Exam 3

Question 1

What types of credit products are covered under Regulation Z? What types of credit products are excluded?

Answer 1

• Regulation Z applies to loans secured by real property, loans secured by personal property used as a member’s principal dwelling, and private education loans.
• Regulation Z does not apply to loans made for business, commercial, or agricultural purposes. It also does not apply to loans made to non-natural persons.
• In practice, most credit unions provide disclosures for all consumer loans.

Question 2

Regulation Z covers both open-end and closed-end credit. What are the definitions of each?

Answer 2

a. Open-ended credit is a credit plan that meets the following criteria:
i. The credit union reasonably contemplates repeated transactions;
ii. The credit union imposes a finance charge on the outstanding balance; and
iii. The amount of available credit is replenished as the outstanding balance is repaid.
b. Closed-ended credit is any other credit plan that doesn’t meet the above criteria.

Question 3

What is a “dwelling?

Answer 3

a. Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.
b. The staff commentary clarified that the determining factor in determining whether something is a dwelling or not is whether or not the property is used as a residence:
i. A dwelling need not be the consumer’s principal residence to fit the definition, and thus a vacation home or second home could be a dwelling.
ii. Mobile homes, boats, and trailers are dwellings if they are in fact used as residences. RVs and campers are not considered dwellings.

Question 4

Are there differences in the account opening disclosures for HELOCs and other open-end credit? When must the disclosures be provided?

Answer 4

a. Regulation Z includes special disclosure requirements for HELOCs due to their nature as home-secured open-ended products.
i. Account Opening Disclosures – Must be provided to the member prior to the first transaction being conducted. Many of these are similar to the disclosures at application.
ii. These disclosures differ from the account opening disclosures for other open-end credit disclosures such as personal lines of credit or credit cards.

Question 5

What disclosures are required when advertising a promotional APR?

Answer 5

a. If the promotional rate is related to the opening of a new account, the credit union must refer to the rate as “introductory” or “intro” and this reference must be included immediately next to each listing of the promotional rate. Additionally, for any promotional rate advertisement (including intro rates), the following disclosure must be stated in a prominent location in close proximity to the first listing of the promo rate:
i. When the promo rate will end; and
ii. The APR that will apply at the end of the promotional period.
b. If the APR at the end of the period will depend on a member’s creditworthiness, the advertisement must disclose the specific rates or the range of rates that might apply.
c. Disclosures included in a footnote are NOT considered “in a prominent location.”

Question 6

What are the change-in-terms requirements for open-end credit? Are the rules the same for all open-end products? If not, what are the differences?

Answer 6

a. HELOCs:
i. Credit unions cannot unilaterally change the terms of a HELOC contract. While there are some exceptions, it is important to note that HELOC contracts are very difficult to change.
ii. Must provide a change in terms notice at least 15 days prior to the effective date of the change
iii. When the credit union prohibits additional advances, or reduces the credit limit on an existing HELOC, change in terms disclosure must be sent within three business days of the action being taken.
b. Not Home-Secured Open-Ended Credit:
i. Must provide 45 day advanced notice of a change in terms
ii. Must be provided whenever the credit union changes a term required to be in the account opening disclosures – such as late fees or APR
iii. Notice can be included on the member’s period statement or sent in a separate mailing.
iv. Must be provided in a tabular format and follow the specific content requirements
c. SPECIFIC CHANGE N TERMS NOTICE INFO:
i. APR Increases – If the credit union increases the APR on a credit card account, it must disclose on which balances the new higher APR will apply, and which balances the current APR will continue to apply. Also, the credit union must disclose a statement of up to four principal reasons for the APR increase (listed in order of importance)
ii. Right to Reject – This notice must include a statement about the member’s right to reject, the process for a member to reject the changes, and, if applicable, the member’s inability to make further transactions on the account if they reject the changes.
iii. Delinquency – If the terms on the account are being changed because the member was more than 60 days late, the credit union must disclose the member’s ability to cure the increased APR or fee by making on-time payments for the first six months after the APR is increased.

Question 7

What are the periodic statement requirements for the different open-end credit products? What are the timing requirements for providing each statement?

Answer 7

a. All Open-Ended Credit:
i. Fees and interest charges must be grouped separately from other transactions
ii. Fees and interest must be totaled for the period (i.e., monthly) and YTD, and disclosed in a tabular format
iii. When a grace period applies, a statement must be sent at least 21 days prior to the expiration of the period
iv. When no grace period applies, a statement must be sent at least 14 days prior to the member’s due date
v. For credit card accounts, a statement must be mailed or delivered at least 21 days prior to the member’s due date, and must disclose additional information including a late payment warning, a minimum payment warning, and a repayment disclosure example
b. HELOCS:
i. Credit unions may follow the specific periodic statement requirements for HELOCs or the periodic statement requirements for other open-ended credit
c. Not Home-Secured Open-Ended Credit:
i. Periodic statements are required to be sent each billing cycle

Question 8

When are additional disclosures required for open-end credit advertising? Are there any exceptions?

