NAFCU Compliance Blog

NCUA Releases Video Series on Preventing Internal Fraud; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

NCUA Releases Video Series on Preventing Internal Fraud.  The NCUA’s YouTube channel has now become the home for a series of videos on how credit union managers and volunteers can detect and prevent internal fraud and employee dishonesty.  The videos are a collaboration between the NCUA’s Office of Small Credit Initiatives and CUNA Mutual Group, and discuss how credit unions can bolster internal controls and learn how to identify potential clues that are warning signs for fraud.

The NCUA added the first three videos of the seven-part series to the channel on Friday, July 25.  According to a press release touting the release of the videos, these first three episodes focus on:

• An overview for the series;
• The importance of maintaining a policy on employee fraud; and
• Conducting surprise cash counts.

According to the agency, the remaining four episodes will be released over the coming weeks, and they will address:

• Separation of duties;
• Employee and family member accounts;
• File maintenance transactions; and
• Vault cash.

The video series is just the latest effort from the NCUA to attempt to minimize the risks to credit unions posed by fraud.  These efforts have led the agency to look at new ways in which fraud risk indicators can be identified, both by credit union leadership and NCUA examiners.  In commenting about the release of the video series, NCUA Chairman Debbie Matz highlighted the agency’s concern regarding the risks posed by fraud:

“The potential for employee fraud should always be a concern for credit union officials and volunteers.  Unfortunately, employee fraud led to $311.4 million in losses for the Share Insurance Fund between 2010 and 2013 at liquidated credit unions.  To protect the Share Insurance Fund from future losses, NCUA has developed this new video series to educate credit union managers and volunteers about detecting and reducing the potential for fraud and dishonesty among employees.  I encourage all credit unions to utilize this new resource.”

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Free Kick.  The “drama” surrounding the transfer window has finally worn off for me.  I can’t wait for meaningful games to be played again, but it just seems like time is moving at a glacial place right now.  Hopefully, with the calendar getting ready to flip to August, things will appear to move a little quicker and the couple of weeks that are left before the season kicks off in earnest will fly by.

While I wait for the season to kick-off, I am going to go try something new, and combine my two sporting passions: football and golf.  Yes, I am making it a point to finally go out and try the phenomenon that is sweeping the nation: FOOTGOLF!  I look forward to sharing my experience in a future blog post.

TILA-RESPA Integrated Mortgage Disclosure Rule: The Loan Estimate Disclosure – Good Faith Requirement and Tolerance Limitations

Written by JiJi Bahhur, Director of Regulatory Compliance

In the last TILA-RESPA blog posting, we covered the timing and delivery requirements for the Loan Estimate.  Today’s discussion topic is the good faith requirement and its applicability to the tolerance limitations set forth in the TILA-RESPA final rule.

Good Faith Requirement:

When completing the Loan Estimate, the creditor is required to act in good faith and exercise due diligence to obtain information necessary to complete the disclosure.  The TILA-RESPA final rule allows creditors to rely on the representations of other parties in obtaining the needed information. However, if the information is not reasonably available at the time the Loan Estimate is made, the creditor may use estimates and, where required (§ 1026.17(c) or § 1026.19), provide new disclosures at a later time. It should be noted that when estimates are used, it must be designated as such on the Loan Estimate.

Good faith, for purposes of the Loan Estimate, is determined by calculating the difference between the estimated charges in the original Loan Estimate and the actual charges paid by or imposed on the consumer in the Closing Disclosure.  Generally, the following is true regarding good faith determination:

• Regardless of whether the creditor later discovers a technical error, miscalculation or underestimation of a charge, the Loan Estimate is considered to be made not in good faith if the charge paid by or imposed on the consumer exceeds the amount originally disclosed on the Loan Estimate.
• Without regard to any tolerance limitations, a Loan Estimate is considered to be made in good faith if the creditor charges the consumer less than the amount disclosed on the Loan Estimate.

There are circumstances where a creditor is allowed to charge the consumer more than the amount disclosed on the Loan Estimate.  We will highlight two of those situations below since they relate to the tolerance limitations and save “changed circumstances” for a future post.

Tolerance Limitations:

In keeping with the good faith requirement, creditors must ensure they stay within the new tolerance levels prescribed by the TILA-RESPA final rule. The tolerance levels are broken into three categories (no tolerance limitation/variations permitted, 10 percent cumulative tolerance, and zero tolerance) and can be complex.

 No Tolerance Limitation (Variations Permitted)

Where the original estimate, or lack of an estimate for a particular service, was based on the best information reasonably available at the time the disclosure was provided, the creditor is permitted to charge consumers more than the amount disclosed on the Loan Estimate without any tolerance limitation for the following charges:

• Prepaid interest;
• Property insurance premiums;
• Amounts placed into an escrow, impound, reserve or similar account;
• If chosen by the member, fees paid to third-party service providers that are not included in the creditor’s written list of service providers; and
• If chosen by the member, fees paid to third-party service providers for services that were not required by the creditor.

10 Percent Cumulative Tolerance

For certain charges and fees, the amounts paid by or imposed on the consumer are grouped together and subject to a 10 percent cumulative tolerance. This means the creditor may charge the consumer more than the amount disclosed on the Loan Estimate for particular charges as long as the total sum of the charges does not exceed the sum of those same charges disclosed on the Loan Estimate by more than 10 percent. The charges subject to the 10 percent cumulative tolerance are:

• Recording fees; and
• If the creditor permitted the consumer to shop, fees paid to an unaffiliated third-party service provider on the creditor’s written list.

