NAFCU Compliance Blog

HOEPA - Section 226.36: No-nos related to principal dwellings; NCUA Chairwoman Speaks on CARD Act Compliance

Posted by Anthony Demangone

I HOEPA you enjoyed this overview.  Today, we've come to the last "new" provision in the HOEPA rulemaking: 226.36.  This section has a title that just rolls off the tongue: Prohibited acts or practices in connection with credit secured by a consumer’s principal dwelling.  While the title will not win marketing awards, it is fairly accurate. And note: the requirements below do not apply to HELOCs.

Broker defined.  226.36(a) defines the term "mortgage broker."  The definition excludes an employee of the creditor. 

Coercion of appraisers.  226.36(b) addresses practices that will constitute impermissible coercion of appraisers for consumer credit transactions secured by a consumer's principal dwelling.  This sort of closes the loop on appraisals.  The HVCC only applied to Fannie/Freddie transactions, and some of the anti-coercion guidance on appraisals was just that - guidance.  Now, such practices are a violation of Regulation Z.  This section lists a number of examples of impermissible coercion, such as implying to an appraiser that current or future work depends on the value of an appraisal.  But it also gives a number of examples that are not impermissible coercion, such as asking an appraiser to consider additional information about the basis for a valuation.

In addition, this section states that a creditor may not extend credit secured by a consumer's principal dwelling if it is aware of impermissible coercion in relation to the appraisal.  There is an exception to this; if the creditor acts with reasonable diligence to determine that the appraisal does not misrepresent the value of the dwelling, then all is hunky-dory.

Servicing requirements.  Section 226.36(c) places new requirements on loan servicers, which often are the creditors themselves. You may see a trend here: these requirements apply to loans that are secured by a consumers principal dwelling.  Servicers must credit payments when they are received.  If you provide specific instructions for payments that are not followed, and you accept the payment, you can credit it no more than 5 days after it is received.  Servicers cannot pyramid late fees, and they cannot refuse to provide an accurate payoff statement within a reasonable time of receiving such a request.  What is a reasonable amount of time?  The Fed doesn't say for sure, but it states that 5 days would be reasonable.  Or in other words, a safe harbor.

As always, there are additional details lurking within the Official Staff Interpretation section of the regulation.

 

***

On Friday, new NCUA Chairwoman Deborah Matz issued a statement regarding CARD ACT Compliance for credit unions.

 

..We understand some credit unions may experience difficulties complying with the requirement of the Credit CARD Act and the Federal Reserve Board’s interim rule regarding the mailing of periodic statements. The amount of time necessary to come into full compliance will likely vary, depending on the type of credit arrangements a credit union offers its members and, in many cases, the cooperation of third party vendors in revising billing procedures and statements. All credit unions are expected to come into full compliance as early as reasonably possible, and to demonstrate their efforts to do so. In the interim, credit unions should follow the alternative allowed by the Federal Reserve. Like any regulatory compliance matter, examiners will review credit union efforts to achieve compliance. In no event can credit unions impose a late fee or change terms except as permitted by the Credit CARD Act and the Federal Reserve’s regulation.  (Emphasis added.)

***

 

OK, it is a Monday, and we're still slogging through Regulation Z.  With that in mind, enjoy the following photo that I took of my son recently.  It never fails to crack me up.  How he finds this pose comfortable is beyond my understanding.  Let's have a great week, everyone!

HOEPA - Section 226.35 - Higher-Priced Mortgage Loans - Cont'd

Posted by Steve Van Beek

Yesterday's blog posting discussed the creation of the new "higher-priced mortgage loans" category, and today we will take a look at some of the restrictions and requirements that come with that special category of loans.

Higher-priced mortgages will be under the following restrictions:

Repayment Ability.  Higher-priced mortgage loans will be subject to the same repayment ability requirement that "Section 32" loans - which Sarah discussed earlier this week.  The key is to realize that Section 226.35(b)(1) simply indicates that credit unions must verify repayment ability as provided in 12 C.F.R. 226.34(a)(4).  So, refer to that section when looking for how to determine repayment ability (including the very, very useful official staff commentary).

Prepayment Penalties.  As you are aware, FCUs are already prohibited from charging prepayment penalties.  However, if you are a state-chartered credit union - be sure to analyze these restrictions:

"(2) Prepayment penalties. A loan may not include a penalty described by §226.32(d)(6) unless:
(i) The penalty is otherwise permitted by law, including §226.32(d)(7) if the loan is a mortgage transaction described in §226.32(a); and
(ii) Under the terms of the loan—
(A) The penalty will not apply after the two-year period following consummation;
(B) The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; and
(C) The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation."

A key here is to realize that these restrictions - which had already applied to "Section 32" mortgages - have been strengthened.  Be sure you review any prepayment penalties your credit union may offer to make sure it will still be allowed when the stronger requirements go into place after October 1, 2009.

Escrow Requirement.  This requirement applies to loans secured by a first lien on a principal dwelling.  In short, credit unions will not be able to extend a higher-priced mortgage loan unless they escrow for for property taxes and mortgage-related insurance.  Mortgage-related insurance includes "insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss."  This blog post contains a link to a great resource from the Philadelphia Federal Reserve Bank on escrow requirements.

Compliance Dates.  The escrow requirement has an effective date of April 1, 2010.  Loans secured by manufactured houses have an extended deadline of October 1, 2010.

Cancellation.  The credit union can allow the member to cancel the escrow account only if one year has passed from consummation of the mortgage and the member submits a dated, written request to cancel the escrow account.  Keep in mind that the request to cancel must come from the member and can not be signed at consummation to apply in the future.  Rather, the written request must be signed, dated and submitted by the member after the one year period has expired.

Again, this escrow requirement applies to higher-priced mortgage loans secured by a first lien on a principal dwelling.  Footnote 99 to the Final Rule (page 42 of the PDF) reiterates the definition of dwelling for Regulation Z:

"99 Regulation Z currently defines a dwelling to include manufactured housing. See § 226.2(a)(19).  Official staff commentary § 226.2(a)(19) states that mobile homes, boats and trailers are dwellings if they are in fact used as residences; § 226.2(b) clarifies that the definition of ‘‘dwelling’’ includes any residential structure, whether or not it is real property under state law; §§ 226.15(a)(1)–5 and 226.23(a)(1)–3 make clear that a dwelling may include structures that are considered personal property under state laws (e.g., mobile home, trailer or houseboat) and draws no distinction between personal property loans and real property loans. "

The official staff commentary includes similar language:

"35(b)(3) Escrows. 
Paragraph 35(b)(3)(i). 
1. Section 226.35(b)(3) applies to principal dwellings, including structures that are classified as personal property under state law. For example, an escrow account must be established on a higher-priced mortgage loan secured by a first-lien on a mobile home, boat or a trailer used as the consumer’s principal dwelling. See the commentary under §§ 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23. Section 226.35(b)(3) also applies to higher-priced mortgage loans secured by a first lien on a condominium or a cooperative unit if it is in fact used as principal residence."