Answer 8

a. When a “trigger term” (“APR,” “transaction fees,” “annual fee,” “certain other charges”) is mentioned in an advertisement of open-ended credit, additional disclosure requirements apply:
i. Any minimum, fixed, transaction, activity, or similar charge that is a finance charge that could be imposed;
ii. The APR and if the plan provides for a variable APR, that fact shall be disclosed; and
iii. Any membership or participation fee that could be imposed
b. For television and radio advertisements, these disclosure do not have to be included. Credit unions can provide the APR (and a statement if the account has a variable rate) as well as a toll-free phone number for members to call for the additional disclosure information.

Question 9

What are the special rules applicable to HELOCs?

Answer 9

a. Trigger terms also apply for HELOCs (references to payment terms, draw period, repayment period, length of the plan, how minimum payments are determined, the timing of payments; also phrases like “we waive closing costs” or “no points” are considered trigger terms) and require additional disclosures if mentioned:
i. Any minimum, fixed, transaction, activity, or similar charge that is a finance charge that could be imposed;
ii. Any membership or participation fee that could be imposed;
iii. Any loan fee that is a percentage of the credit limit under the plan and any estimate of any other fees imposed for opening the plan, stated as a single dollar amount or a reasonable range;
iv. The APR and if the plan provides for a variable APR, that fact shall be disclosed; and
v. The maximum APR that may be imposed in a variable-rate plan
b. There are also special HELOC advertising requirements If the credit union’s advertisement includes any of the following:
i. Discount or Premium Initial Rates – Where an advertised initial APR is not based on the same index and margin used for later rate adjustments under the plan
ii. Balloon Payments – Where the advertisement states any minimum payments and a balloon payment may result if a member makes only minimum payments
iii. Tax Implications – Where the advertisement mentions the potential availability of a tax deduction for interest expenses under a HELOC plan
iv. Promotional Rates and Payments – Where the advertisement includes a promotional APR or a promotional payment amount

Question 9

Do all open-end credit products have application disclosure requirements? If not, which ones do?

Answer 9

• Yes, Regulation Z requires account opening disclosures for open-ended credit prior to the first transaction occurring.

Question 10

What are the disclosure requirements for private education loans? When can a member cancel the loan?

Answer 10

• Application Disclosures – Need to be included on or with the private education loan application
• Approval Disclosures – Need to be given to the member at the time approval is communicated to the member
• Final Disclosures – Need to be given when a member accepts the loan (member must be given up to 30 days after the loan has been approved to accept the loan). After final disclosures are provided, the member has three business days to cancel the loan.

Question 10

What are the special advertising rules applicable to HELOCs?

Answer 10

There are also special HELOC advertising requirements If the credit union’s advertisement includes any of the following:
i. Discount or Premium Initial Rates – Where an advertised initial APR is not based on the same index and margin used for later rate adjustments under the plan
ii. Balloon Payments – Where the advertisement states any minimum payments and a balloon payment may result if a member makes only minimum payments
iii. Tax Implications – Where the advertisement mentions the potential availability of a tax deduction for interest expenses under a HELOC plan
iv. Promotional Rates and Payments – Where the advertisement includes a promotional APR or a promotional payment amount

Question 11

What are the post consummation disclosure requirements for modifications and refinances of closed-end credit?

Answer 11

• Refinances – The credit union must provide new closed-ended disclosures to the member
• Modifications – The credit union is not required to provide new closed-ended disclosures to the member

Question 12

What are the exceptions that allow a credit union to increase the APR and fees on a credit card account?

Answer 12

a. Advance Notice Exception – A credit union uses the 45-day change in terms process
i. 45 day notice prior to the effective date of the change
ii. The increased APR may not be applied to existing balance or to transactions conducted within 14 days of the notice (i.e., only on future transactions)
iii. Cannot be used in the first year after a member open an account
b. Variable Rate Exception – If there is an increase in the underlying variable rate index, a credit union can increase a member’s APR
i. This exception can only be used if the underlying index is outside of the credit union’s control
1. Control is exercised if the variable-rate credit card contains a floor rate
c. Temporary Rate Exception – If the credit union has properly disclosed a temporary rate applicable to the credit card account, a credit union can increase a member’s APR
i. Temporary rate period must be at least six months long
ii. Can be either an introductory APR at account opening or a temporary rate applicable to an existing account
d. Other Exceptions
i. In certain delinquency situations
ii. At the end of a workout or temporary hardship period (whether completed successfully or not)
1. At the end of a workout, the credit union may only restore the APR to the prior contractual level, but no higher
iii. When a member leaves military service (SCRA requires credit unions to reduce the interest rate on loans entered into prior to military service – including credit card accounts)
1. Credit unions may increase the APR back to the contractual rate after giving 45 day advanced notice of the change

Question 12

What are the trigger terms for closed-end credit advertising? What are the disclosure requirements when stating a trigger term?

Answer 12

• Trigger Terms:
  i. The amount or percentage of any down payment
  ii. The number of payments or period of repayment
  iii. The amount of any payment
  iv. The amount of any finance charges
• When stating a trigger term, the following disclosure are required to be included in the advertisement:
  i. The amount or percentage of the down payment
  ii. The terms of repayment, which reflect the repayment obligations over the full term of the loan, including any balloon payment
  iii. The annual percentage rate (APR), and, if applicable, if the rate may be increased after consummation, that fact

Question 13

When must a credit union reevaluate a credit card APR that has been increased? When does the obligation to reevaluate terminate?

