NAFCU Compliance Blog

Qualified Mortgages; Flood; Compliance Monitor; Fair Lending Webinars

Written by Steve Van Beek

Below are just a few quick items for your Friday - have a great weekend!

Qualified Mortgages.  The Consumer Financial Protection Bureau has reopened the comment period for their Qualified Mortgage rule (also known as the Ability-to-Repay rule).  The new comment period ends on July 9, 2012.  It had been expected that the CFPB would finalize this rule in early 2012 but it kept getting pushed back - with good reason as this rule has the potential to significantly alter the mortgage market - and now looks like it will be late 2012 before a final rule.  Dodd-Frank requires the rule in place by January 2013.  The CFPB's notice regarding the extended comment period is here. 

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Flood.  A 2-month extension was passed and then signed by President Obama.  This extends the National Flood Insurance Program (NFIP) through July.

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NAFCU's Compliance Monitor.  Our June 2012 issue of NAFCU's Compliance Monitor is now available for download by NAFCU members.  This month the articles focus on Reporting Interest Payments to Nonresident Aliens as well as the increased Focus on Fair Lending.

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Fair Lending Webinars.  The Federal Reserve's Consumer Outlook Live series is hosting a June 21st webinar on 2010 Census Data - What it Means for CRA, HMDA and Fair Lending Compliance.  The webinar is free and follows on the heels of their November 2, 2011 - Fair Lending Issues and Hot Topics webinar (archived version available).   

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

Written by Steve Van Beek

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

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

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

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

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

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

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

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

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

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

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

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

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

The Origin of a Q&A; Hi my name is…

Written by Michael Coleman, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

Keeping Track of the CFPB's Mortgage Initiatives

Written by Steve Van Beek

The CFPB has been working on mortgage issues in a couple of different areas and I thought it would be a good idea to include links to their information in one location.  Especially as issues seem to disappear on the CFPB's website.  It is truly amazing that a 21st century agency has not included a search bar on either the first or second design of their website.  

I hope the CFPB realizes that institutions cannot instantaneously track and review the hundreds of pages of information the CFPB releases each week.  A search bar would be the first step in increasing transparency.  It really isn't that hard.  The NAFCU Compliance Blog has one.  

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Mortgage Origination.  The CFPB plans to propose these rules this summer with a final rule in place by January 2013.  Below are links to the CFPB's working documents.

• CFPB's Press Release on Mortgage Origination Rules
• The CFPB's 37-Page Outline of Proposals Under Consideration and Alternatives Considered
• Discussion Issues for the CFPB's Small Business Review Panel

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Mortgage Servicing.  Just over a month ago, the CFPB released its game plan for Mortgage Servicing.  For these rules, the CFPB plans to have proposals out this summer and a final rule in place by January 2013 (seeing a trend yet?) 

• CFPB's Press Release on Mortgage Servicing Rules 
• CFPB's Fact Sheet on Mortgage Servicing
• The CFPB's 60-Page Outline of Proposals Under Consideration and Alternatives Considered
• Discussion Issues for the CFPB's Small Business Review Panel
• CFPB's Blog Post on its Prototype Mortgage Periodic Statement

According to the CFPB's press release, the CFPB can provide up to one year of implementation time (January 2014).  However, the CFPB hasn't decided on the implementation period.  Credit unions will want to be very clear in their future comment letters about how long this massive overhaul will take and why even the one-year period might not be enough.  

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TILA/RESPA Disclosures.  The CFPB is also moving forward with their TILA/RESPA mortgage disclosure consolidation.  This was the CFPB's first "Know Before You Owe" campaign.  At this point, it looks like the CFPB is hunkering down with all of their comments with an aim of getting a proposed rule out by July 21, 2012.  

• The CFPB's Blog Post with the Latest Model Forms and the CFPB's Press Release
• The CFPB's 42-Page Outline of Proposals Under Consideration and Alternatives Considered
• Discussion Issues for the CFPB's Small Business Review Panel

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And, this isn't all of it.  The CFPB will be pretty much changing every aspect of mortgage lending within the next couple of years.  For an eye to what else the CFPB is working on, take a look at their Agency Rule List.  

If the outlines are 37; 60 and 42 pages - how long will the actual rulemakings be??  

Member Complaints; NAFCU's 2012 Regulatory Compliance Seminar

Written by Steve Van Beek

Consumer and member complaints are at the forefront of quite a few conversations right now (including quite a few news articles).  The CFPB's promotion of their complaint process is one reason for this uptick in discussion as is the centralized complaint process for financial products.  

The CFPB issued their 2011 Annual Report on Consumer Complaints and it is full of useful information to review.  Here is a snapshot of the results:

"Between July 21 and December 31, 2011 the CFPB received 13,210 consumer complaints, including 9,307 credit card complaints and 2,326 mortgage complaints.

Forty-four percent of all complaints were submitted through the CFPB's website and 14.7 percent via telephone calls.  Referrals from other regulators accounted for 34.9 percent of all complaints received.  The rest were submitted by mail, email, and fax."