If a consumer chooses a provider that is not on the creditor’s written list for a service that would otherwise be included in the 10 percent cumulative tolerance category, the creditor will no longer be limited in the amount that may be charged for the service. Rather, the charge is removed from consideration under the 10 percent tolerance level and instead would fall under the no tolerance limitation. See, § 1026.19(e)(3)(ii).

For charges subject to the 10 percent cumulative tolerance threshold, to the extent the total sum of the charges added together exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10 percent, any difference must be refunded to the consumer.

Zero Tolerance

For all other charges, the TILA-RESPA rule provides that creditors are not permitted to charge consumers more than the amount disclosed on the Loan Estimate under any circumstances other than changed circumstances. The zero tolerance charges include:

• Fees paid to the creditor;
• Fees paid to a mortgage broker;
• Fees paid to an affiliate of the creditor or mortgage broker;
• Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third party service provider for a settlement service;
• Transfer taxes; and
• Lender credits.

For charges subject to the zero tolerance threshold, any amount charged beyond the amount disclosed on the Loan Estimate must be refunded to the consumer. See, § 1026.19(e)(3) and Comment 1026.19(e)(3).

If the amounts paid at closing by the consumer exceed the amounts disclosed on the Loan Estimate beyond the applicable tolerance threshold, the creditor must refund the excess to the consumer within 60 calendar days after consummation. See, § 1026.19(f)(2)(v).

 

CFPB Releases 600 Page HMDA Proposal; Chairman Matz Discusses Regulatory Relief at NAFCU’s Annual Conference

Written by Brandy Bruyere, Regulatory Compliance Counsel

I usually try to find happy news for Friday, but today the best I can do is a mix that ends on a positive note. Today we’ll highlight two items—yesterday’s CFPB HMDA proposal and potential regulatory relief from NCUA including a proposal for this month’s Board meeting on fixed assets.

CFPB Issues Proposed Changes to Home Mortgage Disclosure Act (HMDA) Rules

Yesterday, the CFPB announced a proposed rule that the Bureau claims would “simply the reporting process” under HMDA and Regulation C. Here are some highlights from the proposal:

• Adoption of a uniform loan-volume threshold of 25 loans—entities categorized as financial institutions under Regulation C would need to report HMDA data if they originated 25 qualifying closed-end loans in the last calendar year.
• Expansion of the types of transactions subject to Regulation C—financial institutions would have to report all closed-end loans, open-end lines of credit including HELOCs, and reverse mortgages. However, unsecured home improvement loans would no longer need to be reported.

The CFPB is also proposing to require reporting for several new data points as required by Dodd-Frank, as well as additional data that the CFPB “believes may be necessary to carry out the purposes of HMDA.” These data points can be grouped into four broad categories:

1. Information about applicants, borrowers, and the underwriting process, such as age, credit score, debt-to-income ratio, reasons for denial if the application was denied, the application channel, and automated underwriting system results.
2. Information about the property securing the loan, such as construction method, property value, lien priority, the number of individual dwelling units in the property, and additional information about manufactured and multifamily housing.
3. Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the type of loan.
4. Certain unique identifiers, such as a universal loan identifier, property address, loan originator identifier, and a legal entity identifier for the financial institution

Financial institutions with at least 75,000 reported transactions in the prior calendar will also be required to submit their data quarterly instead of annually. Reported transactions include covered loans, applications, and purchased covered loans.

Finally, on a positive note, the CFPB proposes to add an instructions section to Appendix A and the Staff Commentary to Regulation C in order to address questions and concerns that have been raised by commenters over the years. Again, this is a 600 page proposal so this blog is just a very broad overview. However, NAFCU’s Regulatory Affairs team will work on a Regulatory Alert for our members that provides further details.

Matz Addresses NAFCU’s Annual Conference.  Yesterday, NCUA Chairman Debbie Matz addressed NAFCU’s Annual Conference and as part of her comments provided some details relating to regulatory relief. While discussing recent proposals designed to provide such as last month’s appraisals and asset securitization rules, Matz said the Board plans additional actions to reduce burdens in the areas of caps on fixed asset purchases, the member business loan (MBL) rule, and the advertising rule. Here is a brief summary of NCUA’s plans for these rulemakings:

• Fixed assets—The Board is planning a proposal to “effectively eliminate” the 5% cap on fixed-asset purchases, allowing credit unions to “manage their own fixed-asset purchases without having to seek permission or waivers from NCUA.” This proposed change to Section 701.36 of NCUA’s rules is on the July NCUA Board Agenda.
• Member Business Loans—The Board will propose a rule in the future to provide “greater flexibility” for credit unions that offer MBLs;
• Advertising rules—NCUA plans to update its advertising rule to address modern technology like social media.

Summer Garden. We’ve had a good bit of rain lately, and when weeding my garden I found my first two zucchinis of the summer. I thought the first one was pretty large, and as you can see, so did Lemmy. Then I came across zucchini #2, which had to weigh at least eight pounds!

