NAFCU Compliance Blog

Credit CARD Act - Sections 105, 107 & 108; NCUA LCU

Posted by Steve Van Beek

Today, we are going to knock out a few smaller sections of the Credit CARD Act.  

Section 105 - Subprime or "Fee Harvester" Cards

First off, can you tell Congress did not like this practice?  "Fee harvester" is not a term used to describe a consumer-friendly product.  Few credit unions dabble in these types of products, so take a quick look at your credit cards to see if they would be covered.

Section 105 adds subsection (n) to Section 127 of TILA.  This section requires that if a new credit card account adds fees that equate to more than 25% of the available credit limit - those fees must be paid for in another payment form (i.e. can not be added to the credit card at issuance).  This section stems from practices by some subprime card issuers who would open a credit card account with a credit limit of $300 that already had $250 in fees on the card - giving the consumer on $50 in available credit and accruing interest on the $250 in fees.  Thus, the term "fee harvester."  

This section is a bit confusing and it seems the Fed would issue regulations to clarify and prevent evasion of this subsection.  For FCUs, do not forget about Section 706.26 of NCUA's regulations covering Unfair or Deceptive Acts or Practices (UDAP) - effective July 1, 2010.  The restrictions are more stringent and detailed.  If you offer a credit card like this for some reason, be sure to check out UDAP (see especially page 129 as well as pages 142-145 of the official staff commentary).

Section 107. Enhanced Penalties

This section strengthens the penalties section of TILA by authorizing fines of twice the amount of any finance charge, with a minimum fine of $500 and a maximum of $5,000, in penalties for individual actions on an open end consumer credit plan.  The section also allows higher penalties if a "pattern or practice" of failures can be established.  

Section 108. Clerical Amendments

This section adds the term "open end consumer credit plan" to the existing definition of "open end credit plan" under Section 103(i) of TILA.  The definition remains substantially the same, but the amendment clarifies that the terms "open end consumer credit plan" and "open end credit plan" are interchangeable. 

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NCUA recently issued Letter to Credit Unions 09-CU-13 which discusses the upcoming hurricane season and pandemic planning.  The letter encourages credit unions to review and update their disaster preparedness and response plans.  The Letter includes links to various guidance documents on disaster preparedness and business continuity planning. 

Section 104; NCUA Letter to Credit Unions

Posted by Anthony Demangone

I hope everyone had a nice weekend.  Now, back to the Credit CARD Act daily grind.

Section 104 of the Credit CARD Act does a number of things.

5 p.m. Cutoff.  Section 104 amends Section 164 of the Truth in Lending Act to mandate that if a member makes a payment by 5 p.m. on their due date, you'd need to credit the payment as of that date.  To clarify: There's no requirement to post payments on the day they are received, but payments received by 5 p.m. on the due date must be credited on the due date.  Here's what Section 164 will look like after February 22, 2010:

 164. Prompt and fair crediting of payments.(a) IN GENERAL - Payments received from an obligor under an open end consumer credit plan by the creditor shall be posted promptly to the obligor's account as specified in regulations of the Board. Such regulations shall prevent a finance charge from being imposed on any obligor if the creditor has received the obligor's payment in readily identifiable form by 5:00 p.m. on the date on which such payment is due in the amount, manner, and location indicated by the creditor to avoid the imposition thereof.

This section seem to simply create a 5 p.m. cut-off, although arguably only for the due date. What if you close before 5?  Perhaps the Federal Reserve will clarify expectations when they issue regulations to implement the Act. 

Payment allocation.  Section 104 of the Credit CARD Act also requires that credit unions allocate any payment above the minimum periodic payment to the balance with the highest APR. Note: This is a stronger requirement than UDAP will require on July 1, 2010.  (UDAP would have given the credit union the option of pro rata application of payments.) To illustrate: if a member has a minimum payment of $50 and makes a $300 payment – the $250, in excess of the minimum, must be applied to the balance on the card with the highest APR. There are also other restrictions for certain deferred interest arrangements.

So, scrap what UDAP required.  Make sure your system (and the folks that program it) is ready for this requirement.  If they were shooting for July 1, 2010, using UDAP's requirements as a framework, they'll be late and off the mark. 

Changes to mailing address.  Additionally, if the credit union changes its mailing address or method of handling a member’s payments, it may not charge a late fee for 60 days – if the mailing address change causes a material delay in the crediting of a member’s payment. If a credit union provides two options for payments (such as an old mailing address and a new mailing address) during a transition period, the change would most likely not cause a material delay. The section is intended to prevent card issuers from switching their method of accepting payments to force consumer payments into being late (and, thereby, collecting the fee income).

These provisions go into effect on February 22, 2010.

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NCUA has release NCUA Letter to Credit Union 09-CU-12 to share interagency exam procedures on credit issued to military personnel and their dependents.  You can access it here.  The letter has a number of attachments, which should give you valuable information about the DoD rule, as well as the SCRA. 

Credit CARD Act - Section 103; NAFCU Softball

Posted by Steve Van Beek

Today, we are going to turn to Section 103 of the Credit CARD Act.

A quick reminder - all previous posts on the Credit CARD Act can be found under the category "CreditCardReform" on the right hand side of the blog's mainpage.  Or by clicking this link.

Section 103 - Use of Terms Clarified

Section 103 adds subsection (m) to Section 127 of the Truth in Lending Act (TILA).  This subsection places limitations on using the term "fixed" to describe a credit card account.  A credit union may only use the term "fixed" to refer to an APR that will will not change or vary for any reason over the period clearly disclosed in the terms of the account.  This means if a credit union offers a "Fixed 9.99% APR" credit card and does not specify a time period for the 9.99% APR to expire - the credit union will not be able to change the APR on the account.  Never.  

The credit union could use the term "fixed" if it specifies the time period the APR will not change - for any reason.  Thus, you could offer a credit card that was "Fixed 11.99%" for the first two years after which it would be a variable account at the prevailing APR (based on a disclosed margin and index) at the end of the two years.  Remember, Section 172(b) of TILA - added by Section 101 of the Credit CARD Act - requires promotional periods to be at least 6 months long.   

The Federal Reserve's consumer testing indicated that consumers believed the word "fixed" meant that it could never change.  Here is the explanation from the Fed's open-end amendments to Regulation Z (see page 11 of the 255 page PDF for more information - caution large document):

"Advertising ‘‘fixed’’ rates. Creditors sometimes advertise the APR for open end accounts as a ‘‘fixed’’ rate even though the creditor reserves the right to change the rate at any time for any reason. Consumer testing indicated that many consumers believe that a ‘‘fixed rate’’ will not change, and do not understand that creditors may use the term ‘‘fixed’’ as a shorthand reference for rates that do not vary based on changes in an index or formula. Under the final rule, an advertisement may refer to a rate as ‘‘fixed’’ if the advertisement specifies a time period the rate will be fixed and the rate will not increase during that period. If a time period is not specified, the advertisement may refer to a rate as ‘‘fixed’’ only if the rate will not increase while the plan is open."