Answer 13

• The credit union is required to reevaluate an increased APR every six months
• The reevaluation obligation terminates when the rate has been reduced to the previous level or lower.

Question 14

Describe the de minimis exception to the rules for submitting credit card agreements to the CFPB. When is the measuring date?

Answer 14

The de minimis exception applies to credit unions that have fewer than 10,000 open credit card accounts as of the last business day of the calendar quarter.

Question 15

What are the fee limitations during the first year after a credit card account is opened? Which exception to the limitation on increasing the APR cannot be used during the first year?

Answer 15

a. During the first year a credit card is open, credit unions may not charge fees in excess of 25% of the member’s credit limit.
i. An increase in the credit limit in the first year does not allow the credit union to charge additional fees.
ii. If a credit union decreases the credit limit during the first year, it is only allowed to charge fees up to 25% of the lowered credit limit and must refund any fees already charged that exceed this amount.
b. The advanced notice exception cannot be used to increase a member’s APR in the first year after an account’s opening.

Question 15

What are the limitations on penalty fees?

Answer 15

a. For 2023, safe harbor levels allow the credit union to charge up to $30 for a penalty fee for the first violation and up to $41 for a subsequent violation of the same type within the next six month period.
i. The credit union CAN use lower thresholds
b. Reasonable and Proportional Fees – This rule trumps the safe harbor levels mentioned above.
i. The credit union is prevented from charging a fee in excess of the amount of the transaction that resulted in a violation (i.e., a $29 fee cannot be charged if the transaction that caused the violation was for $15)
ii. The credit union may not charge fees for transactions without a cost involved (i.e., fees for declining a transaction, inactivity fees, or account closure fees)
iii. The credit union may not charge more than one penalty fee based on a single event or transaction.

Question 16

When must a credit union consider a member’s ability to pay? How is the analysis different for members under 21?

Answer 16

• A member’s ability to pay must be considered by the credit union prior to opening a new credit card, or increasing a credit limit on an existing account.
• Members under the age of 21 must demonstrate an ability to pay based on their own independent income, or have a joint member or guarantor who is at least 21.
  i. If the member is under 21 with a joint owner or guarantor, the joint owner or guarantor must agree to any future credit limit increases (in writing) before they are granted.

Question 17

What loans are subject to RESPA?

Answer 17

• Federally related mortgage loans
  i. To be federally related, the loan must have a relationship with the federal government
  1. Loan is made by a lender that is regulated or insured by an agency of the federal government, or under a federal government agency program
  2. Loan is to be sold to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or the Government National Mortgage Association (Ginnie Mae)

Question 18

Which loans are generally subject to RESPA, but not the disclosure requirements?

Answer 18

Loans subject to Regulation Z

Question 19

When can Regulation Z application disclosures be used instead of the GFE?

Answer 19

For open-ended credit

Question 20

How is “application” defined? How does having a completed application impact the delivery requirements for the Loan Estimate?

Answer 20

• Application is defined as the submission of a consumer’s financial information for purposes of obtaining the extension of credit. The following six pieces of info must be obtained:
  i. The consumer’s name
  ii. The consumer’s income
  iii. The consumer’s SSN to obtain a credit report
  iv. The property address
  v. An estimate of the value of the property
  vi. The mortgage loan amount sought
• The requirement to provide consumers with a Loan Estimate is triggered by the receipt of an application as defined above.

Question 20

What is RESPA’s kickbacks rule?

Answer 20

• RESPA prohibits parties giving one another “kickbacks” in connection with a mortgage loan
  i. Giving or receiving a fee or a thing of value in exchange for the referral of settlement business may be a kickback under RESPA
  1. This could apply to any person other than the consumer involved in the settlement, including a title company, a lender, a real estate agent, or an attorney
  2. A “thing of value” is defined broadly and could include payments, commissions, fees, gifts, or special privileges.

Question 21

“Business day” is defined in two different ways. What are the two definitions?

Answer 21

• A day on which the credit union’s offices are open to the public for carrying on substantially all of its business functions
• All calendar days except Sunday and legal public holidays

Question 22

What are the timing requirements for delivering the Loan Estimate? When does the credit union need to send it? When is the disclosure considered received?

Answer 22

• Loan Estimates must be delivered to the consumer or placed in the mail no later than the third business day after the credit union receives the information
• If not provided to the consumer in person, it is considered received three business days after it is delivered or placed in the mail.
• Additionally the Loan Estimate must be provided at least seven days prior to consummation, unless the consumer waives the waiting period

Question 23

What are the timing requirements for delivering the Closing Disclosure? When does the member need to receive the disclosure?

Answer 23

• Closing Disclosures must be received by the consumer no later than three business days before the consummation of the loan
• If delivered to the consumer in person, it is considered received the day it is given
• If mailed or delivered electronically, it is considered received three business days after it was delivered or placed in the mail
• However, if the credit union has evidence that the consumer has received the Closing Disclosure earlier than three business days after it is mailed or delivered, it may rely on that evidence and consider it to be received on that date

Question 23

What are the restrictions on activities that a credit union may not take before the borrower receives the Loan Estimate and indicates an intent to proceed with the loan?

