NAFCU Compliance Blog

ODP - A History Lesson; OTS CEO Letter on Credit CARD Act Fix

Posted by Anthony Demangone

This week, I want to focus on the upcoming changes to NCUA's Truth in Savings regulation.  Those changes require additional disclosure requirements for periodic statements and automated systems.  But today, I want to deliver a brief history lesson and the current state of affairs for overdraft protection programs. 

The regulation.  First, there is a regulatory foundation to our ability to offer overdraft protection programs.  You'll find it buried within NCUA's general lending regulation, at 12 C.F.R. 701.21(c)(3).  I haven't researched exactly when that got on the books, but it predates my arrival at NAFCU.

Please, pretty please.  Roughly 5 years ago, consumer groups started grumbling about overdraft protection programs.  In 2005, NCUA and others issued guidance and some regulatory changes.  First, NCUA issued Letter to Credit Unions 05-CU-03, which provides some guidance and best practices.  They also issued 05-CU-21 later in the year to share an AIRES questionnaire with credit unions concerning ODP programs.  Access both here.  That year, NCUA also amended its Truth in Savings regulation.  It added 707.11, which address ODP programs, and it added some guidance in other areas as well.  Those changes only affected credit unions that advertised their ODP programs.  All of these changes really didn't affect how you structured your ODP programs.  They simply affected or suggested how you were to market them.  Bills were drafted that would greatly limit our ability to charge fees for ODP programs, but these bills never made it into law.

Enough, already.  In 2009, things changed.  With Democrats firmly in control of the White House, Senate and House of Representatives, consumer group arguments against ODP programs found receptive ears.  A number of bills were drafted that would curtail the number of ODP fees we could charge or the amount of such fees.  To date, those bills are still percolating.  Regulators also kicked into high gear, amending two regulations to address ODP concerns.  NCUA and others amended their "Truth in Savings" regulations that mandates increased ODP disclosures for all institutions.  And Regulation E was amended to prevent certain overdraft fees without an affirmative "opt in" from affected consumers.  Will the regulatory changes blunt the legislative momentum of the various ODP bills on the Hill?  It is hard to say for sure.

What are the lessons here?  I'm not sure there are any clear ones.  But here's a possibility.  When consumer groups complain about perceived unfair practices, whether they involve credit cards, ODP, or mortgages, there will be those on the Hill that will listen.  If you derive income from any practice that consumer groups consider to be unfair - even if you do it above board and with a fair price - that income is at risk.  When Congress moves to reform, they do not use scalpels.  They use saws and axes.  We often get caught up in Congressional reforms, even as legislators admit that we are not part of the problem. 

Tomorrow, we'll start looking at the NCUA changes in detail.

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Last week, the OTS released a CEO Letter that appears to be the first guidance issued by a regulator about the Credit CARD Act fix to the 21-day dilemma. Of note:

As originally enacted, § 163(a) of TILA applied not only to credit cards, but to all open end credit, including home equity lines of credit (HELOCs). Because HELOCs are home-secured, savings associations that offer them must also comply with an OTS rule that prohibits assessing a late fee if the borrower’s payment is received within 15 days after it is due.2 To accommodate this rule, many thrifts have drafted their HELOC agreements to require payment by the 15th of the month, but defer charging a late fee until the 30th day. Since contract terms are not easily changed, it has been difficult for associations to adjust their practices to comply with the requirement that consumers be given 21 days to remit payment. The correction discussed above means that this requirement will only apply to credit card accounts.

However, thrifts should note that TILA § 163(b) remains unchanged. Pursuant to § 163(b), when an open end creditor provides a grace period permitting consumers to repay without incurring a finance charge for a period of time after payment is due, the grace period must last at least 21 days. Moreover, the creditor must transmit periodic statements to consumers at least 21 days before their payment is due. Although HELOCs are not typically structured to include a grace period, thrifts should be aware that if they provide one, the requirements of TILA § 163(b) will apply.  (Emphasis added.)

Mortgage Loan Sale/Transfer Notifications; Reg Reform

Posted by Anthony Demangone

In November, the Federal Reserve Board issued an interim final rule to require that consumers receive notification when their mortgage loan has been sold or transferred.  The notification comes from the institution that receives the loan - not the one who sells or transfers it.  The new requirement will apply to both open and closed-end loans.

Compliance deadline: January 19, 2010.