As a result, the Federal Reserve had included this language in its upcoming amendments to Regulation Z:

"(f)  Misleading terms. An advertisement may not refer to an annual percentage rate as "fixed," or use a similar term, unless the advertisement also specifies a time period that the rate will be fixed and the rate will not increase during that period, or if no such time period is provided, the rate will not increase while the plan is open."  12 C.F.R. § 226.16(f).  This section will be effective July 1, 2010 for all open end (not home-secured) consumer credit plans.  This link will take you to the language of Section 226.16 of Reg Z as it will read after July 1, 2010.

Thus, you may want to gather your marketing staff and do a review of your current and planned open end advertisements.  How are you currently using the word "fixed"?  Do you specify a time period that the account will be "fixed"?  

***

After 4 straight weeks of being canceled due to inclement weather, the NAFCU Nationals softball team hit the field last night.  It wasn't the ideal situation as the NAFCU Nationals emerged from their month-long hiatus to face the league-leading Diamond Cutters - who were 7-1 coming into last night's games.

The first game - could have been better.  NAFCU struggled to get the bats going early and ended up losing the first game 15-3.  The second game was a much better game and the Diamond Cutters were given a run for their money.  NAFCU got behind 2-7 early but chipped away with 2 runs in the top of the 4th inning making it 4-7.  After three straight outs, the NAFCU bats caught fire in the top of the 5th with every batter hitting in the inning - the end result being an 8 run inning and a 12-7 NAFCU lead.  However, the Diamond Cutters proved why they were leading the league and came through with 6 runs in the bottom of the 5th for a 12-13 victory.  Despite the loss, the 2nd game was the best the NAFCU Nationals have played as a team and bodes well for the rest of the season.

The current record is 3-7 with a late season push needed to make the playoffs.  We can do it. 

Credit CARD Act - Section 102, Part 2; Global View

Posted by Steve Van Beek

Anthony discussed Part 1 of Section 102 here.  In addition to the sections Anthony mentioned, Section 102 of the Credit CARD Act adds:

• Limit on Fees Related to Method of Payment
• Requirements for Reasonable & Proportional Penalty Fees    

Limit on Fees Related to Method of Payment

Section 102 adds subsection (l) to Section 127 of the Truth in Lending Act (TILA).  The Federal Reserve will most likely issue regulations under Regulation Z to provide clarification and further guidance on this section, but it is not required to by the Credit CARD Act.  Let's take a look at this subsection in full:

"(l) LIMIT ON FEES RELATED TO METHOD OF PAYMENT. - With respect to a credit card account under an open end consumer credit plan, the creditor may not impose a separate fee to allow the obligor to repay an extension of credit or finance charge, whether such repayment is made by mail, electronic transfer, telephone authorization, or other means, unless such payment involves an expedited service by a service representative of the creditor."

Note that this only applies to credit card accounts.  However, the definition of "expedited service" is no where to be found.  Also, what if a credit union uses a shared call center - is the service representative considered "of the creditor?"  Because of the ambiguities, the Federal Reserve will most likely address this in amendments to Regulation Z.  

This section does mean that if your credit union uses an automated phone bill payment system, you would not be able to charge the member a separate fee for using that service.  A fee could only be charged if the payment was expedited by a live service representative.  The subsection seems to address charging a fee for a particular payment.  It does not provide clarity or information on charging a monthly fee for a product (i.e. online bill pay).  Hopefully, the Federal Reserve will clarify this when it issues regulations.

In short, the subsection prohibits card issuers from charging a $5 or $10 fee for consumers to submit a payment via an automated system.  

Reasonable & Proportional Penalty Fees

Section 102 also adds Section 149 to TILA.  This is a new section covers penalty fees and will only apply to credit card accounts.  Subsection (a) mentions late payment fees, over-the-limit fees, or any other penalty fees and requires that they be reasonable and proportional to the member's omission or violation [of the cardholder agreement].  

The $39 dollar question - what is reasonable and proportional?  

[Note: the $39 figure is a joke not a guess]

The Federal Reserve, after consulting the federal banking regulators - including NCUA, will issue regulations to establish standards for determining what level of fee is reasonably and proportional for each type of fee.  The Fed must finalize these regulations by February 22, 2010 with an effective date of no later than August 22, 2010.

The Fed is told, by Congress, to consider:

(1) the cost incurred by the creditor from such omission or violation;
(2) the deterrance of such omission or violation by the cardholder;
(3) the conduct of the cardholder; and
(4) such other factors as the Board may deem necessary or appropriate.

Wow, that should be easy to quantify.  In other words, the Fed is going to magically come up with a number that is reasonable and proportional and then tell institutions they can not charge a higher fee.

Safe Harbor.  The subsection does give the Fed the ability to give a "safe harbor" for amounts of certain penalty fees that will be deemed reasonable and proportional.  I'd bet the Fed uses this authority and comes up with a list of fees and the amounts that can be charge by institutions to receive the "safe harbor" (i.e. a late payment fee of $20 or lower will be considered reasonable and proportional).  Any penalty fee greater than the Fed's safe harbor amount would, most likely, require the credit union to justify why it needs to charge a higher fee (i.e. why the higher fee is reasonable and proportional to the member's omission or violation).  

***

We have been getting into the details of the Credit CARD Act, but I want to step back for a second and take a global look.  These new changes are going to limit credit unions' ability to manage risk using procedures that have been developed over years of risk management of credit card portfolios.  In effect, Congress reached into credit unions' toolbox and removed some of the risk management tools.  

However, credit unions were not the only institutions impacted by the Credit CARD Act.  Other institutions, including banks, may have relied more heavily on the now-defunct procedures to operate their credit card programs.  While dredging through the Credit CARD Act requirements is about as lovely as a root canal, other card issuers may need to completely rethink their business model.

If the Fed determines that $25 is a reasonable and proportional late fee, and your credit union currently charges $29 as a late fee - you would need to lower your fee and will lose some fee income.  Another institution that currently charges $39 as a late fee would need to reduce their fee to $25 as well and forgo even more fee income (which may require an even higher rate hike).  The end result may be credit union credit cards becoming more competitive and the rates becoming more attractive to consumers.       

 

One quick example.  If a card issuer grew its card program by offering low promotional rates or balance transfer options, that card issuer's business model will need to change.  The card issuer's ability to increase the APR on the account if the member did not make their payment on time is severely limited.  Additionally, many (most?) card issuers applied payments in excess of the minimum payment to the balance with the lowest APR.  Some card issuers pretty much banked on consumer's continuing to use their credit cards after utilizing a low APR balance transfer.  This allowed the card issuer to rack up interest charges on the new purchases at the high APR while applying payments to the low APR balance transfer.  The Credit CARD Act requires payments in excess of the minimum payment to be applied to the balance with the highest APR.  This pretty much kills that business model.