Answer 23

• May not impose fees on the consumer
• May not provide written estimates of terms or costs specific to consumer unless a written statement that the terms and costs may change is also provided
• May not require submission of documents verifying info in the consumer’s application

Question 24

What does it mean to provide the disclosures in the Loan Estimate in good faith?

Answer 24

• Whether a loan estimate was provided in good faith is determined by calculating the difference between the estimated charges in the Loan Estimate and the actual charges paid of imposed on the consumer in the Closing Disclosure.
  i. If the charge paid by or imposed on the consumer exceeds the amount originally disclosed on the Loan Estimate, regardless of whether the difference was a result of a technical error, miscalculation or underestimation of a charge, the Loan Estimate is considered to be made not in good faith

Question 25

What are the different tolerance levels for mortgage related services? Which costs does each level apply to?

Answer 25

• No Tolerance Limitation – The credit union is permitted to charge consumers more than the amount disclosed on the Loan Estimate without any tolerance or limitation for the following charges:
  i. Prepaid interest
  ii. Property insurance premiums
  iii. Amounts placed into an escrow, impound, reserve, or similar account
  iv. If chosen by the member, fees paid to third party service providers that are not included in the credit union’s written list of service providers
  v. If chosen by the member, fees paid to third party service providers for services that were not required by the credit union
• 10% Cumulative Tolerance – The credit union may charge the consumer more than the amount disclosed on the Loan Estimate for particular charges as long as the total sum of the charges does not exceed the sum of those same charges disclosed on the Loan Estimate by more than 10%. The following charges are subject to the 10% cumulative tolerance:
  i. Recording fees
  ii. If the credit union permitted the consumer to shop, fees paid to unaffiliated third party service providers on the credit union’s written list
• Zero Tolerance – The credit union is not permitted to charge the consumers more than the amount disclosed on the Loan Estimate under any circumstances other than changed circumstances designated by the Regulation. The zero tolerance charges include:
  i. Fees paid to the credit union
  ii. Fees paid to a mortgage lender
  iii. Fees paid to an affiliate of the credit union or mortgage lender
  iv. Fees paid to an unaffiliated third party I the credit union did not permit the consumer to shop for a third part service provider for a settlement service
  v. Transfer taxes
  vi. Lender credits

Question 26

What tolerance applies if the member is permitted to shop for a mortgage related service? What tolerance applies to a mortgage related service if the member is not permitted to shop?

Answer 26

• Permitted to shop = No Tolerance Limit
• Not permitted to shop = Zero Tolerance Limit

Question 26

If the credit union allows a member to shop for a particular mortgage related service, what impact does that have on the tolerance that applies? What tolerance applies if the member can shop and chooses a provider that is not on the written list of service providers?

Answer 26

If a member is allowed to shop and chooses a provider that is not on the written list of service providers, the credit union is no longer limited in the amount that may be charged for the service.

Question 27

In what kinds of circumstances may a credit union issue a revised Loan Estimate and use those costs instead of the original Loan Estimate to determine whether costs charged to the borrower are in good faith?

Answer 27

• The credit union can only use a revised estimate of a charge in specific situations, such as when the revision is due to a changed circumstance or a borrower-requested change. Technical errors, miscalculations, or underestimated charges alone are NOT permissible reasons for issuing revised disclosures.
• Using a revised disclosure in the good faith calculation is not necessary where the amounts decrease, or if the amounts increase but do not exceed the applicable tolerance
  i. In these circumstances, the original Loan Estimate is still deemed to be in good faith

Question 28

What types of loans are covered under the ATR-QM rule? Why is a QM significant?

Answer 28

• Closed-ended consumer transactions secured by a member’s dwelling
  i. Home purchases
  ii. Refinancings
  iii. Closed-ended home equity loans
  iv. Loans secured by a first lien or subordinate lien on a dwelling
  v. Loans for vacation homes
  vi. Loans secured by a one-to-four unit residence, condominium, cooperative, mobile home, or manufactured home
• A QM is significant because compliance with the requirements related to a consumer’s ability to pay can be assumed if the mortgage meets the definition of a QM (qualified mortgage).

Question 29

What is a reasonable source to verify a consumer’s ability to repay?

Answer 29

• In general, a credit union must use reasonably reliable 3rd-party records to verify any information it uses to evaluate a member’s employment history, credit history, income, or assets, and must retain those records for 3 years
  i. For income/assets, examples include copies of tax returns, W-2s or similar forms, payroll statements, financial institution records, records from the consumer’s employer, records from a Federal/State/local government agency stating the consumer’s income from benefits or entitlements, receipts from a consumer’s use of check cashing services, and receipts from the consumer’s use of funds transfer services

Question 29

What factors must the credit union consider under the ATR rule when underwriting mortgage loans?

