NAFCU Compliance Blog

CFPB Proposes Changes to Credit CARD Act: Ability-to-Repay for Stay-At-Home Spouses

Written by Steve Van Beek

Yesterday, the CFPB followed a NAFCU recommendation (see page 3) and proposed a rule to change 12 CFR 1026.51 of Regulation Z.  The CFPB's press release provides an explanation on how the changes would help stay-at-home spouses and partners:

"The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) became law in 2009.  The CARD Act requires that card issuers evaluate a consumer’s ability to make the necessary payments before opening a new credit card account. Under current CARD Act regulations issued by the Federal Reserve, a card issuer generally may only consider the individual card applicant’s income or assets.

Data made available to the Bureau suggest that some otherwise credit-worthy individuals have been declined for credit card accounts under the current regulation, even though they have the ability to make the required payments.  Discussions with industry sources indicate that a significant number of these individuals may be stay-at-home spouses or partners with access to income from an employed spouse or partner.

The Bureau’s proposed revision would allow credit card applicants who are 21 or older to rely on third-party income to which they have a reasonable expectation of access.  Although the proposal applies to all applicants regardless of marital status, the Bureau expects that it will ease access to credit particularly for stay-at-home spouses or partners who have access to a working spouse or partner’s income."

The proposed rule can be found here.  The summary in the proposed rule is also a useful overview:

"SUMMARY:  The Bureau of Consumer Financial Protection (Bureau) is proposing to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation, which interprets the requirements of Regulation Z.  Regulation Z generally prohibits a card issuer from opening a credit card account for a consumer, or increasing the credit limit applicable to a credit card account, unless the card issuer considers the consumer’s ability to make the required payments under the terms of such account.  Regulation Z currently requires that issuers consider the consumer’s independent ability to pay, regardless of the consumer’s age; in contrast, TILA expressly requires consideration of an independent ability to pay only for applicants who are under the age of 21.  The Bureau requests comment on proposed amendments that would remove the independent ability-to-pay requirement for consumers who are 21 and older, and permit issuers to consider income to which such consumers have a reasonable expectation of access."  (Emphasis added).

The comment period will extend for 60 days after the proposal is published in the Federal Register.  NAFCU's Regulatory Affairs team will be providing a Regulatory Alert for NAFCU members and soliciting comments on the proposal.  

CFPB Releases Semiannual Regulatory Agenda - Spring 2012; Seminar in Seattle

Written by Steve Van Beek

CFPB Regulatory Agenda.  Yesterday, the CFPB posted its Semiannual Regulatory Agenda - for spring 2012.  The previous Semiannual Regulatory Agenda was released in February 2012.  The latest release follows the same format and includes a listing of regulations in the various rulemaking stages: prerule stage, proposed rule stage, final rule stage, long-term actions and completed actions.  

Below is a listing of the various future regulations - organized by rulemaking stage.  Keep in mind the agenda is current as of April 13, 2012 and the CFPB has taken numerous actions since putting this agenda together.    

Prerule Stage:

• Registration of Certain Nonbank Covered Persons
• Supervision of Larger Depository Institutions and Affiliates
• Home Mortgage Disclosure Act (Regulation C)
• Requirements for Prepaid Cards (Regulation E) 

Proposed Stage:

• Amendments to TILA and FIRREA Concerning Appraisals
• Disclosure Rules and Substantive Protection for Certain High Cost Mortgage Loans (Regulation Z)** (proposed on July 9th)
• Mortgage Originator Standards (Regulation Z)
• Mortgage Servicing (Regulation X; Regulation Z)
• TILA/RESPA Mortgage Disclosure Integration (Regulation X; Regulation Z)** (proposed on July 9th)
• Credit Card Pre-Opening Account Fees (Regulation Z)
• Procedural Rule To Establish Supervisory Authority Over Certain Nonbank Covered Persons Based on Risk Determination
• Supervision of Certain Nonbank Covered Persons—Defining Larger Participants in Certain Consumer Financial Product and Service Markets (LP 2) 
• Copies of Appraisals or Other Valuations To Be Furnished by Creditor (Regulation B)