So, yes, the Credit CARD Act is going to significantly alter the credit union's operations.  However, the light at the end of the tunnel is that these restrictions are going to cripple card issuer's who made their money off of these practices.    

Congress wanted to place the true cost of credit cards before the consumers.  This meant reducing the ability of card issuers to hide the true cost using sneaky fees and deceptive practices.  The less credit unions participated in those activities, the better positioned they will be when other card issuers are required to reveal their true cost of their cards.  

Section 102 of the Credit CARD Act, Part 1 of 2; Corporate Stabilization

Posted by Anthony Demangone

Section 102 of the Credit CARD Act is a doozy, so we're going to split it in half. 

Double cycle billing.  This section adds a new subsection (j) to Section 127 of the Truth in Lending Act to prohibit double-cycle billing.  This section should not cause weeping and gnashing of teeth within the credit union industry.  Placing this requirement on credit unions is akin to banning unicorns from running in the Belmont.  The practice was not used much, if at all, within our industry. In any event, NCUA's UDAP rule already would have banned double-cycle billing for federal credit unions on July 1, 2010. 

If you are curious how double-cycle billing works, check out this pretty nifty blog posting.  And you may recall that big credit card lenders were taken behind the woodshed by Congress not too long ago on this issue, forcing many to end the practice.

What this section does, though, is move up the compliance deadline from July 1, 2010 to February 22, 2010.

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Opt-in for over the limit fees.  Section 102 does blaze new trails, though.  This section also adds subsection (k) to Section 127 of TILA – which requires an opt-in for over-the-limit transactions if a fee is assessed.  There was no such requirement under UDAP or the final amendments to Reg Z's open-end rules.  But first, let me vent.

If a fee is assessed?  Does anyone NOT charge an over the limit fee?

Effective on February 22, 2010, a credit union will not be able to charge an over-the-limit fee unless the member has “opted-in” to allowing over-the-limit transactions to be processed rather than rejected.  If a member opts-in, the credit union is only allowed to charge one over-the-limit fee per billing cycle and, in general, would only be allowed to charge an over-the-limit fee for the next two billing cycles if the member’s balance still exceeds their credit limit.   In addition, if the member opts-in, lenders will have to allow them to revoke the opt-in election whenever they wish.  

Oh, in case you forgot.  Each time you charge an over the limit fee (assuming Joe Member gives you his blessing), you have to remind the affected member of his right to revoke their opt-in.   For those members who opt-in (agree to over-the-limit* fees), you will be required to remind them (via new disclosures on the periodic statement) about their right to revoke their opt-in election each time an over the limit fee is charged.  In other words, I'd look at your credit card over the limit fee income, and I would expect it to drop considerably. 

All these requirements kick in on February 22, 2010.

There is some good news.  The Federal Reserve is required to issue regulations relating to the disclosure, form, and timing of the opt-in notice to credit cardholders.  Will they grandfather existing accounts? Don't hold your breath.  The Credit CARD Act doesn't appear to discuss that possibility.  Nevertheless, the Fed has indicated to us that they will issue regulations before August 20, 2009 to implement and clarify requirements under the Credit CARD Act.  If there is any room for comment on these rules, we need to act quickly and decisively. 

*Editor's Note: The original post accidently used "late fee" rather than "over-the-limit" fee.

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NCUA has released Letter to Credit Union 09-CU-14.  The guidance details NCUA's actions and plans on how it will implement corporate stabilization efforts under its new powers as authorized by Congress.

Credit CARD Act - Section 101, Part 2; DC Area Compliance Talk

Posted by Steve Van Beek

This post is a continuation of the discussion of Section 101 of the Credit CARD Act.  Part 1 of Section 101 can be found here.

Restrictions on Raising APRs on Outstanding Balances
Section 101 adds Section 171 to TILA which provides a general prohibition on increasing the APR on the outstanding balance of a credit card account.  Again, this was a situation addressed in the UDAP regulations (see 12 C.F.R. 706.24 on pages 127-128) but Congress decided to strengthen and codify the restrictions. 

Let's be clear, even though the UDAP regulations addressed this issue - the Credit CARD Act is a law and governs if there are discrepancies between the law and the UDAP regulations.  For an example, I'm going to jump down to subsection (d) of Section 171 of TILA which defines "outstanding balance."  The law defines "outstanding balance" as the amount owed on a credit card account at the end of the 14th day after the date the credit union provides advance notice of the increased APR, fee, or finance charge.  The UDAP regulations had defined a "protected balance" as the balance on a credit card account at the end of the 7th day after advance notice.  Thus, the Credit CARD Act provision will prevail, meaning transactions that a member makes up to 14 days after the credit union provides advance notice of the increased APR must remain at the prior APR.  The UDAP regulations will need to be amended to reflect the language in the Credit CARD Act. 

Section 171 allows four exceptions to the general prohibition on increasing APRs on a credit card account's outstanding balance.  

(1) An increase in an APR after the expiration of a specified time period.  The credit union must have disclosed the length of the time period and the higher APR that will apply after the expiration of that time period.  For example, the credit union could advertise a credit card that will have a 9.99% APR for the first year, after which the APR will be increased to 11.99%.  Note: Another section of the Credit CARD Act, discussed below, requires that promotional periods be at least 6 months long.  

After the expiration of the first year promotional APR, the credit union would be able to increase the APR on the account to 11.99% on future purchases as well as on the outstanding balance on the account.  Think about it this way - the credit union has disclosed to the member that the promo 9.99% APR will apply for one year and then the rate will increase to 11.99%.  The member has one year to pay off the balance before the rate is increased to 11.99%.  Since it was disclosed upfront, the increased rate is not unfair or deceptive and could apply to the outstanding balance.  

Subparagraph (C) to Section 171(b)(1) indicates that the increased APR can not be applied to transactions that occurred prior to the commencement of the disclosed time period.  This would not restrict the example listed above.  Rather, this would prevent the credit union from offering a 12-month promotional period on an existing accout and after the 12-month period attempting to increase the APR on the entire outstanding balance.  This exception would only allow the credit union to increase the APR on transactions that occurred within the 12-month period, not those that occurred before that period.  Those must stay at the prior APR.  

(2) An increase in a variable APR due to the operation of an index.  If the credit union has variable rate accounts and the index (i.e. Wall Street Journal prime) changes on those accounts, the APR applicable to transactions occurring befor the index change can be raised to the new APR. 