Limited Exemptions for Cooperatives and certain Condominium units.  Escrow accounts do not need to be established for loans secured by shares in a cooperative.  

For loans secured by condominium units, the exemption is smaller - it only excludes the requirement to escrow for mortgage-related insurance premiums if the condominium association has an obligation to maintain a master policy insuring condominium units.  However, even if this exception applies there is still a requirement to establish an escrow account for property taxes.

Have a great weekend!

HOEPA - Section 226.35 - Higher-Priced Mortgage Loans; Early-Bird Pricing

Posted by Steve Van Beek

Section 226.35 creates a new category of mortage loans - "Higher-Priced Mortgage Loans" - which come with their own requirements and restrictions.  Keep in mind that although this category was created by the HOEPA amendments to Reg Z, it is distinct and separate from the traditional HOEPA loans (a.k.a. "Section 32 mortgages" or "high-rate/high-fee loans").

A mortgage loan is considered a "higher-priced mortgage loan" if the loan's APR exceeds the average prime offer rate for a comparable transaction:

• By 1.5 or more precentage points for loans secured by a first lien on a dwelling, or 
• By 3.5 or more precentage points for loans secured by a subordinate lien on a dwelling. 

The "average prime offer rate" will be determined by the Federal Reserve Board and posted at least weekly on the FFIEC website.  Because this rate will change on a weekly basis, credit unions will need to track their APR rates against this continuously moving "average prime offer rate" benchmark.

When do you measure the rate against the "average prime offer rate"?  The official staff commentary has the answer:

"3. Rate set. A transaction’s annual percentage rate is compared to the average prime offer rate as of the date the transaction’s interest rate is set (or ‘‘locked’’) before consummation. Sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. The creditor should use the last date the interest rate is set before consummation."  Comment 3 - Official Staff Commentary to 12 C.F.R. 226.35(a).

To see the latest "average prime offer rates" tables to gauge how your mortgage loan rates stack up, go to the FFIEC's rate spread calculator and review the tables for the maturity terms your credit union offers.  For this week, the average prime offer rate for a 30-year fixed mortgage was 5.18%.  Thus, if the new amendments were effective today, a first lien mortgage loan with a rate of 6.68% or higher would be a "higher-priced mortgage loan."

Remember, this benchmark will be a moving target that the credit union will need to monitor their loans against to ensure they are in compliance. 

Exceptions. Temporary or "bridge" loans with a term of twelve (12) months or less, reverse-mortgage loans, and HELOCs are not included in the definition of "higher-priced mortgage loans" regardless of their APR. 

Tomorrow we will cover the additional requirements and restrictions on "higher-priced mortgage loans" - including the escrow requirement for higher-priced mortgage loans secured by a first lien.

***

Two early-bird pricing offers expire tomorrow, Friday, August 28th.  The two offers are for NAFCU's Online Training Program and NAFCU's Regulatory Compliance Seminar.

Online Training.  By signing up for NAFCU's Online Training program by Friday, August 28th you will be able to lock-in the 30% introductory savings on the annual subscription price.  After Friday, the introductory pricing expires but you can still sign-up and receive access to the online training program for one-year from the date of subscription.  You can demo the online training program before purchasing and this powerpoint presentation Anthony created gives some additional information (including the pricing before and after Friday's early-bird deadline). 

Compliance Seminar.  The early-bird pricing for Compliance Seminar also ends Friday, August 28th.  Signing-up by August 28 allows you to save $200 off the full compliance program registration price.  The dates are October 19-22 in lovely Charleston, South Carolina.   

Special Offer for Blog Readers.  Given the short notice on the end of the early-bird pricing for Compliance Seminar - I've received the "go-ahead" to extend the early-bird for one week for blog readers.  Between August 31 and September 4, when you sign-up for Compliance Seminar - use promo code "THEBLOG" and receive the early-bird pricing through September 4.  Note: The promo code will not work prior to August 31 but the regular early-bird will still available through COB on Friday, August 28.  

Remember, anyone can sign-up and attend Compliance Seminar.  NAFCU members, non-members, and other credit union industry professionals are all welcome (and add significant value to the compliance discussions).

Compliance Hodgepodge at Seminar.  At Compliance Seminar, Anthony and I will have time set aside to discuss a number of important compliance issues that have not been given their own slot in the program.  In this fast-paced compliance environment, we decided to set aside these "Hodgepodge Sessions" on Wednesday and Thursday afternoons to discuss multiple issues.  

Here are the topics we plan to touch on: RESPA, S.A.F.E. Act, E-SIGN Act & E-statements, HVCC, Regulation D changes, Share Insurance, Fair Lending Exams, Regulation CC consolidation, Gift Cards, as well as Regulation Z issues (Private Student Lending Rules, HOEPA & MDIA Issues, and Proposed HELOC and Closed-End Amendments). 

We will also touch on these issues: Legislative Update, BSA Update, Corporate Stabilization Update, Pandemic Update, and a NCUA Guidance Update. 

If you have other ideas or topics you would like us to discuss, please leave a comment on the blog or shoot us an e-mail and we will do our best to incorporate them into the Hodgepodge Sessions.  

HOEPA - Section 226.34, Prohibited Acts or Practices for Section 32 Loans

Posted by Sarah Loats

This amendment to section 226.34 strengthens the requirement to verify repayment ability for "section 32" mortgage loans (it does not apply to temporary or bridge loans that do not extend beyond 12 months). What are Section 32 loans? These are the traditional HOEPA high-cost loans. They are referred to as section 32 loans because the definition of and requirements for these loans are found in section 226.32 of Reg Z.

The new rule provides that a credit union may not extend a Section 32 loan to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.

• Current obligations include other loans, that the credit union has knowledge of, that are entered into at or around the same time as the current transaction and are secured by the same dwelling (i.e., piggy-back loans).
•  Mortgage related obligations include property taxes, premiums for mortgage-related insurance, and similar expenses such as homeowners/condo dues.

Repayment Ability

The credit union must verify the amounts of income/assets that you rely on by IRS W-2 forms, tax returns, payroll receipts, financial institution records, or other documents that provide reasonable reliable evidence. The credit union must also verify the consumer's current obligations, and this can be done by reviewing a credit report.

There is a get-out-of-jail-free card of sorts - if the credit union didn't verify income and assets, it will not be considered in violation of this provision if it can demonstrate that the income and assets it relied upon were not materially greater than the consumer's actual income and assets. Here's an example from the Staff Commentary:

"For example, if a creditor determines a consumer's repayment ability by relying on the consumer's annual income of $40,000 but fails to obtain documentation of that amount before extending the credit, the creditor will not have violated this section if the creditor later obtains evidence that would satisfy Sec. 226.34(a)(4)(ii)(A), such as tax return information, showing that the creditor could have documented, at the time the loan was consummated, that the consumer had an annual income not materially less than $40,000."