July 2014 NCUA Report; Understanding the Basics of an Information Security Policy; June NCUA Board Meeting Video

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

This week, NCUA released its July 2014 Report.  Featured articles include:

• Office of the Board Report: NCUA Board Proposes Allowing Credit Unions to Securitize Their Own Assets
• Chairman’s Corner: Honor the Past by Protecting the Future
• Board Perspectives: Passing the Torch; You are Now Entering “The Buffer Zone”
• Board Actions: Proposed Appraisal Rule and Final Voluntary Liquidation Rule Cut Red Tape
• Region III Report: Understanding the Basics of an Information Security Policy
• Office of Consumer Protection Report: NCUA Can Help Consumers Improve Their Personal Finance Knowledge
• Office of Public and Congressional Affairs Report: NCUA Unveils New Resources for Interest Rate Risk and Consumer Compliance
• Office of Examination and Insurance Report: Understanding the Civil Money Penalty Process for Late Filers
• Office of Examination and Insurance Report: Agencies Issue Guidance for Home Equity Lines of Credit

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Understanding the Basics of an Information Security Policy. One of the articles in this month’s NCUA Report that caught my attention discusses seven elements found in effective information security policies that NCUA states credit unions should follow when developing or updating their information security policies.  Here's an excerpt from the article on the seven elements:

“General Policy Objectives — This section addresses the scope of the policy and applicability across the credit union. This is perhaps the simplest section to develop in a credit union’s information security policy because the scope and applicability is already defined by federal regulation.

Risk-Management Criteria and Expectations — This section defines a credit union’s commitment to risk management and clarifies general directions and intentions. In this section, the board of directors should delineate what constitutes acceptable risk, and by what process or authority a credit union accepts the remaining unmitigated risk. This helps to prevent the unnecessary acceptance of institutional risk by those lacking clearly delegated authority. Because of the great latitude found in this section, it is often the most difficult to develop.

Governance Roles and Responsibilities — This is the most important section because it is the lifeblood of a credit union’s information security program. This section outlines the roles for the information security program’s development and maintenance. An effective policy document defines the roles for the board of directors, senior management, a steering committee, and other key individuals for the day-to-day management of the program.

Summary of Security Strategies and Control Mechanisms —This section provides a set of information security policies. It outlines at a high-level a credit union’s security strategies and selected controls to mitigate any foreseeable and identified risks in operations, along with the managerial responsibility of those controls. The development and selection of the various controls to use should occur after a risk assessment. Credit unions should also use various recognized information security control standards. This section should outline controls for the reasonably foreseeable risk scenarios in the future.

Testing and Reporting Requirements — This section should address the frequency and nature of testing required to determine the controls’ effectiveness, along with any reporting requirements. At a minimum, NCUA regulations expect a comprehensive annual report to the board of directors about the effectiveness of a credit union’s information security program.

Incident Response — A response policy is a key part of a credit union’s information security policy and program. It is a cornerstone of an incident response program, mandated appendix B of Part 748. The policy addresses a credit union’s commitment, strategy, roles and responsibilities in response to natural disasters or security breaches to ensure operations will be resumed as planned.

Consequences of Non-Adherence — Lastly, this section outlines the consequence of non-adherence to the information security policy. Management should transparently state the legal and administrative avenues available to them to ensure the policy is adhered to and enforced.

These seven components of the information security policy provide the strategic foundation for standards and procedures. Procedures should be implemented for every control of the policy and should address how the control is deployed and managed on a day-to-day basis, including who is responsible for the management and maintenance. Also, effectively segregating policy from procedures simplifies the ongoing maintenance of the information security policy documents, as a policy necessitates board of directors’ approval, while procedures are subject to managerial approval only.”

The article is available in its entirety here.

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June NCUA Board Meeting Video.  Lastly, the video recording of NCUA’s June open meeting, which we blogged about here and here, is now available. The June video, along with archived videos of past Board meetings, may be found on this page of NCUA’s website.

CFPB Proposes Allowing Public Complaints on Financial Products and Services; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

CFPB Proposes Allowing Public Complaints on Financial Products and Services.  On Wednesday, the CFPB issued a proposed policy statement that, if enacted, would bring substantive changes to the Bureau’s Consumer Complaint Database.  Currently, the Database has anonymous information about the complaint received, including the date of submission, the consumer’s zip code, the relevant company, the product type, the issue the consumer is complaining about, and the company’s response.  Wednesday’s proposal would allow the consumer’s narrative description of what happened to be included in the database, if the consumer chooses.

In a press release announcing the proposal, the CFPB states:

“In many ways, the narratives are the most insightful part of a complaint. They provide a first-hand account of the consumer’s experience and the problem they would like resolved. By giving consumers an option to publicly share their stories, the CFPB would greatly enhance the utility of the database, a platform designed to provide consumers with valuable information needed to make better financial choices for themselves and their families.”

According to the Bureau, adding the narratives to the Database will:

• Provide context to the complaint;
• Spotlight specific trends;
• Help consumers make informed decisions; and
• Spur competition amongst financial institutions based on consumer satisfaction.

The CFPB’s proposal will allow financial institutions to respond to the narrative and have the response published alongside the consumer’s narrative.  The narratives will follow the same publishing procedures that currently in place with the Bureau first confirming the commercial relationship between the consumer and company.  The narrative and the rest of the complaint information would be listed in the database only after the company responds to the complaint or after it has had the complaint for 15 days, whichever comes first.

According to CFPB Director Richard Cordray, “[t]he consumer experience shared in the narrative is the heart and soul of the complaint.  By publicly voicing their complaint, consumers can stand up for themselves and others who have experienced the same problem. There is power in their stories, and that power can be put in service to strengthen the foundation for consumers, responsible providers, and our economy as a whole.”