(3) An increase due to the completion of a workout arrangement (or a failure to complete an arrangement).  After a workout period, the credit union would be able to increase the APR back to the contractual rate on the credit card account provided it has properly disclosed the conditions of the workout arrangement.  

(4) An increase due to the fact the member is 60 days late.  Remember, this is an exception that allows the credit union the ability to increase the APR on the outstanding balance of the credit card account.  The credit union would be allowed to increase the APR if: (1) the member is 60 days late; (2) the credit union provides 45-day advance notice of the increased APR; and (3) the notice includes the reason for the increase as well as the fact that the increased APR will terminate if the member makes their next 6 minimum payments on time.  The credit union would need to terminate the increased APR, and return to the prior APR, if the member makes the next 6 minimum payments on time.

Note: This section - especially subsection (4) - will most likely be addressed by the Federal Reserve in regulations that will clarify the requirements for financial institutions.  Remember, similar restrictions were included in the UDAP regulations (see pages 127-128) - which could give credit unions an idea of what the Fed's regulations will look like.  However, the Credit CARD Act restrictions and requirements are much stronger  For example, the "delinquency exception" under UDAP could be used if the member was 30 days late.  Under the Credit CARD Act, the exception can not be used until the member is 60 days late and the credit union provides 45-day advance notice.

Yesterday's post detailed the 45-day advance notice requirement.  There are 3 exceptions to the 45-day advance notice requirement - the first three subsections above: Sections 171(b)(1); 171(b)(2); and 171(b)(3).  Thus, if the credit union properly discloses a one-year promotional period after which the APR will increase, the credit union would not need to send the 45-day advance notice (nor the right to cancel) to the member.  However, Section 171(b)(4) does require a 45-day advance notice to be sent.  The effect is that the credit union would not be able to increase the APR on a delinquent member's account until 105 days after the member missed their payment (60 days late and the expiration of the 45-day advance notice).  In short, Congress severely limited financial institutions' ability to apportion risk in their credit card portfolios.

Repayment of Outstanding Balances
Subsection (c) of Section 171 requires that credit unions provide members sufficient time to repay "outstanding balances" as defined by subsection (d).  This requirement is identical to the repayment methods allowed under the UDAP regulations (see page 128 and especially pages 140-141 for the official staff commentary).  Obviously, the UDAP regulations are not effective - but they provide valuable insight as to what will be required of a credit union.  

Remember, if the member exercises his/her "right to cancel" the credit union must allow the member to repay their outstanding balance according to one of the methods under Section 171(c)(2) or a method that is no less beneficial to the member.     

The two repayment methods are as follows:

(A) an amortization period of not less than 5 years, beginning on the effective date of the 45-days advance notice; or

(B) a required minimum periodic payment that includes a percentage of the outstanding balance that is equal to not more than twice the percentage required before the effective date of the 45-day advance notice.

As indicated in yesterday's post, these repayment methods are designed to prevent financial institutions from requiring a consumer to repay their outstanding balance upon closing their account or within a short period thereafter.  The repayment methods prevent a financial institution from penalizing the consumer from rejecting the changes to their credit card account.  

Repayment method (B) is best explained using an example.  If the credit union currently charges a minimum payment calculated at 2% of the member's outstanding balance, you could not require more than 4% of the outstanding balance if the member closes their account or the balance falls under the definition of "outstanding balance" under subsection (d) of Section 171 (see above).

Also, the credit union may offer a repayment method that "is no less beneficial" to the member.  The easy example is for the credit union to decide to retain its standard calculation of the minimum payment (i.e. 2% of the outstanding balance) even after the member closes the account.  This repayment method is more beneficial as the member has more time to repay the outstanding balance and is not forced to quickly pay off the balance solely because he/she canceled the account.  

Limitation on APR Increases within the First Year
Section 101 also adds Section 172 to TILA.  Subsection (a) limits a credit union's ability to increase the APR on a member's account within the first year the account is open.  The section provides a general prohibition on increasing the APR in the first year.  However, there are 4 exceptions - the 4 subsections under Section 171(b) - that are detailed above.  Thus, if a credit union properly discloses a 6-month promotional period at account opening - it could increase the APR on the account after expiration of the 6-month period even though it was within the first year the account was open. Additionally, if the index tied to the account increases within the first year of the account - the credit union would be able to increase the corresponding APR on the account.

Promotional Rate Minimum Term
Subsection (b) of Section 172 mandates that promotional rates for credit card accounts be at least 6 months in length.  The Federal Reserve is required to define the term "promotional rate."  The Fed's recent amendments to Regulation Z included this definition of "promotional rate" under its advertising section:

"(i)  Promotional rate means any annual percentage rate applicable to one or more balances or transactions on an open-end (not home-secured) plan for a specified period of time that is lower than the annual percentage rate that will be in effect at the end of that period on such balances or transactions."  12 C.F.R. 226.16(g)(2)(i) - effective July 1, 2010.  These Reg Z changes also included requirements when advertising promotional rates that credit unions should be aware of.

Wow.  That is the end of Section 101.  On to Section 102 tomorrow - more of the same....

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Anthony and I will be giving a 4-hour compliance talk at a MACUMA event in Arlington, VA next Monday, June 29.  Believe it or not, the title - "What Keeps Us Up at Night: A Conversation with NAFCU's Compliance Team" - was coined before the Credit CARD Act.  Trust me, the Credit CARD Act has not helped me sleep at night.  We'd love to see you there.  This list covers most of the topics we will address.  Noticably absent is the Credit CARD Act - but, rest assured, we will be getting our hands (extremely) dirty in the Credit CARD Act provisions.  The event is open to both MACUMA members and non-members (as well as NAFCU-members and non-members).   

Credit CARD Act - Section 101, Part 1; NCUA Corporate Webinar

Posted by Steve Van Beek

Welcome to the beginning of a series of in-depth blog postings looking at the Credit CARD Act and its impact on your open-end lending products.  First, a couple of housekeeping issues:

Here is a link to a PDF of the Credit CARD Act.  NAFCU's overview is available for NAFCU-members.  Both are listed under "Research Tools." 

NAFCU will be hosting a webcast covering the Credit CARD Act on July 15, 2009.  For those of you who watched the detailed UDAP webcast, we will have Oliver Ireland back from Morrison & Foerster along with his colleague Obrea Poindexter.  The Compliance Guy will moderate the webcast.  Additionally, Mr. Ireland and Ms. Poindexter will be at NAFCU's Compliance Seminar this October in Charleston, SC discussing the Credit CARD Act.  

If you would like to receive the Compliance Blog each day, click on this link, enter your e-mail and the verification code.  The last step is to respond to the verification e-mail - so be sure to check your SPAM filter if you don't receive it right away.  