Future reports will include even more details - including complaints in new areas such as private student loans, auto loans and checking accounts.  Be sure to review the full report or pass it along to the appropriate person at your credit union.   

NCUA.  The March 2012 edition of the NCUA Report also included an article on Trends in Member Complaints and Consumer Inquiries.  Of note, the article indicates that of the complaints received in 2011 less than 1 percent involved a consumer compliance violation.  Of that 1 percent, half of those were related to timing issues related to the error resolution process under Regulation E.  

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NAFCU Regulatory Compliance Seminar.  October seems like a long way off but it will be here before you know it.  We are in the process of putting together the content and agenda - so please feel free to send in any comments, ideas or suggestions.  We love your input and this conference is really about you all so let us know what you need.

Here is what we are tentatively looking at so far (topics are subject to change, of course):

• TILA/RESPA Mortgage Disclosures
• Upcoming Mortgage Servicing Requirements
• The Latest on Overdraft Protection
• Remittance Transfers under Regulation E
• CUSOs
• Loan Participations
• Bank Secrecy Act Changes
• Social Media
• NCUA Update
• CFPB Update

I think that is a pretty good start - but let us know what you are looking for and how we can make NAFCU's 2012 Regulatory Compliance Seminar even better than the past.  

Recertification for NCCOs.  Remember, attending Regulatory Compliance Seminar is the best way to recertify your NAFCU Certified Compliance Officer (NCCO) designation.  Seminar offers 24 CEUs which is enough to fully recertify for two years.

Seattle, Washington.  Did I mention Seminar was in Seattle?  Right Downtown?  Well, now I have.  Hope to see you October 23-26, 2012!    

Updated Agency Contact Information - Credit Card Disclosures & FEMA Notices

Written by Bernadette Clair, Regulatory Compliance Counsel

Today, we'll continue with the updated Agency information that we started yesterday.   

Credit Card Applications and Solicitations; Account Opening Disclosures.  Last but not least, credit unions need to update references to the Federal Reserve’s website on credit card applications and solicitations provided under12 CFR 1026.60 and credit card account opening disclosures provided under 12 CFR 1026.6(b)(2)(xiv) to refer to the CFPB and the CFPB’s website.

• For a visual example of the change, here is the CFPB's G-10(B) Model Form from Appendix G of Section 1026.  See the section "For Credit Card Tips from the Consumer Financial Protection Bureau."

For more detailed discussion on this particular change, see our January 10, 2012 blog post.

When must credit unions make these changes?  January 1, 2013 is the deadline for all of these updates.  If you haven’t already updated your forms, it’s never too early to start since even the smallest changes can take time. Plus, it always feels good to check something off the list!

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Updated Address for Obtaining the Standard Flood Hazard Determination Form

Since we’re on the subject of address changes, NCUA’s recent technical amendments rule changed the address credit unions can use to obtain a copy of FEMA’s Special Flood Hazard Determination Form.  The address, found in 12 CFR 760.6(a) has been changed from FEMA’s mailing address to FEMA’s website, http://www.fema.gov/.  

Hat tip to Joyce for pointing this one out!

This rule also contains a couple of other technical changes – we blogged about one of these – the changes to the Equal Housing Lending Poster – back on March 22^nd.

CFPB Industry Discussions; Reg Z Proposal for Credit Cards

Written by Steve Van Beek

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

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

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

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

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

"§ 1026.52   Limitations on fees.

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

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

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

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

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

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

Keeping a Record of NCUA's Regs; NAFCU's Comment Letter on TILA/RESPA

Written by Steve Van Beek

On Tuesday we blogged about the FTC's rescission of their regulations that transferred to the CFPB.  We also indicated that NCUA was likely to follow soon after and rescind their rules.  We also included this information about making a copy of the current rules:

"Prior to this occurring, it might be a good business practice to make a copy of the soon-to-be rescinded regulations to ensure your credit union has a copy of the regulations in effect in the past in the case of a member complaint, exam issue or lawsuit."

A very helpful comment highlighted that the Government Printing Office (GPO) retains a copy of each year's CFR in PDF or XML format.  Below are the 2011 PDFs of the rules that transferred from the NCUA to the CFPB.   

Main Rules.  These three rules were transferred either completely (Privacy and SAFE Act) or almost completely (Fair Credit Reporting Act).

• Part 716 - Privacy of Consumer Financial Information
• Part 717 - Fair Credit Reporting
• Part 761 - Registration of Residential Mortgage Loan Originators 

There are a few other regulations listed in the CFPB's Federal Register notice on the transferred regulations but they are not major changes and only impact certain situations.  Part 707 - NCUA's Truth in Savings regulation - is also included on the list but rulemaking authority for Part 707 remains with NCUA.

Note:  Prior years of regulations can be found by using this GPO starting page.  Hat tip to Kennyb.      

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TILA/RESPA Disclosure Combination.  On Monday, NAFCU submitted a comment letter to the CFPB on their plans to combine the TILA and RESPA disclosures.  The comment letter is 7 pages long and highlights areas of concerns as the CFPB continues along their Dodd-Frank mandate.  