NAFCU has concerns with this proposal because it exposes financial institutions to undue reputational risks.  In a statement responding to the proposal, NAFCU Director of Regulatory Affairs Mike Coleman stated:

“Credit unions take great care to address their members’ complaints directly and foster ongoing relationships with their members.  NAFCU has serious concerns about the potential for undue reputation risks to financial institutions relative to unsubstantiated claims. NAFCU will closely examine the proposal and its impact on credit unions, however, at first blush the risks of unwarranted reputational harm to good actors far outweigh any benefits this proposal would create to assist the CFPB to resolve legitimate complaints.”

Credit unions interested in submitting comments regarding the proposal may submit their comments at http://www.regulations.gov.  The docket number is CFPB-2014-0016.

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Free Kick.  With an amazing World Cup behind us, it’s now time to turn our focus to the delightful world of club football.  Players are starting to rejoin their clubs after the World Cup and vacation, but as always, this time of the year is dominated by speculation regarding who is changing clubs.  It can be a bit overwhelming to keep track of the rumors that swirl around during the transfer window, so here is a recap of the big moves that have occurred thus far (through Friday night).

Player	New Club	Old Club
Mathieu Debuchy	Arsenal	Newcastle United
Alexis Sanchez	Arsenal	Barcelona
Ashley Cole	AS Roma	Chelsea
Mario Mandzukic	Atletico Madrid	Bayern Munich
Claudio Bravo	Barcelona	Real Sociedad
Ivan Rakitic	Barcelona	Sevilla FC
Luis Suarez	Barcelona	Liverpool
Robert Lewandowski	Bayern Munich	Borussia Dortmund
Demba Ba	Besiktas	Chelsea
Ciro Immobile	Borussia Dortmund	Torino
Diego Costa	Chelsea	Atletico Madrid
Cesc Fabregas	Chelsea	Barcelona
Yann M’Vila	Inter Milan	FK Rubin Kazan
Alvaro Morata	Juventus	Real Madrid
Adam Lallana	Liverpool	Southampton
Rickie Lambert	Liverpool	Southampton
Bacary Sagna	Manchester City	Arsenal
Luke Shaw	Manchester United	Southampton
Emmanuel Riviere	Newcastle United	AS Monaco
David Villa	New York City FC	Atletico Madrid
Kaka	Orlando City	AC Milan
David Luiz	Paris Sain-Germain	Chelsea
Toni Kroos	Real Madrid	Bayern Munich
Fabio Quagliarella	Torino	Juventus

TILA-RESPA Integrated Mortgage Disclosure Rule: The Loan Estimate Disclosure – Timing and Delivery

Written by JiJi Bahhur, Director of Regulatory Compliance

In the last TILA-RESPA blog posting, we covered the general requirements for the new Loan Estimate.  Today, I’d like to highlight the when and how the Loan Estimate should be delivered. 

General Timing Requirements:

For purposes of the Loan Estimate, there are two timeframes that the creditor should be aware of.  First, the Loan Estimate must be delivered or placed in the mail to the consumer no later than the third business day after the creditor receives the consumer’s application for a mortgage loan.

Since delivery of the Loan Estimate form is triggered by receipt of application, it is important to note the definition of application under the TILA-RESPA Integrated Mortgage Disclosures rule. The final rule defines an application to mean the submission of a consumer’s financial information for purposes of obtaining an extension of credit. Specifically, the revised definition removes the seventh “catch-all” element – “any other information deemed necessary by the loan originator” – from the current definition of application under Regulation X and consists of the following six pieces of information:

• The consumer’s name;
• The consumer’s income;
• The consumer’s social security number to obtain a credit report;
• The property address;
• An estimate of the value of the property; and
• The mortgage loan amount sought.

Second, the creditor must deliver or place the Loan Disclosure in the mail not later than the seventh business day before consummation of the transaction.

The term “business day” has two different meanings for purposes of the Loan Estimate. For purposes of providing the Loan Estimate within three business days from application, the definition of “business day” is “a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.” For many credit unions, this will not include Saturdays. When calculating whether the Loan Estimate is provided at least seven business days before consummation, the term “business day” means “all calendar days except Sundays and the legal public holidays.” Unlike the first definition of “business day,” the latter definition includes Saturday as a business day.

Delivery Methods and Receipt: 

The creditor is responsible for ensuring that the Loan Estimate is received by the consumer in accordance with the timing requirements discussed above. New sections 1026.19(e)(1)(iii)-(iv) provide that if the creditor delivers the Loan Estimate to the consumer in person, it is considered received by the consumer on the day that it is provided.  If the creditor uses another method of delivery other than in-person delivery, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail.

In instances where a mortgage broker relationship is utilized, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf, but it is the creditor’s responsibility to ensure that the content, delivery and timing requirements under the final rule are met.

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The next TILA-RESPA posting will discuss the good faith requirement and how it applies to the tolerance limitations prescribed by the TILA-RESPA rule.

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To all, I wish you a lovely weekend.  I intend to spend a ton of quality time with my buds this weekend since I take off for Annual Conference (AC) on Monday.  Stay cool, and if you're attending AC, come say hi!