Presumption of Compliance

A credit union is presumed to comply with these requirements if it verifies the consumer's repayment ability as mentioned above, determines the consumer's repayment ability using the largest payment of principal and interest scheduled in the first 7 years of the loan, taking into account current obligations and mortage-related obligations, and assesses the consumer's repayment ability taking into account at least one of the following:

1. the ratio of total debt obligations to income; or 
2. the income the consumer will have after paying debt obligations.

Notwithstanding the above, there is no presumption of compliance for loans where the regular periodic payments for the first 7 years would cause the princpal balance to increase, or the term of the loan is less than 7 years and the regular periodic payments do not fully amortize the outstanding principal balance.

I know I go on and on about the Staff Commentary (I really am a fan), but again, the Fed provides great tidbits in there, including examples of how to determine the maximum scheduled payment in the first 7 years of the loan.

Tomorrow is Section 226.35, which incorporates these rules for higher-priced mortgage loans.

HOEPA: Section 226.32 (Prepayment penalties)

Posted by Anthony Demangone

On to section 226.32.  The HOEPA amendments added a new protection for "section 32" mortgages.  But this new protection shouldn't be that big of a deal.  It says that unless you fit within the exception outlined in 226.32(d)(7), you won't be able to charge a prepayment penalty on a mortgage subject to 226.32 (as determined by fees or the loan's interest rate). 

That's old news to us.  FCUs, as an industry, can't charge prepayment penalties.  The prohibition is outlined in the Federal Credit Union Act.

Worth noting: Some federal credit unions waive closing costs on their mortgages. But if the member pays off that mortgage within 2 years, they seek to recoup those fees.  Is that a prepayment penalty?  NCUA says no.

***

Here are a few other things to chew on:

• NCUA recently issued Letter to Credit Unions 09-CU-17.  The letter gives everyone a "heads up" that on September 1, 2009, NCUA is moving toward web-based system to collect Report of Officials and 5300 Call Report information.   NCUA conducted a webinar to explain the changes, which you can access from the guidance noted above.  They plan to offer 3 more webinars on the subject in the next few months
• On September 18, 2009, the NACHA IAT era will begin. The Fed is offering IAT transaction testing until September 11, 2009 for its FedACH customers. If you are one of those customers, you may want to take advantage.
• Each year, the Fed's annual report documents how banks and thrifts are complying with consumer regs.  It lists the most common compliance boo-boos in many areas.  Shari Pogach has written an article highlighting the report, and the article can serve as a simple auditing tool to judge whether you have made similar mistakes in your shop.  NAFCU members can access the article here.

HOEPA: 226.24 - Closed-End Advertising

Posted by Anthony Demangone

Sure, HOEPA was designed to place a ton of protections on "higher-priced" mortgage loans.  But the new regulations will create quite of few new consumer protections that affect many other loans.  The new regulations add a number of requirements to Regulation Z's closed-end advertising rules.

In the Fed's own words..." The three most significant aspects of the (rule) related to strengthening the clear and conspicuous standard for advertising disclosures, regulating the disclosure of rates and payments in advertisements to ensure that low promotional or ‘‘teaser’’ rates or payments are not given undue emphasis, and prohibiting certain acts or practices in advertisements."

The Federal Reserve overviewof the HOEPA changes does a great job of highlighting the new rules.  Rather than recreate the rule, here's what they had to say.

Under the new rules, advertisements for home-secured loans may include only the simple annual interest rate, or the rate at which interest will accrue, along with and not more conspicuously than the disclosed APR. In addition, if an advertisement for a dwelling-secured loan includes a simple annual interest rate, such as a teaser rate, and more than one rate may apply during the loan's term, the advertisement must include:

• each simple annual rate of interest that will apply;
• the time period for which the rate will apply; and
• the loan's APR.

If an advertisement for a dwelling-secured loan states any payment amount, the advertisement must include:

• the amount of each payment that will apply during the loan's term, including any balloon payment;
• the period of time each payment will apply; and
• the fact that the payments do not include taxes and insurance premiums if a first-lien loan.

The additional disclosures discussed above must be equally prominent and in close proximity to the advertised payment or rate that triggered the required disclosures.

Prohibited Advertising Practices. The final rule prohibits a number of advertising practices for dwelling-secured loans deemed to be unfair, deceptive, associated with abusive lending practices, or otherwise not in the borrower's interest. These prohibited practices are:

1. using the term “fixed” when advertising a variable- rate loan or a transaction with a planned payment increase without including information about the time period for which the rate or payment is fixed and stating “ARM,” if applicable;
2. comparing the advertised rate or payment to an actual or hypothetical rate or payment without disclosing the rates or payments that will apply during the entire loan's term, and that they do not include taxes and insurance, if applicable;
3. misrepresenting that a loan is government endorsed;
4. using the name of the borrower's current lender without including the actual advertiser's name and disclosing that the current lender is not associated with the advertisement;
5. making a misleading claim that debt will be eliminated or waived rather than replaced;
6. using the term “counselor” to refer to a for-profit mortgage broker or creditor; and
7. providing an advertisement in one language while providing required disclosures in another.

I find it amazing that the Fed felt the need to regulate away some of these practices. But just the other night, I saw an ad that did a number of these things.  The ad showed a clip of President Obama talking about the need for affordable mortgages.  Then the ad jumped into the marketing of the lender's mortgage product.  The false implication was more than clear.  And then the ad stated that depending on the value of the home, you could eliminate credit card debt.  Note: the ad was at 2:30 in the morning while I was feeding Briggs.  But still. 

HOEPA - Sections 226.17 .19; This and that

Posted by Anthony Demangone

I'll handle these two sections rather quickly.  As I mentioned earlier, the Fed first issued their HOEPA regulations in 2008.  But then Congress passed MDIA, which overtook the HOEPA regs in several areas.  Well, the overlapped areas affect the two sections noted above in this post's title.

Sections 226.17 (general disclosure requirements) and .19 (certain mortgage and variable rate transactions) were amended by the Fed in 2008, but were superseded by the MDIA amendments to Reg Z.  When you begin working toward compliance for HOEPA, remember this important distinction.  The FDIC created thisgreat side-by-side chart that details how MDIA widened and strengthened the disclosure requirements.

With all the important compliance work we're going to have to do, I didn't want you heading down alleyways that are no longer relevant.

***

Here are a few things kicking around my in-box.