Final Rule Stage:

• Supervision of Certain Nonbank Covered Persons—Defining Larger Participants in Certain Consumer Financial Product and Service Markets (LP 1)** (finalized on July 16th)
• Disclosure of Records and Information
• State Official Notification Rule
• Rules Relating to Investigations
• Rules of Practice for Adjudication Proceedings
• Restatement of Federal Consumer Financial Law Regulations
• Requirements for Escrow Accounts (Regulation Z)
• TILA Ability to Repay (Regulation Z)
• Confidential Treatment of Privileged Information
• Disclosure Rules for Remittance Transactions (Regulation E)

Long-Term Actions:

• Alternative Mortgage Transaction Parity (Regulation D)
• Business Lending Data (Regulation B)
• TILA Mortgage Amendments (Regulation Z) 

Completed Actions: 

• Disclosure Rules for Remittance Transactions (Regulation E)

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Only 27 potential rulemakings!!  The Regulatory Agenda also includes a short summary of each rulemaking that is useful for providing a quick overview of what will be covered by the rulemaking.  However, as last Monday's proposed rules show - a short summary doesn't do much when the proposals are 1099 pages and 293 pages.  

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NAFCU's 2012 Regulatory Compliance Seminar.  Luckily, you don't have to read and understand all 27 potential rulemakings on your own.  We'll be covering quite a few of them at our 2012 Regulatory Compliance Seminar in Seattle, Washington - October 23-26.

The program-at-a-glance is available here (and we'll be including additional sessions as the proposals continue to flow).  We already have a session on the TILA/RESPA mortgage disclosures, the upcoming mortgage servicing proposal (including the periodic statement requirement) as well as a session on the remittances final rule.  Detailed session descriptions can be found here.

Remember - you do not need to be a NAFCU member to attend.  And, Save $100 if you Register by August 31st!

CFPB Launches Consumer Complaint Database; Final Regulation; Comment Letters

Written By JiJi Bahhur, Regulatory Compliance Counsel

Consumer Complaint Database.  The Consumer Financial Protection Bureau (CFPB) has launched a Consumer Complaint Database on credit cards.  The database is available to the public and can be accessed here. 

The idea behind the Consumer Complaint Database is to allow the public access to information such as what is being complained about, when it was complained about, why it was complained about, and the company that the complaint concerns.  Also, if action has been taken on the complaint, the database will hold information as to whether the company’s response was timely, how the company responded, and whether the consumer disputed the company’s response.  The consumer’s identity will be withheld. 

The database will include only those credit card complaints received by the CFPB on or after June 1, 2012.  The complaints will be uploaded only after the company verifies that it has been correctly identified by the complainant, but the company will only have 15 days to make the verification. 

It should be noted that the database will only contain information of credit unions directly supervised by the CFPB - those with over $10 billion in assets. 

As of now, the database’s focus is on credit cards, but this will eventually be expanded to other consumer issues as well.  As a head start, the CFPB has also released a snapshot of the complaints it has received on credit cards, mortgages, private student loans, and bank products through June 1, including six stories of success. These can be located here. 

Final Regulation.  NAFCU’s Regulatory Affairs Team has issued its Final Regulation on Loan Workouts and TDR Reporting.  It can be located here (12-EF-05) and is available to NAFCU members only.

Comment Letters.  Yesterday, NAFCU submitted two comment letters, one on Overdraft Protection Programs and the other on Information Collections.  NAFCU’s Comment Letters are available to the public. 

Risk-Based Pricing Webinar & FAQs; NAFCU Compliance Webcast

Written by Steve Van Beek

In February 2011, the Philadelphia Federal Reserve conducted a webinar on risk-based pricing notices.  The archived webinar is still available and the Questions & Answers from the webinar were included in the First Quarter 2012 Consumer Compliance Outlook.    

