NAFCU Compliance Blog

CFPB's Latest Monthly Complaint Report Demonstrates CFPB's Continued (and Growing) Focus on Debt Collection

Written by Shereefat Balogun, Regulatory Compliance Counsel

Yesterday, the CFPB released its latest Monthly Complaint Report, which provides a high-level snapshot of trends in consumer complaints. It is important to keep in mind that credit unions under $10 billion are not included in the Consumer Complaint Database, which forms the basis of the monthly reports. Notwithstanding, the reports can be a useful tool, as they can help credit unions evaluate which products and services are more problematic and thus, should be addressed in order to avoid or mitigate regulatory risks. Moreover, in light of the increased scrutiny of debt collection practices, credit unions are generally advised to monitor the various regulatory bulletins, reports and enforcement actions in this area in order to properly assess whether they are in compliance with FDCPA and Dodd-Frank.

As of March 1, 2016, the CFPB has handled about 834,000 consumer complaints; approximately 219, 200 of those complaints were related to debt collection. Some of the findings in the snapshot include:

• Debt collection represented 26% of total cumulative complaints, beating mortgage as the most-complained about product;

• The biggest debt collection complaint concerned attempts to collect on a debt that is not owed. This complaint accounted for 38% of debt collection complaints received.

• The second biggest complaint touched on communication tactics used by debt collectors. Specifically, consumers complained about frequent or repeated calls from debt collectors, reporting that they receive multiple calls weekly or daily. Additionally, consumers complained about receiving debt collection calls at work. Some consumers reported that their debt was disclosed to a supervisor or other third-party; while others reported that collectors made in person visits to their workplace. Also, consumers reported that requests to cease communications were not honored. This category of complaints represented 19% of debt collection complaints submitted.

• Consumers complained that they were not given enough information to verify whether or not they owed the debt in question.

For a few years now, debt collection has been the source of most complaints submitted to the bureau, and this report highlights that. It is clear that debt collection continues to be one of CFPB’s top priorities, and it does not appear that efforts in this area will slow down. Indeed, last week, the bureau issued its 2016 Fair Debt Collection Practices Act Report, which in addition to citing the general complaints reported in the Monthly Complaint Report, also: (i) summarizes the CFPB’s supervisory activities in the debt collection market; (ii) describes the bureau’s enforcement actions; and (iii) discusses developments in the CFPB’s rulemaking initiatives. In the report’s section on supervisory activities, the CFPB describes the following FDCPA violations found by its examiners:

• Failing to state in subsequent phone calls that the call was from a debt collector. The FDCPA requires debt collectors to state in subsequent communications that the communication is from a debt collector. (15 U.S.C. §1692e(11))
• Failing to implement consumer requests regarding communications, such as honoring a request to not be contacted at work. Generally, the FDCPA sets limits on a debt collector’s ability to communicate with members. For example, a debt collector, without prior consent of the consumer, is prohibited from communicating with a consumer in an attempt to collect a debt, at the consumer’s place of employment if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication. (15 U.S.C. §1692c(a)(2)). Also under the FDCPA, when consumers notify a debt collector that they wish the debt collector to cease communication with them, the debt collector must generally honor that request.  (15 U.S.C. §1692c(c)).
• Use of false, deceptive or misleading representations regarding credit reporting. The FDCPA prohibits a debt collector from using any false, deceptive, or misleading representation in connection with the collection of any debt. For example, a debt collector may not make false statements about the amount of any debt; or make a representation that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure or garnishment of any property or wages of unless such action is lawful and the debt collector or creditor intends to take such action. (15 U.S.C. §1692e).

The report also describes fifteen debt collection enforcement actions filed by the CFPB in 2015. With respect to rulemaking, Director Cordray stated that the bureau “continues its effort to develop the first comprehensive federal regulations covering debt collection.  We are considering provisions to ensure that debt collectors have sufficient information to collect the debt, prevent unfair, deceptive and abusive acts and practices, inform consumers of their rights, and provide interpretation of some sections of the FDCPA.”  While Director Cordray did not offer a specific timeframe for rulemaking, he did indicate that the CFPB “is preparing to convene one or more Small Business Regulatory Enforcement Fairness Act panels before issuing a notice of proposed rulemaking.”

In short, these recent developments demonstrate that debt collection is still at the top of the CFPB's list. Accordingly, credit unions, particularly those with more assets of $10 billion or more, need to pay attention to its debt collection practices.

The CFPB’s Monthly Complaint Report can be found here.

You can view the CFPB’s Consumer Complaint Database here.

Two Utes Walk Into a Credit Union to Open Accounts…

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Laywers love To Kill a Mockingbird. I need both hands to count the number of lawyers I know who have dogs or children named Atticus. Personally, I have always advocated for My Cousin Vinny as the better movie about trial work. So when a wave of questions about ute accounts youth accounts came in to the Regulatory Compliance team  recently, I could not resist.