• Prescreened offers are important.  Just ask this mortgage company that forgot to include the all-important prescreen opt-out notice.   A mistake that cost them $20,000.
• NCUA issued a legal opinion recently offering guidance to a credit union that was trying to offer loan servicing and collection services to a non-profit entity.    It is an interesting read, as it brings up a credit union's charitable donation powers in a way that had not occurred to me.  The letter also offers guidance relating to nonmember services and CUSOs.
• FinCEN issued a ruling to issue guidance on this situation: what do you do when four customers/members get together to have an armored car service to deliver cash to your institution in amounts greater than $10,000?  Well, I won't answer that question, because it is fairly complicated - and the ruling does a good job of walking you through the process.  But here's a great idea for training: ask a group of tellers how they would treat the transaction, and see if the come up with the same answer as FinCEN.  (Just don't tell them that it was my idea.)
• The OCC has issued an updated version of its "Other Consumer Protection Laws and and Regulations.  While not every reg in the massive document apply to federal credit unions, many do.  And there are audit checklists for each one.  Two words for this, my friends.  Good stuff.

Have a great weekend, everyone.

HOEPA - Section 226.16 Con't; CC Act - NCUA Reg Alert

Posted by Sarah Loats

The Federal Reserve provides guidance on the clear and conspicuous standard through new comments in the staff commentary. Which brings up a researching tidbit - always look to see if the rule includes staff commentary. The Federal Reserve hides very useful information in its staff commentary to rules, as we'll see below.

Clear and Conspicuous Standard
In general, all advertisements are subject to a "clear and conspicuous" standard. In the final rule, the Federal Reserve has provided guidance on what is "clear and conspicuous" for certain types of HELOC advertisements.

Promotional Rates and Payments for HELOCs. Additional disclosures that are required due to the advertisement of a promotional rate or payment will be deemed in compliance if they are in the same type size as the trigger terms and appear immediately next to or directly above or below the trigger terms, without any intervening text or graphical displays.

Internet Advertisements for HELOCs. The required disclosures cannot be obscured by such techniques as graphical displays, shading, coloration, or other devices that hinder the consumer's ability to read them. This is true for visual text TV HELOC advertisements as well. Also, for TV advertisements, the consumer should be able to read the disclosures - very fine print would not comply with the standard if consumers cannot read it.

Oral Advertisments for HELOCs. Disclosures should be given at a speed and volume at which consumers can understand them (i.e., not too fast, not too quiet). This applies to all oral advertisements whether over the radio, TV, or internet.

And just a couple of last tidbits for HELOC advertisements. The final rule requires additional disclosures regarding balloon payments if an advertisement states any minimum periodic payment amount. An advertisement that states or implies that the interest expenses under a HELOC plan may be tax deductible must not be misleading, and an advertisement distributed in paper form or via the internet that states the advertised extension of credit may exceed the fair market value of the applicant’s dwelling will trigger additional disclosures.

***

NCUA has issued a Regulatory Alert regarding the Credit CARD Act requirements. For regular readers of the blog, I don't know that there's much in here that would be new to you, but they do provide it in a handy-dandy chart form.

HOEPA - 226.16

Posted by Sarah Loats

Although most of the HOEPA provisions apply to closed-end loans, the final rule did tweak advertising rules for HELOCs. The major changes to Section 226.16 relate to the clear and conspicuous standard, the advertisement of promotional terms, and the advertisement of initial discounted and premium rates. As Anthony mentioned, these rules apply for advertisements that occur on or after October 1, 2009.

Promotional Rates and Payments
If a HELOC advertisement includes a promotional rate or payment amount, the advertisement must also include:

1. the period of time during which the promotional rate or payment will apply (the promotional period); and

2. information about the rate or payment that will apply after the promotional period. These must be listed in a clear and conspicuous manner with equal prominence and in close proximity to each listing of the promotional rate or payment.

A promotional rate is defined as a rate, in a variable rate plan, that is not based on the index and margin that will be used later in the plan, if that rate is less than a reasonably current APR that would be in effect under the index and margin.

A promotional payment is defined, for a variable-rate plan, as a payment applicable for a promotional period that is not derived by applying the index and margin, and is less than other minimum payments under the plan derived by applying a reasonably current index and margin, given an assumed balance. For a non-variable-rate plan, the promotional payment is any minimum payment applicable for a promotional period if that payment is less than other payments required under the plan given an assumed balance.

Initial Discounted and Premium Rates
First of all, what’s the difference between a discounted/premium rate and a promotional rate? The rule limits discounted/premium rates to initial rates (so, a promotional rate could occur anytime throughout the loan). Also, a promotional rate is a rate that is not based on the index or margin that will be used later only if that promotional rate is less than a reasonably current APR that would be in effect under the index and margin. A discounted/premium rate is an initial rate that is not based on the index and margin to be used later, period. Got that? Ok…

Under the rule, if an advertisement states a discounted or premium rate, it must also state the amount of time the rate will be in effect, and a reasonably current APR that would be in effect using the index and margin. Again, these must be stated with equal prominence and in close proximity to the advertised discounted or premium rate.

Television and Radio Ads
The final rule provides alternative disclosure options for radio and television HELOC advertisements that contain trigger terms. A radio/television HELOC ad that contains a trigger term may comply with the disclosure rules by providing APR information and a toll-free telephone number (or any number that allows the consumer to reverse charges) along with a reference that the consumer may call to obtain additional cost information.

Tomorrow we’ll go through the clear and conspicuous standards, which help to explain what “equal prominence and in close proximity” mean, along with some other amendments to the HELOC advertising rules.

HOEPA - 226.2; A little of this, a little of that

Posted by Anthony Demangone

When navigating a new regulatory requirement, do not overlook definitions. With the Reg Z changes that implement HOEPA, there was a tweak of the definition of "business day."  This is important because the HOEPA changes create new requirements for early disclosures. 

The final HOEPA rule was designed to expand upon Regulation Z's requirements to require early TILA disclosures for certain mortgage loans.  In addition, a new requirement will prohibit a lender or any person from collecting a fee, other than a credit report fee, from a borrower until after the borrower has received the early TILA disclosures. For mailed disclosures, the lender may assume that the disclosures have been received three business days after mailing and assess a fee at that time.

Does this sound familiar?  It should.  MDIA did the same thing.  Only sooner.   If you recall, after the Fed issued the HOEPA regs that we are discussing, Congress passed the Mortgage Disclosures Improvements Act, which pushed up (and expanded) some of the HOEPA requirements.  If it sounds confusing, it is.  But here's the point I am trying to make: when MDIA or HOEPA talks about days or business days, be sure you understand what they mean.   Because it can mean two things, depending on the situation.