Below are two that might be of interest:

• Must risk-based pricing notices be provided for denied applicants?  Section 1022.72(a) of Regulation V (12 C.F.R. 1022) specifies when a creditor must provide a risk-based pricing notice to a consumer applying for credit, subject to exceptions in 1022.74.  If an application is denied and an adverse action notice is provided, a risk-based pricing or exception notice is not required.  See 1022.74(b).

• If the same rates are charged to all approved applicants for a particular product, do notices need to be provided?  As discussed in 1022.74(a), if a lender offers one rate for a product and the applicant either receives that rate or is denied, no risk-based pricing or exception notice is required for approved applicants but an adverse action notice is still required for denied applicants.

Additional Q&As are available here.  The CFPB's risk-based pricing rules are located in Subpart H to Regulation V (1022.70 - 75).  

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NAFCU Compliance Webcast.  On July 11th, Carrie Hunt, NAFCU's Vice President of Regulatory Affairs and General Counsel, and I will be presenting a NAFCU webcast that will prepare you for upcoming regulatory changes - from NCUA and the CFPB.  We'll talk about some of the following - which may change as the regulators publish new information between now and July 11:

• Preparing your credit union for numerous, fast-paced regulatory changes;
• How to track and monitor the CFPB's rulemakings;
• Potential changes to overdraft protection and prepaid cards;
• Upcoming comprehensive changes to mortgage lending regulations; and
• Five common struggles with Credit CARD Act compliance.

Learn more here - sign up by July 5th and Save $100!

Credit CARD Act's Ability to Pay Provisions Revisited

Written By JiJi Bahhur, Regulatory Compliance Counsel

 

On Wednesday, the Financial Services Subcommittee held a hearing to examine the ability to pay provisions of the Credit CARD Act (specifically, section 1026.51 and the corresponding Official Commentary from Regulation Z).  Gail Hillebrand, the Associate Director for Consumer Education and Engagement at the CFPB, represented the CFPB’s position at the hearing.  

 

The hearing focused on the rule as it was issued by the Federal Reserve Board last April, and inherited by the CFPB on July 21, 2011. 

 

Under the rule, as currently written, lenders are required to consider individual rather than household income when determining whether someone qualifies for a credit card.  This has raised a significant concern, as it has the potential to disproportionately impact non-working spouses. 

 

On behalf of the CFPB, Gail Hillebrand testified:

 

“Concerns have been raised that for consumers in some States, one element of the ability to pay regulation we inherited could have unintended negative impacts on stay at home spouses. The CARD Act says that a credit card issuer cannot open an account for a consumer unless the issuer “…considers the ability of the consumer to make the required payments….” (2) In February 2010, the Board of Governors of the Federal Reserve System issued regulations to implement this provision. In April 2011, the Board amended those regulations to specify that when a consumer applies individually for a credit card account, the issuer must consider the consumer’s “independent ability” to make the payments. (3) The Federal Reserve Board’s amendment was accompanied by Official Staff Commentary, which interprets the regulation. That Commentary states that in determining ability to pay, a card issuer may not rely on income or assets of a person who is not liable for the debt on the account unless a Federal or State statute or regulation grants a consumer who is liable for the debt an “ownership interest” in the income or assets of the other person. (4)

 

Even before responsibility for this regulation was formally transferred to the Consumer Bureau last July, we heard concerns about the impact this rule could have on the availability of credit to some individuals. In some families, all of the adults are employed outside the home. In others, someone stays at home or works part time. This is often, although not always, a woman.

 

Concerns have been voiced that the ability to pay rule could have the effect of limiting access to credit for the
spouse or partner who is not employed outside the home (or who is employed part time) and who wants to open an individual credit card account rather than opening a joint account.” (Emphasis added). 