All the blog postings related to the Credit CARD Act will be located under the category "CreditCardReform."  The categories are listed on the right-hand side of the blog.  Here are links to 3 prior posts on the Credit CARD Act: the two provisions effective August 20, 2009; how the Credit CARD Act impacts Regulation Z and the Truth in Lending Act; and NAFCU's overview. 

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That was the easy stuff.  Now we get into the details.  Editor's Note: Now is the time to grab a cup of coffee...

As promised, we are going to be walking section-by-section through the Credit CARD Act.  Some sections will be added together, some sections might take more than one blog posting to cover.  If new issues related to a certain section crop up, we will try to address the issues as we go along.  No better place to start than Section 101.

Before we get too far - I want to remind you that the following discussion of the Credit CARD Act is provided for informational purposes only and should not be treated as legal advice.  This blog's disclaimer reads as follows:

"This website is intended to provide general compliance information in regard to the subject(s) covered. It is provided with the intent and understanding that the publisher is not engaged in the act of rendering legal, accounting or any other professional advice. The information provided in this website is not intended nor should be used as a substitute for legal advice or other expert opinions and services in specific situations."

NAFCU-members can contact our compliance team at any time, our contact information is here under "contact sheet".

Section 101. Protection of Credit Cardholders.
This section covers a variety of issues, some of which were already going to be addressed in upcoming changes to Regulation Z (Reg Z) or under the new Unfair or Deceptive Acts or Practices (UDAP) regulation.  The four main issues covered by Section 101 are:

• Advance Notice of Changes - including the Right to Cancel;
• Restrictions on Raising APRs on Outstanding Balances;
• Mandatory Review of Credit Card Accounts with Increased APRs; and
• Limitations on APR Increases for the First Year and for Promotional Period APRs.

This posting will address the Advance Notice and the Mandatory Review with the other 2 provisions being covered in tomorrow's posting.

Advance Notice of Changes
Currently, under Reg Z, credit unions need to provide advance notice of a change-in-terms 15 days prior to the effective date of the change. 12 C.F.R. 226.9(c).  The Credit CARD Act requires this notice to be sent 45-days in advance of any increase in the APR or "other significant term" - including any fee or finance charge.  Similar language was including in the Reg Z amendments that were to be effective July 1, 2010 (this link is to the language of the Federal Reserve's recent amendments to Reg Z - the Fed may need to revise these amendments).  The Credit CARD Act pushes up the effective date for the 45-day advance notice to August 20, 2009.

Section 101 also requires credit unions to include a "Notice of Right to Cancel" statement with each advance notice of changes.  The "Right to Cancel" means the member would be able to reject the change-in-terms, cancel the account, and pay off their account under the terms and conditions of the credit card prior to the notice.  The credit union may not retaliate against a member who cancels his/her account.  The law prohibits credit unions from treating the cancellation as default and prohibits the credit union from demanding the member repay the obligation, in full, at account closing.  Additionally, the credit union may not charge a fee or penalty if the member exercises the "right to cancel." 

The member's repayment of any outstanding balance on the canceled credit card account is also addressed in Section 101.  The credit union needs to offer the member a repayment method under Section 171(c)(2) of the Truth in Lending Act (TILA) or a method that is more beneficial to the member.  Section 101 of the Credit CARD Act also adds Section 171(c)(2) to TILA (discussed in tomorrow's blog posting).  This repayment requirement was also addressed in the UDAP regulations, 12 C.F.R. 706.24(c) - (see especially pages 128 and 140-141), which are still slated to become effective July 1, 2010.       

Mandatory Review of Credit Card Accounts with Increased APRs
While many of the provisions in the Credit CARD Act had been addressed in some form or fashion under Reg Z amendments or UDAP regulations, some provisions - like the mandatory review - are completely new.  You may want to make sure you are sitting down for this one (and clearing your desk of breakable objects may not hurt either). 

Section 101 adds Section 148 to TILA which requires credit unions to review credit card accounts which received increases in their APRs based on the member's credit risk, market conditions, or other risk factors.  Credit unions will be required to review these accounts to determine if the factors which lead to the increased APR are still present and warrant the continuation of the increased APR.  This review will need to occur at least every 6 months.  If the review indicates the factors prompting the increased APR are no longer present or are less prevalent, the credit union would need to the lower the credit card account's APR.  If the factors are greater, the credit union could increase the APR by giving 45 days advance notice. 

Section 148 requires the Federal Reserve to issue regulations by February 22, 2010 to implement the review requirements.  These future regulations will be effective August 22, 2010.  Because this issue was not addressed in previous Reg Z amendments or the UDAP regulations, it is unclear what the detailed regulations from the Federal Reserve will look like.  And, since the effective date for this provision is further into 2010 - credit unions may want to focus on complying with the other provisions of the Credit CARD Act while keeping an eye out for proposed regulations from the Federal Reserve to implement Section 148 of TILA. 

I think that is enough for the first day - we will continue Section 101 in tomorrow's blog posting.   

***

On Wednesday, June 24 at 1 p.m. EDT, NCUA will host a free webinar to discuss the actions the NCUA Board took at its June 18th meeting.  NCUA will discuss the establishment of the Stabilization Fund and its impact on credit unions.  The 2-hour webinar is free, but you must register before 12:45 p.m. EDT on June 24.   

The Credit CARD Act of 2009 - Section by Section

On Monday, we'll begin walking you through the Credit CARD Act of 2009, section by section.  We'll start at Section 101 and dance our way through Section 505.  One section per day.  It should be as fun as a barrel full of monkeys. 

Here's a link to the Credit CARD Act itself.

In addition, for NAFCU members, we created a Credit CARD Act overview, which you can access in the "useful tools" section of our compliance homepage.

With that in mind, you may know of folks at your credit union who would find such an overview useful.  Well, have them sign up to have the blog emailed to them each day.  Simply forward this email to them, and have them sign up to receive the daily email.  The process is easy:

• They'll have to click on this link. 
• They'll have to enter some information and then respond to a confirmation email.  (So be sure to have them look in their SPAM filter, which is where the confirmation emails sometimes land.)

***

Yesterday, NCUA held its monthly board meeting.  You can find the results here.  (Note that all the items are noted as "draft."  Worry not, fellow compliance warriors.  All the draft items were passed by the NCUA Board unanimously.)

Of note, NCUA passed an interim final rule that creates an exception to the 20-year maturity limit on second mortgage loans so that federal credit unions can participate in the Making Home Affordable Program (MHA), a program administered by the U.S. Department of Treasury.  The interim final rule would allow federal credit unions that participate in the MHA program to modify the second mortgage to match the term of a modified first mortgage beyond 20 years.  It takes effect 60 days after publication in the Federal Register.

NCUA also did a number of things in relation its corporate stabilization efforts.  Access the link above for additional details.  Be on the lookout for a letter to credit unions that will explain things, and an NCUA webcast on June 24 that will address the subject.