Under the standard definition, a business day means a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. However, for purposes of rescission under §§ 226.15 and 226.23, and for purposes of § 226.31, a ‘‘business day’’ means all calendar days except Sundays and specified legal public holidays.The definition of ‘‘business day’’ is being revised to apply the second definition of business day to the consumer’s receipt of early mortgage loan disclosures under § 226.19(a)(1)(ii). The Board believes that the definition of business day that excludes Sundays and legal public holidays is more appropriate because consumers should not be presumed to have received disclosures in the mail on a day on which there is no mail delivery.

So, as you work through the HOEPA (and review MDIA) requirements, don't forget to note that business day has a very specific meaning.  The devil is in the details, or definition section, many times.

***

Here are some odds and ends.

• You may have noticed already, but the NAFCU Compliance Blog has surpassed 1,000 subscribers.  Did you hear that sound?  It was us patting ourselves on the back.  :)  All kidding aside, we have a lot of fun with this, and we appreciate that you choose to read what we have to say.
• NAFCU's August Flash Report is available.  (NAFCU log-in needed.) Many folks do not know that NAFCU has a team of economists that do a BUNCH of stuff.  One of the things they do is issue a monthly Flash Report, which summarizes the results of a member survey.  The August issue, linked above, looks at regulatory burden.  From a compliance perspective, it is fairly interesting.  For example...(a)lmost all participating credit unions said that they would expect their regulatory burden to increase should the June 30th proposal for a consumer finance protection agency come into effect. The rough estimate respondents stated of their credit union’s annual regulatory costs due to a duplicate agency was an average of $45,120.

• Remember when I wrote about how GAO wasn't overly pleased with how fair lending regs are being enforced?  Well, on August 4, the FFIEC did release new fair lending exam procedures.   I would glance through this doc if you are in lending. 

HOEPA Overview - Intro and 226.1; RESPA FAQs

Posted by Anthony Demangone

HOEPA.  Compliance deadline: October 1, 2009. 

Overview.  The mortgage crisis continues to throw curve balls at compliance officers.   Using its existing powers under the Home Ownership and Equity Protection Act (HOEPA), the Fed amended Regulation Z to create a slew of consumer protections in the area of mortgage lending.  And while many refer to this as the "higher priced mortgage" regulation, there are provisions that affect all dwelling-secured loans. 

First, there's one area of confusion that I want to clear up.  These regulations do create a category of loans, known as "higher-priced" loans.  Many of the restrictions within the new changes affect these loans.  (But not all.)  Regulation Z already has an existing category of HOEPA loans, known as "Section 32 loans."  Don't get these confused.  Here's how the Fed explains the distinction:

Distinguishing New Higher-Priced Loans From Existing HOEPA Loans
Many of the key provisions of the rule relates to higher-priced loans, a new category of mortgage loans within Regulation Z containing expanded consumer protections. This new loan category should not be confused with existing HOEPA loans, often referred to as “section 32” loans. Higher-priced loans have lower triggers than HOEPA loans and therefore encompass more loans. In addition, the rule for higher-priced loans applies to purchase money mortgages, which are excluded from HOEPA's coverage. But like HOEPA, the final rule for higher-priced loans excludes home equity lines of credit (HELOCs) and construction and reverse mortgage loans. The final rule also prohibits lenders from structuring a closed-end higher-priced loan as an open-end line of credit to evade the rule's protections. The rule for HOEPA loans remains in effect, albeit with some enhancements.

Next, I think it would be good to share some resources on the upcoming requirements.

• Here's a link to the actual regulation itself.
• Here's a link to a wonderful overview produced by the Philadelphia Fed.

• Here's a link to NAFCU's Final Regulation on the changes. (NAFCU Member Log-in needed.)

• In addition, this Wednesday, NAFCU will host a webcast that will address HOEPA requirements.

I'd read the overview first or our Regulatory Final.  This will give you a good foundation. Then you can dive into the rule itself for tough issues.  Now, let's get started.

The changes amend many sections of Regulation Z.  Today, we'll focus on section 226.1.  The section covers "Authority, purpose, coverage, organization, enforcement, and liability." Never overlook these sections when reviewing regs.  They can hold important information.

The HOEPA changes amend paragraph (d)(5) within 226.1 as follows:

Subpart E contains special rules for mortgage transactions. Section 226.32 requires certain disclosures and provides limitations for loans that have rates and fees above specified amounts. Section 226.33 requires disclosures, including the total annual loan cost rate, for reverse mortgage transactions. Section 226.34 prohibits specific acts and practices in connection with mortgage transactions that are subject to § 226.32. Section 226.35 prohibits specific acts and practices in connection with higher-priced mortgage loans, as defined in § 226.35(a). Section 226.36 prohibits specific acts and practices in connection with credit secured by a consumer’s principal dwelling.

The staff commentary for the section does the following:

• Makes it clear that the requirements apply to covered loans where applications are received on or after October 1, 2010.
• Makes it clear that the rules apply to refinances and assumptions considered new transactions under 226.20. 
• Notes that the rules for mandatory escrow for certain covered loans kicks in on April 1, 2010.  But mandatory escrow for covered manufactured loans kicks in October 1, 2010.  We'll tackle the escrow issue later.

• It also notes that for advertising, requirements apply to ads occurring on or after October 1, 2009.  But interestingly, it notes that a radio advertisement, for example, occur on the day it they are "first broadcast."  And that would make sense.  Perhaps advertisements are scheduled to air for months.  Forcing folks to plan ahead to make advertisements comply with future requirements would effectively move up the compliance date.

Tomorrow, we'll tackle 226.2, definitions.

***

HUD has dropped its FAQ document that is designed to help compliance with the upcoming RESPA changes.  It was announced as HUD's "first release," so hopefully, there will be more.

HOEPA Wins; Fair Lending; Freebie/Shameless Plug

Posted by Anthony Demangone

Happy Friday, everyone.  When I asked what folks wanted us to focus on next, the response was overwhelming: HOEPA.  And that makes sense, as the compliance deadline kicks in October 1.  In second place came RESPA.  So, we'll focus on HOEPA first.  Once we finish that, we'll move on to RESPA. 

***

The GAO has issued a report critical of federal regulator enforcement of fair lending laws.  Here are a few things I noted:

• First, I became aware of this issue after receiving a press release from the House Committee on Financial Services.  In other words, those with the power to lean on regulators and hold hearings are drawing attention to the report.
• The report points to inconsistencies in enforcement.  One line, on page 41, really caught my attention.  

  Finally, depository institutions under the jurisdiction of FDIC, Federal Reserve, and OTS were far more likely to be subject to referrals to DOJ for potentially being at heightened risk for fair lending violations than those under the jurisdiction of NCUA and OCC.

What does this mean?  It is hard to say.  But if regulators start getting beat up over this report, you can bet that there will be greater attention on this issue.  And that mean potentially more fair lending exams.

