Bank Fraud Victims

         First County National Bank

        Regulatory Compliance Examination

By:

Kirschler Peterson & Associates

Certified Regulatory Compliance Manager

 

Initial Review

 

First County National Bank

NOTE: The following is provided for illustration purposes only; referenced Exhibits are not attached.

SCOPE

An initial review of the First County National Bank's consumer compliance program was conducted October 2, 1995, and included the period between July 1994 (the date of the most recent regulatory compliance examination) and October 2, 1995. An assessment of the bank's compliance with the following laws and their respective implementing regulations was performed:

 

                     Community Reinvestment Act (CRA)

                     Equal Credit Opportunity Act (ECOA)

                     Fair Credit Reporting Act (FCRA)

                     Fair Housing Act (FHA)

                     Truth-in-Lending Act (TILA)

                     Real Estate Settlement Procedures Act (RESPA)

                     Flood Disaster Protection Act (FDPA)

                     Truth-in-Savings Act (TISA)

                     Expedited Funds Availability Act (EFAA)

                     Electronic Fund Transfers Act (EFTA)

                     Bank Secrecy Act (BSA)

                     Bank Protection Act (BPA)

                     Right to Financial Privacy Act (RFPA)

                     Fair Debt Collection Practices Act (FDCPA)

                     Credit Practices Rule

COMPLIANCE MANAGEMENT

To determine the bank's approach to managing its compliance program, the most recent compliance examination report, board of directors meeting minutes, policies, and procedures were reviewed and the Compliance Officer interviewed.

 

The examination report stated that the bank's level of compliance with consumer laws and regulations was less than satisfactory. The examination report noted many violations of the RESPA, TISA, and BSA. Since the examination, management has taken steps to ensure corrective action. This review revealed that such actions have been effective in correcting noted violations.

 

As stated in the examination report, the review was limited to approximately half of the applicable consumer laws and regulations. The scope of this initial review was more broad and included all applicable consumer laws and regulations.

As further described below, this review revealed substantive violations of Regulation Z as well as technical violations of the ECOA, RESPA, TISA, EFAA, and EFTA. To prevent future similar violations, it is recommended that additional staff training be conducted and that regular monitoring be implemented. It is also recommended that policy statements be adopted by the board and implemented by management that will provide staff with guidance regarding compliance with specific consumer laws and regulations.

 

It is further recommended that the bank establish a Compliance Committee to oversee daily operations. The Compliance Officer will chair periodic meetings to ensure that management receives timely information regarding regulatory changes as well as recommendations for implementing such changes.

 

It is recommended that the committee be comprised of Executive Vice President/Lending, Executive Vice President/Operations, Senior Vice President/Security Officer, Assistant Vice President/Training Officer, Internal Auditor, and a CRA Officer (preferably the President or a member of senior management). The Compliance Committee will ensure that staff receive sufficient training and guidance and that the bank's compliance status is assessed at least annually.

 

The following describes the specific findings of, and recommendations resulting from, the review.

SPECIFIC FINDINGS

Community Reinvestment Act (CRA)

The bank's CRA Statement, CRA Notice, CRA Public File, and board of directors meeting minutes were reviewed to assess the bank's level of compliance with the CRA.

The CRA Statement, CRA Notice, and CRA Public File all contain the information required by regulation. In addition, the board of directors reviewed and approved the CRA Statement at its June 1995 meeting. The board also regularly discusses the bank's CRA-related activities.

 

It is recommended that subsequent to the end of 1995 a self-assessment be conducted that will detail the bank's compliance with CRA regulations. While not required, it is recommended that the results of the self-assessment be provided to the board of directors.

Fair Lending Laws and Regulations

Equal Credit Opportunity Act (ECOA)

Fair Credit Reporting Act (FCRA)

Fair Housing Act (FHA)

 

To determine the bank's level of compliance with fair lending laws and regulations, the bank's loan policy, twenty-five (25) denied loan applications, and fifty (50) approved loans were reviewed. The bank does not currently operate under formal policies or procedures concerning compliance with specific consumer laws or regulations.

The board has adopted and management has implemented nondiscriminatory lending standards. There are no recommendations in this regard.

