NAFCU Compliance Blog

Escrow for Flood Insurance; Dividends on Escrow Accounts?

Posted by Steve Van Beek

The new higher-priced mortgage requirements under HOEPA require the escrowing of taxes and mortgage insurance for loans secured by a first lien on a principal dwelling.  This blog post discusses this requirement.  Reminder: the deadline is April 1, 2010 (or October 1, 2010 for manufactured homes).  

So what does this have to do with flood insurance?  NCUA's regulations require credit unions that escrow for taxes and mortgage insurance to also escrow for flood insurance:

"§ 760.5 Escrow requirement.
If a credit union requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after November 1, 1996, the credit union shall also require the escrow of all premiums and fees for any flood insurance required under § 760.3. The credit union, or a servicer acting on behalf of the credit union, shall deposit the flood insurance premiums on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Director of FEMA or other provider of flood insurance that premiums are due, the credit union, or a servicer acting on behalf of the credit union, shall pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due."

Note that the section says "if a credit union requires the escrow."  Could you argue that it is not the credit union requiring escrow but, rather, HOEPA which requires the credit union to escrow?  I'm not so sure.  In practice, the credit union would require escrowing of taxes and mortgage insurance to comply with HOEPA and, therefore, would need to escrow for flood insurance as well.

Thanks to Katey from Chevron FCU for bringing this to our attention.  

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The new HOEPA requirements will result in some credit unions escrowing for the first time which will bring some new challenges.  One of them is state law that attempts to require escrow accounts to pay interest (or dividends).  

Do federal credit unions have to pay dividends on escrow accounts?  NCUA says that these state laws are preempted as they attempt to regulate the setting of dividends (an explicit power granted to the FCU Board under the Federal Credit Union Act).  Here is another NCUA opinion from 1991 on a Wisconsin state law.

Credit CARD Act; Contact Us

Posted by Steve Van Beek

First things first, the language of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) is available on NAFCU's Compliance website (available to both NAFCU members and non-members).

Ok, only 33 pages.  Not so bad, right?  Unfortunately, there appears to be a trade-off where we received brevity in exchange for confusion.  Trust me, the law is much harder to read than the regulations.  

How did we get here?  Congress codified, strengthened, enhanced and moved up many of the protections that NCUA and the other federal regulators adopted in their regulation on Unfair or Deceptive Acts or Practices (UDAP - Part 706 of NCUA's Regulations).  Congress also added new restrictions on credit card accounts.     

What does this mean?  The protections on credit card accounts are now law.  The Credit CARD Act amended the Truth in Lending Act.  In contrast, the Federal Reserve (and NCUA) had adopted the UDAP regulations under existing authority under the Federal Trade Commission Act (FTC Act).  Six of one or a half dozen of the other, right?  No, again.  The fact that these protections are now codified in laws rather than regulation means they are harder to change.  

However, there is a glimmer of sun for federal credit unions.  The Credit CARD Act applies to a broader scope of institutions than the UDAP regulations ensuring each card issuer is operating on a level playing field.  For example, state-chartered credit unions were not subject to the UDAP regulations (because for unfair practices they are regulated by the FTC) but they will be subject to the Credit CARD Act.  

What do we need to do?  Review the new Credit CARD Act and determine how your card operations need to adjust to comply with the law.  The law covers a wide variety of situations, such as gift cards, credit cards to persons under the age of 21, and the timing to send periodic statements - just to name a few.  

When is the effective date?  The majority of the provisions of the Credit CARD Act become effective 9 months after President Obama signed the bill into law.  President Obama signed the Act on May 22, 2009 making February 22, 2010 the effective/compliance date for many of the provisions.  Note:  This is more than 4 months prior to when the UDAP regulations are slated to become effective (July 1, 2010).  The UDAP regulations are still scheduled to be implemented - the Credit CARD Act does not mean credit unions do not need to be follow UDAP - though the regulators may amend the UDAP regulations at a future date.