 

Foreign Banks Pay Hefty Price for Violating U.S. Economic Sanctions; July BSA Blast and New BSA Quiz

Written by Shari R. Pogach, Regulatory Paralegal

Foreign banks are under serious scrutiny by federal and state authorities and regulators for dealing with countries blacklisted by the United States.  Almost $9 billion is what it’s costing BNP Paribas S.A. (BNP) for not obeying U.S. economic sanctions against Sudan, Iran and Cuba.  The $8.9 billion penalty was to settle U.S. Department of Justice charges that BNP willfully continued to do business with nations and entities on the U.S. sanctions list.  While a record fine, BNP is simply the latest among foreign banks that have collectively paid billions in settlements since 2009: 

01/09/09 - Lloyds TSB Bank Plc Agrees to Forfeit $350 Million in Connection with Violations of the International Emergency Economic Powers Act;

12/16/09 - Credit Suisse Agrees to Forfeit $536 Million in Connection with Violations of the International Emergency Economic Powers Act and New York State Law;

05/10/10 - Former ABN Amro Bank N.V. Agrees to Forfeit $500 Million in Connection with Conspiracy to Defraud the United States and with Violation of the Bank Secrecy Act;

08/18/10 - Barclays Bank PLC Agrees to Forfeit $298 Million in Connection with Violations of the International Emergency Economic Powers Act and the Trading with the Enemy Act;

06/12/12 - ING Bank N.V. Agrees to Forfeit $619 Million for Illegal Transactions with Cuban and Iranian Entities;

12/10/12 - Standard Chartered Bank Agrees to Forfeit $227 Million for Illegal Transactions with Iran, Sudan, Libya, and Burma; and

12/11/12 - HSBC Holdings Plc. And HSBC Bank USA N.A. Admit to Anti-money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement.  

According to news sources, U.S. authorities have also begun initial settlement talks with Germany’s Commerzbank and Deutsche Bank over sanctions violations.  There are reports of at least six banks in Germany, France, Italy or Japan that are under long-running investigations and could face fines or forfeitures for processing transactions with countries or entities the U.S. has designated.

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BSA Blast – NAFCU members can read all about BNP’s settlement and penalty in the July issue of NAFCU’s BSA Blast.  And, this issue also includes a new BSA quiz that’s oriented to Bank Secrecy Act (BSA) training for credit union board and volunteer members.   Let us know what you think. Happy BSA reading!

Canada’s Anti-SPAM Legislation Likely Applies To U.S. Credit Unions Sending Electronic Messages To Members in Canada

Written by Eliott C. Ponte, Law Clerk

At the beginning of the month, Canada’s anti-SPAM legislation (CASL) went into effect.  Canada’s legislation, which is most similar to the United States CAN-SPAM Act of 2003, places restrictions on companies sending commercial electronic messages (CEMs) to or from Canada.  As it applies to United States credit unions, the legislation and its accompanying regulations place restrictions on when companies (including non-Canadian companies not doing business in Canada) can send CEMs to people living in Canada.

CASL authorizes several Canadian regulatory agencies to enforce this law on companies who do not operate in Canada.  While Canada’s laws do not normally apply to companies who do not operate in Canada, Canada will likely work with the regulatory agencies in other countries, like the Federal Trade Commission (FTC) here in the United States, to enforce this law on companies who send CEMs to people in Canada.  To date, the FTC has not indicated it will work with Canada to enforce its new law, but Canada has worked with the FTC on several consumer protection matters involving Canadian companies not operating in the United States that were taking advantage of United States consumers.  Thus, it is likely that the FTC will return the favor, and credit unions with members living in Canada should be aware of this legislation.

How to Comply with CASL

To comply with the new law, credit unions must receive consent from their members living in Canada prior to sending a CEM.  In addition, the CEM must identify the credit union as the sender, offer an opt-out mechanism, and contain truthful and accurate information. 

The CASL defines CEMs as:

“an electronic message that, having regard to the content of the message, the hyperlinks in the message to content on a website or other database, or the contact information contained in the message, it would be reasonable to conclude has as its purpose, or one of its purposes, to encourage participation in a commercial activity, including an electronic message that

(a) offers to purchase, sell, barter or lease a product, goods, a service, land or an interest or right in land;

(b) offers to provide a business, investment or gaming opportunity;

(c) advertises or promotes anything referred to in paragraph (a) or (b); or

(d) promotes a person, including the public image of a person, as being a person who does anything referred to in any of paragraphs (a) to (c), or who intends to do so.”

CASL §1(1).  Thus, CEMs apply to various forms of electronic communications, including emails, text messages, and social media messages, and various types of communications, including images, text, and sounds.   

Consent to receiving CEMs can be either express or implied.  Generally, express consent occurs when a member gives an affirmative indication that they wish to opt-in to receiving CEMs, whereas implied consent can be given when the member engages the credit union on a particular subject or has been a member of the credit union before July 1, 2014 (more on this last one below).  The specific differences between express and implied consent are clearly stated on Canada’s website.  Consent may be received in writing or orally from the member, and the member’s express consent to opt-in to receiving CEMs must be separate from other types of consent.

In each CEM, the credit union must identify itself and list its contact information, which must include its mailing address.  In addition, the CEM must provide an unsubscribe mechanism that remains functional for at least 60 days.  Canada has issued guidance, with examples, on the unsubscribe mechanism on its website, and this requirement is very similar to the CAN SPAM Act requirements.  Last, a credit union must have truth in its advertising (ie. no false or misleading information). 