Review of the denied loan applications revealed ten instances in which the documentation contained in the file did not support the reason for denial in violation of Section 202.9(b)(2) of Regulation B. It is recommended that lending staff be instructed to clearly document all reasons for denial.

The denied loan application review also revealed that in twelve situations, the Adverse Action Notice was not provided within the time frame required by Section 202.9(a) of Regulation B. It is recommended that lending staff be instructed regarding the importance of adhering to these regulatory time frames.

 

SPECIFIC FINDINGS

Fair Lending Laws and Regulations (continued)

Review of the approved loan applications revealed that in each instance the borrowers were not provided with the Appraisal Availability Notice required by Section 202.5a(a)(2)(i). To prevent future violations, it is recommended that management determine whether to automatically provide customers with a copy of an appraisal (independent or internal) or to provide customers with the notice advising them of their rights to obtain a copy of the appraisal used in connection with their loan application. It is recommended that this determination be described in formal procedures that will provide staff guidance.

 

While not required by regulation, it is recommended that the board of directors adopt a policy statement concerning compliance with fair lending laws and regulations that will assign responsibility and provide for periodic training and monitoring. In addition, it is recommended that management develop and implement procedures that will provide specific staff guidance.

A list of the denied and approved loan applications reviewed is contained in the Exhibit section of this report.

 

Lending Laws and Regulations

Truth-in-Lending Act (TILA)

 

Fifteen (15) denied residential mortgage loan applications, thirty (30) approved residential mortgage loans, the bank's initial home equity line and credit card disclosures, two consecutive months of home equity lines statements for five customers and two consecutive months of credit card statements for five customers were tested to assess the bank's compliance with the TILA and Regulation Z. The bank does not currently operate under a formal policy or specific procedures.

 

Review of the residential mortgage loans revealed three instances in which the rescission period was waived at the borrowers' request. As stated in Section 226.23(e) of Regulation Z, this is permissible only in financial emergencies. In one situation, the borrower was going out of town and had bills to pay; another customer perpetually waived her right to rescind based on unspecified financial emergencies; and one couple waived their right to rescind due to Christmas expenses. Management is reminded that permitting non-emergency rescission waivers is a substantive violation and may result in significant financial liability to the bank. In that regard, management is cautioned to only permit rescission waivers in extreme circumstances. To prevent these situations from occurring in the future, it is strongly recommended that specific procedures be immediately implemented and that all lending staff receive training concerning rescission provisions.

SPECIFIC FINDINGS

Truth-in-Lending Act (TILA) (continued)

 

The approved residential mortgage loan review also revealed one instance in which it appears that the loan was funded during the rescission period in violation of Section 226.23(c). This is considered a substantive violation. To prevent future such violations, it is recommended that lending staff be provided training concerning rescission provisions.

In addition, there was one instance in which the finance charge was overstated by an amount that exceeded regulatory tolerance. Given that this is an isolated incident, there are no recommendations for improvement.

 

Review of the denied applications revealed one instance in which the initial Regulation Z disclosure was not provided as required by Section 226.19(a). Continued monitoring is recommended to determine whether additional staff training is necessary.

 

The bank's home equity line initial disclosure generally complies with regulatory requirements but does not disclose when fees are payable to third parties. It is recommended that this information be inserted or separately provided to customers. Review of the credit card application/disclosure revealed that it does not contain the statement that charges incurred are due when the periodic statement is received. It is recommended that this information be inserted or separately provided to customers.

 

Review of the home equity line statements revealed that the statements contain the required information; however, payments do not appear to be credited on the date they are received. Specifically, payments listed as being received on a Friday are not credited until Monday and a payment submitted four days prior to the due date was not credited until the due date. Of the statements reviewed, only one payment, that was submitted after the due date, was credited when received. Regulation Z specifically states that payments should be promptly credited unless the payment does not conform to the bank's requirements for payment (i.e., account number, payment stub, etc.). It is recommended that the accounts be researched to determine whether immediate credit should have been provided to these customers. If so, the bank may be required to re-credit the customers during the following billing cycle as the difference in crediting will affect the average daily balance that is used to calculate the finance charge. Following are the accounts requiring research:


NAME ACCOUNT NUMBER

 

Burton 82818

 

Grant 82825

 

Tracy 82883

 


SPECIFIC FINDINGS

 

Truth-in-Lending Act (TILA) (continued)

 

Review of the credit card statements revealed that the statements contain the information required by regulation and that the average daily balances and finance charges are accurately calculated. No adverse findings were noted.

