Five common compliance testing comments

Many of us are familiar with some of the adages about time:

• Time is money.
• Time waits for no one.
• Lost time is never found again.

Time does seem to get away from us, and many days it seems like there is not enough of it to accomplish everything we set out to do.

This is one of the reasons that when I was a compliance officer at a financial institution, I would look for time savers. One of the things I appreciated most was when a regulator would publish common exam findings — it was like receiving an instant update to my risk assessment. These publications gave me targeted areas to test to determine whether my financial institution had the same or similar issues. 

In our role as compliance consultants, working with many different financial institutions, we also see trends in findings when testing consumer protection regulations.

Below are five common comments we have when testing various consumer protection regulations that you may want to test, as applicable, at your financial institution. Identifying and correcting issues prior to an examination is not only a time-saver but also proof of a strong compliance management system.

Regulation CC – Expedited Funds Availability Act

• The financial institution’s funds availability policy disclosure did not reflect the policy followed by the financial institution in most cases.

Regulation CC states that the disclosure describing a financial institution’s funds availability policy must reflect the policy followed by the financial institution in most cases. The commentary goes on to explain that the disclosure must reflect the availability policy followed by the financial institution in most cases, even though in some cases funds may be made available sooner or longer delays may be imposed. The disclosure must reflect the policy and practice regarding availability as to most accounts and most deposits into those accounts.

With the increased use of online teller machines and real-time transactions, many financial institutions are making funds available, on most deposits into most accounts, on the day of deposit, but their disclosure reflects either a next-day or second-day policy.

Servicemembers Civil Relief Act (SCRA)

• The financial institution’s policy and procedures did not address how to handle a safe deposit box when payments are late or not paid.

Section 3958 of the SCRA addresses storage liens and states a person holding a lien on the property or effects of a servicemember may not, during any period of the servicemember’s military service and for 90 days thereafter, foreclose or enforce any lien on such property or effects without a court order granted before foreclosure or enforcement. This provision often applies to safe deposit boxes because these agreements are usually leases under state law. Therefore, for safe deposit boxes rented to a servicemember, a financial institution cannot repossess the box for late payment or drill the box for nonpayment without a court order.

Military Lending Act (MLA)

• Covered borrower status was not determined prior to making a consumer loan secured by vacant land.

The MLA has an exclusion from the definition of consumer credit for “residential mortgages,” defined as “any credit transaction secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling, any refinance transaction, home equity loan or line of credit, or reverse mortgage.” This definition does not include loans secured by vacant real property; therefore, any transaction secured by vacant land is covered under the MLA regulations.

We have identified in our testing that a financial institution’s procedure to check the Department of Defense’s website to determine covered borrower status is not incorporated into the mortgage department’s processes when consumer vacant land loans are generally originated or that the type of credit report obtained for this type of loan does not have the covered borrower determination information.

Homeowner’s Protection Act (HOPA) – Private Mortgage Insurance (PMI)

• The annual PMI disclosure did not include information on both the consumer’s right to cancel PMI at 80%, if certain conditions are met, and automatic termination at 78%.

HOPA requires, for all residential mortgage transactions for which PMI is required, that the servicer provide the borrower with an annual written statement that sets forth the rights of the borrower to PMI cancellation and termination and the address and telephone number the borrower may use to contact the servicer to determine whether the borrower may cancel PMI.

Real Estate Settlement Procedures Act (RESPA) – Regulation X

• The initial escrow account statement was not provided to the borrower with the first year’s annual escrow account analysis statement.

The regulation requires, for each escrow account, that the servicer provide an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. The servicer must provide with, or as part of this statement, the previous year's projection or initial escrow account statement.

We have identified that many systems that produce the annual escrow account statements provide the prior year’s projection after the first year’s analysis, but the system does not produce the initial escrow account statement with the first year’s analysis.

Remember, if time in your day does not permit you to incorporate compliance testing on a regular and frequent basis, we can help with that.