NAFCU Compliance Blog

A Quick Look Toward 2010

Posted by Anthony Demangone

When I was a young lad, I realized that I would graduate from high school in 1990.  1990!  That date seemed like something from a science fiction movie.  Twenty years later, I still get those same feelings each year.  2010?  It can't be.  But it is.  And it will take me about a month to remember to write 2010 on my checks.

With that in mind, here's a quick run-down on things that we should keep in mind this year.

SAFE Act.  If you are a state or federally-chartered credit union, there's still no news here.  NCUA has yet to issue a final rule.  And the deadline for registration is still 180 days after the system starts accepting registrations.

Escrowing.  I'm not even sure if that is a valid verb.  But we'll start doing that for higher-priced mortgage loans this April.  And for manufactured homes, the escrow deadline is in October.

BSA.  The BSA manual will be updated at some point.  I'm not sure when, but it very well may require you to tweak your BSA/AML program. The CARD Act will require Treasury to issue rules to bring stored value cards under the BSA regulatory system.  I expect that rule at some point. 

Reg Z. Ugh.   Where do I begin?  Sure - we have a good grasp on how the open-end changes will wreck our social lives this year.  But don't forget that there the July 1 changes to Reg Z's open end rules that already were to take affect before the CARD Act entered our lives.  Also, there are proposals on HELOCs and closed-end lending that should go final this year.  The private student lending rule takes effect in February.  And the mortgage transfer/sale rule kicks in later this month.  In addition, there are two more Credit CARD Act provisions that will become affective this August.  The Fed will need to issue rules for those this year.

Reg E.  The overdraft rules kick in on July 1, 2010.  We expect additional guidance from the Fed this month on this topic.

FCRA.  Risked-based pricing notice rules kick in on January 1, 2011. But don't forget that another "FACT Act rule" kicks in on July 1, 2010 - the Accuracy and Integrity Guidelines. 

Corporates.  NCUA has a major proposal out there to overhaul the corporate credit union system.  NAFCU members - we urge you to respond to our Regulatory Alert's call for comments on this proposal.

Reg CC.  The Fed has not officially changed the regulation due to the impending death of non-local checks.  But they'll have to do so at some point in 2010.

The Hill.  Reg Reform and overdraft protection issues are addressed in a number of areas. But nothing has passed both houses.  Stay tuned.

So, 2009 was a bear.  I'm not sure what animal 2010 will ultimately be, but it won't be a kitten. 

NAFCU Offices Closed; Monday Morning Grab Bag; CULookup.com on CBS

Editors's note:

Due to the blizzard of 2009, the Federal Government has closed its agencies in the Washington, D.C. area.  NAFCU follows the Fed's lead in this area, so our offices are closed today.  And that's just as well, as I'm unable to lift my arms after shoveling out two cars.   We'll hopefully get back at it on Tuesday.

 

A view from my front window Sunday morning.
 

Posted by Anthony Demangone

Here are a few things worth sharing.

• The FDIC has issued its most recent "Supervisory Insights" publication.  Of note in this issue: interest risk management.  The FDIC sees that bank asset maturities are lengthening.  And in this rate environment, that comes with added risk. 

• The FFIEC has issued proposed guidance to address compliance and reputation risks when offering reverse mortgages. The proposed guidance appears to be a nice primer on reverse mortgages if you need one.

• If you missed the Fed's recent teleconference on Reg E, they archived the presentation.

• NCUA has issued a legal opinion letter that clarifies how share insurance protection can cover "529 accounts."

• FinCEN has released its 2009 fiscal year annual report.  It provides a decent 20,000 foot analysis of what the agency was up to during the past fiscal year.

***

Last week, NAFCU's credit union locator website CULookup.com was featured on the CBS Early Show. You can follow this linkto an article as well as the video that was shown last Thursday.  Financial contributor Vera Gibbons spent a good amount of time with Harry Smith discussing the great benefits of credit unions and why many people are switching over to credit unions from banks right now. She mentions NCUA insurance, the fact that credit unions have money to lend, and that credit unions are member-owned and member-operated.

Now, just how did she find out all of this information? Well, our PR department put her in contact with our CEO Fred Becker, who met with her and provided her with some great credit union information. Trade associations are known for their lobbying and regulatory work but they are working hard for you in many many ways, including PR and marketing.

