NAFCU Compliance Blog

Regulation E Final Regulation Released: Worst Case Scenario Realized

Posted by Anthony Demangone

Yesterday, the Federal Reserve issued a final rule to amend Regulation E to limit the ability of financial institutions to charge overdraft fees for one-time POS and ATM transactions.  Under the final rule, consumers must give their affirmative "opt-in" to the overdraft program before such fees can be charged.  The compliance effective date is July 1, 2010.  Here's a nice, depressing one-page summary.

• The "opt-in" must be given for all accounts.  New and  existing accounts.
• Anyone who opts in has a continuous right to opt-out.
• You cannot bundle the opt-in for POS and ATMs with overdraft services for checks and other transactions.  In other words, ATM and POS transactions get their own, independent opt-in.
• Here's the model opt-in form.

• Again, while the rule takes affect 60 days after the final rule is published in the Federal Register, the compliance effective date is July 1, 2010.

My general thoughts?

1. This will affect budgeted revenues for credit unions that charge overdraft fees for these types of transactions.  Insert this information into your budgeting process as soon as possible.
2. It seems that Congress and regulators do not want us to earn non-interest income.  Overdraft fees. Over-the-limit fees on credit cards.  Interchange.  What would your credit union look like if it lost 80 percent of its non-interest income?  What would you have to do to survive?  Those questions are seeming more and more relevant as time passes.
3. I wonder if you'll start seeing a resurgence of monthly maintenance fees on share accounts in the not-to-distant future.

Oh, and have a nice weekend everyone.

Fed Guidance on HPMLs, "Balloons" and Ability to Repay

Posted by Anthony Demangone

Earlier this week, the Fed issued a nice guidance document to clear some confusion on higher priced mortgage loans that centered on balloon loans and verifying the borrower's ability to repay. Access the guidance here.  Before the guidance, many concluded that HPMLs with short-term balloons (less than 7 years) were a no-no.  The Fed clarifies that this isn't the case.

I'd keep an eye out for this type of guidance moving forward.  With virtually every aspect of Reg Z being amended, the Fed will have to clarify issues that pop up.  And many will.  I'd bet on it.

Here's the Q and A portion of the guidance:

Frequently Asked Questions and Answers

1. Question: Does the rule prohibit short-term balloon loans that are higher-priced mortgage loans?

Answer: No. However, the creditor must use prudent underwriting standards and, after considering consumers’ income, employment, obligations and assets other than the collateral, the creditor should determine that the value of the collateral (the home) is not the basis for repaying the obligation (including the balloon payment).

2. Question: Does that mean the creditor must verify that the consumer has assets and/or income at the time of consummation that would be sufficient to pay the balloon payment when it comes due?

Answer: No, such a requirement would effectively ban short-term balloon loans. If the Board had intended to ban these products it would have done so explicitly.

3. Question: What must the creditor do, then, to verify the borrower’s ability to repay a short-term balloon loan?

Answer: In addition to verifying the consumer’s ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral.

4. Question: How does the creditor verify, when it originates a short-term balloon loan, whether the consumer could qualify for a refinancing before the balloon payment is due?

Answer: The creditor has an affirmative duty to engage in prudent underwriting. Thus, the creditor should consider factors such as the loan-to-value ratio and the borrower’s debt-to-income ratio or residual income—all as of the time of consummation. A borrower with a high debt-to-income ratio, and/or with little or no equity in the property, will be less likely to be able to refinance the loan before the balloon payment comes due than a borrower with lower debt-to-income and loan-to-value ratios. The creditor is not required to predict the consumer’s future financial circumstances, interest rate environment, and home value.

As Tomorrow is Veterans Day...

Posted by Anthony Demangone

Tomorrow is Veterans Day.  NAFCU's offices will be closed tomorrow, and there will be no blog update.  In honor of the holiday, I wanted to share some resources that help explain the laws and regulations that apply to financial institutions when we serve men and women who are in the armed forces. 

As you know, the protections for those who serve in the military are largely grouped into two areas:

1. The Servicemembers Civil Relief Act, and
2. The recently enacted Department of Defense regulations that implemented provisions of the John Warner National Defense Authorization Act for Fiscal Year 2007.  I'll refer to these as the DoD regulations.

Here are some resources that will help you navigate these requirements.

• The FFIEC issued detailed examiner procedures regarding the DoD regulations.
• NCUA issued Letter to Credit Union 09-CU-12, which contains not only the DoD procedures from the first link, but also procedures regarding the SCRA.
• Here's a 146-page overview of the SCRA. (Courtesy of the American Bar Association.)  This loads very, very slowly.
• Here's an SCRA guide published by a retired Army Reserve JAG colonel.  (Courtesy of the American Bar Association.) It is very detailed, and very handy.

• And here's a free SCRA brochure developed by NAFCU. (Member log-in needed.)