Editor's Note: The original post accidently listed February 22, 2009 as the effective date - it is, rather, February 22, 2010.

However, Congress determined that two sections of the Credit CARD Act warranted earlier effective dates 90 days after enactment - August 20, 2009.  Yes, as in 70 days from today.  

Which provisions are effective August 20, 2009?  

Section 101. Protection of Credit Cardholders. (a) Advance Notice of Rate Increase and Other Changes Required.   (see pages 2-3 of the Credit CARD Act PDF).

Advanced Notice 

Beginning on August 20, 2009, credit unions will need to send an advanced notice of (a) an increase in an APR; or (b) other significant changes - including an increase in any fee or finance charge.  The advanced notice must be 45 days before the effective date of the change.  The Federal Reserve Board will determine what "other significant changes" trigger the advanced notice.  Until the Federal Reserve provides clarity in this area, credit unions may want to use Regulation Z, 12 CFR 226.9(c), as guidance for which terms of the account might be considered significant.   

Right to Cancel

A "Right to Cancel" statement must accompany the advanced notice to the member.  The statement needs to inform the member of his/her right to cancel the account and, in effect, reject the changes.  The Federal Reserve Board is required to establish rules regarding the "Right to Cancel."  It is unclear what information would be required to accompany this "Right to Cancel" statement.  My best guess is that the credit union would need to inform the member of what canceling the account would entail (i.e. no new purchases; retain existing APR and terms; repayment options, etc.)  Additionally, the law prohibits a credit union from requiring a member who exercises his right to cancel the account to repay the obligation in full.  Rather, the credit union needs to provide a repayment method that is no less beneficial than one of the methods in Section 171(c)(2) of the Truth in Lending Act (see page 4 of the Credit CARD Act PDF).   

Section 163.  Timing of Payments.  (see page 9 of the Credit CARD Act PDF).

Credit unions need to mail or deliver periodic statements 21 days or more before the payment due date in order to charge a late fee.  Note: This section applies to all open end consumer credit plans and is not limited to credit cards.

Additionally, another section of the Credit CARD Act, Section 106 (on page 9), requires the payment due date for a credit card account to be on the same day each month (i.e. the 18th of the month).  If the due date falls on a day the credit union does not accept payments, the credit union may not treat a payment received the next business day as late.  Note: Section 106 is not effective until February 22, 2010 but credit unions should consider its impact when making any needed changes to their credit card billing cycles.

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NAFCU will be relaying information regarding all the new rules and requirements as fast as we can.  Be on the lookout for a big overview blog posting from Anthony tomorrow summarizing many of the upcoming compliance deadlines.

NAFCU is planning a webcast on the Credit CARD Act in August, so stay tuned for information on that webcast.

As always, NAFCU members can call or e-mail us with their questions.  We have created a "Contacting NAFCU Compliance" cheat sheet that is available on our compliance homepage.  Talk to you soon.  

Capital Guidance; 44, on Preemption

NCUA has released Letter to Credit Union 09-CU-10.  You can access it here.

Following the conservatorships of WesCorp and U.S. Central, many credit unions asked about the status of their paid-in-capital and their membership capital.  This letter was designed to answer the numerous questions posed to NCUA. Rather than rehash it, I urge you to review the guidance - especially if your credit union is a member of either institution.

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If anyone wondered what President Obama's administration thinks about federal preemption of state laws, one only has to review this memo from the White House.  It will remain to be seen what effect it has.  But it clearly is not a "hooray for preemption" sort of document.

To ensure that executive departments and agencies include statements of preemption in regulations only when such statements have a sufficient legal basis:

1. Heads of departments and agencies should not include in regulatory preambles statements that the department or agency intends to preempt State law through the regulation except where preemption provisions are also included in the codified regulation.
2. Heads of departments and agencies should not include preemption provisions in codified regulations except where such provisions would be justified under legal principles governing preemption, including the principles outlined in Executive Order 13132.
3. Heads of departments and agencies should review regulations issued within the past 10 years that contain statements in regulatory preambles or codified provisions intended by the department or agency to preempt State law, in order to decide whether such statements or provisions are justified under applicable legal principles governing preemption. Where the head of a department or agency determines that a regulatory statement of preemption or codified regulatory provision cannot be so justified, the head of that department or agency should initiate appropriate action, which may include amendment of the relevant regulation.
   