***

• Thanks to those who responded to my call for help regarding their most recent BSA exam.  I've received a good number of emails, which will certainly help me prepare for the September 30 BSA roundup.  (The session is available to all, including non-NAFCU members.) But I'd love to hear from more of you!
• Here's a freebie that might interest some of you.  On Tuesday, August 25, I'll conduct a webinar to give an overview of NAFCU's new Volunteer and New Staff Online Training program.  The webinar is free, and those who sign up will get a free 3-day trial subscription to kick the training program's tires. And all are welcome to take advantage - including non-NAFCU members. The program does have a BSA module for volunteers and new employees. 

***

Have a great weekend, everyone! 

Useful Resources - Data Breach Laws; Escrow Requirements

Posted by Steve Van Beek

The internet is truly a wonderful thing.  At last year's Compliance Seminar I gave a talk on Organizing the Compliance Information Flow (additional materials here) - with an emphasis on automating how information comes to your desk (or computer).  

Data Breach Laws

I wanted to share two resources that came my way.  The first came through my RSS Reader, via the Privacy Law Blog, and it contains a  list of each state's data breach laws.  Sometimes finding the laws themselves are half of the battle, but in this case all the state laws are linked to in an organized manner.  Proskauer Rose LLP runs the Privacy Law Blog - which also covers issues such as CAN-SPAM, COPPA, Privacy laws (obviously), and Identity Theft issues. 

Escrow Accounting Information

The next useful resource came from the Federal Reserve, but not the central arm of the Federal Reserve.  This resource came from the Philadelphia Federal Reserve's Consumer Compliance Outlook.  The article, Escrow Accounting Rules, Are You In Compliance?, addresses the current escrow rules (including best practices) as well as the upcoming amendments from RESPA and Regulation Z (via HOEPA).  Thus, if your credit union will need to begin escrowing due to the new Higher-Priced Mortgages category in Regulation Z - this resource is a great place to start.  

In this compliance environment, having useful information sent directly to you - rather than having to go and find it (if it exists) - is a huge time and energy saver.  Well, you know that already as you've subscribed to this blog.......

21-Day Issue - A Skip Solution?

Posted by Anthony Demangone

I know it is decision time for some of you on the 21-day issue.  I just wanted to bring to light a creative solution that a few credit unions are considering.  I call it the "skip" solution.

In essence, some credit unions will force a "skip" for their entire open-end portfolio for September.   This would be done via some global change in terms notification that goes to all affected loans.  Based on this change, when the credit union issues their August periodic statements in early September, the due dates will be pushed forward a month to October.  This way, the members get to keep their existing due dates.  The credit union, however, potentially sacrifices an entire month's-worth of payments for their open-end loans.  And all subsequent due dates are pushed back.  So, when September statements are mailed in early October, a November due date will be shown.  And so on.

Technically, this is not really a "skip," as the September payment (and all subsequent payments) are pushed back a month.  Will credit unions lose interest income?  I don't think so.  At least not when you look at it from an "annual" point of view.  In the hypothetical above,  the September payment is pushed to October.  Some members will continue to pay as they have.  So, nothing is different there.  Others will take advantage of this quasi-skip.  If interest continues to accrue, members will pay the accrued interest in October when they make their next scheduled payment.

This solution seems to be permissible under the Credit CARD Act and interim final rule to Regulation Z.  When and how credit unions would notify members about the change would be a business decision, as long as you follow Reg Z's change in terms requirements.  Personally, I lean toward a separate mailing that clearly describes the changes and clearly explains that interest will continue to accrue. 

In any event, I wanted to pass that along.  If you have thoughts or feedback about this possible solution, please leave a comment on the blog.

***

On a related note, here's a news story about our continued efforts to turn the 21-day issue around. (Scroll down a little bit.)  While the Fed has indicated that they do not intend to budge, we'll keep plugging away.

HVCC Clarifications Issued; HOEPA Trigger Updated

Posted by Anthony Demangone

As those of you who deal with Fannie Mae and/or Freddie Mac know, Fannie and Freddie now require that lenders follow the Home Valuation Code of Conduct (HVCC) in order to deliver conventional, single-family loans originated on or after May 1, 2009 to them.  Many of you have told us about the difficulties you've had with the HVCC.   NAFCU continues to seek relief from HVCC-related burdens.   We also sent a letter to the Hill on this issue.  Download H R 3044 Comment Letter.

The Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie and is in charge of their conservatorship, issued a statement to try to clear up common misunderstandings related to the HVCC.   Fannie and Freddie themselves have also updated their respective "frequently asked questions" on the HVCC.Combined, these documents address, among other things, what loans are specifically covered by the HVCC and communication with appraisers and lender removal of appraisers. You can find these documents by clicking FHFA Notice or Fannie’s FAQ or Freddie’s FAQ.  (And know how I love my FAQs.)

For example, here's a Fannie FAQ that attempts to clarify a major area of confusion: providing borrowers a copy of their appraisal.

Question: Can you clarify the requirements around Section II of the Code requiring the borrower’s receipt of the appraisal?

Answer: The Code requires that a borrower be provided a copy of the appraisal no less than three days prior to the closing of the loan. The Code allows that the borrower may waive this three-day requirement. Situations where a borrower is unaware of his or her right to a copy of the appraisal prior to the three days and is then provided a waiver of that right at the closing table, would not be compliant with the intent of the Code. The time period of rescission in a refinancing situation does not constitute a valid three-day waiver period.     

    The Code does not specify what form the waiver must take or whether it be oral or written. In addition, the Code does not prohibit that a waiver, given in a timely manner, be recorded at some later point when the parties are available. Each lender must develop its own policies, procedures, and documentation. For example, a lender may obtain a waiver from a borrower through an email, phone call, or some other means, prior to the three-day period, and then have that waiver recorded in writing at the settlement table or at some other time.

    The three-day period begins on the day of the receipt of the appraisal. For example, in a non-waiver situation, where a borrower received an appraisal on Monday, the closing could be held on Wednesday. Saturday is included for purposes of counting the three-day period. Sundays and legal holidays are not included for counting the three-day period.

I would forward this to whomever at your credit union is tracking the HVCC issue. 

***

In other compliance happending, the Fed has updaded the dollar amount of its fee-based HOEPA trigger down to $579, effective January 1, 2010.  Read all about it here.

HELOCs; I need your help

Posted by Anthony Demangone

The Federal Reserve Board recently published a consumer-oriented list of "tips" regarding HELOCs.  Specifically, the Fed issued the 5 tips to help consumers understand their rights and lender responsibilities when HELOC lines are frozen or reduced.  Access the Fed's press release here, which contains a link to the "tips." 

I mention this because this is the type of thing that will be picked up by financial columnists and news wire services.  Your members very well could read this tip sheet, so you should as well.  Tip #2 directs consumers to contact their lender should their line be frozen or reduced.  I would read this document closely if your credit union has or will reduce or freeze HELOCs.  And be sure your front-line staff can respond to these tips assuming members will read them and then contact your shop.