While not required by regulation, it is recommended that the board of directors adopt a policy statement concerning TILA/Regulation Z compliance that will assign responsibility and provide for periodic training and monitoring. In addition, it is recommended that management develop and implement procedures that will provide specific staff guidance.

Real Estate Settlement Procedures Act (RESPA)

To determine the bank's level of compliance with the RESPA and Regulation X, the OCC examination, five approved residential mortgage transactions, and five denied residential mortgage loan applications were reviewed. The bank does not currently operate under a formal policy or procedures.

The examination report stated that disclosures required by the RESPA, including the HUD-1 Settlement Statement, the Mortgage Servicing Transfer Disclosure, the Good Faith Estimate, and the Special Information Booklet, were not provided or copies, or evidence of receipt by the customer, were not maintained in the files.

 

To prevent future violations of the RESPA, the Executive Vice President in charge of lending discussed RESPA requirements with lending staff. In addition, a form has been developed and implemented to verify that required RESPA disclosures were provided; customers will sign and date this form.

Review of the five approved residential mortgage transactions revealed that, with one exception, RESPA disclosures were provided as required. It is recommended that continued monitoring of RESPA transactions be conducted to ensure that corrective action initiated by management is sufficient.

Review of the five denied residential mortgage loan applications revealed one instance in which the mortgage servicing transfer disclosure was not provided as required by Section 3500.21. It is again recommended that continued monitoring of RESPA transactions be conducted to ensure that corrective action initiated by management is sufficient.

 

SPECIFIC FINDINGS

 

Real Estate Settlement Procedures Act (RESPA) (continued)

 

While not required by regulation, it is recommended that the board of directors adopt a policy statement concerning RESPA compliance that will assign responsibility and provide for periodic training and monitoring. In addition, it is recommended that management develop and implement procedures that will provide specific staff guidance.

Flood Disaster Protection Act (FDPA)

The compliance examination and five residential mortgage loan files were reviewed to assess the bank's compliance with the FDPA. The bank does not currently operate under a formal policy or specific procedures.

The examiners noted no exceptions with regard to the bank's FDPA compliance. The file review also revealed no errors.

It is recommended; however, that the board of directors adopt a formal policy statement concerning FDPA compliance that assigns responsibility and provides for periodic training and monitoring. It is also recommended that management develop and implement formal procedures that will include the Standard Flood Hazard Determination form the use of which is mandatory beginning January 2, 1996.

 

Credit Practices Rule

Three consumer loans having co-signers were reviewed to test the bank's compliance with the rule. The consumer contracts do not contain prohibited provisions and the appropriate co-signer notice is contained on the back of the combination note/TILA disclosure.

 

SPECIFIC FINDINGS

 

Savings Laws and Regulations

 

Truth-in-Savings Act (TISA)

To assess the bank's compliance with the TISA and Regulation DD, the examination report, bank policy, and account brochures were reviewed. In addition, periodic statements for interest bearing accounts held by individuals were tested regarding the accuracy of the interest paid and the Annual Percentage Yield (APY) earned.

 

The bank's current TISA policy reflects general regulatory requirements but does not provide for periodic training and testing. In addition, implementing procedures have not been developed. It is; therefore, recommended that the policy be amended to provide for training and testing and that management develop and implement specific procedures that address Regulation DD compliance.

Review of the account brochure revealed that for the 18-month (both fixed and variable) and the 30-month IRA accounts, there are conflicting statements regarding the withdrawal of interest. Specifically, the brochure states "You can withdraw interest credited to your account in the term before maturity of that term without penalty"; then under transaction limitations, the brochure states "You cannot withdraw interest from your account before maturity". The brochure should be revised to correctly reflect whether interest withdrawals are permitted.

