Compliance Corner

COMPLIANCE CORNER with Timothy A. Schenk KBA Assistant General Counsel tschenk@kybanks.com

COMPLIANCE QUESTIONS & ANSWERS

Last month we hosted compliance, risk and trust roundtables that created good discussions about pertinent compliance issues. We wanted to share highlights of those discussions and answers.

Please feel free to reach out to me at tschenk@kybanks.com with additional questions.

We have been receiving EIP stimulus payments under the latest stimulus bill for customers who deceased in 2020. How should these payments be handled?

Payments for customers who deceased in 2020 under the third stimulus must be returned.

The IRS provided specific instructions for returning an economic impact payment (EIP) sent to a person who deceased in 2020 and received a EIP under the third stimulus bill. The information is available at iris.gov (https://www.irs.gov/newsroom/returning-an-economic-impact-payment), but in summary:

If the payment was a paper check and it hasn’t been cashed:

• Write “Void” in the endorsement section on the back of the check. • Mail the voided Treasury check immediately to the appropriate IRS location for your state. • Don’t staple, bend or paper clip the check. • Include a note stating the reason for returning the check.

If the payment was a paper check and you have cashed it, or if the payment was a direct deposit:

• Submit a personal check, money order, etc., immediately to the appropriate IRS location for your state. • Write on the check/money order made payable to “U.S. Treasury” and write “2020EIP,” and the taxpayer identification number (Social Security number, or individual taxpayer identification number) of the recipient of the check. • Include a brief explanation of the reason for returning the EIP.

For Kentucky residents, the check must be returned to:

Atlanta Refund Inquiry Unit, 4800 Buford Highway, Mail Stop 112, Chamblee, Georgia 30341.

We are only doing escrow accounts for loans that are HPML. We have one loan on the books that was done back in 2013 that is not a HPML. The Loan Officer let them do an escrow account because they wanted it. Our bank assets are less than 200,000,000. We also originated less than 1,000 loans during the previous calendar year. We are in a distressed and underserved county in Kentucky. Do we still have to do escrow accounts on a HPML under the new rule?

Also, how does this new rule interplay with the escrow requirements for flood insurance?

The best way to explain it is that there are two buckets: one for HPML and one for flood. The two are mutually exclusive.

Let’s start with the HPML escrow exemption.

The new rule, “TILA section 129D(c)(2), as amended by the EGRRCPA, requires the Bureau to issue regulations to exempt from the HPML escrow requirement any loan made by an insured depository institution or insured credit union secured by a first lien on the principal dwelling of a consumer if:

(1) the institution has assets of $10 billion or less; (Meet). (2) the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year; (Meet). (3) certain of the existing Regulation Z HPML escrow exemption criteria, or those of any successor regulation, are met.”

Those criteria, referenced in part three (3) above, are:

(1) the requirement that the creditor extend credit in a rural or underserved area (§ 1026.35(b)(2)(iii)(A)); (Most likely a yes, but the official comment on the criteria states):

A. In general, whether the rural-or-underserved test is satisfied depends on the creditor’s activity during the preceding calendar year. However, if the application for the loan in question was received before April 1 of the current calendar year, the creditor may instead meet the rural-or-underserved test based on its activity during the next-to-last calendar year. This provides creditors with a grace period if their activity meets the rural-or-underserved test (in § 1026.35(b) (2)(iii)(A)) in one calendar year but fails to meet it in the next calendar year.

B. A creditor meets the rural-or-underserved test for any higher-priced mortgage loan consummated during a calendar year if it extended a first-lien covered transaction in the preceding calendar year secured by a property located in a rural-or-underserved area. If the creditor does not meet the rural-or-underserved test in the preceding calendar year, the creditor meets this condition for a higher-priced mortgage loan consummated during the current calendar year only if the application for the loan was received before April 1 of the current calendar year and the creditor extended a first-lien covered transaction during the next-to-last calendar year that is secured by a property located in a rural or underserved area.

(2) the exclusion from exemption eligibility of transactions involving forward purchase commitments (§ 1026.35(b)(2) (v)); and (Do you have any purchase commitments or are you keeping them in-house?);

(3) the prerequisite that the institution and its affiliates not maintain an escrow account other than either (a) those established for HPMLs at a time when the creditor may have been required by the HPML escrow rule to do so, (This will resolve itself so long as you are going to do away with escrows going forward for new loans). or (b) those established after consummation as an accommodation to distressed consumers (§ 1026.35(b)(2)(iii)(D)) (not applicable here).

Based on that criteria, it appears that you most likely meet the criteria for the HPML escrow exemption.

The exemption for flood is separate from the HPML escrow requirements and are available at: https://www.ecfr.gov/cgi-bin/ text-idx?SID=aac7593dfe181e41c34de5a68e343a9f&mc=true &node=se12.5.339_15&rgn=div8

Those exemptions state:

(2) Exceptions. Paragraph (a)(1) of this section does not apply if: (i) The loan is an extension of credit primarily for business, commercial, or agricultural purposes; (ii) The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of §339.3(a); (iii) Flood insurance coverage for the residential improved real estate or mobile home is provided by a policy that: (A) Meets the requirements of §339.3(a); (B) Is provided by a condominium association, cooperative, homeowners association, or other applicable group; and (C) The premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; (iv) The loan is a home equity line of credit; (v) The loan is a nonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full; or (vi) The loan has a term of not longer than 12 months.

Within that rule you also have the small lender exception:

(c) Small lender exception—(1) Qualification. Except as may be required under applicable State law, paragraphs (a), (b) and (d) of this section do not apply to an FDIC-supervised institution:

(i) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and

(ii) On or before July 6, 2012:

(A) Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and

(B) Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.

You may or may not meet the exceptions for flood escrow but that is a fact intensive question separate from the HPML escrow requirements.