***

Have a great weekend, everyone.  For those interested in baby pictures, go here.

Credit CARD Act Overview; Compliance Seminar Agenda Finalized

NAFCU Members: we've put together an overview of the Credit CARD Act.  Access it here  within the research tools area. (NAFCU Member log-in needed.)  For you non-NAFCUers, here's a taste of what is inside.

TITLE III – PROTECTION OF YOUNG CONSUMERS
Sec. 301. Extensions of credit to underage consumers.

This section amends Section 127 of TILA by adding consumer protections aimed to limit the ability of creditors to issue open end credit to consumers who have not reached the age of 21.
In short, credit unions will not be able to issue open end credit (note – this is not limited to credit cards) to a member under the age of 21 unless: a) A parent, spouse, or legal guardian over the age of 21 co-signs; or b) The consumer under the age of 21 provides financial information showing independent means of repaying any obligations. The Federal Reserve shall issue regulations that will give creditors the standards for determining the ability to repay.

Effective date: February 22, 2010.

***

The agenda for the NAFCU Compliance Seminar has been finalized.  You can access it here.  Shocker: we'll discuss Reg Z and the Credit CARD Act here as well.

Reg Z Help; Credit CARD Act - Truth in Lending Act

Posted by Steve Van Beek

Okay, I admit - I'm using "help" generously, but I believe the following is very useful.  For quite some time, I'm been lamenting the fact that the new open-end Regulation Z rules, effective July 2010, need to be organized in some fashion to assist in reading and understanding the new requirements.  I have a love/hate relationship with the Federal Register.  I love it because I can find background on why the changes are being made in the preamble to the final rules.  I hate it because the background information can be presented in a very, very confusing way.  Not to mention the three column approach - I'm not a fan of those columns.  

I stumbled across a page on the FDIC's website that contains a list of Regulations and Laws.  I've seen plenty of lists similar to this, but one section caught my eye: "Truth in Lending (FRB Regulation Z) Effective Date July 1, 2010."  I said a quick prayer and clicked on the link to find a truly glorious sight: the language of the open-end portions of Regulation Z as they will look on July 1, 2010.  

The reason I find this so useful is that it removes some of the hunting required when a regulation is amended.  As I detail below, amendments to regulations or laws can cause confusion by making small changes without providing the bigger picture.  Seeing the new open-end Reg Z rules together in one place provides the big picture.

Note: The Reg Z changes above do not address the subsequent changes required by the Credit CARD Act, the Federal Reserve will need to further amend its regulations to implement the Credit CARD Act changes.  

***

The Credit CARD Act primarily amends the Truth in Lending Act (it also amends portions of the  Electronic Funds Transfer Act and other laws).  As I mentioned above, amendments to laws can be extremely confusing.  For example, here is a portion of Section 104 of the Credit CARD Act:

"Sec. 104. APPLICATION OF PAYMENTS.
Section 164 of the Truth in Lending Act (15 U.S.C. 1666c)
is amended--
(1) by striking the section heading and all that follows through "Payments" and inserting the following:
"§ 164. Prompt and fair crediting of payments
"(a) IN GENERAL.--Payments";
(2) by inserting ", by 5:00 p.m. on the date on which such payment is due," after "in readily identifiable form";
(3) by striking "manner, location, and time" and inserting "manner, and location"; and
................................................................."

Looking at the section, by itself, it is very difficult to determine what has changed in the law and what is required of credit unions going forward.  Examination of the current language of the Truth in Lending Act helps to decipher what the new law will look like.  The link above also comes from the FDIC's list of regulations/laws.  To navigate within the Truth in Lending Act, click on "[Next Page]" or "[Previous Page]" to find the section the Credit CARD Act amends.

Thus, by using these resources we can see that the Credit CARD Act amends Section 164 of the Truth in Lending Act from this (the current version):

"§ 164. Prompt crediting of payments.
Payments received from an obligor under an open end consumer credit plan by the creditor shall be posted promptly to the obligor's account as specified in regulations of the Board. Such regulations shall prevent a finance charge from being imposed on any obligor if the creditor has received the obligor's payment in readily identifiable form in the amount, manner, location, and time indicated by the creditor to avoid the imposition thereof."

To the new language of the Truth in Lending Act (effective February 22, 2010):

"§ 164. Prompt and fair crediting of payments.
(a) IN GENERAL -- Payments received from an obligor under an open end consumer credit plan by the creditor shall be posted promptly to the obligor's account as specified in regulations of the Board. Such regulations shall prevent a finance charge from being imposed on any obligor if the creditor has received the obligor's payment in readily identifiable form, by 5:00 p.m. on the date which such payment is due in the amount, manner, and location indicated by the creditor to avoid the imposition thereof." (emphasis added).

Referring to the current language of the Truth in Lending Act can clarify what the changes of the Credit CARD Act accomplish.  In the example, it is now easier to see that the new laws will require payments made by 5:00 p.m. to be credited on the day they are received.  Examining the existing language of TILA also makes it clear that the Federal Reserve must make changes to Regulation Z to implement and clarify this requirement.

The Federal Reserve had already made changes to this section of Regulation Z, 12 C.F.R. 226.10, in its recent amendments to open-end lending.  However, the Credit CARD Act will require further amendments in order for the Federal Reserve to align Regulation Z with the Truth in Lending Act.

We were operating under the following laws and regulations for the crediting of payments:

Truth in Lending Act - Section 164.

Regulation Z, 12 C.F.R 226.10. 

Then, the Federal Reserve amended Regulation Z to make 12 C.F.R. 226.10 look like this (effective July 1, 2010).  

But, the Credit CARD Act threw a wrench into the whole thing.  Not only is the Federal Reserve going to have to amend Regulation Z again - but the effective date might need to be moved up to February 22, 2010.

Why is this important?  The regulations gave flexibility to credit unions when setting cut-off times for accepting payments.  Looking at the amended § 226.10, the credit union could set reasonable cut-off times for payments.  If your credit union closes at 3:00 p.m., a 3:00 p.m. cut-off time might be considered reasonable.  NAFCU commented on this issue when the Federal Reserve amended Regulation Z (see page 2).  However, the Credit CARD Act mandates a 5:00 p.m. cut-off time and the Federal Reserve will need to amend Regulation Z accordingly. 

Note: The 5:00 p.m. cut-off time does not require a credit union to post the payment to the member's account on that particular date, but, rather, would require the credit union to credit the member's account as of the date of payment (by using a backdating posting method).  