Safe Harbor for U.S. Credit Unions 

Credit unions will not violate CASL if the credit union reasonably believes that the member recipient would access the email outside of Canada, and the credit union complies with the CAN SPAM Act (here is a link to the CAN SPAM Act compliance guide). See CASL Regulations §3(f). Thus, a credit union who has no knowledge that a member lives in Canada (the member showed a US driver’s license, has a US mailing address on file, a .com email address, etc.) and complies with the CAN SPAM Act, will likely fall into the safe harbor exception and thereby not violate the CASL.

Grandfather Clause (Implied Consent)

Members of the credit union who joined prior to July 1, 2014 are presumed to have given their consent to receiving CEMs.  CASL §10.  This provision allows credit unions with members living in Canada to continue sending CEMs to preexisting members without trying to get their express consent, thus making compliance a lot easier.  Moreover, the legislation contains no sunset provision, so this implied consent will be valid until the member opts-out. 

Other exceptions and resources

The legislation and regulations contain additional exceptions that are not listed on this blog post.  Credit unions should check the legislation and regulations before sending messages to members who live in Canada.   

 

Credit Card Advertising: Dotting the I’s & Crossing the T’s

Credit cards increase member loyalty and revenue.  Yet regulations governing credit card advertising are difficult and confusing.  Gain a greater understanding of the regulatory requirements with this informative webcast.  You will learn your way around alternative disclosures and the intricate requirements involved when advertising introductory and promotional rates.  We will also provide you with balance transfer promotion best practices. 

Register by July 30 to save $100.

CFPB Doubles Up on Guidance; Hot Dog!

Written by Brandy Bruyere, Regulatory Compliance Counsel

The CFPB released two items of interest on Tuesday, so today’s blog is a bit long for a Friday but we will kill two birds with one stone and address both. The first is an interpretative rule regarding the applicability of the Ability-to-Repay rule to certain mortgage assumptions. The second is a memorandum regarding the treatment of same-sex marriages for the purposes of laws under the CFPB’s jurisdiction.

Assumptions and the Ability-to-Repay Rule

On Tuesday, the CFPB announced it was issuing an interpretative rule to address how the Ability-to-Repay (ATR) applies when adding a successor to an existing mortgage. These situations arise when a member passes away, after a divorce, or another ownership transfer such as from parents to children. Here are key excerpts from the rule with hyperlinks added for reference:

“Under § 1026.43(c), a creditor must make a reasonable and good faith determination that the consumer has the ability to repay at or before consummation of the covered transaction.

…

§ 1026.20(b) [defining “assumption”] applies to changes in the loan’s obligors. Under § 1026.20(b) an assumption occurs when—and only when—the creditor “expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential mortgage transaction.”

…

A residential mortgage transaction does not arise where a successor takes on the debt obligation that is secured by property the successor previously acquired. In these situations, § 1026.20(b) does not apply when the successor agrees to be added as an obligor on an existing mortgage loan. Although these transactions are commonly referred to as assumptions, they are not assumptions under § 1026.20(b) because the transaction is not a residential mortgage transaction as to the successor. Accordingly, the ATR Rule in § 1026.43 does not apply to a transaction in which a successor seeks to take on the debt secured by property that the successor previously acquired.

In contrast to the successor situation described above, if a consumer without an existing interest takes on the obligation of the existing borrower in order to finance the acquisition of the consumer’s principal dwelling, the transaction is a residential mortgage transaction. In such a case, where the creditor expressly agrees in writing to the new primary obligor, an assumption has occurred under § 1026.20(b), and it is subject to the ability-to-repay requirements in § 1026.43, in addition to other requirements of Regulation Z.” (Emphasis added.)

In other words, the ATR rule does not apply when someone acquires interest in the property before taking on the mortgage obligation. However, the ATR rule will apply when a person takes over a mortgage obligation in order to acquire an interest in a property that will also be that person’s principal dwelling. Where this can become complicated is that state law will determine the point in time that the member acquired his or her interest in the property.

Memorandum on the Equal Treatment of Same-Sex Married Couples

On June 26, 2013 in United States v. Windsor the Supreme Court struck down a section of the Defense of Marriage Act that limited the definition of marriage under federal law to legal unions between one man and one woman. On July 8, 2014 CFPB announced it issued a memorandum on same-sex marriages stating “the Bureau will regard a person who is married under the laws of any jurisdiction to be married nationwide…regardless of the person’s place of residency.” For the purposes of provisions such as ECOA/Regulation B, TILA/Regulation Z, and RESPA/Regulation X, terms such as “spouse,” “marriage,” “husband,” “wife,” and similar terms will be interpreted to include same-sex marriages and spouses. For example:

“Regulation B defines ‘marital status’ as ‘the state of being unmarried, married, or separated, as defined by applicable state law’ and states that ‘unmarried includes persons who are single, divorced, or widowed’ but does not state that those examples are exhaustive…While referring to ‘applicable state law,’ this definition does not specify which state’s laws is applicable…a person has the marital status of ‘married’ by virtue of being in a marriage under the laws of any jurisdiction while a person has the marital status of ‘unmarried’ by virtue of being in a domestic partnership, civil union, or other relationship not denominated by the law as a marriage.”

Essentially, same-sex couples who married in states where such marriages are legal, but live in or moved to a state that refuses to recognize these marriages are considered “married” for the purposes of the statutes and regulations administered and enforced by the CFPB.

Regulatory Compliance Seminar--Summer is going by fast, and October will be here before we know it! Be sure to secure your seat now for our 2014 Regulatory Compliance Seminar October 14-17 in Baltimore, MD. Enroll by 8/22 to save $100.

Hot Dog!

