Capitol Comments

April 2012

Recent News...... 1

Dodd-Frank agency actions...... 12

Publications, reports, studies, testimony & speeches...... 13

Selected upcoming federal compliance dates...... 14

Selected federal compliance dates from the past 12 months...... 15

How to submit comments to your federal regulators...... 16

C A P I T O L C O M M E N T S A P R I L 2 0 1 2 Page 1

When there is a deadline associated with an item, you will see this graphic:

RecentNews

CFPB Bulletin: Mortgage loan originator compensation

CFPB Bulletin 2012-02 was issued on April 2, 2012, in response to several inquiries the Consumer Financial Protection Bureau (“CFPB”) has received regarding the payment of compensation to loan originators under Regulation Z, 12 C.F.R. § 1026.36 (“Compensation Rules”).The CFPB anticipates issuing a proposed rule for public comment in the near future on the loan origination provisions in the Dodd-Frank Act.

Comment:To provide clarity at this juncture, the CFPB’s view is that the Compensation Rules permit employers to contribute to Qualified Plans out of a profit pool derived from loan originations. That is, financial institutions may make contributions to Qualified Plans for loan originators out of a pool of profits derived from loans originated by employees under the Compensation Rules.

FDIC guidelines on confidentiality of financial institution information

In a Financial Institution Letter (FIL-14-2012[i]), FDIC stated that it has observed a limited number of instances in which directors and officers of troubled or failing institutions have made copies of financial institution and supervisory records, and removed those copies from the institution in anticipation of litigation or enforcement activity against them personally.

The FDIC issued guidelines[ii] as a reminder to directors and officers that this activity is a breach of their fiduciary duty to the institution and an unsafe and unsound banking practice, which may also violate applicable laws and regulations and contravene the financial institution's information security program. Attorneys who represent an insured depository institution are also reminded that their fiduciary duty, both legally and ethically, obligates them to act in the best interests of the institution. The FDIC said that it will investigate any matter that appears to violate confidentiality and pursue enforcement actions, as appropriate.

Comment: While the editor recognizes the importance of an insured depository institution’s directors, officers, and attorneys not breaching their fiduciary duties to the institution, the FDIC has not truly considered the needs of directors and officers. The FDIC closed its guidelines with this statement:

“Former directors and officers may have a legitimate need to access certain limited confidential financial institution records in order to prepare for, or defend against, litigation that may arise following the placement of a financial institution into receivership. The FDIC is willing to address this need, but any such access must be arranged formally, after the financial institution is taken into receivership, and subject to a suitable confidentiality agreement with the FDIC as receiver, or other acceptable assurance of confidentiality such as a protective order.”

Considering the fact that the FDIC is often the plaintiff in lawsuits against directors and officers of failed institutions, this statement is cold comfort to potential defendants. The editor believes he speaks for everyone who has been involved in litigation in saying that no one wants to depend on the opposing party to address their need for access to information necessary to mounting a proper defense. The FDIC needs to provide a clear and adequate method for directors, officers, and their attorneys to obtain access to the documents needed to mount defenses to lawsuits relating to failed institutions without depending on the plaintiff to provide the documents after the financial institution is taken into receivership.

CFPB: Student loan cost comparison tool

The CFPB is asking for input to develop a new interactivecost comparison tool[iii] to help navigate financial aid offers and student loans. CFPB put together a prototype. In their beta version, students can enter the financial aid information they’ve received from colleges, adjust their family’s contributions, input scholarships and military benefits, and much more. The beta version can give a rough estimate of the monthly payment after graduation, as well as a sense of overall debt burden in relationship to the average starting salary of a college graduate. A student can also see school-specific indicators like graduation rates.

The CFPB is askingstudents and families to tell them what is helpful and what is confusing. For the experts out there, theywant to know how to think about some of the technical assumptions, like interest rates and salary data.

They’re also challenging the app developer community to make their own apps and web tools to help students make more informed decisions.

CFPB: Student debt hits a trillion dollars

In a CFPB blog[iv] on the private and federal student loan market, the CFPB states that private and federal student debt has hit $1 trillion and that students borrowed $117 billion in federal loans last year.

Comment: According to the Federal Reserve, the nation’s credit card debt is $800 billion. (Consumer Credit – G.19, February 2012[v]) That means the student loan debt is actually greater. In September, the U.S. Department of Education released FY 2009 student loan[vi] numbers showing that the default rate had increased from 7.0% in FY 2009 to 8.8%. At $1 trillion, a mass default on student debt could plunge the country into another recession.

NMLS resources for info on federal registrations

On April 2, 2012 all information regarding federal registration was moved out of the current NMLS Resource Center to a new site that is specific to the NMLS Federal Registry. This includes all Quick Guides, instructions and reference materials that pertain to Federal Registration. The NMLS Federal Registry Resource Center is available at:

Establishment of Financial Research Advisory Committee and solicitation of committee membership

The U.S. Department of Treasury’s Office of Financial Research (OFR) announced plans to create the Financial Research Advisory Committee (“the Committee”). The Committee will provide advice, recommendations, analysis, and information to the OFR.

