New Compliance Challenges Ahead in 2021

New Compliance Challenges Ahead in 2021

BY FELECIA BOWERS | HOMEOWNERS FINANCIAL GROUP

My original thought was to recap 2020 before launching into speculation of what 2021 will hold for compliance professionals. I am confident that the events of 2020 will be forever etched into our memory banks and no one wants or needs a recap. Some things remained steady through 2020, including challenges relative to the constitutionality of the CFPB, payday rule, and privacy laws on federal and state levels, and we saw new definitions of what is considered nonpublic information. In the last two years, we saw an uptick in enforcement actions and the expansion of enforcement actions for redlining extending to a non-bank mortgage lender affiliate of real estate brokerage firms. I like the idea that CFPB issues are being resolved via supervisory actions, which focus on changing the behavior with oversight and supervision versus enforcement actions and fines. Compliance professionals should ensure that a review of any supervisory action is included in your periodic quiet reading time. If the issue does not fit within your organization right now, it may later. Who knows if the situation may impact your organization in the future? Or, is there a way someone within your organization could be guilty of committing the same protocol violation now thinking they will not get caught?

While the CFPB undergoes changes and possibly a refocus of their energy, we can expect the individual states to maintain or even ramp up their exam processes. NY, MA, NJ, PA, and CA have launched a mini version of the CFPB designed to pick up the slack in areas they perceive the CFPB is not being proactive. The states will establish their own definition of what is or is not proactive enough. As I write this, I have six individual state exams in process. Each one is obviously different as to its depth and focus.

Did anyone realize that Employee Earned Wage Access (EWA) programs were under scrutiny by the CFPB? I know I missed this one. EWA programs allow employees to access wages they have already worked for and accrued but have not been paid. The CFPB issued an Advisory Opinion on this subject on November 30,2020. Timing was probably not fortuitous given the global impact of COVID on companies. The opinion will impact your program depending on how your program works; for example, if the employee handles repayment via monthly payments, you may have to provide Regulation Z type disclosures. It is an interesting reading assignment.

LIBOR sunsets by December 31, 2021 and by now, if you are still offering LIBOR products in your adjustable-rate menu, you should have transitioned to the alternative language promissory note and documents during Q2 2020. A joint statement issued November 30, 2020 encouraged banks to stop engaging in new contracts using LIBOR as soon as possible but no later than the December 31, 2021 deadline. Failure to stop would create a safety and soundness issue for your organization. That is one heck of an incentive to stop.

The CFPB announced on August 20, 2020 that it will provide an additional 60 days for public comment on its Request for Information (RFI) on how best to create a regulatory environment that expands access to credit and ensures that all consumers and communities are protected from discrimination in all aspects of a credit transaction. The comment period ended December 1, 2020, so we can expect more guidance on this subject mid-2021, hopefully. The RFI should trigger lenders to re-evaluate their organizations globally for ECOA and fair lending current practices and ways they can improve balancing the ATR/AM Guidance from October 2020:

• How diverse is your hiring practices?

• Have you introduced limited English proficiency options for consumers, such as pertinent disclosures in foreign languages?

• Make sure you are analyzing your HMDA data on a periodic basis. Periodic being judgmental but with sufficient frequency to ensure you are monitoring compliance and activity.

• With DACA applications and renewals re-opening, we can expect an uptick in applications albeit it somewhat subdued primarily due to COVID. Requests for financing might increase too. As of August 20,2020, DACA recipients were still ineligible for FHA loans, but there may be other programs available. Do you have programs available for this group of individuals?

• There is speculation that the incoming leadership will focus on racial equities and social injustice during COVID which means your HMDA data, loan program menu, and outreach activities will be scrutinized for overt discrimination, disparate impact, redlining and racial biases. For instance, did you shrink your menu of loan programs during COVID? Were the programs you discontinued inadvertently impact a protected class of individuals?

Artificial intelligence (AI) is garnering more interest in our industry with speculation that the incoming administration will be very sensitive and interested in the role it plays in access to credit. The leading question is whether AI increases discrimination through its reliance on large data bases and does that data contain outdated or predetermined biases. Think about this for a second. Most of the data that goes into these programs is proprietary; therefore, we really do not know how the calculations and ratings are determined. The programs in use have policies and procedures stating they are unbiased as to discriminatory factors such as race, sex, and ethnicity but can we be sure? We do know that the creators of the AI underwriting programs in use today stipulate that their programs are to be used to “compliment” the underwriting process, which puts the onus back on the lender to make the final decision, and it emphasizes the importance of your manual second look program and lends favorably to developing programs designed around alternative credit histories.

I may be in the minority, but I do hope 2021 ushers in increased scrutiny on cryptocurrency, cybercrimes, and regulations. Last week I received, through my work email, a ransom demand for a large amount of bitcoin to be deposited into a specific account or the sender was going to release my internet search and viewing activities to my employer and social media. Let me first state I do not use my company computer to handle personal internet business. Second, I did not realize that shopping for flannel sheets online was a nefarious activity. The sender did not receive his ransom and I am waiting for social media opinions on the set of sheets I bought.

Have you taken advantage of any of the recent webinars on lending to employees who derive their income from the marijuana industry, doing business with this industry, or even lending to businesses in this industry? You should. It is enlightening (no pun intended). There are approximately 35 states allowing medicinal usage and another 15 states allowing recreational usage. The incoming VP has opined that they will consider decriminalizing marijuana usage and expunge the records of those individuals convicted of illegal marijuana activity. If this happens, how will these changes impact your hiring practices? Your background check procedures? Your lending documentation and ability-to-repay requirement? The Safe Banking Act may open the door to permit mainstream banking of marijuana business too. Many, many years ago we had a customer shove thousands of dollars through the tiny little deposit slot on the ATM machine on a Saturday night. When the bank branch opened on Monday morning, it wreaked of marijuana and we had to call the local police. They confiscated the deposited funds and paid a visit to the customer who made that deposit. It took months for the smell to go away and the customer jokes were plenty with the favorite being we did not provide enough donuts. We still do not know how he was able to force that thick envelope through the tiny slot.

Servicing issues will be prominent through 2021, especially if COVID persists. On December 7, 2020, the CFPB, a multistate group of state attorney generals, and bank regulators filed a complaint against a major servicing entity alleging multiple consumer financial law violations relative to the servicing of loans. The order consisted of $73 million in redress to over 40,000 impacted customers as well as a $1.5 million penalty to the CFPB. In addition to the standard requirements of RESPA, TILA and state rules, there are interim protocols in place under the CARES Act that impact the collection and servicing activities for delinquent borrowers.

COVID caused many of us to refocus our operations and even engage third party vendors for some of the standard operational activities such as processing or underwriting. For many, outsourcing these activities was a new adventure and created new challenges for our third-party vendor management program. Outsourced and offshore vendors require tailored and unique protocols:

• Security of data

• Security protocols if you allow them access to your systems

• Privacy

• Liability insurance coverage

• Service level expectations and how to measure these expectations

• Legal jurisdiction especially when dealing with offshore enterprises

• On-site visits are not available right now with COVID restrictions. How do you legitimize the operations?

• And remember, licensing may be required if the vendor is performing processing or underwriting services. Be sure to read the S.A.F.E. Act.

Suffice it to say, 2021 will be full of compliance challenges for our industry with many of them contingent on the new administration heading to the White House. In other words, business as usual. Remain flexible, informed, and alert as things could get interesting.