It’s hard to exercise in the summer when you have to wear your coat everywhere you go! Lemmy tends to flop onto the floor for a while after his walks these days, it’s rather pathetic but I feel for him. 

Pew Study Continues the Drum Beat for Additional Regulation of Overdraft Programs

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

The Pew Charitable Trusts (Pew) recently released the results of a study on consumers’ experiences with debit card and ATM overdrafts, as well as consumer knowledge, understanding, and attitudes about overdraft fees. This latest study was completed in December 2013 and is a follow-up to a similar study by Pew in 2012. According to Pew, both studies have similar findings – consumers are still confused and unhappy about overdraft practices and fees.

According to the report, “the key 2013 survey findings are:

• Younger, lower-income, and nonwhite account holders, as well as those who did not have a credit card, are among those who were more likely to pay an overdraft penalty.
• More than half of those who incurred a debit card overdraft penalty fee do not believe that they opted in to overdraft coverage.
• 10 percent of Americans paid at least one overdraft penalty fee in 2013, and another 5 percent paid an overdraft transfer fee.
• On average, people who paid an overdraft penalty also incurred additional fees, for a total of $69 the last time their account was overdrawn.
• 13 percent of people who paid an overdraft penalty say they no longer have a checking account; 19 percent report responding to overdraft fees by discontinuing overdraft coverage; and 28 percent report closing a checking account in response to overdraft fees.
• More than three-quarters of the people who paid an overdraft penalty fee express concern about specific overdraft policies, including the high cost of a penalty and the practices of charging “extended” overdraft fees—additional charges for failing to repay a negative balance on time—and of reordering withdrawals from highest to lowest dollar amount, which have the effect of increasing overdraft fees.
• Large majorities of those who paid an overdraft penalty prefer that a transaction be declined rather than overdraw an account, and they support greater regulation of overdraft products.
• Four groups of consumers surveyed—“overdrafters,” “transferers,” “decliners,” and “never-negatives” (see “Survey Details” sidebar)—express similar concerns about overdraft policies, in spite of their differing experiences."

Based on these findings, Pew makes a few recommendations, urging the CFPB to require that all financial institutions: (1) provide account holders with clear, comprehensive, and uniform pricing information for all available overdraft options; (2) make overdraft penalty fees reasonable and proportional to the bank’s costs in covering the overdraft; and (3) stop the practice of reordering transactions to maximize fees, and post deposits and withdrawals in a fully disclosed, objective, and neutral manner.

So, where does that leave us vis-à-vis the CFPB? It’s no secret that overdraft practices have been on the CFPB’s radar for some time now. At present, overdraft regulation is listed in the “prerule stage” on the CFPB’s Spring 2014 regulatory agenda, but back in June of 2013, the CFPB issued its own Study of Overdraft Programs which we blogged about here and here. Some of the areas highlighted in the CFPB’s study as potential areas of concern include opt-in processes, fee structures, involuntary account closures, and transaction posting order. The CFPB indicates that it is considering whether additional regulations are needed, which could include additional disclosure requirements or the regulation of specific acts or practices. Stay tuned on this one, because despite the amendment to Regulation E several years ago requiring affirmative consumer opt-in before charging a fee for one-time debit and ATM overdrafts (implemented in section 1005.17(b) of Regulation E), this is an issue that doesn’t look to be going away anytime soon.

 

Interagency HELOC Guidance Released; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Interagency HELOC Guidance Released.  On July 1, NCUA (jointly with OCC, the Federal Reserve, FDIC, and the Conference of State Bank Supervisors) released guidance regarding home equity lines of credit (HELOCs) nearing their “end-of-draw” periods.  The guidance is intended to help financial institutions fully understand the potential risks associated with HELOCs that are approaching the transition from their draw periods to full repayment.  The guidance states:

“As HELOCs transition from their draw periods to full repayment, many borrowers will have the financial capacity to pay as agreed.  Some borrowers, however, may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values.

"When borrowers experience financial difficulties, financial institutions and borrowers generally find it beneficial to work together to avoid unnecessary defaults.  As HELOC draw periods approach expiration, lenders should communicate clearly and effectively with borrowers and prudently manage exposures in a disciplined manner.”

The guidance states that “[a]s part of the supervisory process, examiners will review financial institutions’ end-of-draw risk management programs for provisions that address five risk management principles.”  These principles are:

• Prudent underwriting for renewals, extensions, and rewrites;
• Compliance with pertinent existing guidance;
• Use of well-structured and sustainable modification terms;
• Appropriate accounting, reporting, and disclosure of troubled debt restructurings; and
• Appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses (ALLL) estimation processes.

The guidance goes on to provide guidelines for best practices with regards to “policies and procedures for managing HELOCs nearing their end-of-draw periods that are commensurate with the size and complexity of the portfolio.”  These risk management best practices include:

• Developing a clear picture of scheduled end-of-draw period exposures;
• Ensuring a full understanding of end-of-draw contract provisions;
• Evaluating near-term risks;
• Contacting borrowers through outreach programs;
• Ensuring that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations;
• Establishing clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives (renewals, extensions, and modifications);
• Providing practical information to higher-risk borrowers;
• Establishing end-of-draw reporting that tracks actions taken and subsequent performance;
• Documenting the link between ALLL methodologies and end-of-draw performance; and
• Ensuring that control systems provide adequate scope and coverage of the full end-of-draw period exposure.

