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.

Dispute Fees; Foreclosure and Evictions

Posted by Anthony Demangone

Credit card and debit card disputes can be a drag.  Especially if the dispute seems to be nothing more than an attempt to weasel out of a legitimate transaction.  Can you fee members if the dispute resolution shows that the member actually conducted the transaction?

It doesn't look like it.

Regulation Z or Regulation E governs plastic disputes, depending on the situation.  But both regulations indicate that financial institutions should not do things to "chill" good faith assertions of errors.

Regulation Z (Official Staff Interpretation to 226.13)

2. Charges for error resolution. If a billing error occurred, whether as alleged or in a different amount or manner, the creditor may not impose a charge related to any aspect of the error resolution process (including charges for documentation or investigation) and must credit the consumer's account if such a charge was assessed pending resolution. Since the Act grants the consumer error resolution rights, the creditor should avoid any chilling effect on the good faith assertion of errors that might result if charges are assessed when no billing error has occurred. (Emphasis added.)

Regulation E (Official Staff Interpretation to 205.11(c)

3. Charges for error resolution. If a billing error occurred, whether as alleged or in a different amount or manner, the financial institution may not impose a charge related to any aspect of the error-resolution process (including charges for documentation or investigation). Since the act grants the consumer error-resolution rights, the institution should avoid any chilling effect on the good-faith assertion of errors that might result if charges are assessed when no billing error has occurred. (Emphasis added.)

Both sections do use the word "should."  But I think the Fed is very clear on this issue.  And from a member service/reputation risk point of view, I know how I would come down on this issue.

***

NCUA has issued NCUA Regulatory Alert 09-RA-08 to remind credit unions of their responsibilities under "The Protecting Tenants at Foreclosure Act of 2009."   Here's a thumbnail sketch:

When a credit union takes title to a rental property after foreclosure, it must:

1. Provide bona fide tenants with 90 days notice prior to eviction; and
2. Allow bona fide tenants with leases to occupy property until the end of the lease term, with the exception that the lease can be terminated on 90 days notice if the unit is sold to a purchaser.

If your credit union does mortgage lending and has or will foreclose on properties, be sure to understand this guidance.

***

NAFCU's Regulatory Compliance team is in a good mood.  We're a collective 3-0, as Michigan, Ohio State and Penn State were victorious last weekend.  Should one or more of our teams falter this Saturday, please take that into account when contacting us.   Just in case we're a bit moody.

Have a great weekend, everyone.  Even you Syracuse Orangemen. And yes, I know they are now called the Orange.  It is just that I am becoming an old fuddy-duddy who hates change of any kind.

Deadlines...

The deadlines approaching compliance peeps are many.  It can be very difficult to keep everything straight.  With that in mind, here's some help.

Truth in Savings.   NCUA has a proposed rule to amend Part 707 of its rules and regs.  The changes would mirror the Fed's Reg DD.  Currently, only credit unions that promote their overdraft protection programs need to provide monthly and year-to-date NSF and ODP fee totals.  After this become effective, all credit unions will need to make those disclosures, whether or not they promote the programs.  While NCUA's rule is a proposal, they are mandated to keep their Truth in Savings rule aligned with the Fed's.  So this train is a'comin.

Compliance Deadline: If it mirrors Reg DD, January 1, 2010.
Here's a link to NCUA's proposal.
Here's a link to the Reg DD final rule.

On a related note, the Fed currently has another overdraft-protection-related proposal.  They have issued a proposal to amend Regulation E that could conceivably require consumers to opt-in to a financial institution's overdraft protection program for ATM and one-time POS transactions.  Access the proposal here.   Comments were due back on March 30.

RESPA.  Despite everyone and their brother asking HUD to derail their RESPA reform efforts, HUD is proceeding with the amendments to its RESPA regulation.  The changes mostly amend the GFE and HUD-1 and HUD 1-A.