In the piece, she points viewers to a great tool - CULookup.com- as a place to find a credit union they could join. CULookup.com was developed and is maintained by NAFCU's subsidiary, NAFCU Services Corporation. For NAFCU members, listing your credit union on this website is free - go check it out and make sure your credit union is listed and the information is accurate.

Regulation E and Overdrafts: Unintended Consequences?

Posted by Anthony Demangone

Editor's apology: This is a long post.  Especially for a Friday.  But I think it is important enough to merit the length.

Yesterday, the Federal Reserve held a tele-conference to offer guidance about recent amendments to Regulation E that affect overdraft protection programs. You can access the presentation materials here. 

The teleconference revealed a very important, and potentially costly, clarification.  But first, let me give a wee bit of background.

In short, the changes to Regulation E will mean that after July 1, 2010, you may not charge a fee when a non-recurring debit card or ATM transaction overdraws an account unless you have given that member disclosures describing your overdraft program - and the member opts in.  Again - unless the member opts in, you will not be able to charge a fee for such debit card and ATM transactions that overdraw an account.

There is an exception, though.  If your credit union has a policy that it only pays those non-recurring debit card or ATM transactions when funds are available when the authorization comes in, you will not need to comply with the opt-in requirements.  But does that exception allow you to charge fees as well, or just it just relieve you from the notification and opt-in requirements?  And that's a bid deal.

Even for credit unions that do not have overdraft programs and fit within that exception, some non-recurring debit card and ATM transactions will sneak through.  Examples?  Your ATM network goes offline and the member makes a withdrawal that exceeds the account balance.  Or the gas station only sends an authorization through for $1, before the member pumps $100 of gas into his Hummer.  Collectively, I'll call these "gas station" transactions. But, the exception still stands.  You don't have to comply with the opt-in requirements in order to process them.  If you can charge fees for those, that's a good deal of revenue.  If not, you might have a big revenue hole to fill.

Here's the clarification that caught everyone's attention.  You'll find it on pages 14 and 15 of the Fed's presentation via the link above.  The exception is only for the opt-in disclosure.  The exception does not allow you to charge a fee. The presentation clarifies that there is no exception that allows a credit union to charge a fee for any non-recurring debit card or ATM transaction that overdraws an account.  You to have the opt-in.  So, for the "offline ATM" transaction, or the "gas station" transaction that takes the account negative, you cannot charge a fee without that opt-in.

Enter Troy.  I don't know who Troy is, but his question summed up everyone's frustration.  You could practically hear his teeth grind as he spoke.

His bank does not have an overdraft program.  They do not pay any transaction unless funds are available when the check, ATM transaction or debit card authorization comes in.  So he fits within the exception.  His bank does not have to send the "opt-in" form to its customers.

But his bank has charged, and wishes to continue charging, a fee when those "gas station" transactions hit accounts.  Those transactions take accounts negative, and he wants to charge a fee to mitigate the risk of the negative account.  How does he go about charging that fee after July 1. 

One of the Fed speakers said to use the opt-in form.  But Troy correctly pointed out that an opt-in form won't really work, because what would the member be opting into?  His bank has no choice but to clear the "gas station" transaction, even if the member does not opt in.  The member is really only opting into the fee! 

The other Fed speaker paused, and said that they just never considered that a financial institution would want to charge fees for "gas station" transactions. (As my colleague Steve said during the training session, perhaps the Fed should spend a little less time on consumer testing, and spend a little bit more on learning how our industry does business.)

Troy followed up and said that this whole debacle has created an unintended consequence.  Credit unions or banks that want to charge fees for "gas station" transactions may have to consider creating a full-blown overdraft protection program for debit and ATM cards.  Something Troy does not want to do. 

We're sending a letter to the Fed to underscore our concerns on the subject.

Happy Friday, everyone.

Editors's Note: Reportedly, the Fed will issue some clarifying guidance on this issue in January.

Tuesday Leftovers

Posted by Anthony Demangone

Here's a little of "this and that" to help you through your Tuesday.

• FinCEN announces an important update for E-Filers.   FinCEN has implemented the second phase of the BSA E-Filing SAR Acknowledgements and Validation process. Phase I was implemented in September 2009 and provided BSA E-Filers with an acknowledgement of receipt for a submitted Suspicious Activity Report (SAR). Phase II applies data quality checks and will provide financial institution filers with information on the quality of their submissions for electronically filed SARs.
• NAFCU members: We've released a Final Regulation on Regulation E's recent final rule on opt-ins for overdraft protection services.  Access it here.  (Member log-in needed.)  We've also released a Regulatory Alert on the Regulation E proposal that affects gift cards.