As is stated in several places in the document, the guidance should be applied in a manner commensurate with the size and risk characteristics of a financial institution’s HELOC portfolio.  Therefore, NCUA, through their examination process, may look for how credit unions have applied some or all portions of the guidance.

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Free Kick.  And then there were four.  After a riveting 60 matches, we are down to the final week of the World Cup.  Left standing are Brasil, Germany, Argentina, and the Netherlands.  All four have had their moments of brilliance, but they have also had moments of true concern in this tournament.  There are no doubt several plot twists left over the final four games of this tournament, but what I do know right now is that the eventual champion will have earned it.  This has been a tournament full of parity, surprises, and great play.  But it also has been a tournament that has seen controversy and injury strike.  In the end, though, this tournament has been a celebration of the beautiful game, and it will be sad to say goodbye to Brasil 2014 this Sunday afternoon.

As a very proud Colombian-American, this tournament has also filled me with much joy and pride.  Both the U.S. and Colombian teams acquitted themselves superbly throughout the course of this tournament.  It was sad to see them both bid farewell to this celebration of football this past week, but I will be comforted with amazing memories, especially the stalwart goalkeeping displayed by Tim Howard and the simply sublime playmaking abilities of James Rodriguez.  Both teams have bright futures ahead, and I look forward to seeing them, hopefully, take the next step over the next four years and in Russia in 2018!

Now, to my Starting XI (in a 4-4-2 formation) of the tournament:

Keeper – Tim Howard (USA);

Backs – Daley Blind (NED), Thiago Silva (BRA), David Luiz (BRA), and Serge Aurier (CIV);

Midfielders – Philipp Lahm (GER), James Rodriguez (COL), Lionel Messi (ARG), and Xherdan Shaqiri (SUI); and

Forwards – Arjen Robben (NED) and Thomas Muller (GER).

TILA-RESPA Integrated Mortgage Disclosures Rule: The Loan Estimate Disclosure – General Requirements; Programming Note; What Are You Reading?

Written by JiJi Bahhur, Director of Regulatory Compliance

As part of the TILA-RESPA blog series, I’d like to take a look at the general requirements applicable to the Loan Estimate Disclosure today. 

The Loan Estimate form, a three-page document, integrates and replaces the existing RESPA Good Faith Estimate (GFE) and the initial Truth in Lending (TIL) disclosure. The general requirements, located in new sections 1026.19(e) and 1026.37, are summarized in the CFPB’s TILA-RESPA Small Entity Guide as follows:

• “Loan Estimate must contain a good faith estimate of credit costs and transaction terms. If any information necessary for an accurate disclosure is unknown, the creditor must make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer, and use due diligence in obtaining the information. (§ 1026.19(e)(1)(i); Comment 19(e)(1)(i)-1)
• Loan Estimate must be in writing and contain the information prescribed in § 1026.37. The creditor must disclose only the specific information set forth in § 1026.37(a) through (n), as shown in the Bureau’s form in appendix H-24. (§ 1026.37(o))
• Delivery must satisfy the timing and method of delivery requirements. The creditor is responsible for delivering the Loan Estimate or placing it in the mail no later than the third business day after receiving the application. (§ 1026.19(e)(1)(iii))
• Creditors may only use revised or corrected Loan Estimates when specific requirements are met. Creditors generally may not issue revisions to Loan Estimates because they later discover technical errors, miscalculations, or underestimations of charges. Creditors are permitted to issue revised Loan Estimates only in certain situations such as when changed circumstances result in increased charges. (§ 1026.19(e)3)(iv))
• In certain situations, mortgage brokers may provide a Loan Estimate. As discussed in more detail in section 6.2 below, if a mortgage broker receives a consumer’s application, either the creditor or the      mortgage broker may provide the Loan Estimate. (§ 1026.19(e)(1)(ii))”

The new Appendix H to Part 1026 contains model forms, including multiple variations of each page of the Loan Estimate. The standard form, H-24, must be utilized for all loans subject to the TILA-RESPA rule that are federally related mortgage loans.  For loans that are not federally related mortgage loans but that are subject to the TILA-RESPA rule, creditors are not strictly required to use the H-24 form; however, the disclosure used by the creditor must contain the exact same information and be made with headings, content and format substantially similar to that form.

For a page-by-page overview of the Loan Estimate, the CFPB has provided a couple of resources that may be beneficial to a credit union. First, the CFPB’s TILA-RESPA Small Entity Guide provides page-by-page visuals of the form with general information describing what creditors are required to disclose. For further guidance, the CFPB has provided the TILA-RESPA Guide to Forms, which provides detailed, illustrated instruction on how to complete the individual fields and calculations for the Loan Estimate.

It should be noted that NAFCU’s June Compliance Monitor included an article entitled A Deep Dive into the Loan Estimate Disclosure: Requirements, Timing and Tolerances.  For fuller detail on the Loan Estimate, including information on delivery/timing and tolerance restrictions, take a look at that article (NAFCU log-in required).   

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Programming Note.  NAFCU's office will close at noon on Thursday and will also be closed on Friday for the long holiday weekend.  We will be back to blogging on Monday.  Have a great long weekend!

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What Are You Reading?  While some of you are nose deep into TILA-RESPA, I often find myself taking a break from the regulatory readings for something a little lighter.  Kyse and Ava have taken a great liking to books lately.  I like to think they actually enjoy when I read to them, but I’ve come to the realization they actually like carrying the books around more than anything.  Here they are, book in hand: