers but that’s pretty hard if you’ve got a customer who’s trying to buy a home and has everything in a moving truck.
Or you as the creditor might have to absorb or eat the cost if there was a differential and you couldn’t redisclose. And that’s sort of a rock and a hard place for most lenders. So I think this change, from that perspective, is viewed as a common sense regulatory relief to give creditors and customers, for that matter; borrowers, a little bit more flexibility when those type of changes occur to redisclose as need be and to allow those costs to be passed onto customers when they rightfully should be passed onto those customers.
So, that’s among the changes that are occurring. You’re seeing sort of a common-sense change to TRID that fell out of the implementation of the rule in 2015 and had caused, again, consternation within the lending industry.
Kevin Donahue: Tom and Steve, I want to thank you very much for joining me today to discuss some of the highlights from our July issue of Compliance Insights. I want to remind our audience that you can find further updates and more detailed rundowns of these and other issues at our dedicated website for this newsletter protiviti.com/compliance-insights.