• HUD announces a new RESPA outreach program to help all of us comply with the new RESPA rules that take affect next month.  HUD  will make earlier versions available in an archived format.  (I don't see any of those posted yet, but it does look like the December 3 PowerPoint is available here.   And I don't see the scheduled sessions on their "schedule page."  Be sure to check back. Don't forget, we're offering a RESPA and FHA related webcast this Thursday.

• NCUA has released its semi-annual regulatory agenda.  These documents are great as they give you an idea of what NCUA has done and what is in the hopper.  The Fed also issued its agenda.

Scope of Overdraft Fees - Reg E

Posted by Steve Van Beek

As everyone works through the new Reg E Overdraft rules, I think it is important to remember which fees are being regulated.  In addition to the overdraft fee, a member must opt-in before the credit union could charge (for ATM and one-time debit card transactions):

• Daily Overdraft Fee;
• Sustained Overdraft Fee; 
• Negative Account Fee; or 
• Any other similar fees - no matter what the credit union calls the fee. 

Here is the Fed's rationale (from the preamble - page 9 of the PDF - middle column):

"A few commenters recommended that the Board define ‘‘overdraft fee’’ to exclude fees assessed on accounts that maintain a negative balance for an extended period (often referred to as ‘‘sustained’’ overdraft fees). The Board believes, however, that any fee charged on an account for an overdraft should be subject to the rule, including but not limited to a per item, per occurrence, daily, sustained overdraft, or negative balance fee. A consumer who inadvertently overdraws his or her account may not learn about the overdraft until several days after the occurrence of the overdraft and so may unknowingly accrue additional fees. Therefore, the Board believes all overdraft fees should be within the scope of the rule." (emphasis added).

Additionally, these additional fees must be disclosed by financial institutions on the opt-in form.  See page 21 for 205.17(d) and the staff commentary to 205.17(d) on page 23.  

Thus, we can result with the following situation.

1. The credit union was forced to pay a one-time debit card transaction (based on its network rules) even though the transaction took the account into the negative.
2. The credit union is prohibited from charging an overdraft fee because the member has not opted-in 
3. The credit union can not charge a "sustained overdraft fee" even if the account is still negative after a certain period of time - because it was the one-time debit card transaction that triggered the account into the negative. 

However, if a subsequent check, ACH, or recurring debit transaction hits the account (while still negative) - the credit union would be able to charge an overdraft fee for that transaction as it is not subject to the overdraft restrictions.  Could the credit union charge a sustained overdraft fee if the two transactions are keeping the account overdrawn?  It is unclear.  The credit union could argue that the sustained overdraft fee is being charged not for the one-time debit but for the subsequent transaction.  In essence, the argument is that the sustained overdraft fee is charged for the subsequent (non-protected) transaction still being overdrawn and not the protected transaction.  This would mean if the account only had protected transactions causing the account to be overdrawn - the credit union would not charge the sustained overdraft fee.  Unfortunately, at this point, I think we might need more information from the Fed before these questions are clear.  

Compliance Dates Reminder

Posted by Sarah Loats

There's quite a few compliance dates next year and the Federal Reserve sure seems to like July 1, 2010, as there are three fairly major rules effective that day. Let's recap, shall we (the links will take you to NAFCU's Final Regulation summaries):

1. Regulation Z open-end lending rules. Prior to the Credit CARD Act, the Federal Reserve issued final rules to the open-end lending rules. This was a major overhaul of the open-end lending rules, amending the rules for applications and solicitations, initial disclosures, periodic statements, and advertising, among other things.  For the changes that haven't been swallowed up by the Credit CARD Act, the effective date is still July 1, 2010.

2. FACT Act.  By July 1, 2010, credit unions must have in place policies and procedures regarding the accuracy and integrity of information provided to consumer reporting agencies.  This rule also addresses direct disputes from consumers.

3. Regulation E overdraft rules. This rule is probably fresh in your head, but again, the effective date is July 1, 2010.