Compliance Deadline: January 1, 2010.
Here's a link to a HUD page that contains a link to the final rule, forms, and other information.  Note that the "required use" provision has been yanked, and that some minor provisions of RESPA reform have already become final.

UDAP.  NCUA, along with other financial regulators, issued a final rule to amend Part 706 of its rules and regulations.  The rule creates 5 new "unfair acts and practices" related to credit cards that are a no-no.  But the wind has been knocked out of this regulation by a credit card bill recently signed by President Obama.

Compliance Deadline: July 1, 2010
Here's a link to NCUA's final rule.

Credit CARD Act of 2009.  President Obama recently signed this piece of legislation into law.  In a word: ugh.  The law codifies expands, and strengthens many of the consumer protections found within the UDAP and Regulation Z amendments. 

Compliance Deadline: It depends:

• Generally, it becomes effective 9 months after President Obama signed the bill. That is February 22, 2010.
• But two provisions become effective earlier, and warrant some attention.  The 45-day notice requirement for change-in-terms and 21-day timing requirement for billing statements both take affect 90 days after the signing, which is August 20, 2009.  Yes.  2009.

Here's a link to the Credit CARD Act of 2009.

Regulation Z.  Where to begin?  Well, how about chronologically.

Mortgage Loan Disclosures.  Thanks to the Mortgage Disclosures Improvement Act, credit unions must move up their compliance efforts concerning the disclosure requirements for certain mortgage loans.

Compliance Deadline: July 30, 2009.
Here's a link to the Fed's final rule for this requirement.
Here's a link to the FDIC's FIL on this requirement.  English! 
And the FDIC provided this supplement, which is a nice side-by-side chart. Side-by-side chart!

HOEPA Amendments.  The Fed has amended Regulation Z to put in place a ton of mortgage-related protections for consumers.  They did so under authority from the Home Ownership and Equity Protection Act of 1994.  The goal was to eliminate deceptive acts and practices for mortgage products.  Most of the provisions apply to higher-priced mortgage loans.  But not all.

Compliance Deadline: It depends.

• October 1, 2009 for nearly all the provision.
• April 1, 2010 for the escrow provisions. Unless the mortgage covers manufactured housing.  Then the deadline is October 1, 2010.

I always have a heard time finding this rule.  So here's some help.
Here's a link to the final rule from the Fed.
Here's a link to a simply fantastic overview from the Philadelphia Fed.

Open-end Amendments.  Remember when this was supposedly what we were supposed to worry about?!  Ha!  Well, this final rule that amends Regulation Z changes everything we know about open-end lending.    And this final rule contains provisions mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Compliance Deadline:  July 1, 2010. 

Here's a link to the Fed's announcement, which contains links to the final rule, forms, etc.

NACHA's IAT Rule.  The IAT is a new Standard Entry Class code for ACH payments to identify international transactions.  International transactions are those payments that have been funded internationally or are being sent to another country and a part of the transaction will be processed via the ACH Network.

Compliance Deadline:September 18, 2009.

Here's a link to a great IAT resource page, developed by NACHA.

***

With that in mind, try to have a great weekend, everyone!

FDIC on the MDIA; ODP; Online Training

Posted by Anthony Demangone

On Friday, Sarah wrote a nice post on the changing mortgage requirements brought about by the Mortgage Disclosure Improvements Act. (MDIA).  As she pointed out, back in 2008, the Fed issued changes to Regulation Z that amended some disclosure requirements for closed-end mortgages.  In 2009, as mandated by the MDIA, the Fed had to issue additional changes and move up compliance deadlines. 

On Monday, the FDIC issued a Financial Institution Letter that does a GREAT job of highlighting all of these changes.  Access the guidance here.   And this supplement provides a side-by-side comparison of the 2008 and 2009 Reg Z amendments to closed-end mortgage disclosures. 

If only someone would create such a chart that compares the Reg Z changes with the credit card bill.

***

Representatives Carolyn Maloney, Barney Frank and Luis Gutierrez issued a strongly-worded letter to the Federal Reserve asking that the agency implement strong controls on overdraft protection programs.  Specifically, they are seeking an opt-in requirement for consumers and a rule that prohibits issuers to order transactions in a way that maximize ODP fees.  Access the letter here.

***

NAFCU's Online Training for volunteers and new employees is now available for purchase.  Read all about it here.  If you've seen me lead a training session, you'll have a good idea regarding the quality and substance of the sessions.   Let me know if you have any questions about the new product, which is available to all credit unions - even those who do not belong to NAFCU. 

Unauthorized; Newsletter; Uh-oh

With all the text message scams currently taking place, there is a good chance that one of your members will give some crook his or her debit card number, PIN and security code.  With that in mind, some of you may have the following question:

If the member gives his or her personal data away after falling victim to a text message scam, they must be on the hook for any resulting unauthorized transactions.  Right?

Wrong.

Regulation E governs electronic funds transfers (EFTs).  The regulation also governs when consumers will be responsible for unauthorized EFTs.  In the staff commentary to Regulation E, the federal reserve states this:

Consumer negligence. Negligence by the consumer cannot be used as the basis for imposing greater liability than is permissible under Regulation E. Thus, consumer behavior that may constitute negligence under state law, such as writing the PIN on a debit card or on a piece of paper kept with the card, does not affect the consumer's liability for unauthorized transfers.

If the member gives his or her debit card information away to a crook over the phone, that might be negligence.  As noted above, however, that negligence means nothing.  The member gave his or her data over the phone because the member thought there was some security-related freeze on their card.  They thought they were authorizing the lifting of the freeze, not the subsequent transactions.  It is a very one-side rule that favors consumers.

(Go here to read the commentary.  Simply search for the word negligence to find the relevant text highlighted above.)

***

NAFCU members, the February compliance newsletter is available here.  (Member log-in needed.)

***

Mandy was laughing a few nights ago.  Here's what she found in the nursery.

I told him he could sleep there whenever he wants, as long as he learns to change diapers.

A Little of This; A Little of That

Posted by Anthony Demangone.

Here are a number of things that caught my eye recently:

1. If you're credit union does "drawings" or other types of incentive-based marketing contests, please read this blog postingby Robert Rutkowski.   Good, good stuff.  There are more compliance issues than meet the eye.

2. Our paralegal, Shari Pogach, wrote a nice summary of a Federal Reserve study that examined violations by banks and thrifts in the areas of Regulations Z, B, DD (Truth in Savings), CC, E, and P (privacy).  Available for members here, the article could serve as a simple auditing tool.  Review the errors made by others to see how you measure up.

3. Here's a good flood insurance update that I recently read.

4. Our Book of Answers keeps being updated.  NAFCU members can access the latest version here.

5. NCUA has released the agenda for next week's board meeting.  The only compliance related item will be a final rule concerning the "Official Sign."  Access the agenda here.

6. It is official.  HUD has delayed enforcement of the "required use" provision from the RESPA final rule for 90 days.  Access its Federal Register notice here.

***

NAFCU's offices will be closed next Monday and Tuesday.   My goals are to finish assembling the twins' cribs and watch my Steelers win against Baltimore.  I mentioned those goals to someone else earlier this week, and this is what following:

 

Coworker: You should really enjoy the game this weekend.
Compliance Guy:  I plan on it.

Coworker: I don't think you understand.  This may be the last time you get to see the Steelers play in peace for the next 18 years.  Once the twins come, forget about it.

Compliance Guy: (Blank stare.)
Coworker: You know that I'm serious, right?  And that assumes they leave the house at age 18.  It could be 20 years.

Compliance Guy: (Blank stare.)

 

Have a great weekend, everyone!  Even you Ravens' fans!  Until Wednesday, stay warm!

