Compliance Update – February 2020

Question
As a Bank, you have an arrangement with an insurance company to offer homeowner’s insurance to borrowers that have received a mortgage. Do you need to provide a privacy opt out notice regarding the insurance company or can the bank get consent?

Answer
Section 1016.15 of Regulation P provides the following information; an opt out notice is not required with regard to obtaining a consumer’s consent. You will also want to look at other considerations which may include:

• Verify with your third-party contract to verify your bank’s expectations of privacy
• Vendors handling of nonpublic information and/or the type of information the insurance company receives
• Be aware of regulatory additional requirements, i.e. RESPA

Reference: Regulation P: 12 CFR 1016.15

Question
Are risk-based pricing and risk based pricing products applicable to fair lending?

Answer
Regulation B does apply to all credit including consumer, commercial both business and agricultural.  Risk based pricing – without clear adjustments for various risk factors, creative underwriting, and no formal application processes often exist in commercial lending departments and present significant risk challenges for effective fair lending monitoring by banks.

Reference: 12 CFR 1002.2(f) and (g); New York Region Fair Lending Banker Call Transcript, July 17, 2013.

One of the nation’s top banking regulators is discussing the risk of leveraged lending with bank boards and management, as questions loom over how vulnerable the economy is concerning risky corporate loans.

In a semiannual report of risk in the banking industry released Monday, January 17th. The Office of the Comptroller of the Currency said it is challenging banks to evaluate the “potential effect on the financial system from originating and distributing weakly underwritten loans to leveraged borrowers.”

Leveraged loans, which are large sums of money lent to corporate borrowers with poor credit ratings, have been cited as a possible risk to the financial system in recent years.

The loans themselves are packaged into collateralized loan obligations that are carved up and bought by institutional investors, raising memories of the subprime consumer loans and mortgage-backed securities that brought the economy to its knees in 2007 and 2008.

The head of the OCC, Joseph Otting, has said in the past that banks should have the right to “do what they want” with leveraged loans, as long as it does not affect their safety and soundness.”

Still, the OCC is advising banks to understand their relationships in the leveraged loan market and the risks that those loans carry.

February 14, 2020: The Federal Financial Institutions Examination Council issued its 2020 Home Mortgage Disclosure Act reporting guide.

The resource includes technical updates and is designed to help financial institutions better understand HMDA requirements, including data collection and reporting.

Access to the Guide