Regarding HELOCs, don't forget that the Fed has a proposed rule out there to amend its HELOC rules.

***

I need your help in two areas. 

• I'll be presenting a "BSA Update" for NAFCU on September 30.  Go here to see what I'll yabba dabba about and to sign up, if you are so inclined.   As part of the webcast, I'd love to hear what your examiner stressed over during the BSA portion of your most recent exam.  I've spoken with folks at NCUA and FinCEN to get their take, but I always like to hear it from you.  I'll take the responses and share what I learn.  Feel free to email me (respond to the daily email or email me at ademangone (at) nafcu.org.).
• What should we focus on next within this Blog?  The HOEPA changes that take effect in October?  RESPA?  Something else? Let me know your thoughts.  Either email us or leave a comment on the blog.

Credit CARD Act and the 21-Day Issue

Posted by Anthony Demangone

After extensive and very recent conversations with numerous folks at many levels of the Federal Reserve, I do not hold out any real hope that the Fed will carve out an exception for non-credit card open-end loans on the 21-day issue.  Without a legislative fix, the Fed feels that it can go no further.  And with Congress either out (the House) or soon leaving (the Senate) for its August recess, the window of opportunity for a legislative fix has slammed shut for some time.  We have a NAFCU Today article on this issue that you can access here.  NAFCU pushed hard to try to get a fix while Congress was in session, but ultimately obtaining a legislative fix in such a short time faced many hurdles.

With that in mind, affected credit unions may want to consider the following paths.

1. Do nothing.  They can keep their current due dates and simply send periodic statements as they do now.  With this choice, credit unions will lose the ability to treat payments as late for many open-end loans.
2. Credit unions can latch on to the temporary "fix" that the Fed provided in its interim final rule.  This fix involves placing a disclosure on or with the periodic statement to indicate that members have 21 days from the date of mailing to get a payment in to the credit union. I wrote about this earlier, as you may recall. (Scroll to the bottom of the post.)  With the fix, a credit union can wait to see if a legislative fix emerges.  Which may or may not happen.  But ultimately, as things currently are, credit unions that take this route will need to make operational changes when the availability of this fix sunsets.
3. Credit unions can make operational changes necessary to bring themselves into compliance with the 21-day requirement so that they may treat payments as late.  With this comes risk that Congress may ultimately fix the 21-day issue sometime in the future.  

I wish there were better news, but I can say that NAFCU has worked this issue as hard as possible.  We've met with Congressional staff, NCUA, the Fed and urged Connecticut credit unions to communicate concerns with Senator Dodd.  And we'll keep working this issue.  But I know that many of you needed information to make operational decisions.

Have a great weekend, everyone.

Reg Z and Private Student Lending

Posted by Anthony Demangone

Why did the compliance officer cross the road?  Because Reg Z was not on the other side.

OK, that was a terrible joke.  But I think you understand the punchline, even if it makes you cry instead of laugh.

Regulation Z, specifically the open-end rule changes that we are swimming through, have captured our attention.  But do not overlook a recent final rule that amends to Regulation Z that addresses private student loans.

The final rule dropped on July 30th.  The effective date will be 180 days after the Federal Register publishes the final rule, which should be shortly.  So the effective date should be early in 2010.  Here's a link to the Fed's press release about the final rule, which includes a link to the actual document.

I mentioned this final rule last week, but after glancing through the 234 pages this afternoon, the final rule appears to be fairly tricky. 

Here's why.  If you ask credit unions whether they do student lending, many will think about the classic student loan - those formal, government guaranteed loans that you take out to pay for tuition and room and board.  The loans that I will personally be paying off until I'm 90 years old.   But this final rule covers "private student loans," a term that is defined to include a wide range of loans that you might not have considered.

Here's the definition:

(5) Private education loan means an extension of credit that:
(i) Is not made, insured, or guaranteed under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
(ii) Is extended to a consumer expressly, in whole or in part, for postsecondary educational expenses, regardless of whether the loan is provided by the educational institution that the student attends;
(iii) Does not include open-end credit, any loan that is secured by real property or a dwelling; and
(iv) Does not include an extension of credit in which the covered educational institution is the creditor if:
    (A) the term of the extension of credit is 90 days or less; or
    (B) an interest rate will not be applied to the credit balance and the term of the extension of credit is one year or less, even if the credit is payable in more than four installments.

So, if you make a closed-end personal loan, and the member indicates that it is being made for educational purposes, you are under the new reg's requirements.  Here's a snippet of the final rule:

2. Multiple-purpose loans.

    i. Definition. A private education loan may include an extension of credit not excluded under § 226.46(b)(5) that the consumer may use for multiple purposes including, but not limited to, postsecondary educational expenses. If the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses by indicating the loan’s purpose on an application, the loan is a private education loan.
    ii. Coverage. A creditor generally will not know before an application is received whether the consumer intends to use the loan for postsecondary educational expenses. For this reason, the creditor need not provide the disclosures required by § 226.47(a) on or with the application or solicitation for a loan that may be used for multiple purposes. See § 226.47(d)(1)(i). However, if the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses, the creditor must comply with §§ 226.47(b) and (c) and § 226.48. For purposes of the required disclosures, the creditor must calculate the disclosures based on the entire amount of the loan, even if only a part of the proceeds is intended for postsecondary educational expenses. The creditor may rely solely on a check-box, or a purpose line, on a loan application to determine whether or not the applicant intends to use loan proceeds for postsecondary educational expenses.

So, if the member notifies you that the purpose of the closed end loan is to help pay for postsecondary education, you apparently are under the reg's requirements.  And what are those?

On top of new disclosures, you're looking at the following requirements:

• Creditors must give the consumer 30 days after a private education loan application is approved to decide whether to accept the loan offered. During that time, the creditor may not change the rates or terms of the loan offered, except for rate changes based on changes in the index used for rate adjustments on the loan.
• The consumer has a right to cancel the loan for up to three business days after consummation. Creditors are prohibited from disbursing funds until the three day cancellation period has run.

Please keep in mind that I write this at 9 p.m. after a feverish read through this final regulation. Further clarifications may occur.  For now, it is enough to say this: if your credit union offers closed-end personal loans, and you allow the member to choose a purpose code on their application from a list that includes "educational expenses" or you allow the member to write in their purpose code, you very well could offer "private student loans." 

Stay tuned.

Risk-Based Lending for Credit Cards

Posted by Anthony Demangone

For the past month, I've heard the following question quite a few times.

Following the Credit CARD Act, is risk-based lending dead for credit cards?

Let me give you a great attorney answer: it depends.