 

The CFPB is currently in the process of evaluating the regulation and reviewing responses and input it has received from individuals who have petitioned the Bureau to express their concerns about this issue.  The goal is to ensure access to credit to those that do have the ability to pay, but without having potentially negative consequences.  The CFPB will continue to move forward on addressing the issue during the course of this summer.

 

For more information on the CFPB’s review of the Credit Card Ability to Pay rules, check out this Press Release and a recent NAFCU Today story.  Also note, NAFCU's Comment Letter can be accessed here. 

 

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Happy Friday to you all!  

 

Common Compliance Violations: Account Opening Disclosures for Open-End Credit

Written by Steve Van Beek

We've discussed the Philadelphia Federal Reserve's Consumer Compliance Outlook a few times - including the following common compliance violations:

• Regulation B - Spousal Signatures
• Regulation B - Adverse Action Notices

Today, I wanted to highlight a common Reg Z violation (according to Federal Reserve examiners) which stems from the multitude of changes in Regulation Z over the past 3-4 years.  And, unfortunately, we ain't seen nothing yet!

Regulation Z - Account Opening Disclosures for Open-End (Not Home-Secured) Credit Plans.  Here is the description of the issue from the Philadelphia Federal Reserve:

"The Board of Governors of the Federal Reserve System (Board) amended some of the Regulation Z disclosure requirements for open-end credit (not home-secured) in a January 2009 final rule that became effective July 1, 2010.¹⁷The changes include new requirements for account-opening disclosures.¹⁸ Consumer testing revealed that consumers responded favorably to a table format that summarized key terms (based on the Schumer Box format used for credit card solicitation and application disclosures). As a result, the Board required in 12 C.F.R. §1026.6(b)  that creditors use a table format substantially similar to model form G-17 to disclose certain key account terms.¹⁹

The failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit. As with the RESPA tolerance requirements, this violation reflects the compliance challenges that arise with a significant regulatory change. Financial institutions relying on third-party software to create disclosures should verify that the software reflects the changes in regulatory requirements. For internally created software, institutions should ensure that regulatory changes are communicated in a timely manner to the IT department and that the software is tested to verify that the changes have been implemented. For a more detailed discussion of vendor risk management, refer to the Outlook article “Vendor Risk Management” in the First Quarter 2011 issue.^20"  (emphasis added).

As the underlined text indicates - this is an issue partly because of the magnitude of regulatory changes and the inability for smaller institutions to simply keep up.  

Inadequate Model Forms.  I'd also like to add another observation on why this might be a common compliance issue.  The model forms for these disclosures are located in Appendix G to Regulation Z.  From Appendix G, the account opening tables are the G-17 Series:

• G-17(A) Account Opening Model Form
• G-17(B) Account Opening Model Form
• G-17(C) Account Opening Model Form
• G-17(D) Account Opening Model Form

The article indicates that "the failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit."

If you click through the model form links above, you'd see that G-17(A); G-17(B) and G-17(C) are all designed as model forms for credit card accounts.  Only G-17(D) provides any guidance on open-end account opening disclosures for non-credit cards.  Thus, three of the four forms are designed for credit cards and not other types of open-end products. 

I wonder if that is part of the reason this is a common compliance violation?  And - this is the part of the feedback loop that the CFPB needs to improve on if it truly wants to lessen the regulatory burden on smaller institutions.  If there are numerous compliance violations - the CFPB needs to look internally and see if their regulations, forms and guidance are making the requirements clear and straightforward.  

Work with Us.  Other regulators have not succeeded in the past and they also haven't shown much effort.  Usually, the regulation gets promulgated and that is the end of it.  But that isn't good enough.  It isn't good enough for the regulator, it isn't good enough for credit unions and it isn't good enough for consumers.  The real test is whether the CFPB improves in the future or whether it follows the same old story.  