The OFR was launched after enactment of the Dodd-Frank Act to serve the Financial Stability Oversight Council, its member agencies, and the public by improving the quality, transparency, and accessibility of financial data and information, by conducting and sponsoring research related to financial stability, and by promoting best practices in risk management. Members of the Financial Research Advisory Committee will include academics, researchers, industry leaders, government officials, and experts in the fields of data and technology.

Committee members will be selected based on their expertise in economics, financial institutions and markets, statistical analysis, financial markets analysis, econometrics, applied sciences, risk management, data information standards, technology, or other areas related to OFR’s duties and authorities. Subcommittees will be formed to address research issues and data and technology issues, two distinct, but related areas.

A Notice of Establishment of the Financial Research Advisory Committee was delivered to the Federal Register[vii]. The Notice sought applications for membership on the Committee. The application period was open through April 16, 2012.

Comment: Unfortunately, the application period is now closed, but we wanted to make you aware of the establishment of this committee.

CFBP announces “Ask CFPB” interactive online tool

Ask CFPB[viii] is a new interactive online tool from the CFPB. Ask CFPB contains three general categories of questions and answers:

  1. Definitions:It defines the financial jargon.
  2. Explanations:It provides general information and explanations of terms and features of financial products.
  3. Situations:It gives information and tips on various situations.

Comment: The CFPB is doing a great job of creating information for consumers. The editor hopes that soon it will begin to develop significant and useful guidance for lenders.

Federal Reserve report to Congress on Office of Minority and Women Inclusion

Section 342 of the Dodd-Frank Act requires all of the federal financial regulatory agencies to assess the diversity policies and practices of the entities the agencies regulate. The Fedrecently issued a Report to Congress on the OMWI[ix]. Though much of the report had to do with the internal employment and contracting practices of the agencies, there was a section on the diversity policies and practices of entities regulated by the federal agencies.In that section, the Fed said that theyhave met regularly with the staff of other financial regulatory agencies to establish a common framework for compliance with this provision of section 342 of the Dodd-Frank Act. The Fed stated that the regulatory community believes that a uniform approach is important to ensure that all entities are subject to similar standards regardless of regulator. The agencies are exploring ways to have maximum impact while limiting regulatory burden and remaining within the constraints of the statutory authorization.

Comment: The financial regulators will establish a schedule of roundtable discussions with financial institutions and other regulated entities to further develop standards for the diversity policies and practices of regulated entities. Our concern is that with no federal requirement for businesses to have diversity policies or practices, what are the regulators going to assess? Businesses with 50 employees or more must have affirmative action plans, but not diversity policies or practices. Is this a backdoor method to require businesses with fewer than 50 employees to have an affirmative action plan? We wonder what a regulator is going to do the first time a bank with fewer than 50 employees tells them that their diversity plan and practice is to hire the best people they can. On the other hand, this is probably a good time for small banks to reassess their hiring and contracting procedures and policies to assure that they do not discriminate against minorities or women either in writing or in practice.

SAFE Act: New Federal Registry Resource Center Opens

The new online Federal Registry Resource Center[x] went online on April 2nd. All information regarding federal SAFE Act registration has been moved out of the current NMLS Resource Center into this site. This includes all Quick Guides, instructions and reference materials that pertain to Federal Registration. Start by choosing either Institutions or Loan Originators from the menu at the top of the home page to see what resources are available.

CFPB files amicus brief supporting borrowers in right of rescission case

The CFPBfiled an amicus brief[xi]in the Rosenfield v. HSBC Bank case in the United States Court of Appeals for the Tenth Circuit in Denver, Colo., arguing that certain borrowers who did not receive rescission disclosures mandated by the Truth in Lending Act may cancel their loans so long as they notify the lender of their intent to cancel within three years, but they do not need to file a lawsuit within three years for the rescission to be valid.

Comment: The CFPB said that filing amicus briefs in litigation involving federal consumer financial protection laws would be a regular part of its work.