 

The bank's account brochure states that the bank requires a social security card and picture identification to open a checking account. While demand deposit accounts are not subject, per se, to fair lending rules and regulations, it is recommended that management consider alternative identification such as an alien identification card or cards issued to elderly persons for identification purposes.

 

The bank's periodic statements contain the information required by Regulation DD. In addition, the interest paid and the APY earned are within regulatory tolerance. The periodic statements contain the "average balance for APY" which does not appear to correspond to the interest paid or the APY earned. It is; therefore, recommended that this be deleted from the periodic statement if possible.

 

SPECIFIC FINDINGS

 

Expedited Funds Availability Act (EFAA)

 

The bank's policy, procedures, account brochure, and a sample of eight recently completed hold notices were reviewed to determine the bank's level of compliance with the EFAA and Regulation CC.

The bank's policy and procedures generally reflect regulatory requirements and bank practices; however, it conflicts with the account brochure regarding the availability of electronic deposits. The policy/procedures state that such deposits are available the next day following deposit while the brochure states that deposits are available the day they are received by the bank. It is recommended that the bank revise the policy/procedures to reflect that electronic deposits are immediately available.

The bank's general policy is to make funds available on the next business day following deposit; holds are imposed on a case-by-case basis. The bank's procedures specify how to complete a hold notice. For customer convenience, it is recommended that the actual date the funds will be available be reflected on the hold notice; it will be necessary to revise the bank's procedures to reflect this change.

 

Review of a sample of eight recently completed hold notices revealed that in one instance availability was not provided on the proper day in violation of the EFAA and Regulation CC. In addition, there were five instances in which the hold notice was not correctly completed. Specifically, the name or address was not completed or the reason for the hold was listed under the check description. It is recommended that staff responsible for EFAA/Regulation CC compliance receive additional training concerning hold notice completion. A list of the hold notices reviewed is contained in the Exhibit section of this report.

Electronic Fund Transfers Act (EFTA)

 

To assess the bank's compliance with the EFTA and Regulation E, its policy, procedures, account brochure, and periodic statements were reviewed.

The bank's policy and procedures generally reflect regulatory requirements and bank practices; however, it is recommended that the policy/procedures describe who, or what area of the bank, is responsible for resolving EFT errors and for communicating with customers concerning the error resolution.

The bank's policy/procedures also do not discuss the types of transfers permitted or transfer limits. It is recommended that the policy/procedures refer to the bank's account brochures which reflect this information.

 

SPECIFIC FINDINGS

 

Electronic Fund Transfers Act (EFTA) (continued)

 

The bank's account brochure states that a customer will only be liable for the first $50 if a lost or stolen ATM card is reported to the bank within four days. The disclosure also states that unauthorized or disputed transfers reflected on periodic statements must be reported to the bank within 90 days; the bank's policy/procedures states that unauthorized transfers must be reported within 60 days. The EFTA and Regulation E state that a lost or stolen ATM card must be reported within 2 days to limit the customer's liability to $50 and that unauthorized transfers must be reported within 60 days of the first periodic statement. It is recommended that a label reflecting the proper time frames be developed and placed over the existing language so that customers are provided with proper information. It is also recommended that existing customers be provided a re-disclosure and that recently-reported errors be researched to determine whether customers were harmed by the incorrect disclosure.

 

Review of the bank's periodic statements revealed that they contain required information. No adverse findings were noted.

Operations Laws and Regulations

 

Bank Secrecy Act (BSA)

 

The bank's policy, procedures, most recent regulatory compliance examination, large cash transaction report, recent Currency Transaction Reports (CTRs), exemption list, and Monetary Instruments Log were reviewed to determine the bank's level of compliance with the BSA and implementing Treasury Regulations.

 

The bank's policy was approved by the board at its February 1995 meeting and provides for proper reporting, monitoring, and training. It also states that the bank's Compliance Officer also has the responsibility of BSA Officer; this is not appropriate.

As stated above in the Compliance Management section, it is recommended that the bank form a Compliance Committee that will oversee daily operations. The BSA Officer should be a member of this committee. To ensure adequate controls, it is recommended that Executive Vice President of Operations, or a designee, be appointed the position of BSA Officer. The BSA Officer will ensure prompt and accurate reporting of cash transactions and will provide daily guidance to staff. Appointing the Executive Vice President of Operations as BSA Officer will provide the Compliance Officer and Internal Auditor with the independence necessary to properly review or audit the bank's BSA compliance program. Management is reminded that implementation of the above recommendations will necessitate revising the bank's current policy/procedures to reflect the separation of duties.