The Origin of a Q&A; Hi my name is…

Written by Michael Coleman, Regulatory Compliance Counsel

Greetings fellow compliance professionals! For those of you who do not know me, I am Mike Coleman, the newest Regulatory Compliance Counsel here at NAFCU. As this is my inaugural blog post, I promised Steve I would not “break the blog.”

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If your credit union is a NAFCU member you are probably familiar with NAFCU’s Compliance Monitor, our monthly compliance newsletter. One of the features of the Compliance Monitor is the Compliance Forum, which includes questions and answers written by our Compliance Team. You may have asked yourself, “Where do they come up with these questions?” The answer is from our NAFCU members!

Answering compliance questions is one of the major member services NAFCU’s Regulatory Compliance Division provides our members. We get a lot of questions. Sometimes we see a pattern of questions on a particular topic, particularly after there has been a recent regulatory amendment. Sometimes we get a unique question that we just feel compelled to share. When this happens, we start drafting Q&As.

Here is an example of a Q&A that might be featured in the Compliance Monitor:

Question: At our credit union we understand that the Credit CARD Act, and the resulting changes to Regulation Z, prohibits increasing an APR within the first year of account opening. However, we want to increase the annual fee for a credit card account which is six months old. Is this permissible?

Answer: No.  Regulation Z contains special protections for credit card accounts which stem from the requirements of the Credit CARD Act of 2009. Regulation Z contains a general prohibition for the increase of an APR or a fee required to be disclosed at account opening unless an exception applies. Section 1026.55(b)(3) of Reg Z provides an “advanced notice exception”, which allows a credit union to use the 45 day change-in-terms process to increase an APR or a fee. However,  Section 1026.55(b)(3)(iii) specifically prohibits a credit union from increasing a member’s APR or certain fees required to be disclosed in the account opening table during the first year of the account:

“(iii) This exception does not permit a card issuer to increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (iii), or (xii) during the first year after the account is opened, while the account is closed, or while the card issuer does not permit the consumer to use the account for new transactions. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.”

(Emphasis added.) 12 C.F.R. §1026.55(b)(3)(iii).

The annual fee for a credit card account is one of the fees required to be disclosed under Section 1026.6(b)(2)(ii), therefore, increasing the annual fee during the first year after the account is opened is prohibited.

This Q&A is an example of a particular question that came in and we thought it would benefit all our members to get an answer, so we drafted a Q&A for the Compliance Monitor.

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Just to add my own personal disclaimer, I grew up in the DC Metro area (in Falls Church, Virginia) and as such am an avid Redskins, Capitals, and UVA fan. In addition to Steve’s usual plugs about everything Michigan, I will do my best to keep you updated on the trials and tribulations of being a sports fan in DC. Here’s hoping RG3 lives up to the hype! 

CFPB Industry Discussions; Reg Z Proposal for Credit Cards

Written by Steve Van Beek

If you are located in either the Cleveland or New York City areas, you might be able to get a chance to listen to the CFPB in-person.  The CFPB has two "Industry Discussions" listed for later this spring.

• Friday, April 27th in Cleveland, Ohio
• Friday, May 4th in New York City, New York

You can also hear from CFPB Director Cordray during NAFCU's Free Webcast on April 24th.  The Webcast is open to all credit unions but registration is required.    

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Last Thursday, the CFPB issued a proposed rule to amend Section 1026.52(a) of Regulation Z.  I know what a lot of you are thinking - another change to the Credit CARD Act regulations?  Another clarification?

Well, yes.  But, this one shouldn't impact many credit unions as it relates to the cap on fees credit unions can charge during the first year of a credit card.  Here is the current 12 CFR 1026.52(a):

"§ 1026.52   Limitations on fees.

(a) Limitations prior to account opening and during first year after account opening.(1) General rule. Except as provided in paragraph (a)(2) of this section, the total amount of fees a consumer is required to pay with respect to a credit card account under an open-end (not home-secured) consumer credit plan prior to account opening and during the first year after account opening must not exceed 25 percent of the credit limit in effect when the account is opened. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.(emphasis added).