Finally, here are a few thoughts.  I tend to be a conservative fellow when it comes to compliance.  While the SCRA gives creditors the right to challenge those who assert rights under the law, I would tread very carefully in this area.  In addition, I wouldn't get too caught up in tracking exactly when rights spring to life, and whether the servicemember has all the proper paperwork to you before you take action, for example, to lower rates on covered loans. Here's why.

• Remember the purpose.The purpose behind the SCRA is to protect those who are in harm's way, protecting us.  Sure, the servicemember has to meet certain procedural hurdles, but I'd always keep this in mind: Those in need remember those who help them. 
• How much are you talking about, anyway?  So you have to lower an interest rate from 11.9 percent to 6 percent. How much money is that costing your credit union on an annual basis?  Or on used car loan that currently has a 7.9 rate? 
• Remember your reputation.  Keeping in mind the last bullet point, is it worth it to be a real stickler on the SCRA?  Or does it make sense to be lenient?  You can always create a policy that is more beneficial than the SCRA requires.  One of my mentors had a good saying when people asked her whether the SCRA really protected a particular servicemember.  She would reply with this question: Would you want your SCRA decision regarding a particular member of the armed forces on the front page of your local newspaper? 

To all of you, enjoy the holiday.  And to by brother-in-law Rob, and my cousins Mark, Thomas, Patrick, Kyle, Devin, Matt and Corrie, many, many thanks for your service.

Grab Bag

Posted by Anthony Demangone

Here are a few items of interest.

• HUD has issued a number of civil money penalties against financial institutions.  In addition, HUD has settled allegations of non-compliance with several others.   The number of items in this notice makes me wonder whether HUD's enforcement office has been pressed to kick it up a notch.
• Speaking of HUD, NAFCU is hosting a webcast this Thursday.  Barton Shapiro, Deputy Director for RESPA and Interstate Land Sales from HUD will be one of the speakers. If you have concerns with the looming compliance deadline, this might be right up your alley.  Sign up here.
• NAFCU Members: Don't forget about our "Year-End Review," a NAFCU member-only conference call on Thursday, Nov. 19, from 4-5 p.m. EST. NAFCU President Fred Becker and the association's senior staff will report on the latest developments in Washington affecting credit unions. Our Call-In is free, but you must register to participate. Call our Member Service Center at (800) 344-5580 or (703) 522-4770; or you may register online at http://www.nafcu-training.org/callin.
• NCUA has issued Regulatory Alert 09-RA-12 to highlight recent changes to Regulation D regarding reserve requirements.
• NCUA has issued Regulatory Alert 09-RA-11 to remind us about recent changes to Reg Z closed end lending brought about by MDIA.  Old news, right?  Not quite. The Reg Alert also contains the new questionnaire that NCUA examiners will use to measure your compliance.   
• Finally, this caught my eye when reviewing the Reg Z open end proposal.  File this one under: paternalism.

As you may recall, credit card lenders will have to make disclosures regarding the cost if consumers only make the minimum payment on their balance.  If the estimated payoff time is less than two years, it can be disclosed in months.  If it is more than two years it must be disclosed in years AND rounded to the nearest year.  But, here is what caught my eye.

“The Board believes that disclosing the estimated minimum payment repayment period in years (if the estimated payoff period is 2 years or more) allows consumers to better comprehend longer repayment periods without having to convert the repayment periods themselves from months to years.”

There are so many things I want to type right now.  But I won't. (Sigh.)

President Signs H.R. 3606 into Law

Posted by Anthony Demangone

Earlier today, President Obama signed H.R. 3606 into law, which provides a technical fix for the 21-day issue by limiting its affects to credit card accounts.  Let me know when you're done clapping.

OK.  Here's what that did.  With a stroke of the pen, the Truth in Lending Act has been amended.  The Fed will need to update regs and guidance to implement this, and we can expect that information when the Fed issues the final rule to implement the portions of the Credit CARD Act due to go into affect on February 22, 2010.  Those rules should come by year's end.  But no matter how long the Fed takes, the law was changed the moment President Obama's signature graced the document.

I cannot say with 100 percent certainty how the Fed will address this issue.  There always is a bit of haziness until you see what the final regs say.  Can credit unions that moved due dates simply move them back without some sort of notice?  I wouldn't think so.  But again, we'll have to wait for the final rule to know what the Fed really thinks about all of this. In any event, this sure is wonderful news. 

And with the news, it signals the end of one of the strangest chapters in my life as a compliance professional.

Regulation Z Proposal: Online Disclosures of Credit Card Account Agreements

Posted by Anthony Demangone

First, please accept my apology for such a post on a Friday. 

As you ready your credit union to comply with the massive changes to Regulation Z's open-end rules, do not put off today's topic too long.  While the online disclosure of credit card account agreements sounds like it could be simple...it simply is not.  In short, you'll need to post your credit card agreement on your website. And you'll have to submit them to the Fed as well.  The Fed will create a website where people can go to view all the credit card agreements that exist in American. 

