Pub. 9 2018 Issue 4

www.wvbankers.org 8 West Virginia Banker Skip-a-Pay Programs: Holiday Miracle or Coal in the Stocking? By James McGuire, Associate General Counsel, Compliance Alliance ‘T is the season! Sleigh bells are jingling, leaves are turning, pumpkin-spiced lattes are brewing, and skip-a-pay programs are back in full force. A tra- ditional mainstay for community banks around the holidays, skip-a-pay programs allow loan borrowers to defer one or more payments to free up cash to spend elsewhere (like on holiday gifts, perhaps?). But like a brooding Grinch on the outskirts of Whoville, a predatory threat lurks within these seemingly helpful programs, which the Dallas Branch of the FDIC addressed in its most recent quarterly newsletter. To avoid predatory concerns with skip-a-pays, the FDIC addressed three types of consumer disclosures: advertise- ments, up-front disclosures, and adverse action notices. When it comes to advertising, a bank must identify any fees and the expiration date for the program. Fees for skipping or deferring payment should be clearly stated and the way in which they are incurred explicitly disclosed, and expiration dates must be stated in a way that is not misleading, especial- ly when those dates come immediately after the grace period for a monthly payment. Regarding up-front disclosures for the program—whether a part of advertising or given separately—banks should ensure customers are aware of all terms and conditions of the offer. The following issues should be prioritized and addressed in the disclosures where applicable: credit life/disability insur- ance running less than the full loan term; mortgage escrow account maintenance and possible shortages resulting from a deferred payment; interest continuing to accrue during a deferred-payment month; when a deferred payment’s interest will be paid; whether a deferred payment generates added interest over the life of the loan; and how the final loan payment is affected. For adverse action notices, if a custom- er applies but doesn’t meet a skip program’s terms, that’s an “adverse action” per Regulation B, so an adverse action notice must go out within the required timeframe. Addition- ally, if a credit report informs the decision to turn down a customer, the bank must provide the required FCRA credit information in the adverse action, including credit score data if the credit score was used. In addition to the FDIC’s suggestions, we have a few of our own. First of all, make sure that any sort of hazard, flood or property insurance on the loan collateral will cover through- out an extended term, or otherwise inform the borrower that the property may not be covered. Second, the dollar amount of any skip-a-pay fee should be reasonable based on market conditions within a bank’s own service area. Third, avoid using a ‘bait’ approach in advertising, keeping UDAP in mind and shunning misleading descriptions of the program such as “free money” or “more cash in your pocket.” Lastly, although the phrase “skip-a-pay” is fine to use as a general descriptor, make sure to refer to the program as a deferral rather than a skipped payment in the fine print, unless a payment is actual- ly going to be skipped. Skip-a-pay programs can be a great option for strapped bor- rowers looking to have a little extra cash on hand for holiday cheer, but it’s important to not take these heartstring-tug- ging products too far in a way that preys upon wintertime vul- nerability. For more about discounted rates for new member- ships, and a complete list of all the bank compliance services, please call C/A’s Membership Team at (888) 353-3933 or contact them at: info@compliancealliance.com.  JamesMcGuirehasworkedasanattorneyand legalresearcher inthefinancial industrysince 2010. After graduating from the University of Minnesota Law School in 2007, he served as Assistant General Counsel for the Texas Attorney General in the Open Records Division, and later worked as a solo practitioner in the Austin area. He has extensive first-hand experiencewithopenrecords,mortgageservicing,consumer lawandsecuritiesregulation. Skip-a-pay programs can be a great option for strapped borrowers looking to have a little extra cash on hand for holiday cheer, but it’s important to not take these heartstring-tugging products too far in a way that preys upon wintertime vulnerability.