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What is the CFPB proposing?  The CFPB is proposing to remove the "prior to account opening" language from Section 1026.52(a) and, thus, the restriction on fees would only cover fees charged after the account is opened.  

Why is the CFPB doing this?  Isn't this weakening the rule?  The Federal Reserve originally wrote this rule and was sued by an institution arguing the Fed went beyond the requirements of the Credit CARD Act.  There are good stories on the CFPB's move here (New York Times) and here (Washington Post).   

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The Short Version.  This proposal won't directly impact most credit unions as they are not offering credit cards with large amounts of fees in the first year or prior to account opening.  However, other card issuers might be able to move back to their prior business model of charging processing fees prior to account opening.    

To see the specifics of the proposed change, click here to see the Federal Register (the bracketed text indicates that text - "prior to account opening" would be removed if the rule was finalized).   

Note:  If you are looking for which fees count toward the 25% cap during the first year - scroll down in the staff commentary to 12 CFR 1026.52(a)(2).  

A Few CFPB Items

Written by Steve Van Beek

Below are a couple of CFPB-related items for your Tuesday morning:

• Last Thursday, the Senate failed to confirm Richard Cordray as Director of the CFPB.  It is starting to look more and more like the CFPB will be without a Director until after the 2012 Elections.

• The CFPB recently announced its Ombudsman's Office.  From the CFPB's blog:

"At the CFPB, the Ombudsman’s Office will assist in the resolution of individual and systemic issues that a depository entity, non-depository entity, or consumer has with the CFPB. People may use the Ombudsman’s Office when they have not had success with the existing CFPB processes, or to achieve an informal resolution. Others may contact the Ombudsman to keep their concerns confidential.

Starting today, the CFPB is officially opening the doors of the Ombudsman’s Office under the direction of our Acting Ombudsman, Wendy Kamenshine. Wendy now is ready to hear from the depository and non-depository entities we regulate on issues concerning our supervisory and enforcement processes. She looks forward to hearing from consumers beginning in the spring."

• The CFPB also recently issued a report on credit card complaints.  The CFPB blog post is here with the full report here.  

In addition to the report on credit card complaints, the CFPB proposed a policy statement related to disclosure of credit card complaint data.  Part of the disclosure would include a publicly available database including information on complaints to card issuers with over $10 billion in assets.  

NAFCU has issued a Regulatory Alert on this policy statement (11-EA-33).  

Know Before You Owe: Credit Cards

Wrtiten by Steve Van Beek

Well, the CFPB wasn't lying when it stated its initial focus would be on mortgages, credit cards and student loans.  We now have "Know Before You Owe" projects for each one.  

• Know Before You Owe: Mortgage Loans

• Know Before You Owe: Student Loans

• Know Before You Owe: Credit Cards

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Yesterday, the CFPB announced their first steps toward clarifying and condensing credit card agreements.

• Press Release

• Prototype Credit Card Agreement

• Listing of Definitions for Prototype Agreement

The announcement also came with a pair of blog posts from the CFPB.  

• Shopping for a Credit Card

• Making Credit Card Agreements Understandable

Similar to the other Know Before You Owe projects, the CFPB is actively soliciting feedback on their prototype.  Importantly, this is not a proposed rule.  However, it is the CFPB's first steps toward collecting information and attempting to clarify credit cards for consumers.  (I'm sure many compliance officers are wanting some clarification as well - and not the kind of "clarifications" the Fed dropped on everyone earlier in 2011).

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If your credit union offers credit cards, be sure to review the prototype.  It might be a good idea to have preliminary discussions with your forms provider as well.  Would they be able to make these changes?  How long would that take?  At what cost?   

This also might be a good time to put together a summary of the headaches during the last round of "tweaks" to credit card disclosures.  Detailed, specific information on the timeframe, steps and costs to comply with the most recent changes to credit cards would be very useful during the prototype stage and especially during any future proposed rulemakings.