Answer 29

• Current or reasonably expected income or assets on which the consumer will rely to repay the loan (not including the value of the property securing the loan)
• Current employment status (if the credit union relies on employment income when assessing the consumer’s ability to repay)
• The monthly payment on the covered transaction
• The monthly payment on any simultaneous loan secured by the same property
• The monthly payment for mortgage-related obligations (including any monthly payments for property taxes and insurance that the credit union requires the consumer to buy and other costs related to the property at issue, such as homeowners association fees or ground rent)
• Current debt obligations, alimony, and child support
• The monthly debt-to-income ratio or residual income
• Credit history

Question 30

What are the types of qualified mortgages? What features make each QM different?

Answer 30

• General Definition QMs – Have the following characteristics:
  i. Price Based Limitations – Beginning July 1, 2021, to meet the general QM definition, a loan must not exceed certain pricing limitations. For most first lien covered loans, the APR cannot exceed the average prime offer rate (APOR) by more than 2.25%
  ii. Loan Term - May not exceed 30 years
  iii. Points and Fees – Total points and fees charged may not exceed the threshold set for the size of the loan under the rule. This threshold differs based on loan amount. Updated annually in the commentary
  iv. Underwriting – Loan must be underwritten taking into account the monthly payment for mortgage-related obligations using:
  1. The maximum interest rate that may apply during the first five years after the date of the first payment
  2. Periodic payment of principal and interest that will repay either the principal balance over the remaining term of the loan as of the date the interest adjust to the maximum interest rate, or the loan amount over the loan term (i.e., underwritten on a fully amortizing schedule)
  v. Income and Debt – Credit union must consider the borrower’s debt-to-income ratio
  vi. There are certain risky features that can disqualify a mortgage from being a general definition QM:
  1. Negative Amortization – This feature may allow the principal balance to increase during the life of the loan
  2. Interest-Only Payments – If the loan allows the payment of principal to be deferred, it is not a general definition QM
  3. Balloon Payments – If a balloon payment is due at the end of the loan, it is not a general definition QM, though it may be a balloon payment QM
• Temporary Definition QMs - Does not refer to temporary loans, rather that the QM definition itself is temporary. This was designed as a placeholder until various federal agencies establish their own definitions of QMs.
• Small Creditor QMs – Must be made by a small creditor, with relaxed underwriting requirements:
  vii. The credit union must consider and verify the consumer’s income including considering the consumer’s debt-to-income ratio
  viii. The loan must also be underwritten based on a fully amortizing schedule, and the maximum interest rate that may apply during the first five years of the loan
  ix. A credit union is a “small creditor” if:
  1. The total assets of the credit union and its affiliates were less than $2.230 billion (adjusted for inflation annually by the CFPB) and the end of the previous calendar year
  2. Together with all affiliates, it originated and sold, transferred, or assigned 2,000 or fewer first-lien mortgages that are subject to the ability-to-repay rule during the previous calendar year. Loans that the credit union or its affiliate originate and keep in its portfolio do not count toward the 2,000 loan threshold
• Balloon Payment QMs – Has the following characteristics:
  x. Must have a minimum term of five years and a maximum term of 30 years
  xi. Must have a fully fixed interest rate and periodic payments (other than the balloon payment) that would fully amortize the loan over 30 years or less
  xii. It must not exceed the points and fees threshold in the general definition
  xiii. It also MAY NOT have the three risky features
• Seasoned QMs – A residential mortgage loan is a seasoned QM if the loan meets certain product restrictions, does not exceed a points-and-fees limit, and satisfies underwriting requirements.
  xiv. Underwriting requirements include:
  1. The loan is secured by a first lien
  2. The loan is fixed-rate
  3. The loan payments are regular and substantially equal
  4. There is no negative amortization
  5. There is no balloon payment
  6. The loan’s maturity does not exceed 30 years
  7. The loan is not a high-cost loan
• Portfolio Loan QMs – This applies only to depository institutions with under $10 billion in assets. To qualify as a portfolio loan QM, it MAY NOT have the following features and characteristics:
  xv. Negative amortization
  xvi. Interest only
  xvii. Points and fees in excess of the limits for QMs in the General Definition
  xviii. The following restrictions also apply:
  1. The loan must be originated and held in portfolio by the insured credit union
  2. The credit union must consider and document the consumer’s debt, income, and assets but no method of documentation is required
  3. Generally, the loan may not contain a prepayment penalty other than a few limited circumstances described in TILA

Question 31

What are the record retention requirements for the ATR-QM rule, meaning how long do records demonstrating compliance need to be kept?

Answer 31

• The rule does not specify which records must be kept. Instead, it provides examples of records that may be kept and what would be deemed sufficient evidence for purposes of recordkeeping. Credit unions must keep records related to the requirements for loan originator compensation for three years after the date of payment or receipt of compensation. Also, credit unions must retain records for three years after each receipt or payment, even if multiple compensation payments relate to a single transaction.

Question 32

What loan terms can disqualify a mortgage from being a general definition QM?

Answer 32

• There are certain risky features that can disqualify a mortgage from being a general definition QM:
  i. Negative Amortization – This feature may allow the principal balance to increase during the life of the loan
  ii. Interest-Only Payments – If the loan allows the payment of principal to be deferred, it is not a general definition QM
  iii. Balloon Payments – If a balloon payment is due at the end of the loan, it is not a general definition QM, though it may be a balloon payment QM

Question 33

What kinds of mortgages does the loan originator compensation rule apply to?