The Fed issued its rule in response a new requirement mandated within the Helping Families Save Their Homes Act, which was enacted back in May.  Why this new requirement?  Currently, RESPA requires a notification when the servicer of a mortgage changes.  Congress wanted to make sure consumers know when the ownership of the mortgage changed as well. Here's a snippet:

Consistent with the legislative intent, this interim final rule implements Section 404(a) of the 2009 Act by applying the new disclosure requirements to any person or entity that acquires ownership of an existing consumer mortgage loan, whether the acquisition occurs as a result of a purchase or other transfer or assignment. A person is covered by the rule only if the person acquires legal title to the debt obligation....However, the interim final rule applies only to persons that acquire more than one mortgage loan in any 12-month period.

To comply with the interim rule, a covered person must mail or deliver the required disclosures on or before the 30th day following the date that the covered person acquired the loan. The disclosure need not be given, however, if the covered person transfers or assigns the loan to another party on or before that date. 

NAFCU has prepared a Regulatory Finalthat provides a great overview of the new requirement.  (Member log-in needed.)  Again, you can view the final rule via the link at the top of this post.  NAFCU members: we'd need any comments that you have by December 16th.  While the scope of this rule should not be too cumbersome (it only affects those who receive the loan, not those who transfer or sell it), there are some compliance issues that could be cleaned up.  For example, what about loan participations? Does every credit union that gets a piece of the mortgage need to send the notification?  Inquiring minds want to know.

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There soon could be a "midnight oil" shortage.  As you know, the House is attempting to finalize its regulatory reform legislation.  This legislation, if made into law, will affect every aspect of the American financial system.  As part of the process, there was a deadline for amendments to be submitted.  Well, nearly 300 such amendments are now in play.  Rest assured that NAFCU Compliance, Reg Affairs and lobbying staff worked late into the evening on Monday and all day yesterday to review each amendment.  We've already begun voicing our concerns or support to Congress on many of these proposed amendments.  Stay tuned.

A Little of This, A Little of That

Posted by Anthony Demangone

Here are a few things that have been rattling around my in-box recently.

• A criminal BSA prosecution against a bank. You don't see this very often.  Someone asks me every so often what has to happen for the government to use this power under the Bank Secrecy Act.  This is a good example. This could be a good item to share in a training session to underscore that criminal prosecution is a real possibility.  However, it is usually used against an organization or official who uses their position to inentially evade the Bank Secrecy Act's requirements.  Here's a taste of what the bank allegedly did:

It was further part of the conspiracy that (the bank) opened multiple accounts held in the names of nominees or other business entities so that the cash deposits, on any one day in excess of $10,000, could be deposited into the various accounts, in order to conceal the relationship between the transactions and the depositors and to avoid the filing of any reports. Emphasis added.

• The IRS is starting a pilot program to allow those who file IRS information returns to truncate the individual's 9-digit identifying number on paper payee statements.    It looks like the pilot program is limited to 1098s, 1099s and 5498s.

• NCUA issues Regulatory Alert 09-RA-14 to highlight recent changes to Reg CC and how those changes might affect your funds availability policy.

• NCUA issues Regulatory Alert 09-RA-13 to highlight changes to the annual fee threshold for HOEPA loans under 12 C.F.R. Part 226.32.  The dollar threshold will drop from $583 to $579, effective January 1, 2010.

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

Posted by Anthony Demangone

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

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

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

Frequently Asked Questions and Answers

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

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

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

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

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

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

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

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

Grab Bag

Posted by Anthony Demangone

Here are a few items of interest.

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

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

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

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

Reg Z Proposal: Late Payment Disclosures

Posted by Sarah Loats

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

Here are some items of note from the proposal:

- The requirements apply only to credit cards.

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

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

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

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

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

An excerpt from the proposal summarizes the format requirements nicely:

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

21-Day Fix on to President's Desk; Reg Z Proposal: Timely Settlement of Estates

Update by Anthony Demangone 7:55 p.m., Thursday evening

I just received an email from our lobbying dynamo, Brad Thaler.   Just minutes ago, the U.S. Senate passed H.R. 3606 by unanimous consent. This bill would make a technical correction to the Credit CARD Act to limit the 21-day requirements to credit cards, instead of all open-end lending.  The legislation now goes to President Obama's desk.  He is expected to sign it within days.

Many thanks to all of you for your help in getting this legislation to this point. We'll update you on any developments.