As if that wasn't enough, we have quite a few more compliance dates coming up next year:

• RESPA - January 1.
• Truth in Savings (disclosures of overdraft fees on periodic statements and disclosure of account balances through automated systems) - January 1.
• Private Student Lending - February 14.  .
• Credit CARD Act - February 22.
• Reg GG - June 1.
• More Credit CARD Act (gift cards, reasonableness and proportionality of fees, reevaluation of credit card rate increases) - August 22.
• HELOC and closed-end mortgages amendments to Reg Z and SAFE Act registration requirements- who knows??? 

Maybe it's time to look into that year-long sabattical...

A Little of This and a Little of That

Posted by Anthony Demangone

Much like the leftover turkey that is starting to go bad in your fridge, I had a few leftover items getting dusty in my in-box.  Enjoy!  (With or without cranberry sauce.)

• The Fed is offering a FREE audio conference on December 10 to go over the ODP-related changes coming to Regulation E.  Sign up here.
• The FDIC issued Financial Institution Letter FIL-66-2009 to help banks comply with Reg E's requirements concerning ATM disclosures.  It seems that some of them were not complying with section 205.16 of Reg E.  If some banks are tripping up on this, I bet some of us are as well.  Ergo, I'd give this a glance to make sure you're O.K.
• FinCEN's CTR informational pamphlet is now available in Spanish.
• NAFCU members, the December 2009 Regulatory Newsletter is available here. (Member log-in needed.)
• Did you wonder whether NAFCU members and non-members can sign up for NAFCU Today, a wicked good credit union news service?  Why yes, yes you can.

Odds and Ends

Posted by Anthony Demangone

The regulators do not seem to grasp the idea that some of us have Holiday shopping to do.  The pace of news has been furious, and it doesn't seem to be slowing down a bit.  Here's some recent items of interest.

Gift cards.  Yesterday, the Fed released proposed changes to Regulation E that would restrict fees and expiration dates that would apply to gift cards.   This proposal flows from the Credit CARD Act, which required the Fed to issue rules in this area.  The proposal would prohibit dormancy, inactivity, and service fees on gift cards unless: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.   Under the proposal, expiration dates for funds underlying gift cards must be at least five years after the date of issuance, or five years after the date when funds were last loaded.  We'll have 30 days to comment once this is published in the Federal Register.

120 Days of Love.  Not quite, but close enough. Last Friday, HUD announced that it will "exercise restraint" for the first 4 months of 2010 in its enforcement of RESPA. And it urges federal regulators to follow suit. As you would expect, HUD will give lenience to those who made "good faith" efforts to comply.

RESPA procedures.  Speaking of RESPA, the FFIEC interagency RESPA exam procedures have been released.  These procedures will be used by examiners.  The procedures also provide a very good overview of all the changes taking place to the RESPA requirements. 

NCUA.  The agenda for this Thursday's board meeting is available.  The item that caught my eye? NCUA will release its proposal regarding corporate credit unions.   Last week, Chairman Debbie Matz indicated that NCUA examiners will take a close look at fixed-rate mortgage loan concentrations, and increased delinquencies in indirect lending, member business lending and loan participations.  She also said that if credit unions do not address NCUA recommendations that were in a private Document of Resolution, expect a public Letter of Understanding and Agreement or Cease and Desist Order. 

SAFE Act.  Last week, the FDIC issued a final rule to implement the SAFE Act requirements.   Of note: the document, which is labeled a draft, has NCUA's name on it, along with other regulators.  Therefore, I would expect NCUA to follow suit shortly.  Remember, you'll have 180 days to register folks covered by the regulations once the registration system is open and ready to take registrations.

Reg E Rule: Possible Exception Overview

Posted by Anthony Demangone

On Friday, I wrote about the recently issued final rule that amends Regulation E to provide new consumer protections concerning overdraft protection.  My phone and email box starting to overheat, and generally it was in reference to this question: What about those transactions where we have to pay a point of sale debit card transaction that overdrafts the account because the gas station only authorized $1, but the transaction posts for $60?

Please allow me to give you the 50-cent answer, because I think it is important to see how this new final rule will work. Here's a link to the final rule.  Please print it out or save it to your computer.  I'll reference certain pages of the final rule, so having a copy would be beneficial.

The general rule:  Outside of applicable exceptions, a financial institution holding a consumer's account, shall not assess a fee or charge on a consumer's account for paying an ATM or one-time debit card transaction pursuant to the institution's overdraft program, unless you comply with the notice and opt-in requirements. Section 205.17(b), pp. 79-80

Let's stop and think about that.