Answer 33

The rule applies to closed-ended mortgage transaction, excluding time shares

Question 34

In what ways does Regulation Z limit a loan originator’s compensation? What is permitted and what is prohibited?

Answer 34

• Originator compensation is prohibited from being based on the terms of the transaction or a proxy for a transaction term
• Permits certain methods of compensating loan originators using bonuses, retirement plans, and other compensation plans that are based on mortgage-related profits
• Prohibits loan originators in a transaction from being compensated by both the consumer and another person, such as a credit union
• Loan originator compensation is prohibited from being reduced to offset the cost of a change in transaction terms, often called a “pricing concession.”

Question 34

What disclosures are required under the loan originator rule and on what documents?

Answer 34

• The SAFE Act requires mortgage loan originators to register with the NMLSR and obtain an NMLSR unique identifier. The NMLSR ID facilitates electronic tracking and uniform identification of loan originators and provides public access to the employment history of, and the publicly adjudicated disciplinary and enforcement actions against loan originators.
  i. Credit unions are required to disclose the name and NMLSR ID of both the individual loan originator and the loan originator organization on the credit application, the note, or loan contract, and security instrument

Question 35

Which types of loans are covered under the MLA?

Answer 35

• Loans considered “consumer credit” are covered by the MLA. That is defined as credit which is offered or extended to a covered borrower primarily for personal, family, or household purposes and is subject to a finance charge or payable by a written agreement in more than four installments.
• There are several exceptions to this rule:
  i. Residential mortgages, meaning “any credit transaction secured by an interest in a dwelling” including loans to finance the purchase or initial construction of a dwelling, a refinance, a HELOC, or reverse mortgage
  ii. Transactions that are “expressly intended” to finance the purchase of a motor vehicle, or personal property, where the credit is secured by the vehicle or property being purchased
  iii. Loans that are exempt for the purposes of Regulation Z, such as business purpose loans
  iv. Any loan where the credit union determines the member is not a “covered borrower”

Question 36

What are the MLA disclosure requirements? Specifically, which MLA disclosures must be written and which disclosures must be given orally?

Answer 36

• MLA disclosures must be provided to the covered borrower for new consumer credit accounts, as well as any refinancing that would require new disclosures under Regulation Z
  i. Written Disclosures
  1. MAPR Disclosure
  a. Doesn’t need to be a numeric disclosure
  2. A clear description of the payment obligation
  a. For open-ended credit, this means an account opening disclosure
  b. For closed-ended credit, this means a payment schedule
  3. All disclosures required be Regulation Z
  ii. Oral Disclosures
  1. MAPR Disclosure
  2. A clear description of the payment obligations

Question 36

What is a covered borrower under the MLA? Is there a difference between who can be a covered borrower under the MLA and which servicemembers receive protection under the SCRA?

Answer 36

• A covered borrower is a covered member or a dependent of a covered member AND is a covered member or dependent at the time the “become obligated” on or establishes an account for a covered loan
  i. A “covered member” is a member of the armed forces serving on active duty, or active Guard or Reserve duty
  ii. A dependent includes the servicemember’s spouse, children under 21 (23 if students), children incapable of self-support, and parents/in-laws if they reside with the servicemember and rely on them for at least half their support
• MLA applies to debts taken on while the servicemember is in the military, while SCRA applies to debts the servicemember had prior to military service

Question 36

Which charges and fees are included in the MAPR? How is the MAPR disclosed?

Answer 36

• The MAPR includes:
  i. Any credit insurance premium or fee, including charges for single and premium credit insurance
  ii. Any fee for a debt cancellation contract or any fee for a debt suspension agreement
  iii. Any fee for a “credit-related ancillary product” sold in connection with the loan
  iv. Finance charges
  v. Application fees, other than one fee charged in a rolling 12-month period for “short-term small amount loan” offered by a federal credit union or insured depository institution
  vi. Certain participation fees
• Creditors are required to provide three disclosures to covered borrowers regarding the MAPR:
  i. A statement of the MAPR applicable to the consumer credit, which can be satisfied through a model disclosure or by describing the charges that may be imposed and included in the MAPR; it is not required to provide the calculated numerical MAPR or to describe the total dollar amount of charges in the MAPR
  ii. Any disclosure required by Regulation Z, provided in accordance with the provisions of Regulation Z that apply to the particular disclosure
  iii. A “clear description” of the member’s payment obligation, which may be made using a payment schedule for close-ended credit or account opening disclosures for open-ended credit
• Written disclosures must be provided in a form that the member can keep, but oral disclosures can be provided either in person or via a toll-free phone number
  i. When using a toll-free phone number, the credit union must include the number on either the application or along with the written MLA disclosures

Question 37

What is the SCRA’s interest rate cap? When does the credit union have to apply the cap? Are late fees included in the calculation of the interest rate cap? Can the credit union collect this foregone interest at a later time? Are there potential differences in treatment between open-end and closed-end credit?