***

Posted by Steve Van Beek

Today's blog will be a little lighter in content as we will take a look at a less controversial provision of the Fed's Reg Z proposal.  Section 226.11(c) requires Timely Settlement of Estates.  The summary of the provision lays out the main changes:

"E. Timely Settlement of Estates 

The Credit Card Act directs the Board to prescribe regulations requiring creditors to establish procedures ensuring that any administrator of an estate can resolve the outstanding credit card balance of a deceased accountholder in a timely manner. The proposed rule would impose two specific requirements designed to enable administrators to determine the amount of and pay a deceased consumer’s balance in a timely manner. First, upon request by the administrator, the creditor would be required to disclose the amount of the balance in a timely manner. Second, once an administrator has made such a request, the creditor would be required to cease the imposition of fees and charges on the account (including the accrual of interest) so that the amount of the balance does not increase while the administrator is arranging for payment."

Section 226.11(c) is broken down into three subsections.

• (1) General Rule. Creditors need to establish reasonable procedures to ensure administrators or executors of estates can determine the amount of and pay any balance on the credit card account. 

• (2) Fees and Charges. After receiving a request by an administrator or executor, the credit union would not be able to charge interest or late fees to the account.  There is an exception for a joint credit card accounts.       

• (3) Timely Statement of Balance. Upon request from an administrator or executor, the credit union would need to provide a statement balance within a reasonable period of time.  The proposal considers 30 days, from the date of the request, to be reasonable.  

 The staff commentary also provides examples and additional information (see pages 12-13).   

Have a great weekend!  I'll be spending my Saturday moving and hoping the rain holds off (currently 30% chance - but on moving day that might as well be 75%).  

Grab Bag

Posted by Anthony Demangone

Please let me pause our Regulation Z discussion to touch upon some things that have been bouncing around my in-box.  I understand how important Reg Z is, but other things continue to happen.

• HUD has updated its RESPA FAQs again.
• The FTC settled charges against an apparel company for alleged violations of COPPA.  You don't see these very often, so the settlement serves as a nice reminder that COPPA is alive and well.  And yes, it applies to credit unions.  The announcement also provides background information on COPPA.
• Earlier this month, the Fed announced its annual adjustments to the Regulation D reserve tranches.  I like this update each year, because it is the only time get to use the word tranche.
• NCUA issued Letter to Credit Unions 09-CU-21to remind credit unions about how to properly use the NCUA official sign.  This would be a good piece of guidance to share with marketing.

• HOEPA's higher-priced mortgage loans will affect HMDA reporting.  The OTS has updated its exam procedures, and they do a great job of highlighting these changes.

• The free go-to-webinar that will discuss our on-line training program will take place next Tuesday from 1 until 2 p.m. EST.  I had the wrong time in yesterday's blog posting.  Register here.

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The Saturday after our Regulatory Compliance Seminar, I had the pleasure of watching Penn State play Michigan with my colleague, Steve.  Steve is a big Michigan fan, and I went to Penn State.  I didn't watch all of it, as I was distracted by a couple of brand new Penn State fans who joined us to watch the game.  Kate was so excited to wear her Penn State shirt that she couldn't sit still for the photo.

Reg Z Proposal: Marketing to Students

Posted by Steve Van Beek

The Credit CARD Act limits card issuers ability to market open-end consumer credit to college students.  The Federal Reserve has proposed to implement this restriction in new Section 226.57 of Regulation Z.  This posting will focus on the marketing to college students while a future blog posting will cover the restrictions and requirements related to creditors who offer "college affinity cards."

Definition of College Student Credit Card & College Student

The proposal defines "college student credit card" as a credit card offered to any college student.  The definition of "college student" would extend to any student attending an institution of higher education regardless of age and is not limited to undergraduate students but would apply to all students including those enrolled in graduate programs or joint degree programs.  

Prohibited Inducements

Credit unions will be prohibited from offering a college student "any tangible item" to induce a student to apply for or open an open-end consumer credit plan if the offer is made:

• On the campus of an institution of higher education;
• Near the campus of an institution of higher education; or 
• At an event sponsored by or related to an institution of higher education.    

Comment 57(c)-1 clarifies that a "tangible item" includes any physical item (such as a gift card, t-shirt, magazine subscription, etc.) but does not cover non-physical items such as discounts, reward points, or promotional credit terms.  Comment 57(c)-2 clarifies that if an item is offered to all students (and not dependent upon applying for an account) that the item is not an inducement.

Comments 57(c)-3 and 57(c)-5 helps explain which marketing activities are "near the campus" and which are "at an event sponsored by or related to an institution."  The proposal uses 1,000 feet to determine whether a location is "near the campus."  Comment 57(c)-5 indicates that an event is related to an institution if "the event uses the name, emblem, mascot, or logo of an institution of higher education in a way that implies that the institution of higher education endorses or otherwise sponsors the event."