I randomly picked this one section of the Credit CARD Act as an example.  Perhaps, an onion analogy is most appropriate.  Each layer that gets pulled away reveals more layers beneath - and makes us cry that much more.  This is just one of issues that will be changing in the upcoming months as the Credit CARD Act provisions begin to be implemented - by both the Federal Reserve and credit unions.   And, I only examined section (a) of § 164 of TILA - new section (b) regulates the application of payments in a manner more restrictive than the UDAP regulations (credit unions must apply payments in excess of the minimum payments to the highest APR balance on the account - but that is another blog posting altogether).

Compliance with these rules is best described, in my opinion, as trying to hit a moving target.  Hopefully, the resources provided above will help clarify what is required of credit unions going forward.    

Reg Reform; NCUA Board Meeting Agenda; Updated Compliance List

Posted by Anthony Demangone

President Obama is really picking up the ball on regulatory reform.  Here are a few upcoming events:

Today:
Secretary Timothy F. Geithner joins President Barack Obama
Remarks by the President on the economy and a comprehensive plan for new rules of the road for the financial industry
Location TBA

Thursday, June 18, 2009
9:30 AM ET
Treasury Secretary Timothy F. Geithner
Testimony before the U.S. Senate Committee on Banking, Housing, & Urban Affairs on The Administration’s Proposal to Modernize the Financial Regulatory System
Hart Senate Office Building, room 216
Washington, DC

We are monitoring this closely, and we have been told that there's no plan to consolidate NCUA with other regulators.  But again, this is something that we'll monitor closely.

***

The NCUA Board Meeting agenda for this Thursday is available here. Here's what is on tap.

1. Interim Final Rule – Section 701.21(f) of NCUA’s Rules and Regulations, Exception to the Maturity Limit on  Second Mortgages. 
2. Final Rule –Section 701.26 of NCUA’s Rules and Regulations, Operating Fees.
3. Temporary Corporate Credit Union Stabilization Fund.
4. Insurance Fund Report.

***

Remember that list of compliance deadlines from last week?  I totally whiffed on a major one!  Don't forget the NACHA IAT Rule, which becomes effective September 18, 2009.  Here's a great resource page.  And the compliance deadline posting has been updated. Thanks, Sharon! 

Red Flags FAQ; Pandemic

A bunch of regulators, including NCUA, recently issued a frequently asked questions document to provide guidance on the recent Red Flags Identity Theft Prevention rules.  Access it here.  I just love FAQs.  I do.  They are written in English.  They address real-world problems that have surfaced since the rule was released.  I just love, love love them.  Here's a taste of what you'll find inside:

1. Do the Red Flags Rules, Card Issuers’ Rules, or Address Discrepancy Rules contain record retention requirements?

These three Rules do not contain specific record retention requirements. However, financial institutions and creditors must be able to demonstrate that they have complied with the requirements of the Red Flags and Card Issuers’ Rules, and users of consumer reports must be able to demonstrate that they have complied with the requirements of the Address Discrepancy Rules, in addition to any other applicable record retention requirements.

8. Are credit union service organizations (CUSOs) covered by the Red Flags Rules and Guidelines?

CUSOs, according to the Federal Credit Union Act, provide “services which are associated with the routine operations of credit unions” and are “established primarily to serve the needs of its member credit unions, and whose business relates to the daily operations of the credit unions they serve.” 12 U.S.C. §§ 1757(5)(D), (7)(I). A CUSO that is a “creditor” under the FCRA is covered by the Red Flags Rules and Guidelines issued by the FTC.

***

The WHO has officially declared a pandemic.  What does this mean for compliance?  The WHO lists the risk of a pandemic with phases, numbered one through six.  We're now at WHO pandemic phase six.  Some credit unions use the WHO stages to trigger different parts of their pandemic plan.  You may want to check your pandemic plan to see what phase 6 triggers.

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!

Credit CARD Act; Contact Us

Posted by Steve Van Beek

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

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

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

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

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

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

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

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

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

Which provisions are effective August 20, 2009?  

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

Advanced Notice 

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

Right to Cancel

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

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

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

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

***

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

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

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

FHA...Again

Posted by Anthony Demangone

A short while ago, Steve Van Beek posted some information about FHA violations by 120 lenders.  Well, there's more.

Yesterday, HUD made two FHA-related announcements.  First, HUD announced that 2008 was a banner year for FHA enforcement.

A record 10,552 fair housing discrimination complaints were filed in fiscal year 2008, according to a report just released by the U.S. Department of Housing and Urban Development. The report, which is produced for Congress each year, shows that a large portion of the complaints, 44 percent, were filed by persons with disabilities. Thirty-five percent, or 3,699, of the complaints alleged discrimination based on race.

Second, HUD announced a media campaign to make people more aware of their FHA rights.

So, let's do the math.  HUD had a banner year last year with FHA enforcement.  Just a few weeks ago, HUD announced FHA violations by 120 lenders.  And there's going to be a media campaign to make consumers aware of their rights.  That all adds up to higher compliance risk in the land of FHA. 

You may just want to make sure your FHA compliance is up to snuff. 

314(a) Requests

Every so often, FinCEN issues a 314(a) fact sheet update.  Here's the most recent edition, which FinCEN issued yesterday.

In case you thought the process was a huge waste of time, it has nailed some bad dudes.

To date, the 314(a) Program Office has processed 979 requests submitted by twenty-two Federal agencies. Federal law enforcement organizations have submitted cases in the conduct of the following significant criminal investigations:

Terrorism/Terrorist Financing – 302 cases

Money Laundering – 677 cases

These requests included 9,105 subjects of interest. Of these, financial institutions have responded with 61,817 total subject matches: 60,779 positive and 1,038 inconclusive.

If you have questions on how to complete 313(a) requests, this chapter of the BSA manual does a good job of providing a basic overview.  But I've been told that the best instructions actually are included with the 314(a) transmittal sheet itself.  So, the next time you process the request, keep the instructions portion of the 314(a) transmittal sheet.  It might come in handy if you need to address 314(a) issues on the fly.

FedFocus; The ADA

The Federal Reserve banks put together a newsletter of sorts called FedFocus.  Here's the most recent issue, which addresses fraud prevention, NACHA's International ACH Transactions rule, and other issues. Its a good read, folks.

***

The Department of Justice publishes a report every now and then on how they are enforcing the Americans With Disabilities Act.  Here's a link to their most recent publication, which provides details on all of their enforcement actions. If you're curious to see where some businesses are tripping up, this is a good read.

Hidden Tax?

Posted by Anthony Demangone

Here's an interesting article that looks at the "hidden tax" of regulations on business.  I know I'm preaching to the choir on this, but I still think you'll find this to be a good, yet distressing read.  Here's a snippet:

Federal regulations impose a whopping $1.17 trillion last year in compliance burdens on Americans, finds a new report from the Competitive Enterprise Institute.  That amounts to $3,849 for each man, woman, and child in America. The Federal Register, the depository of all rules, stands at a record-high 79,435 pages.