RESPA; The High Court and Preemption; Discrimination

NAFCU has signed on to a letter urging  Congress to support HR 1728.  It would require HUD to repeal the current RESPA rule and then work with the Federal Reserve to issue a joint rulemaking to deal with mortgage disclosures.  Read the letter here.  Download RESPA amendment to HR 1728 - letter of support. 

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The Supreme Court is hearing arguments in an important case involving preemption.  Here's a good overview of the case.  And why don't you read this guy's blog post.  He's very good, in my humble opinion.  In short, state attorney generals are challenging an OCC reg that claims the OCC has exclusive authority to enforce state fair lending regs against national banks. While this case involves the OCC, it will be interesting to see in which direction the preemption winds are blowing these days.

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The OCC has issued a consent order against the former VP and branch manager of a Mississippi bank.  Since 1993, this fellow has been doing the following, as alleged by the OCC:

(1) While employed at the Bank, from at least February 1993 until his employment was terminated in May 2004, Respondent violated ECOA and the FHA. Respondent discriminated against female applicants for credit, female borrowers and female accountholders by subjecting them to severe, pervasive, and unwelcome sexual harassment in connection with credit transactions and real estate-related transactions.
(2) Respondent breached his fiduciary duty and engaged in a pattern of unsafe or unsound practices contrary to generally accepted standards of prudent operation.
(3) Respondent’s conduct caused more than a minimal loss and other harm to the Bank and resulted in other benefit to the Respondent.
(4) Respondent’s conduct involved personal dishonesty and demonstrated a continuing disregard for the safety and soundness of the Bank.

The fellow is banned from working at financial institutions.   From the tone of the order, I wonder if he'd be able to work at a convenience store if that store had an ATM.  Such consent orders are a good reminder why we need to train, train, train and train employees on matters of discrimination.  One branch manager can wreck your reputation.  Not to mention all of the individuals who were violated.  And from a business point of view, think of all the business this bank may have lost from 1993 until 2004.  The last time I checked, a performing loan has no gender, race, religion or creed.

Home Valuation Code of Conduct; Whoops!

You may have heard about the Home Valuation Code of Conduct (HVCC).  For credit unions that do mortgage lending, this is a big deal.  Well, here's some help.

• Fannie Mae has put together a very nice HVCC resource page.  Access it here.  It has an FAQ, the HVCC itself, and some Fannie-related guidance.  (OK, that last phrase sounds funny.)  Seriously, though - this is a very good source of HVCC information.
• NAFCU is also offering an HVCC/Appraisal webcast later this month.  Read all about it here.   We put together a nice line-up.  We have someone from NCUA's Examination and Insurance side, a person from NCUA's Office of General Counsel, an expert from Fannie Mae, and an expert from the appraisal industry.  I can't imagine a better panel to address the changes.

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Yesterday's post on preemption had a dead hyperlink.  Use this link to access NCUA's recent legal opinion letter, which indicates that NCUA's regulations preempt a New York State law that attempts to limit insurance-related activities at federal credit unions.  I apologize for any inconvenience.

Preemption LOL

Posted by Anthony Demangone

Last week, NCUA issued Legal Opinion Letter 09-0218 (February 24, 2009). Access it here.  Here's a snippet of the letter:

You have asked if an FCU is engaging in an insurance business under New York state law if the FCU earns a fee by offering GAP waivers to its members for more than the cost of the FCU’s GAP creditor insurance coverage. No, GAP waivers are a permissible loan-related activity for FCUs under NCUA’s incidental powers rule, regardless of state law limitations. The incidental powers rule also permits FCUs to derive income from these activities.