FinCEN Advisory on tax refund fraud

FinCEN issued an Advisory (FIN-2012-A005[xii]) to assistfinancial institutions with identifying tax refund fraud and reporting the activity throughthe filing of SARs. To assist financial institutions with identifying potential taxfraud, FinCEN has, in consultation with the IRS and law enforcement, identified eight red flags:

  • Multiple direct deposit tax refund payments, directed to different individuals, from the United States Department of the Treasury (Treasury) or state or local revenue offices are made to a demand deposit or prepaid access account held in the name of a single accountholder.
  • Suspicious or authorized account opening at a depository institution, on behalf of individuals who are not present, with the fraudulent actor being named as having signatory authority. The subsequent source of funds is limited to the direct deposit of tax refunds. This activity often occurs when exploiting returns for the elderly, minors, prisoners, the disabled, or recently deceased.
  • Opening multiple prepaid card accounts by one individual in different names using valid TINs for each of the supplied names, and subsequent mailing of the prepaid cards to the same address. Shortly after card activation, Automated Clearing House (ACH) credit(s) from Treasury or state or local revenue offices representing tax refunds occur. This is followed quickly by ATM cash withdrawals and/or point-of-sale purchases.
  • Business accountholders processing third-party tax refund checks in a manner inconsistent with their stated business model or at a volume inconsistent with expected activity. Similarly, individuals processing third-party tax refund checks through a personal account with no business or apparent lawful purpose.
  • Business accountholders processing third-party tax refund checks and conducting transactions inconsistent with normal business practices, which may include:
  • Large volume of Treasury refund checks or bank checks being deposited in contrast to few other checks being deposited, such as payroll checks;
  • Large volume of refund checks bearing addresses of customers out of state;
  • Multiple refund checks are for the same dollar amount or a few dollars off;
  • Treasury refund checks or bank checks, representing electronic refunds, are sequentially numbered or within a few numbers of each other;
  • The dollar amount of checks being deposited is not commensurate with the amount of currency being withdrawn to cover the cashing of these refund checks.
  • Multiple prepaid cards that are associated with 1) the same physical address [fraudulent actors may also contact their customer service department requesting to change their address for their Permanent Prepaid Card shortly after opening their Temporary Prepaid Card on-line]; 2) the same telephone number; 3) the same e-mail address; or 4) the same Internet Protocol (IP) address, which receive tax refunds as the primary or sole source of funds.
  • The opening of a business account for a check cashing business at a financial institution, with a subsequent high volume of tax refund checks issued to individuals from across the United States.
  • A sudden increase in volume moving through the account of an existing check cashing service, involving tax refund checks issued to individuals from across the United States.

Comment: The Advisory instructs financial institutions to use the term “tax refund fraud” in the narrative section of the SAR and provide a detailed description of the activity.

FinCEN guide on filing new reports

FinCEN issued Guidance[xiii] on filing their new reports. The new CTR and SAR form do not create any new obligations or otherwise change existing statutory and regulatory expectations of financial institutions. FinCEN is now accepting the new CTR and SAR filings through the BSA E-Filing System. The BSA E-Filing System will continue to accept submissions of the legacy reports until March 31, 2013. Accordingly, until such time, financial institutions may choose to electronically file either the legacy or new reports, or any combination thereof.

Comment: FinCEN has mandated electronic filing of most reports through the BSA E-Filing System, beginning July 1, 2012. Financial institutions may continue to file, via paper, the most currently available versions of the legacy reports before July 1, 2012. However, financial institutions are strongly encouraged to begin filing electronically before the mandate takes effect. The new CTR and SAR reports may only be submitted electronically.

Photo evidence of affixed notice sinks consumer ATM lawsuit

Gerald Rivello, Jr., used a Pennsylvania State Employees Credit Union ATM that was allegedly missing the required physical fee disclosure notice. The credit union introduced affidavits and photographic evidence reflecting the presence of the notice and the prompt replacement of the notice when it went missing.

Comment: This credit union implemented an effective process for routine inspection of its ATMs. When the responsible employee noticed the notice was missing on the ATM, it was replaced and pictures were taken of the machine—particularly of the adhesive residue where the notice had been. The credit union’s success in this law suit reiterates the need for every financial institution to implement procedures for routine inspections of their ATMs. Checking and photographing ATMs when filling with cash is likely the least disruptive process. If a notice is missing, the bank’s “inspector” should take a “date stamped” photograph of the machine without the notice, replace the notice, then take another “date stamped” photograph of the ATM with the new notice in place. The bank should keep a log of inspected machines including notes regarding missing notices that are replaced. The “inspector” should always record the dates and times of inspections. It may be possible to implement an electronic inspection system on a Smartphone or tablet device so that when the inspector returns to the bank, further documentation is unnecessary.

HUD delays new guidance

In order to allow Mortgagees additional time to adapt their procedures to implement portions of the new guidance found in Mortgagee Letter 2012-03 (See page 3 of the letter), FHA is delaying the effective date of the following topics from ML 2012-03:

  • Handling of Disputed Accounts, Public Records FHA Total User Guide Chapter 2, and
  • Handbook 4155.1 4.C.2.e, Paying off Collections and Judgments.

The guidance provides that a borrower with the total outstanding balance of all disputed collection accounts equal to or greater than$1,000, must resolve theaccounts (e.g. enter into paymentarrangements with minimum three monthsverified payments—paid as agreed) or be paid infull at the time of, or prior to closing to be eligible for FHA insurance endorsement.Mortgagees must document the case bindershowing each account was resolved or paidin full.