Answer 37

• SCRA’s interest rate cap is 6%.
• The cap must be applied by the credit union when the member enters military service (i.e., active duty status, which means full-time duty in military service, including full-time training duty, aka “boot camp” and annual training duty)
• The credit union may not collect any foregone interest at any time
• For most closed-ended credit accounts, the 6% cap only extends for the period of the member’s military service. Mortgages receive special protection, and extend the interest cap for one year after the end of military service
• For open-ended credit, generally, an existing credit card balance would receive the 6% cap once a member entered active duty; however, future purchases on the credit card would not be covered because the transactions would occur after military service begins

Question 37

How can a credit union determine someone’s MLA covered borrower status in a legally conclusive way to benefit from the rule’s safe harbor?

Answer 37

• MLA Database – Two options for this method:
  i. Single record check
  ii. Large batch checks (up to 50 queries per day per financial institution, with 250,000 checks per query, with a 24 hour turnaround)
• Consumer Reports – DMDC works to provide accurate data so that a member’s credit report would indicate whether he or she is a covered borrower
• The use of either of these two methods is not mandatory, but they provide a safeharbor meaning that if the credit union uses one of them and the result is the person is not an MLA covered borrower, there’s protection for not having followed the MLA.

Question 38

How does the SCRA interest rate cap apply for credit card accounts?

Answer 38

An existing credit card balance would receive the 6% cap once a member entered active duty; however, future purchases on the credit card would not be covered because the transactions would occur after military service begins

Question 39

What are the SCRA’s limitations on repossessing vehicles and mortgage foreclosures?

Answer 39

An automobile cannot be repossessed without a court order. The same is true for foreclosures and evictions.

Question 40

Review the nondiscrimination in real estate advertising requirements. What are the disclosure requirements for various types of advertisements: print, oral/radio, and video (TV, YouTube, etc.)?

Answer 40

• Print – Credit unions can meet the requirements by including the Equal Housing Logo with either the words “Equal Housing Lender” or “Equal Housing Opportunity”
• Oral/Radio – Credit unions can use either statement” “Equal Housing Lender” or “Equal Opportunity Lender”
• Video – The credit union can follow either the rules for the printed/online ads or the rules for oral ads. However, both are not required for video ads

Question 41

Overt Discrimination

Answer 41

This is established by looking at the lender’s statements and policies for explicit actions that discriminate against a protected class. For example, if a credit union offered credit cards where the credit limit was determined solely by the gender of the applicant, I would be evidence of overt discrimination.

Question 41

During which part of the lending process must credit unions treat all applicants in the same manner?

Answer 41

The information and assistance an applicant receives from the credit union needs to be uniform to prevent fair lending issues. When offering exceptions, credit unions need to be sure to treat all applicants in the same manner.

Question 42

Comparative Evidence of Disparate Treatment

Answer 42

This is established when a credit union treats applicants differently. For example, a protected class could be discriminated against if the members of that class receive less assistance than other applicants, or are not offered the same alternatives or potential for exceptions that are provided to other applicants.

Question 42

Evidence of Disparate Impact

Answer 42

This occurs when a neutral policy results in members of a protected class not obtaining the same level of service, access to information, or credit as other members. An example of this type of discrimination would be a loan policy that included a minimum loan amount for home purchase loans. The credit union might have included a minimum for legitimate business reasons (such as to sufficiently recoup their costs), but the policy could nevertheless prevent certain applicants from obtaining a loan at the credit union because their property value falls below the minimum loan amount.

Question 43

What is a “prohibited basis?” Do protected classes differ under different laws?

Answer 43

• A prohibited base is a characteristic by which a member may not be discriminated against:
  i. Race
  ii. Religion
  iii. National Origin
  iv. Sex
  v. Age
  vi. Marital Status
  vii. Familial Status
  viii. Handicap
  ix. Receipt of Public Assistance Income
  x. Prior Assertion of any Right Under the Consumer Credit Protection Act

Question 44

What types of actions are considered adverse actions under Regulation B? What actions are not adverse?

Answer 44

• Adverse Action has several meanings under Regulation B:
  i. A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a difference amount or on other terms) and the applicant uses or expressly accepts the credit offered
  ii. A refusal by the member to accept a counteroffer proposed by the credit union (or the member does not respond to the counteroffer)
  iii. A termination of an account or an unfavorable change in terms of an account that does not affect all or substantially all of a class of the creditor’s accounts
  iv. A refusal to increase the amount of credit available to an applicant who has made application for an increase
• Actions that are NOT adverse include:
  i. A change in terms of an account expressly agreed to by an applicant
  ii. Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account
  iii. A refusal or failure to authorize an account transaction at point of sale or loan, except when the refusal is a termination or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts, or when the refusal is a denial of an application for an increase in the amount of credit available under the account
  iv. A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested
  v. A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested

Question 45

What are a credit union’s options for responding to an incomplete application?

Answer 45

• The credit union could respond within 30 days after taking adverse action on an incomplete application
• The credit union could send the member a “Notice of Incompleteness” informing them of the required information and the time period for the member to respond
• The credit union could inform the member of the required information orally (i.e., in person or over the phone). If the member does not respond, the credit union would need to send an adverse action notice.

Question 46

What is the timeframe for sending an adverse action notice? If the credit union makes a counteroffer, what options does it have for providing an adverse action notice?