Access the article here.

***

Have a great weekend, everyone. 

UDAP on Mortgages; Beware of Shark Attacks; DC Training Opportunity

Yet another regulator is thinking about taking another swing at the lending process.

Earlier this week, the FTC published an Advance Notice of Proposed Rulemaking (ANPR) that addresses every aspect of mortgage lending: advertising and marketing, origination, appraisals and servicing.   Any rules adopted following this ANPR would not apply to banks, thrifts or federalcredit unions.  But as the rulemaking will solicit activities that are alleged to be unfair or deceptive, any rules that are developed might be seen as a nice fix for federal credit unions, banks and thrifts as well. 

In addition, some credit unions use mortgage lending CUSOs that very well might come under an FTC rulemaking.  But keep this in mind: ANPRs are more of a fact-finding mission than anything else.   There's no guarantee that the FTC will issue regs in this area.  But the ANPR certainly signals that they are considering it.

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What is a shark attack?  Other than the obvious answer, I like to use shark attacks as an analogy.  For me, a shark attack is an unfortunate event that comes out of the blue.  Why does the shark attack you?  Because it was hungry, and you were nearby.  The number one reason for shark attacks in my opinion?  Bad luck.

Case in point: a credit union in Pennsylvania was recently sued over alleged improper ATM disclosures.  Read about it here.  The plaintiff had sued at least one other bank using the same argument.  I'm sure that if someone looked long and hard enough at any financial institution's disclosures, they'd find something that isn't quite up to date.  With ever-changing regulations, it is virtually impossible to be 100 percent compliant all of the time.

So, I shared that article to remind everyone that sharks exist.  Do your best to update disclosures, especially where they touch upon fees. 

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Attention to those in the Capital Region.  MACUMA has invited NAFCU's compliance team to lead a training session on June 29 in Arlington.  Here's some information on how to sign up.

Good News for BOA, and for Credit Unions; SAFE Act

On Monday, the California Supreme Court ruled in favor of Bank of America in an extremely important case involving the ability of a California institution to offset overdraft and other fees on an account with incoming social security benefits. 

In short, the plaintiff would take his account into the negative.  BOA would then apply his Social Security deposit to cover the account deficit.  The plaintiff cried foul - saying this was an unfair collection of his protected Social Security funds.  BOA countered that it wasn't a collection effort - but rather account balancing.  The court agreed with BOA.

• Read a news article about it here.

• Read the actual California Supreme Court decision here.

Here's a snippet from the Reuter's Article:

In 1974, the California Supreme Court had ruled that a bank may not satisfy a credit card debt by deducting fees owed from a separate checking account containing deposits that "derived from unemployment and disability benefits."

But in Monday's unanimous ruling, the court distinguished the current case by saying the transactions at issue occurred "within a single account" rather than in multiple accounts.

It said policy concerns about setting off independent debt, such as the importance of providing people "with a stream of income to defray the cost of their subsistence," were not present in this case.

"We do not agree with plaintiffs that there is no meaningful difference between satisfying a debt external to an account and recouping an overdraft of an account from funds later deposited into that same account," Justice Carlos Moreno wrote for the court.

Again, this is great news for the financial industry.  Credit unions have struggled on how to handle accounts that have social security deposits.  If the member in such accounts took their account negative, credit unions had worried that offsetting the losses with the next Social Security deposit would be seen as impermissible.  Had the court gone the other way, many financial institutions may have dramatically changed how they serve consumers who receive SS benefits.  The California decision certainly makes sense from our point of view.  But keep in mind this: while this decision will make noise across the nation, the court's jurisdiction stops at the Oregon, Nevada, Arizona and Mexico borders.  It remains to be seen whether the decision will spur consumer groups to seek protections via other avenues.

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NCUA, along with other financial regulators, has issued a proposed rule to implement registration requirements for mortgage lenders.  The rule was mandated by the S.A.F.E. Act.  Access a NAFCU Today article here.  Access the proposed rule here.  Here's a snippet from the proposal:

The OCC, Board, FDIC, OTS, FCA, and NCUA (collectively, the Agencies) are proposing amendments to their rules to implement the Secure and Fair Enforcement for Mortgage Licensing Act (the S.A.F.E. Act). The S.A.F.E. Act requires an employee of a bank, savings association, credit union or other depository institution and their subsidiaries regulated by a Federal banking agency or an employee of an institution regulated by the FCA (collectively, Agency-regulated institutions) who acts as a residential mortgage loan originator to register with the Nationwide Mortgage Licensing System and Registry (Registry), obtain a unique identifier, and maintain this registration. This proposal implements these requirements. It also provides that Agency-regulated institutions must require their employees who act as residential mortgage loan originators to comply with the S.A.F.E. Act’s requirements to register and obtain a unique identifier and must adopt and follow written policies and procedures designed to assure compliance with these requirements.

Comments are due 30 days after this proposal finds its way into the Federal Register.  Will the requirements take effect this year?  I think it is doubtful.  The regulators will need to read the comments, and then issue a final rule.  And that will have a good date that is somewhere out in the future.  I may be wrong, but using the FACT Act rulemaking process as a guide, I again state my belief that we're looking at a 2010 compliance date.

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.

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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.

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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. 

MDIA

Posted by Sarah Loats

Do you find it confusing to sort out the compliance dates of the recent Federal Reserve rules? Don't worry, you're not alone. We do too. This post is an attempt to clear up the MDIA/HOEPA confusion.

The Federal Reserve issued a final rule on July 30, 2008, which amended Regulation Z and was adopted under the Home Ownership and Equity Protection Act (HOEPA). Among other things, the final rule requires creditors to provide early TIL disclosures shortly after application for any closed-end loan secured by a consumer’s principal dwelling. The effective date for this rule is October 1, 2009. 

Also on July 30, 2008, Congress enacted the Housing and Economic Recovery Act of 2008, which includes the Mortgage Disclosure Improvement Act (MDIA). The Board recently issued a final rule to implement the provisions of the MDIA. Here’s where it gets confusing – the MDIA and its implementing provisions are effective July 30, 2009. However, these provisions broaden and add to the requirements of the Board’s recent HOEPA provisions pertaining to early disclosures. The MDIA and its implementing regulations require early disclosures for closed-end loans secured by dwellings other than the consumer's principal dwellings (i.e., second homes). It also contains timing restrictions.

Since they are so closely related, the Federal Reserve has moved up the effective dates for the HOEPA provisions that are so closely related to the MDIA provisions. In other words, if you can deliver early disclosures for loans secured by second homes by July 30, 2009, you can also deliver them for loans secured by principal dwellings. 

The press release includes a link to the rule. The final MDIA rule provides the specific HOEPA provisions that are now effective July 30, 2009.