Reg Z Final Rule Dropped; U Da Man? No. UDAP

Posted by Anthony Demangone

Did you hear a loud noise yesterday?  The Federal Reserve dropped the long-awaited final rule to amend the open-end portion of Regulation Z.  (That was what you heard.  611 pages makes quite a sound when it hits the floor.)

Go here to view the final rule.  It is a doozy, for sure.  The compliance deadline is July 1, 2010.  This final rule was far beyond my holiday cookie-clouded ability to analyze coherently for this posting.  But for now, understand that the rule is here.  (Happy Holidays from the Fed, everyone!) 

Here's something I read that might affect credit unions that offer open-end lending programs with sub-accounts:

The final rule generally adopts the proposal that would clarify that credit is not properly characterized as open-end credit if individual advances are separately underwritten. (Emphasis added.)

***

Yesterday, NCUA, the Federal Reserve and Treasury joined together to issue a final rule to address unfair and deceptive acts and practices in the area of credit cards.  NCUA will house its rule under Part 706 of its rules and regulations.  Here's what you need to know now:

Compliance deadline.  This puppy doesn't go into affect until July 1, 2010.  That's a long time from now, but the changes outlined in the final rule may take a long time to implement.

On the editing floor.  Not everything that was in the proposal made it to the final rule.  The final rule does not address overdraft privilege programs.  Are we out of the clear?  Not so fast, my friend.  The Fed will address this issue with proposed changes to Regulation E.  The Fed released that proposal yesterday as well.  I haven't read through it yet.  There was enough depressing news from the Fed already.  I felt no need to dig deeper. 

What does this final rule do?

1. Late payments -- Prohibits treating a payment as late unless consumers are given a reasonable time period for payment. A credit card statement must be sent at least 21 days before payment is due.
2. Payment allocation -- Requires reasonable allocation of amounts paid in excess of a required minimum payment in relation to interest rate accruals The rule specifically requires allocation to segments with the highest APRs in descending order or among the balances in the same proportion to the total outstanding balance.
3. Application of interest rate increases to pre-existing balances -- Prohibits credit card issuers from applying an increased APR to existing balances except in cases of a variable rate account, where payments are 30 days late or do not comply with a workout arrangement, and when a “go to” rate has been previously disclosed on an account with a specified term or expiration date. 
4. Double cycle billing -- Prohibits a finance charge based on days in a prior billing cycle for an outstanding balance in the current cycle.
5. Security deposits and fees for providing credit -- Prohibits an FCU from financing a security deposit or other account opening fees if the charges constitute a majority of the available credit offered. The rule modifies the proposal to limit first month fees to no more than 25 percent of available credit, and requires that fees between 25 and 50 percent of available credit be spread equally over the next five months.

Now, the devil is in the details.  This is a broad overview.  Here would be my battle plan: go over the rule.  See what affects you.  And then call a meeting with everyone involved in credit cards to see what you need to do.  These changes may (let's be real, will) require changes to data processing systems, such as those that allocate payments.  This means most of you will be herding cats and bashing your head against a wall dealing with third parties to implement some changes.  Don't wait too long to get started.

Go here to read the final rule or if you want to kill a tree print it out.

***

Have a great weekend everyone.  I hope your holiday shopping is in better shape than mine.  (The cookbook will be distributed soon.  And it will be a dandy!  Diets beware!)

Recent Changes to VISA Operating Regulations - January 1 Deadline

Credit unions that use VISA should be aware of a recent change to VISA's Operating Regulations.  The changes were effective July 1, 2008 and card issuers have a mandatory compliance date of January 1, 2009.

The changes include two definitional changes:

"Non-Visa Debit Transaction—Effective July 1, 2008, an act between a Visa Check Card or Visa Debit Card Cardholder and a merchant that results in the generation of a transaction on a PIN-Debit Network.

