Compliance Corner

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

QUESTIONS & ANSWERS

As we all adjust to the new world of communicating with examiners primarily through telecommunication, the importance of compliance continues. We received some good questions over the past month and wanted to share our answers in the event they impact your institution. Please feel free to reach out to me at tschenk@kybanks.com with any questions you may have!

My question is regarding consumer online applications not secured by real estate: Do these applications require signatures? If so, at what point in the process?

If the Insurance Disclosure is on the application, would this change anything? Is the consumer required to sign this disclosure?

There is no regulatory requirement for a signature on a consumer loan application. It is generally considered a business decision for the bank. In answering the insurance questions, KRS 304.12-150 states, “Every debtor, borrower, or purchaser of property with respect to which insurance of any kind is required in connection with a debt or loan on the property shall be informed by the creditor or lender of his or her right of free choice in the selection of the agent and insurer through or by which such insurance is to be placed.”

It does not require a signature. As long as you disclose it, you should be good to go.

Does an application to purchase a vehicle or any other consumer purpose have to be hand written? I know that Residential Real Estate Loan Applications have to be hand written.

First, make sure that whatever you are doing fits your bank’s policies and procedures. Many banks require a written application.

In terms of regulatory guidance, a written application is not necessarily required, even for real estate.

12 CFR Part 1002(c) (Reg B) states:

Written applications. A creditor shall take written applications for the dwelling-related types of credit covered by section 1002.13(a).

1002.13(a) covers applications for credit primarily for the purchase or refinancing of a dwelling occupied or to be occupied by the applicant as a principal residence, where the extension of credit will be secured by the dwelling.

Also, the commentary to Reg B in paragraph 4(c) states:

1. Requirement for written applications. Model application forms are provided in Appendix B to the regulation, although use of a printed form is not required. A creditor will satisfy the requirement by writing down the information that it normally considers in making a credit decision. The creditor may complete an application on behalf of an applicant and need not require the applicant to sign the application. 2. Telephone applications. A creditor that accepts applications by telephone for dwelling-related credit covered by section 1002.13 can meet the requirement for written applications by writing down pertinent information that is provided by the applicant.

3. Computerized entry. Information entered directly into and retained by a computerized system qualifies as a written application under this paragraph. (See the commentary to section 1002.13(b), Applications through electronic media and Applications through video.

You can take applications by other means, even for real estate.

We have a new loan in the amount of $255,000. It is secured by four pieces of property. Two of the properties are in a flood zone. What amount of flood insurance do we need on the loan if the total appraised values of the properties is $235,000? The properties were appraised individually.

Assuming the properties are eligible under the National Flood Insurance Program, Pursuant to 12 CFR Part 339.3, the minimum required flood insurance coverage is the lesser of:

1. The insurable value of the building or buildings located in the SFHA.

2. The outstanding principal balance of the loan or loans secured by the building or buildings located in the SFHA.

3. The maximum coverage available through the NFIP for the property type located in the SFHA.

Based on the circumstances, the property insurance required will mostly likely be a number less than $235,000 depending on the individual appraisals of the properties located in the flood zone.

Does the right of rescission apply to a refinanced HELOC with an increased loan amount? We have the loan being refinanced and are doing the refinancing.

Yes, the right of rescission applies. 12 CFR 1026.15(a) states:

1026.15(a) Consumer’s right to rescind. (1)(i) Except as provided in paragraph (a)(1)(ii) of this section, in a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind: each credit extension made under the plan; the plan when the plan is opened; a security interest when added or increased to secure an existing plan; and the increase when a credit limit on the plan is increased.

Even if you were not extending new money, the right of rescission would apply as there is no new money exception. It is important to note that this is a difference from 12 CFR 1026.23 related to closed-end credit where the right of rescission only applies to the addition of the security interest and not the existing obligation.