Key
Issues in
Fair Lending
Analysis

SEPTEMBER–OCTOBER | ABA BANK COMPLIANCE | 9

BY ARTHUR P. BAINES AND DR. MARSHA COURCHANE

Compliance in the

Indirect Automotive
Market

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SEPTEMBER–OCTOBER 2013 | VOl. 34 | nO. 5

ONGOINGLEGISLATION,REGULATORYREFORMS,ANDSUPREMECOURTCASES havedramaticallychangedthescopeandapplicationoftheRealEstate SettlementProceduresAct(RESPA).Section8ofRESPAremainsinforce, however, and compliance officers must be aware of its new contours.

RESPA regulates real estate settlement services, which includes credit reports, title searches, document preparation, property surveys, real estate broker services, and processing and closing services.1 RESPA’s purpose is to “insure that consumers ... are protected from unnecessarily high settlement charges caused by certain abusive practices.” 2

To further this end, Section 8 prohibits both kickbacks and so-called “unearned fees.” There are few compliance labyrinths more complex than Section 8 of RESPA. In the world of residential mortgage finance, this provision has served as a compliance trap since its enactment in

1974. The application of this law to real-life situations has been extremely confusing and often counterintuitive. More importantly, the real and ever-present hazard for banks is that Section 8 of RESPA carries very hefty penalties for non-compliance and can also result in criminal liability—even prison time.

It is important to note thatSection 8 has survived all of the legislative and regulatory reforms that the mortgage finance industry has traversed over the past four years.

But it took a recent Supreme Courtdecision to provide clarity to Section 8(b). The decision, entitled Freeman v. Quicken Loans, dealt with a controversial Department of Housing and Urban Development (HUD) policy statement issued in 2001.3

In Freeman, the Court reached a unanimous decision not to
extend Section 8(b) beyond the “normal meaning” of the statu-
tory language. 4 Now that the Consumer Financial Protection
Bureau (CFPB) enforces the consumer protection provisions of
RESPA and applies HUD’s official policy statements, Freeman’s
tightening the reins on the application of RESPA may serve as
a model for strict statutory construction to be applied to future
Dodd-Frank regulation.

In light of the changed landscape, Section 8(b) merits some focus, and all bank compliance professionals must learn to meld this old regulatory acquaintance into the new post-Dodd-Frank world.

To understand this ruling, you must understand the controversy that gave rise to the need for Supreme Court interpretation of Section 8(b), and the Court’s clarifications, rationale, and resulting regulatory limitations. Given the importance of this provision, compliance professionals mustunderstand the regulatory issues in the evolving, post-Freeman world.

RESPA and the Rub

Section 8(b) of RESPA addresses dividing fees and provides that “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” 5

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22 | ABA BANK COMPLIANCE | SEPTEMBER–OCTOBER SEPTEMBER–OCTOBER | ABA BANK COMPLIANCE | 23

The NEW CONTOURS of RESPA’s Section 8

BY DANIEL HOFHERR AND ROD ALBA

AUS REGULA TOR Y CHANGESmadebyCongressto2010’s ReformandConsumerProtectionActthataffectedbankbusiness yfederallycharteredbankscanoperateonamulti-statebasisand whethertheycanpreemptstateconsumerprotectionlaws.

aw has not been as approach under the since Dodd-Frank.

banks to engage in nce to state laws that ank Act instituted a llow in determining laws, the end result dd-Frank—federal as a result of Dodd-Protection Bureau ance has become a ent.

I. STATE CHARTERED BANKS

ty still exceeds that e-chartered deposit change as a result ot amend the FDIC state banks operate.

e Dodd-Frank Act,
on authority, there
ws available to state
te lines. While legal
a state bank located
nsumer protection
multi-state lending
program, state banks do not enjoy a clear legal basis for preemp-
tion the way their federally chartered counterparts do. Given the
heightened regulatory focus on compliance since Dodd-Frank,
though, state-chartered banks have to focus increased attention
on the laws of other states in which they operate.

II. FEDERALLY CHARTERED INSTITUTIONS The Way It Used To Be

Prior to the Dodd-Frank Act, federal banks and thrifts had strong
preemption authority in their statutes of origin. Typically, federal
thrifts enjoyed more advantages because of the very clear federal
preemption of state laws created by the Home Owners’ Loan Act
(HOLA). In 2004, the Office of the Comptroller of the Currency
(OCC) issued broad regulations clarifying the national bank preemp-
tion, saying that the authority was the same under the National Bank
Act as it was under HOLA. Interpretive letters from the OCC and
the former Federal Home Loan Bank Board guided bank business
decisions on whether a federal bank could preempt a state disclosure
or substantive requirement, and there was fairly broad discretion
at the regulator level. When federal banks and thrifts were in court
defending their preemption position, the courts had a tendency to
agree with the regulators about what level of preemption was ap-
propriate. In the aftermath of the financial crisis of 2007, Congress
passed the Dodd-Frank Actto, among other things, put a more
formal structure around how a federal bank and its regulators should
decidewhetherthebankcanpreemptastatelaw. SHU
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TE
RS
TOC
K
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OAC
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EN
D
LER

SEPTEMBER–OCTOBER | ABA BANK COMPLIANCE | 27

Federal Preemption in the Wake of Dodd-Frank

BYCHUCKDODGE

THIS FIELD GUIDE previouslycoveredtamingthe Deceptive and Abusive Acts or Practices (UDAAP) beast through

BY MEG SCZYRBA, CRCM, AND PHILLIP R. “RICK” FREER, JR., CR

A Field Guide to Tam the UDAAP Beast

Adventures in

Part II: MONITORING

I. PRODUCT INITIATION

General Testing

■■

This journey is not for the faint of heart!

It will take you to areas of your bank that have rarely been traversed by compliance officers.

8 | Compliance in the Indirect Automotive Market: Key Issues in
Fair Lending Analysis

With the focus on fair lending compliance, indirect automotive finance has stepped into the spotlight. Most banks in the mortgage space have established compliance programs that meet regulatory standards. While such existing programs provide some benefit when building a corresponding program in the indirect automotive space, there are a number of important differences between these markets.

By ARThuR BAinES And dR. MARShA COuRChAnE

14 | Adventures in UDAAP: A Field Guide to Taming the UDAAP Beast

To properly monitor for UDAAP dangers, compliance officers must be prepared to focus on the product life cycle. From concept to product initiation through customer service and termination, there are many aspects compliance officers should examine to ensure that customers are being treated fairly and receiving what was promised. All testing and monitoring should include both new and existing products, especially those that have undergone changes.

By MEg SCzyRBA, CRCM, And PhilliP R. “RiCk” FREER JR., CRCM

22 | The New Contours of RESPA’s Section 8

Ongoing legislation, regulatory reforms, and Supreme Court cases have dramatically changed the scope and application of the Real Estate Settlement Procedures Act (RESPA). Section

8 of RESPA remains in force, however, and compliance officers must be aware of its new contours after a recent Supreme Court decision tightened the reins on the application of Section 8(b) of RESPA.

By dAniEl hOFhERR And ROd AlBA

26 | Federal Preemption in the Wake of Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act changed the way federally chartered banks can operate on a multi-state basis and how those banks decide whether they can preempt state consumer protection laws. Though the Dodd-Frank Act instituted a new, more-structured approach for banks to follow in determining whether they have to comply with certain state laws, federal banks can still preempt certain state laws.