What if the credit union mails an offer of a tangible item to a college student (at or near the campus)?  Comment 57(c)-4 indicates this would be prohibited because the offer for a tangible item was sent to a location on campus.  See pages 20-21 for the language of the comments to Section 226.57(c). 

Note: The prohibitions in subsection (c) applies to all open-end consumer credit plans and is not limited to credit card offers. 

If your credit union markets to college students, be sure to analyze how this proposal will impact your marketing plans.  Remember, this is a proposed rule.  While the Federal Reserve's hands are tied in some respects due to the statutory language of the Credit CARD Act, the Fed does have some latitude and flexibility.  

What about branches on or near campus?

The proposal does not provide any guidance for institutions that have branches on a college campus. Are exceptions allowed in these instances?  It does not appear so.  Thus, this section could prohibit the credit union from offering account opening bonuses to college students solely because the branch is located on or near the campus of an institution of higher education.  Interestingly, the college student would be able to go to another branch (that is not located on or near campus) and receive the bonus to open an account.  Remember, this section covers any open-end consumer credit plan.  

Send your comments to the Federal Reserve (or NAFCU if you are NAFCU-member) if you believe branches on or near a college campus are different and deserve an exception (i.e., because the student is coming to the credit union rather than the credit union coming to the student).  Try to focus your comments on why accepting applications and offering a bonus in a credit union branch on campus is different than a card issuer handing out t-shirts at a college football game to induce students to apply for credit card account.  

Reg Z Proposal: Subprime Fee Credit Cards; See You in Charleston

Posted by Steve Van Beek

The Credit CARD Act included a restriction on charging subprime fees on a credit card account during the first year the card is opened.  The Federal Reserve has proposed to implement this restriction in Section 226.52 of Regulation Z.  The Fed provides a description of these subprime cards on page 3 of the above PDF (page 159 of the proposed rule).

The limitations in Section 226.52 apply to fees assessed during the first year a credit card account is opened.  If a card issuer charges any fees to a credit card account during the first year an account is opened:

"(i) The card issuer must not charge to the account during that period [the first year] fees that in

total constitute more than 25 percent of the credit limit in effect when the account is opened; and

(ii) The card issuer must not require the consumer to pay any fees in excess of the total amount permitted by paragraph (a)(1)(i) of this section with respect to the account during that period [the first year]." 

The limitations in Section 226.52 apply throughout the first year the credit card is opened rather than only at account opening.  Pages 11-12 of the cut-out PDF contains a detailed example of Section 226.52's application.  

Comment 52(a)-3 clarifies that the credit limit to be used in the 25% calculation is the credit limit at account opening even if the credit limit is raised during the first year.  This restriction makes sense.  If a card issuer could raise the credit limit and use the new, increased credit limit to calculate the 25% ratio - the consumer would not receive the benefits of the increased credit limit because the card issuer would then be allowed to charge additional fees on the account.

Which fees does Section 226.52 apply to?  Comment 52(a)(2)-1 lists which fees are limited by Section 226.52 (page 13-14).  Covered fees include:

• Fees the consumer is required to pay for issuance or availability of credit (including an activity or inactivity fee);
• Any fee a consumer must pay to receive a particular credit limit; 
• Fees for insurance or debt cancellation coverage if required for the account; and 
• Fees the consumer is required to pay for transactions on the account (such as cash advance fees, balance transfer fees, foreign transaction fees, and fees to use the account for purchases). 

Fees for expedited payments, reproduction of periodic statements, or fees to reissue a lost or stolen card are not covered fees for Section 226.52.  Additionally, late payment, over-the-limit, or returned-payment fees are not subject to this restriction because they are fees related to the member's behavior rather than simply imposed by the credit union as a condition of the credit.  

The credit union will be required to refund or waive any fees that exceed the 25% threshold during the first year.  And, the credit union will not be able to collect these fees in any other manner.  See page 13 - Comment 52(a)(1)(ii)-1 for an example.

If your credit union offers credit card accounts with low credit limits, be sure to analyze whether these new restrictions will impact your cards.  Remember, the restrictions apply to fees assessed throughout the first year an account is opened. 

***

Have a great weekend everyone!  If you are heading down to Charleston next week for Compliance Seminar, have a safe trip.  Anthony and I will see you down there.