 

SPECIFIC FINDINGS

 

Bank Secrecy Act (BSA) (continued)

 

Review of CTRs filed since the compliance examination revealed that the section regarding the identity of the individual is now fully completed. The bank has attempted to obtain the revised CTR form that became effective October 1, 1995 but had not yet received a working copy as of the date of the review and will continue to file the previous form until receipt of the revised form. The IRS stated that it is permissible to use the previous form until the end of 1995; provided, the bank has made a good faith effort to obtain the new form.

 

The bank's exemption list contains the names, addresses, and tax identification numbers of all correspondent banks. None of the bank's customers are exempted from CTR reporting requirements. While the bank's current automated system easily reports these transactions, the IRS has stated that exemptions should be used so that the IRS system does not become overloaded with unnecessary information. As recommended by the OCC examiners, management should consider exempting some of its retail customers that regularly deposit, withdrawal, or exchange in excess of $10,000.

 

Review of the monetary instruments log revealed that the bank continues to collect information that is no longer required by Treasury Regulations. It is; therefore, recommended that the Monetary Instruments Log contained in the Exhibit section of this report be utilized as it complies with current requirements.

Bank Protection Act (BPA)

 

To assess the bank's approach to compliance with the BPA, the board of director meeting minutes, security program, equipment testing, and training records were reviewed.

 

At its June 1995 meeting, the board of directors approved the bank's security program and appointed the bank's Security Officer. The security program describes opening and closing procedures, security devices, and robbery procedures. The program provides for annual training for the Security Officer and periodic staff training. There are no recommendations for improvement.

Review of the equipment testing records revealed that security devices are generally tested monthly and information regarding the testing is forwarded to the Security Officer at the main office. It appears; however, that the First County office has not forwarded such information. It is recommended that the Security Officer ensure that all offices promptly report equipment testing and failures to ensure continued security.

 

SPECIFIC FINDINGS

 

Bank Protection Act (BPA) (continued)

 

Training records indicate that, with the exception of the Second County office, the bank's entire staff received security training in June 1995. It is recommended that the Second County staff receive security training prior to year end.

 

Right to Financial Privacy Act (RFPA)

 

A recent subpoena from the SEC was reviewed and management interviewed to determine the bank's level of compliance with the RFPA. The bank does not currently operate under a formal policy or procedures.

Review of the SEC subpoena and supporting documentation revealed that the bank received proper authorization prior to complying with the SEC information request. Management is reminded that under the RFPA, the bank may recoup from the SEC its clerical, copying, and other costs associated with the information requested.

 

It is recommended that the board of directors adopt a formal policy concerning compliance with the RFPA and that management develop and implement procedures that will provide staff guidance.

Fair Debt Collection Practices Act (FDCPA)

 

The bank's loan and collection policy and procedures were reviewed to determine the bank's approach to compliance with the FDCPA.

Since the bank does not act as a "debt collector", the FDCPA does not apply. The bank has; however, adopted and implemented a "non-harassment" policy and procedures for handling bank collections. There are no recommendations for improvement.

 

                                   

Certified Regulatory Compliance Manager

Kirschler Peterson & Associates provides a full

range of financial institution consulting services.

 

Kirschler Peterson website: http://www.kirschlerpeterson.com/1095rpt.htm

 

Find out if you are a victim of predatory lending practices:

TO GET A  FREE  PRELIMINARY CONSULTATION CLICK HERE!

 

Kenneth M. DeLashmutt

"Predatory Lending Defense Specialist"

Call me most days 10 A.M. to 6 P.M. EST

Phone: 401-349-4717 EST

email: educationcenter2000@cox.net

 

| Home | Articles | Foreclosure Help | Legal Disclaimer | Case Law |

| Legal Resources| Resources | Privacy Policy | Site Map |

| About Us | Contact Us |

 

Bank Fraud Victim Center

Copyright All rights reserved.