The letter points out how NCUA believes its incidental powers rule preempts a New York state law.  If your credit union offers GAP insurance, this is a good read.  Regarding preemption, I still believe that this letter provides the best overall guidance on the preemption issue.   If you are new to compliance, read it.  Live it.  Love it.  It will give you a great overview of "preemption" in 5 minutes.

The Joy of Being Federal; Shuffle; The Agony of Being Blue and White

Pennsylvania just passed a regulation that greatly restricts the ability of lenders to offer no-document mortgages.   Read the state press release here.  Will it apply to federally-chartered credit unions located in the Keystone State?  It doesn't seem so. 

In the final rule, Pennsylvania's Department of Banking indicated that it "will not enforce or administer the CDCA against entities that set forth a valid claim of Federal preemption."  (The CDCA is the statute that authorized the regulations.)  Read the regs here if you want.

Federal credit unions have one heck of "valid claim of preemption."  Pursuant to the Federal Credit Union Act, NCUA regulations explicitly underscores the preemption of state laws that attempt to affect the rate, terms and other conditions of federal credit union loans.  See 12 C.F.R. 701.21(b) for all the glory.

These situations arise regularly, as states and even county governments pass laws or regulations that affect lending.  Preemption is never a slam dunk, but if the local rule affects the rates, terms or other conditions, it likely is preempted.

If you'd like a nice overview of the preemption issue, read this NCUA legal opinion letter.  I consider it to be the Grand Poobah of federal credit union preemption guidance. 

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Yesterday, NCUA announced that it is reassigning the examination and supervision of Alaska and Nevada credit unions, effective January 1, 2009.  Nevada goes to Region I (Albany, NY) and Alaska goes to Region II (Alexandria, Va.)  NCUA's announcement didn't provide a sunset date.

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For those who saw the grand slaughter Rose Bowl, you know that my Nittany Lions were crushed by the Lords of Hollywood, aka U.S.C.  It was a grand season, but I have to tip my hat to Old S.C.  Perhaps next year.  Perhaps.

NCUA Issues Legal Opinion Letter Reviewing State Law

Last week, NCUA released Legal Opinion Letter 08-0120 (July 14, 2008).  You can access it here.  NCUA was asked to determine whether a Massachusetts law applied to federal credit unions.   In the letter, NCUA determined that it did not have to make a preemption analysis, as a close inspection showed that the law was not intended to apply to federal credit unions.  In the letter, NCUA states:

The purpose and scope sections of the state regulations, 940 Mass. Code Regs. 8.01-.02, indicate the Attorney General of Massachusetts promulgated the regulations under the authority granted in “M.G.L. c 93A §2(c),” which is part of a state law titled the “Regulation of Business Practice and Consumer Protection Act,” and often referred to as Chapter 93A. Mass. Gen. Laws ch. 93A, §§1-11. Section 2(c) of Chapter 93A authorizes the Attorney General to promulgate rules and regulations interpreting Section 2(a), which states, in part, that unfair and deceptive acts or practices are “unlawful.” Id. at §2(a). Under the Attorney General’s authority, the state regulations define and prohibit certain types of activities by mortgage brokers and mortgage lenders as unfair or deceptive acts or practices.
By its own terms, Chapter 93A, however, does not apply to FCU lending activities. Chapter 93A states:

Nothing in this chapter shall apply to transactions or actions otherwise permitted under laws as administered by any regulatory board or officer acting under statutory authority of the commonwealth or of the United States. Mass. Gen. Laws ch. 93A, §3.

Federal law, the Federal Credit Union Act, permits FCUs to engage in lending, including mortgage lending, and the National Credit Union Administration (NCUA), a regulatory board, regulates those activities under the authority of the same federal law. 12 U.S.C. 1751 et seq. We conclude that, because Chapter 93A does not apply to FCUs, the Attorney General’s regulations issued under the authority of Chapter 93A are likewise inapplicable to FCUs.

This legal opinion letter is a good reminder that when you want to determine if a local law or requirement applies to your operation, nothing beats a close reading of the law itself.