Yee-haw.  Pop me some popcorn.  I can't wait.

In today's post, I wanted to give you a taste of what is involved.  For painful, excruciating detail, please refer to this document. 

• First, note that the Fed created a "small issuer" exemption.  If your credit union has less than 10,000 credit card accounts open (including dormant accounts), you are not subject to the requirement to submit agreements to the Fed. 
• The new requirements will be housed at 12 C.F.R. Part 226.58.
• Even if your agreements do not include pricing (i.e., APRs), you'll need to provide this information to the Fed, along with applicable fees.
• You only need to upload agreements to the Fed that you currently offer to the public.
• You'll need to register with the Fed, and upload agreements electronically to them 4 times a year.  The Fed indicates that it will provide specific details on how to do this in the near future. 
• While the quarterly submissions are generally due no later than the first business day after January 31, April 30, July 31, and October 31, there is special timing for the first two submissions.  The first submission would be due February 22, 2010, and the next one would be due August 2, 2010.
• Here's the rub.  Or one of them, anyway.  If you change your agreement, including pricing or provisions) you need to update the agreement on the next quarterly submission.  And if an agreement no longer is offered, you'll need to notify the Fed about that as well.
• Much of the specifics are outlined in Appendix N of Regulation Z.

As I said, I apologize for sending this to you on a Friday.

***

We are reworking our regulatory compliance newsletter.  After we began the process, we realized that we had a terrible name.  What happens when you let attorneys name a newsletter?  Well, we called ours...The NAFCU Regulatory Compliance Newsletter.  Pretty creative, huh?

Well, what should we call it?  We're asking you, NAFCU members, to come up with a new name for the new newsletter.  I'll give some sort of award for two entries: 1) one for the name we end up using; and 2) one for the name that makes me laugh the hardest.

Send ideas to compliance@nafcu.org.

***

Have a great weekend, everyone!  (Even you Buckeye fans.)

Organizing the Compliance Information Flow; Webcasts

Posted by Steve Van Beek

Wow.  It has been a whirlwind of a year.  The speed and complexity of the regulatory changes has been maddening.   

I utilize a few unique tools to help obtain and organize compliance information to make my life easier and less stressful.  At last year's Compliance Seminar in San Francisco, I presented on "Organizing the Compliance Information Flow" and I believe these tools could be very useful to compliance officers looking to sift through information during compressed implementation periods.  I created a powerpoint slideshow as well as a user's guide to detail some of the tools I use to stay organized.  Hopefully some of these resources are useful and can help save you time.  

***

On Thursday, November 12, NAFCU will host a webcast on Essential Updates on FHA Lending Programs and RESPA.  Assistant Secretary of Housing - FHA Commissioner, David H. Stevens will discuss updates and changes to FHA Lending Programs.  The webcast will also address implementation of RESPA - scheduled to be effective January 1, 2010.  This webcast is a great opportunity to hear directly from FHA Commissioner Stevens on FHA lending and RESPA.  NAFCU's President and CEO, Fred Becker, will moderate the webcast.  Please note: Due to Veteran's Day, this webcast will be on Thursday rather the customary Wednesday timeslot.  

Additionally, NAFCU will be offering a unlimited webcast subscription for 2010.  This is your opportunity to sign-up for all of NAFCU's webcast at one price for the year.  There are a minimum of 18 webcasts planned for 2010.  Given the rapidly changing regulatory environment, this subscription allows you to ensure you are able to attend and view all of NAFCU's webcasts.  Remember, even if you are unable to attend the live webcast - all of NAFCU's webcasts are archived for 6 months for later viewing.   

Reg Z Proposal: Late Payment Disclosures

Posted by Sarah Loats

Today we'll continue through the Regulation Z proposal and focus on late payment disclosures for periodic statements. For those of you familiar with the Federal Reserve's January 2009 rule, effective July 1, 2010, the proposed rule is revising that final rule in order to implement the new Credit CARD Act amendments to TILA. Here is the language from the proposed rule that relates to this provision.

Here are some items of note from the proposal:

- The requirements apply only to credit cards.

-The due date is required on the statement regardless of whether a late fee or penalty rate would be assessed.

-The due date disclosed must be the same date each month. A proposed comment clarifies that this means the same numerical day each month (i.e., the 25th of each month). Another comment provides that the credit union would be able to change the due date from time to time, such as in response to a member request, provided the new due date will be same date each month.

- Proposed staff comments explain that the date to be disclosed is the due date according to the "legal obligation between the parties" and that a courtesy period should not be taken into account.

