"Modification" versus "Refinancing:" Does the Ability-to-Repay Rule apply? (and
As you are well aware, the new ability-to-repay standards apply to mortgage loan refinances, but not to modifications (same with loan originator rules, with one exception). Please join our discussion of the fine line between refinancing and modifying with a special note on complaint management systems!
Whether the federal ability-to-repay and loan originator rules apply to a transaction depend on the distinction between "modification" and "refinancing" under 12 CFR 1026.20(a). Except for a special category of consumer-friendly refinances (discussed in a previous article) these rules do not apply for modifications (with the one exception being 1026.36(c) concerning servicing practices).
Although the modification vs. refinance distinction is important, it could also be "fuzzy" in close cases. Generally, a refinance consists of the cancellation of the original obligations and substitution of a new obligation - the new obligation normally must completely replace the prior one. There are some special rules, and the following are contrary to the general definition - not considered refinances (subject to detailed requirements in specific cases):
Renewals
Annual percentage rate reductions
Court agreements
Workout agreements
Insurance renewals
Note on Complaint Management System
What have you been hearing about ways to manage consumer complaints? We've heard about one idea that we wanted to share with you. The general concept is a complaint management system designed with the purpose of enabling the lender to handle his/her own "dirty laundry." It would consist of the following:
- Assign employees to monitor any social media account for your institution ... if you're not monitoring it, you probably shouldn't have the account anyway
- Strongly encourage and solicit complaints from consumers (whether through social media or other means)... it's better than having them file a complaint with your regulator, e.g., through the CFPB's new mobile phone app.
- Develop policies and procedures to genuinely, quickly, and thoroughly respond to complaints... if a consumer feels like you're sincerely working to correct the problem, they are less likely to go anywhere else
- Monitor complaints for trends and create reports to help develop strategies to prevent problems identified
Be careful... complaints on social media might actually be considered "written" for compliance purposes. And you'll have to train your employees on what actually constitutes a consumer complaint .... a statement that the borrower is mistakenly being overcharged for monthly mortgage payments is a true consumer complaint, but you might not want to follow the same official procedures if a consumer just writes in to complain about the branch manager's new haircut. Remember, "Life [is] like a box of chocolates. You never know what you're gonna get." The same will be true with complaint management ... it appears sifting through consumer complaints may develop into an important and interesting job function.
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**These are our opinions. We're not authorized, or willing, to express those of others.**