1. First, this only applies to consumer accounts. Commercial accounts need not be included.
2. Overdraft program.  Is it defined?  You bet.   At section 205.17(a).  It defines it as "a service under which a financial institution assesses a fee or charge on a consumer’s account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account."  It does not include a line of credit subject to Reg Z, transfers from savings accounts, or a line of credit or other transaction exempt from Regulation Z.  You'll find this on pp. 78-79.  This definition limits the new rule's scope.
3. Finally, there's an exception.  Let's explore that.

The exception.  Here it is, word for word.

The requirements of § 205.17(b)(1) do not apply to an institution that has a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions when the institution has a reasonable belief at the time of the authorization request that the consumer does not have sufficient funds available to cover the transaction. Financial institutions may apply this exception on an account-by-account basis. Section 205.17(b)(4).  p. 80.

So, if your credit union has a policy and practice of declining to authorize and pay ATM or one-time debit card transactions when you have a reasonable belief at the time of the authorizationrequest that the consumer does not have sufficient funds available to cover the transaction - you do not have to send out the opt-in notification.

But why would you?  If you have a policy and procedure of only paying these transactions when funds are available, then you technically have a policy of not allowing members to overdraft their accounts using these transactions.  There'd be nothing for the member to opt-in to.  As we read the final rule, there's nothing that appears to prevent credit unions from charging fees in this situation.

If, on the other hand, you do have a policy and practice of paying such transactions when funds are not available pursuant to an overdraft program as defined by Reg E, then you do have to send an opt-in notice as required by the regulation.

So, what about those gas station transactions that we discussed earlier?

This is where it gets very hazy.  The following discussion comes from pp. 52-53.

...The Board believes that consumers who make the choice not to opt in may reasonably expect an ATM or one-time debit card transaction to be declined if there are insufficient funds in their account, and that they will not be charged overdraft fees. Adopting exceptions to the prohibition on fees would undermine the consumer’s ability to understand the institution’s overdraft practices and make an informed choice.

    The Board recognizes that financial institutions and consumers have imperfect information as to the balance in the account at the time of the transaction. Financial institutions face operational limitations in processing transactions, and in tracking the consumer’s actual balance, because transactions may not be processed in real-time. Similarly, even if a consumer checked his or her balance prior to a transaction, the balance may not be updated, so the consumer may inadvertently overdraw his or her account on the belief funds are available. On balance, the Board believes financial institutions are in a better position to mitigate the information gap by developing improved processing and updating systems, as they have in recent years, and as the Board expects they will continue to do over time.

    The rule does not, however, prohibit financial institutions from paying overdrafts for ATM and one-time debit card transactions even if a consumer has not affirmatively consented or opted in to the institution’s overdraft service, so long as a fee is not imposed. For example, under network rules, financial institutions must pay authorized debit card transactions, even if at settlement intervening transactions by the consumer have reduced the consumer’s available balance below the authorized amount of the transaction. To address any safety and soundness concerns, and as discussed above, institutions may debit the consumer’s account for the amount of the overdraft, provided that the institution is permitted to do so by applicable law.

So, where does that leave us?

Those without an overdraft program, who are eligible for the exception. If you look at the regulation itself and not the guidance, the regulation only says that an institution cannot charge a fee to a consumer's account pursuant to an overdraft protection program unless the consumer has opted in as outlined in the regulation.  Credit unions without an overdraft protection program as outlined by the rule (those who have a policy not to pay POS and ATM overdrafts when they reasonably determine that funds are not available) are not subject to the notice and opt-in requirement.  So it appears they have an argument that they can pay those gas station transactions and nothing appears to prohibit them from charging a fee.

Those with an overdraft program, who are ineligible for the exception.  They have to give the notice and opt-in. And the guidance above appears to show the Fed's thoughts that if a member chooses not to opt-in, these institutions can pay the "gas station" transaction - but cannot charge a fee.

The strange aspect of this is that there appears to be a disconnect between the guidance and the actual Reg.  The reg creates a clean exception, but that exception gets muddy when you read the explanatory language that comes with the regulation.  I wish this were an easy, clear issue - but it isn't. This rule is a big deal for many of you, so I urge you to do your own research.  We're digging through this as quickly as we can, but nothing compares to a legal opinion provided by competent legal counsel.

And remember that this analysis doesn't take into account the various legislative fixes that might address the number of possible overdrafts in a day or month and the amount of overdraft fees.

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.