Remember:  The CFPB has to have an official proposal out for the TILA/RESPA combined disclosures by July 21, 2012.  Their Know Before You Own project was not an official proposed rule and was not part of the Administrative Procedures Act.   

CFPB Bulletin on Mortgage Loan Compensation; NCUA Report - EHL Poster

Written by Steve Van Beek

I've been wondering if and when the CFPB would start issuing guidance to regulated entities on the existing regulatory requirements the CFPB inherited.  It seemed the CFPB's focus - outside of examinations and inquiries - was placed on making sure they met their Dodd-Frank deadlines for adding new regulatory requirements on financial institutions.  

With that lead-up, on April 2nd the CFPB issued Bulletin 2012-02 which seeks to clarify an area of 12 CFR 1026.36 of Reg Z on mortgage loan compensation.  Prior Bulletins from the CFPB can be found here.

Bulletin 2012-02.  The CFPB stepped into an area that had caused quite a bit of confusion since it was enacted (and the Fed's Webinar last March seemed to muddy the waters more).  The rule itself - 12 CFR 1026.36 - prohibits the payment of compensation based on the loan terms or conditions.  The staff commentary takes this prohibition into grayer waters by extending the prohibition to any factor that might be used "as a proxy for a term or condition."  As you can imagine, there has been quite a bit of confusion and the CFPB's Bulletin seeks to provide clarity in one area.

Qualified Plans  The Bulletin includes this description of the questions received:

"The Bureau has received several questions about whether and how the Compensation Rules apply to qualified profit sharing, 401(k), and employee stock ownership plans (collectively, "Qualified Plans"). 

The CFPB answers the Qualified Plan question as follows:

"To provide clarify at this juncture, the Bureau's view is that the Compensation Rules permit employers to contribute to Qualified Plans out of a profit pool derived from loan originations.  That is, financial institutions may make contributions to Qualified Plans for loan originators out of a pool of profits derived from loans originated by employees under the Compensation Rules."

Non-Qualified Plans.  The CFPB declined to comment or provide clarity on other profit-arrangements/plans that are not Qualified Plans.  However, the CFPB indicated they would address this in a future rulemaking required by Dodd-Frank.

Not the Last Word.  While clarity is usually welcomed, this particular clarity might not be long-lived as Section 1403 of Dodd-Frank requires the CFPB to adopt loan originator compensation rules by January 21, 2013.  According to the Bulletin, "the Bureau anticipates issuing a proposed rule for public comment in the near future on the loan origination provisions in the Dodd-Frank Act."  These new rules will also have the potential to change the CFPB's interpretation on Qualified Plans (but credit unions can rely on the Bulletin until then).  

In other words - we'll have continued confusion and lack of clarity as well as another round of proposed and final regulations on mortgage loan compensation.  And people wonder why Dodd-Frank creates regulatory burden?  

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The April 2012 NCUA Report is now available.  I was very glad to see this put in writing by NCUA regarding the timeframe for the Equal Housing Lending poster:

• Updates nondiscrimination requirements for credit union operations (Part 701) to reflect the recent designation of NCUA’s Office of Consumer Protection to hear Fair Housing Act and Equal Credit Opportunity Act complaints. Credit unions engaging in real estate-related lending will have a reasonable amount of time to post updated Equal Housing Lender signs in public areas.

From Page 5.  As usual, the NCUA Report is a useful resource to review to get the latest directly from NCUA.    

Consumer Compliance Outlook: Common Compliance Violations

Written by Steve Van Beek

Hope everyone had a great weekend - below is a great resource that might be useful.

Consumer Compliance Outlook.  The Philadelphia Federal Reserve publishes a Quarterly Consumer Compliance Outlook that is usually a valuable resource.  This month's material is especially useful as they walk through common compliance issues seen during examinations.  The PDF of the 1st Quarter 2012 Issue is here and includes: 

• Fair Lending Webinar Questions and Answers
• View from the Field: Commonly Cited Compliance Violations in 2011
• Risk-Based Pricing Notice Requirements: Questions and Answers
• News from Washington: Regulatory Updates
• On the Docket: Recent Federal Court Opinions
• Compliance Alert
• Index of Articles
• Calendar of Events

The Commonly Cited Compliance Violations include:

• Regulation B's requirement for joint intent for joint credit (spousal signatures);
• Regulation B's adverse action notices (lacking content and specificity);
• RESPA's Tolerance Cures;
• Reg C/HMDA Rate Spread, Loan Purpose Definitions and Type of Action Taken; and
• Reg Z Account Opening Disclosures for Open-end Credit. 

We'll look at some of these violations in more detail later this week.  

For now, I'm just glad the Philadelphia Federal Reserve has continued this publication even though authority for the consumer regulations passed to the CFPB.  In the future, I'm hoping the CFPB (and NCUA) realize how useful an informal publication like the Consumer Compliance Outlook can be in highlighting common issues and explaining the requirements to increase compliance among financial institutions.