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Two Old Issues Revisited

More on Overdraft Fees
Institutions are required by their debit card networks to honor certain small dollar and some authorized transactions that exceed the authorized amount even if the transaction will cause an overdraft in the member or customer’s account. Regulation E provides that an institution may not charge an overdraft fee on a one-time point of sale (POS) debit card or ATM transaction, unless the institution has the member or customer’s prior written consent. Consequently, many institutions which do not have formal overdraft programs sent their members or customers the Regulation E prescribed request for consent, and many apparently consented. The result was that an overdraft fee for the force paid transactions was charged to the consenting members and customers and not to those that did not consent.

The FDIC initially determined that this practice was an unfair and deceptive act and practice. Banks being examined were instructed to reimburse all of the offending fees it had collected since July 1, 2010 when the Regulation E rule became effective. But then, the FDIC told at least one bank that it had criticized that it had changed its mind. The practice was determined not to be an unfair or deceptive act or practice and that the bank was not required to reimburse.

So far, so good. But now, the FDIC has backed off its back off. It recently told the Independent Community Bankers Association (ICBA) that they would not cite banks for the practice as unfair or deceptive. But, and it’s a big BUT, the FDIC also stated it would not allow banks, which do not have a formal overdraft program, to charge a fee for POS debit card and ATM overdrafts going forward, even though the customer has consented. Also, banks are encouraged to reimburse the offending fees to mitigate litigation risk, but they are not required to do so and they will not be criticized if they do not. Further, the FDIC indicated that such a practice would not affect compliance ratings, which has been confirmed in at least one instance.

If your bank does not have a courtesy overdraft program but you sent the Regulation E notice to your customers, you must cease charging those customers fees for the transactions that you force pay, but you are not required to reimburse for prior transactions. In other words, when the only time you pay an overdraft is when you have a force pay situation, you must cease charging an overdraft fee for your force pay POS and ATM transactions. If you have a courtesy overdraft program, be it formal or ad hoc, you do not need to cease charging such overdraft fees for which you have consent from the customer as provided under Regulation E.

We have not heard of any other agency taking the FDIC’s position. Moreover, the CFPB still has not made any decision despite having authority over Regulation E and are tasked with ensuring consistent examinations as proscribed under Dodd Frank.

Residential Loan Officer Compensation
When the rules governing residential loan officer compensation were published, they appeared to be pretty straight forward. Fundamentally, the rules prohibit a loan originator from being compensated based on any term or condition of a residential credit transaction other than the amount of the loan. Compensation was defined in the Commentary to Regulation Z as any salary, commissions or incentives based on the terms or conditions of the loan originator’s transactions. The purpose of the law and the regulation is straightforward. A lender should not be compensated for encouraging a customer to take a loan on terms that are not as favorable as other terms that are available. A lender should not receive additional compensation for abusing his or her customer. (I wish that the same rule applied to clothing stores that sell my wife clothing that she later determines is unattractive and will not wear.) In any event, the law was well meaning and most would say reasonable. However, the regulators have taken their interpretation of it from the absurd to the absurder.

First, they ruled that an institution could not pay a loan originator a year-end bonus or a 401(k) contribution if either was based on the institution’s profitability, the fact that the institution met its budget, or similar factors. It would be an unusual situation where the terms and conditions of a single loan officer’s loans would move the profitability needle of the institution; however, the regulators have taken the position that if they contribute to the institution’s earnings in any way, compensation may not be made with any profits from mortgage loans.

Now, virtually any aspect of a loan is a term or condition. For example, if a bank has several loan programs, some of which generate loans to be sold in the secondary market and some generate loans that will be retained, the institution cannot pay a higher compensation for one over the other. If an institution pays a higher commission for in-house loans, the regulators will say that some condition of those loans makes them more valuable. On the other hand, if the higher commission is for the secondary market loans, the examiners will say that some condition made them more valuable. The examiners do not realize that there are some mortgage products that are very useful to customers for which there is no secondary market source. Also, it appears that the geography in which the mortgaged property is located is a term or condition of the loan.

If an institution wants to make inroads into an area where it has little loan penetration and wants to pay its lenders a premium for originating loans in that area it may not do so. This one may bite the regulators when they realize that it prohibits an institution for paying its lenders a premium for generating loans in low- and moderate-income areas. In any event, if an institution’s residential mortgage lenders are receiving anything of value from their employer other than a salary, normal employee benefits and a commission based solely on the dollar volume of that the lender originates mortgages (or consistent with the other examples provided in the Commentary), then, their compensation is probably in violation of the new interpretations of the rules.

The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.