PIN-Debit Network—Effective July 1, 2008, a non-Visa debit network that typically authenticates transactions by use of a PIN that is not generally known as, marketed as, or enabled as a competitive general-purpose card program, or other prohibited payment program, either directly or through a joint acceptance agreement."  

The first objective is to determine if the network(s) your credit union uses allow "Non-Visa Debit Transactions."  Karl Leslie of Wolters Kluwer Financial Services has written a wonderful article summarizing the rule changes and helping financial institutions determine if they need to comply.

"Determining whether a financial institution has enabled Non-Visa Debit Transaction processing appears to be dependant on the network an institution uses. In other words, if your network has enabled Non-Visa Debit Transaction processing, then you have too. Stated more broadly, all financial institutions that use that network have enabled Non-Visa Debit Transaction processing and thus need to comply with the Visa rule.

For example, let’s say your network offers a PIN-less bill payment product. A merchant that uses the same network offers that payment option in its online payment environment. One of your cardholders goes to that merchant’s web site and chooses that payment option because she sees the payment option has the same logo as she has on her card. Your institution has to honor that PIN-less bill pay transaction because you agreed to do so when you subscribed to your network. As a result, your institution has enabled Non-Visa Debit Transaction processing.

We are aware of the following networks that offer a PIN-less payment option:  STAR, PULSE, NYCE, COOP, and ACCEL/Exchange."  (emphasis added).

If one of your networks allows "Non-Visa Debit Transactions" the credit union must make certain disclosures to its cardholders as well as notifying VISA because these "Non-Visa Debit Transactions" would not be conducted through VISA's network and, therefore, would not receive VISA's zero liability and other protections. 

Take a look at your language in your cardholder agreement and Reg E disclosure to see if it addresses transactions not conducted through the VISA network.  If not, you may need to add this information as well as disclosing this information to your cardholders on an annual basis. 

    

No, not that deadline; Married Life

There's a compliance deadline coming October 1.  And I'm not talking about Affiliate Marketing.

Last year, the Federal Reserve announced final rules to amend Regs B, E, M, Z and DD.  The amendments address the delivery of electronic disclosures.   Here's the Fed's press release, which includes links to each final rule.  Remember, NCUA has to ensure that our Truth in Savings rule closely mimics their Reg DD, so expect changes in the not too distant future. 

Don't blame the messenger.

***

My father said something funny the other day.  He grew up in Latrobe, Pennsylvania, which is 40 or so miles outside of Pittsburgh.  He played tennis for Duquense, which is in downtown Pittsburgh.  He may live in north-central Pennsylvania, but he's a Pittsburgh boy, through and through. After the Steeler's victory last week, I called to chat.  Both my Mom and Dad were on the line. 

Mom: Your father said something that made me laugh this weekend.  He said that at his age, the only thing that he gets excited for is the Steelers.
Dad: It's true.  I was sick to my stomach all day Sunday.

I told Mandy, and I think she saw her future.  She looked worried.

Editor's note: The editor isn't watching as much football as he did as a bachelor.  Mandy says this is a good thing.  The editor is not so sure. 

Unauthorized EFT?

This is why I love my job.  A member called with an interesting issue.  We don't know the answer, and we don't know that there is an answer.  But it is fascinating, in a compliance kind of way.

The situation. A member opens a joint account with her minor child.  The credit union has a policy whereby they will not issue a debit card to a minor.  Therefore, they issue a debit card just to the mother.  The mother now reports that the daughter has withdrawn $500 at an ATM, and she'd like the credit union to reimburse her via Regulation E's unauthorized EFT provisions.  Regulation E does not really address this situation.

Here are some observations:

• The daughter is joint, so she has a right to all the money.  So where is the harm?
• Is the joint relationship an implicit authority for the daughter to use the card?
• The account is a joint account, not a UTMA.
• The mother is adamant that the transaction was unauthorized.
• How did the daughter get the PIN?

So what's a credit union to do?  I'd love to hear your thoughts.