-If the due date falls on a day the credit union does not accept payments, it must still reflect that day as the due date. An example provided in the proposed rule - the member's due date is on the 4th of each month, and the credit union does not accept payments by mail on July 4th. Under another portion of the proposal, the credit union would have to accept a payment received by mail on July 5th as timely, but it must still disclose the 4th as the due date.

The portion of the proposed rule relating to the formatting of the late payment (and repayment) disclosures can be found here.

An excerpt from the proposal summarizes the format requirements nicely:

Consistent with TILA Section 127(b)(12), as revised by the Credit Card Act, the Board proposes to retain the requirement in § 226.7(b)(13) that credit card issuers disclose the payment due date on the front side of the first page of the periodic statement. In addition, credit card issuers would be required to disclose the amount of any late payment fee and penalty APR that could be triggered by a late payment in close proximity to the due date. Also, the due date, late payment fee, penalty APR, ending balance, minimum payment due, and the repayment disclosures required by proposed § 226.7(b)(12) must be grouped together. See § 226.7(b)(13). The Board believes that these format requirements fulfill Congress’ intent that the due date and late payment disclosures be grouped together and be disclosed in a conspicuous location on the periodic statement.

Tuesday Grab Bag; Group Photo from Seminar

Posted by Anthony Demangone

Here's some compliance-related odds and ends.

• The FTC has delayed the effective date of its Red Flags rule again, this time until June 1, 2010.  Remember, the FTC's version of this rule does not cover federal credit unions.  So the extension does not benefit you FCUs.  I mention this news because the FTC announcement may confuse some within our industry.  (Now, if only the FTC would talk to HUD about extending the RESPA deadline...)
• NCUA has announced that we can expect its proposed rule that will address corporate credit unions in its November 19th board meeting.
• I'm guessing it was not fun working at this Ohio bank recently.  (Link to www.bankinfosecurity.com).  Someone walked in and took three storage bins that contained paper that was to be shredded.  Oh, and each bin weighed 500 pounds.  This would be a nice story to use to reinforce your security procedures.  Along those lines, don't forget that Appendix B to Part 748 contains NCUA's guidance on response programs.  If the incident noted above happened at your credit union, how long would it take you to respond as outlined in that guidance? 
• NCUA, along with other regulators, adopts "Prudent Commercial Real Estate Loan Workouts" guidance.  If your credit union does commercial real estate lending, this is a must read.
• Relatedly, NCUA issued Letter to Credit Union 09-CU-19 in September, to share a Supervisory Letter given to examination staff to help them evaluate residential real estate modification programs.   If your credit union is doing workouts, your examiner will likely scan this guidance before visiting your shop.  Ergo, you should review it as well.

I guess that's enough.  Enjoy your Tuesday!

***

Here's a group photo of our Compliance Seminar attendees from Charleston.  A full week of compliance, and they are still all smiling.  Incredible! To all the attendees, thanks so much for attending.  I hope you had as much fun as I. *

 

* (I always waffle on how to end that sentence.  As much fun as I?  Or as I had?  Is the had implied?  It sounds fancier to leave it out.  But what do I know?  Ugh.)

Regulation Z Proposal: Substitute or Replacement Card Disclosures

Posted by Anthony Demangone

The Regulation Z proposal tackles a number of sticky issues.  The issue of substitute and replacement cards is one of them.  A member may request additional features to a credit card account that will require a change in the disclosures.  So, must you send a change in terms or a set of brand new initial disclosures?  Here's what the Fed is thinking.

    The Board understands that, when an existing cardholder requests new features or benefits, disclosure of the new terms pursuant to § 226.6(b) may be preferable because the cardholder generally will not want to wait 45 days for the new terms to take effect (as would be the case if notice were provided pursuant to § 226.9(c)(2)). Thus, this comment is intended to provide card issuers with some flexibility regarding whether to treat the substitution or replacement as the opening of a new account (subject to § 226.6(b)) or a change in the terms of an existing account (subject to § 226.9(c)(2)).
    However, the Board does not intend to permit card issuers to circumvent the disclosure requirements in § 226.9(c)(2) by treating a change in terms as the opening of a new account. Accordingly, the comment would further state that whether a substitution or replacement results in the opening of a new account or a change in the terms of an existing account for purposes of the disclosure requirements in §§ 226.6(b) and 226.9(c)(2) is determined in light of all the relevant facts and circumstances.  74 Fed. Reg. 54131.

The Fed proposes that creditors look at the following factors:

1. Does the member get a new credit card?
2. A new account number?
3. New features?
4. Does the card work at a greater or lesser number of locations after the change?
5. Was it done on an individual basis?
6. Does the card become a different type of card (does a charge card become credit card, for example)

When most of these facts are present, the substitution or replacement is really the opening of a new account, for which new account disclosures are required.  Note: the Fed is looking for comments on this issue.

If you want to read more about this issue, here's the part of the proposal that deals with this issue.

***

I just realized that is is November.  Where did this year go?