Answer 46

• An adverse action notice must be sent within 30 days after the adverse action on an existing account
• If the credit union provides the member with a counteroffer, section 1002.9(a) requires the credit union to notify the member of its decision within 90 days after the counteroffer date if the member has not expressly accepted the counteroffer. The credit union does not have to keep the counteroffer open for a set period of time and can adjust the acceptance period of the counteroffer. If a member does NAFCU NOTE Check out this NAFCU Compliance Blog post for further analysis on when an inquiry becomes an application under a credit union’s prequalification or preapproval program. NAFCU Credit Union Compliance Roadmap 341 Chapter 3 — Lending Section 11 — Fair Lending and Reg B not accept a credit union’s counteroffer, the credit union would need to send an adverse action notice if it did not include one with the counteroffer notice. If a member expressly withdraws the application, the credit union is not required to complete the decision process and is not required to send a notification to the member.

Question 47

How do the adverse action and risk-based pricing rules interact with the Fair Credit Reporting Act’s requirements?

Answer 47

• Credit unions are required to send risk-based pricing notices when granting credit to a member on terms that are less favorable than the terms granted to other members (i.e., a higher annual percentage rate).
  i. One of the exceptions to the risk-based pricing rules occurs when the credit union sends the member an adverse action notice.
  1. This makes sense as the adverse action notice is sent when the credit union denies credit, whereas the risk-based pricing notice is required when the credit union grants credit on less favorable terms

Question 48

Credit unions must have a “permissible purpose” to obtain a consumer report. What are the permissible purposes?

Answer 48

• In accordance with the written instructions of the consumer
• To a person, including a credit union, that the consumer reporting agency has reason to believe intends to use the report for any of the following reasons:
  i. In connection with a credit transaction involving the consumer (including extending, reviewing, and collecting credit)
  ii. For employment purposes
  iii. In connection with the underwriting of insurance involving the consumer
  iv. Is a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with an existing credit obligation
  v. Otherwise has a legitimate business need for the information
  vi. In connection with a business transaction that the consumer initiates
  vii. To review an account to determine whether the consumer continues to meet the terms of the account

Question 49

What must a credit union do in order to obtain and use a prescreened list? Under what circumstances may a credit union refuse to grant credit to someone on the list?

Answer 49

• In order to obtain and use these lists, credit unions must make a “firm offer of credit or insurance” to each person on the list
• A credit union is not required to grant credit if the credit union established a requirement for collateral before obtaining the list, the collateral requirement is disclosed in the offer, and the member cannot furnish the required collateral.

Question 50

What must a credit union do when it receives a direct dispute from a member?

Answer 50

• The credit union must:
  i. Conduct a reasonable investigation with regard to the disputed information
  ii. Review all relevant information provided by the member with the dispute
  iii. Complete the investigation of the dispute and report the results of the investigation to the member within 30 days, with a possible 15 day extension
  iv. If the investigation finds that the information reported was inaccurate, promptly notify each consumer reporting agency to which the credit union provided the inaccurate information of investigation findings, and provide to the consumer reporting agency and correction to that information that is necessary to make the disputed information accurate

Question 51

When is a risk-based pricing notice required and how is it different from an adverse action notice? What must be included in the risk-based pricing notice? Are there any exceptions to the risk-based pricing notice requirement?

Answer 51

a. Credit unions are required to send risk-based pricing notices when granting credit to a member on terms that are “materially less favorable” than the terms granted to other members (i.e., a higher annual percentage rate).
i. The notice must also disclose the following:
1. A statement advising the member that the credit terms offered are based on information from a consumer report
2. The numerical credit score used in making the decision
3. The range of possible scores under the model used
4. Key factors that adversely affected the member’s credit score
5. The date on which the credit score was created
6. The name of the person or entity that provided the score, and the person’s contact info
7. A statement that the member can obtain a copy of the consumer report without charge from the person that supplied the consumer report to the credit union
ii. A risk-Based Pricing Notice differs from an adverse action in that it is to notify a member that credit was granted, albeit on a materially less favorable basis, and an averse action notice is provided when credit is denied.

Question 52

When is a negative information notice required?

Answer 52

• A negative information notice is required to be provided to members either before the credit union reports negative information to a nationwide consumer reporting agency, or within 30 days after reporting the negative information
  i. For these purposes, “negative information” means any information concerning a member’s delinquencies, late payments, insolvency, or any form of default.

Question 53

When is an adverse action notice required under the FCRA?

Answer 53

a. Definition of an Adverse Action. The term adverse action has the same meaning as used in the ECOA and Regulation B. Under the ECOA, adverse action means a denial or revocation of credit, a change in the terms of an existing credit arrangement or a refusal to grant credit in substantially the same amount or on terms substantially similar to those requested. The term does not include a refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default, or where such additional credit would exceed a previously established credit limit. It also does not include a counteroffer that the member expressly accepts or uses. For purposes of the FCRA, the term has four additional meanings. One of those additional meanings is important to note as it can include applications for deposit products:
i. › An action taken or determination that is:
› Made in connection with an application made by or transaction initiated by any member, or in connection with a review of an account to determine whether the member continues to meet the terms of the account; and › Adverse to the interests of the member