Before you chuckle too hard, that really is the best answer I can give.  Compliance gives few simple conclusions.  And as I like to point out, simple issues generate few questions.  Let me explain.

What do you mean by risk-based lending?  Terms are a funny thing.  If you ask 5 people what risk-based lending means, you'll get 6 different answers.  Does risk-based lending refer to the initial rate, or is it a process that reassesses the risk of the credit card borrower over time and adjusts the rate in relation to risk?  Or is it both?  The Credit CARD Act makes it much more difficult to reprice credit cards after they are issued.  That is true.  But can you use risk to price new credit cards?  You bet.  Knock yourself out. 

But what about after the card is issued?  There's nothing that prevents you from using risk to reprice your card portfolio after you issue the card.  But we're going to live in a different world after the Credit CARD Act is fully implemented.  After new cards are issued, you won't be able to change rates within the first year (with certain exceptions).  After that period, you'll have to give 45 days notice before you increase rates, and the member will have the right to reject the increase.  If you do manage to navigate a rate increase by the member rejection right, you'll have to revisit the rationale at least every six months to ensure that the basis for the increase still exists.  If it doesn't, you'll have to reduce the rate.

The dreaded right to cancel.  This new right does get your attention, doesn't it?  But I can't wait to see how it ultimately plays out.  How many folks will cancel their card following a notice of a rate increase?  Some will, for sure.  And for those folks, you're really no worse off than you were.  They'll have to repay your card (under a new set of rules) based on the initial rate.  But some will accept the new rate, because many folks will want to use the card.   (Keep in mind that the new, higher rate will not apply to existing, outstanding balances.)  In addition, I believe consumers will soon learn that the easy days of 0% balance transfer offers and easy to obtain teaser rates are behind us.  Consumers will learn that if you cancel a change in terms on a decent credit card, they'd better have something better in hand.  The devil you know, as they say. 

Conclusion.  These extra hurdles certainly make risk-based pricing adjustments more difficult for credit cards.  For some credit unions, the changes are enough to make risk-based adjustments out of the question.   I'm sure some credit union out there, though, will find a way to make it work.  So, is risk-based lending dead for credit cards?  It depends on how you look at it.  And now you know why.

Compliance Round-up

Posted by Anthony Demangone

It may be shocking to some, but not all compliance issues touch upon the Credit CARD Act!  With that in mind, here are some things that have been kicking around my inbox that I wanted to share.

Red Flags.  The FTC has delayed enforcement of the Identity Theft Red Flags Rule, again.  This time until November 1.  The delay will give state-chartered credit unions additional time to comply.  Federal credit unions?  No such luck.  Our compliance deadline was, and still is, November 1, 2008.

NCUA Prohibition Orders.  NCUA has issued its most recent bunch of prohibition orders.  These orders effectively ban individuals who allegedly did bad things from working in our industry.  They can be useful training tools to remind folks that the danger of embezzlement always is with us.

Another Reg Z change.  On Friday, the Fed published final rules to implement portions of the Higher Education Opportunity Act.  The compliance date will be 6 months after the final rule is published in the Federal Register, which should be shortly.  For those who do not want to page through the 234 page rule, here's a link to a Fed Press Release that gives a very high-level overview. 

Check processing changes.  For those involved with Regulation CC and check holds, you've notice a ton of check processing restructuring at the Fed.  Here's a Fed document that updates recent changes and gives a view to the future. 

Foreclosures and tenants.  The FDIC issued a consumer affairs letter to remind banks of a new law that protects tenants from eviction due to foreclosures.  If your credit union does real estate lending, I'd give this a read. 

Credit CARD Act: 15/45 Days; Payday Lending

Posted by Anthony Demangone

Last week, Sarah did a great job of highlighting when and how the Credit CARD Act 45-day change in terms notification kicks in this month.  Here's a link to her post.   She pointed out that it will only apply to credit cards on August 20 of this month.  In other words...

The 45-day notice does not apply to other, non-credit card lines of credit - and not even to HELOCs that are accessed via a credit card device.  Here's the language of the interim final rule, with emphasis added.  The 45-day requirement will kick in later for other open-end (non credit card loans) and the Fed has a proposal out right now that would address HELOCs.

Credit Card Accounts
The interim final rule preserves, in § 226.9(c)(1) and associated staff commentary, the existing change-in-terms notice requirements for home-equity plans and other openend plans that are not credit card accounts. These rules are substantively identical to the current rules under § 226.9(c), except for several technical and renumbering changes. 
    The Board notes that open-end (not home-secured) lines of credit that are not credit card accounts will be subject to the revised change-in-terms notice requirements contained in the January 2009 Regulation Z Rule when that rule becomes effective. In particular, changes made in January 2009 to § 226.9(c) and (g) have not been withdrawn. However, the January 2009 Regulation Z Rule is not yet effective, and unsecured lines of credit that are not credit card accounts are not subject to the advance notice requirements in the Credit Card Act. Therefore the existing rules have been preserved for such lines of credit for the period between the effective date of this interim final rule and the date the January 2009 Regulation Z Rule becomes effective. Thus, creditors offering open-end (not home-secured) lines of credit that are not credit card accounts may continue to comply with the existing change-in-terms notice requirements, which have been adopted in this interim final rule as renumbered § 226.9(c)(1).
    The Board notes that it also is currently reviewing those portions of Regulation Z that pertain to home-equity lines of credit, and the applicable notice requirements for such products may be amended in the course of that rulemaking.

***

NCUA just issued Letter to Credit Unions 09-FCU-05.  Access it here.  Note that this is a letter to federal credit unions.  And why is that?  The usury ceiling looms large in this letter.  NCUA, in a well-written and straight-forward manner, reminds FCUs that if they have a payday lending program, they must abide by the usury ceiling of 18 percent.  They have one example of a no-no that really caught my eye:

An FCU offers loans with a stated 0% APR and charges an application fee of 20% based on the loan amount. The FCU has essentially the same processing costs for all payday loans regardless of amount. The 20% fee does not accurately reflect the costs of processing applications so the fee should be considered a finance charge under Reg Z and be included in calculating the APR. This would raise the APR above the 18% ceiling. (Emphasis added.)

I take two things away from that section.

1. First, an application fee based on a percentage of loan proceeds is a no-no.

2. But the guidance implies that an application fee should accurately reflect the costs of processing an application.  Is your application fee based on an accurate reflection of the costs of processing your loans?  If it is, how have you documented that fact?  Inquring minds (examiners) may want to know.

Clarification on the Same Day Requirement

Posted by Anthony Demangone

On Friday, I wrote about the Credit CARD Act requirement that due dates be on the same day of the month.

As many of you pointed out to me, that requirement only applies to credit cards.  I should have been more specific with the post, and I apologize for any confusion!  And if you are reading this on Saturday...booooo!  I've updated the post, which you can access via the link above.