The Federal Credit Union Act expressly provides that a federal credit union (FCU) may issue shares in a minor's name, subject to conditions prescribed by the bylaws. See, 12 U.S.C. § 1765. NCUA’s Federal Credit Union Standard Bylaws permit minors to own shares, but points to state law with regards to their rights to transact business with the federal credit union:

“Article XV. Minors

Section 1. Minors permitted to own shares. Shares may be issued in the name of a minor. State law governs the rights of minors to transact business with this credit union.”

See, 12 C.F.R. Part 701, Appendix A, Article XV, Section 1. The standard bylaws direct an FCU to the state law in their jurisdiction regarding the rights of a minor because whether or not a minor has legal ability to enter into a binding agreement, i.e. the legal capacity to contract, is determined by law in each state. If an FCU were to enter into a contract, for example - an account agreement, with someone who did not have capacity to do so at the time the agreement was made, the agreement could become void, possibly even years later. For this reason, most credit unions require a parent or adult to also be on the account, to ensure that an enforceable agreement is in place. An FCU considering youth accounts or writing a policy regarding youth accounts should speak with local counsel who can advise it on the law regarding minority and capacity to contract in the credit union’s jurisdiction.

NAFCU members have also asked about performing Customer Identification Program (CIP) procedures on youth accounts. When a parent opens the account for the minor because the minor does not have the legal capacity to make an agreement under state law, the customer for an account is usually the parent. Below is from the CIP Overview section of the FFIEC’s Bank Secrecy Act/Anti-Money Laundering Examination Manual:

“The CIP rule applies to a ‘customer.’ A customer is a ‘person’ (an individual, a corporation, partnership, a trust, an estate, or any other entity recognized as a legal person) who opens a new account, an individual who opens a new account for another individual who lacks legal capacity, and an individual who opens a new account for an entity that is not a legal person (e.g., a civic club).”

(Emphasis added.) Even if not needed for CIP reasons, many credit unions request the minor’s SSN and/or birth certificate to document the account and to ensure the minor is actually a minor.

 If a state’s laws and the credit union’s policies permit the minor to open the account on his or her own behalf, then the minor is the customer. In this case, the FCU should perform CIP regarding the minor as it would on any other customer.

 One final consideration with regard to youth accounts is the Children’s Online Privacy Protection Act (COPPA). COPPA imposes certain requirements on operators of websites or online services directed to children. Credit unions are subject to COPPA if they operate a website or online service directed to children, or have actual knowledge that they are collecting or maintaining personal information from a child online. COPPA could apply to a credit union’s internet-based services, such as online banking. A credit union could be unintentionally accessing a minor’s personal information through cookies or similar devices which may collect nonpublic personal information. Making COPPA determinations generally requires an analysis of the specific facts and circumstances surrounding a credit union’s online activities against the requirements of COPPA. Thus, a credit union may want to work with local counsel to see if COPPA applies. The FTC’s website has an excellent overview of COPPA.

Vinny Gambini may have been great at cross-examination, but he was terrible at managing his reputation. Don’t make the same mistake! Check out NAFCU’s new webcast:

How to Manage Reputation Risk: A Deep Dive into Murky Waters

Live Webcast: Wednesday, March 30 | 2:00 p.m. – 3:30 p.m. EST

Part of the Risk Webcast Series

Enterprise Risk Management (ERM) is becoming a more prominent management strategy in the credit union industry. This webcast focuses on the importance of reputation management and NCUA’s requirements and expectations. You’ll work through real examples of risk scenarios that could significantly impact your reputation, such as data breaches and social media attacks. Learn how to properly implement a reputation risk plan and how to defend your credit union.

Agencies Issue Guidance on Applying Customer Identification Program Requirements to Holders of Prepaid Cards

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

On March 21, 2016, the federal banking agencies, FinCEN, and NCUA issued interagency guidance on applying customer identification program (CIP) requirements to certain prepaid cards issued by banks, savings associations, or credit unions. In general, the guidance states that financial institutions should apply CIP to general purpose prepaid cards that provide a cardholder with the ability to reload funds or access to credit or overdraft features.

The agencies believe that the issuance of these types of prepaid cards establishes a formal banking relationship that is equivalent to opening an account for purposes of the CIP rule. For prepaid cards that require the purchaser to contact the issuing bank or credit union in order to active these types of features, the agencies “believe that an account is not established until a reload, credit, or overdraft feature is activated by cardholder registration.”

For purposes of complying with the CIP rule, the guidance states that banks and credit unions should treat the cardholder as the bank or credit union’s customer even if the cardholder is not the named account holder. This is typically the case when the prepaid program is run by a third-party intermediary who uses a pooled account to fund the prepaid cards. Therefore, the fact that the funds are held in a pooled account “should not affect the status of the cardholder as the bank customer, assuming the cardholder has established an account with the bank [or credit union] by activating the reloadable functionalities…” of the card.

The guidance also discusses how the CIP rule applies to specific prepaid card programs such as payroll, government benefit cards, and health benefit cards. For payroll cards, the guidance states that the bank or credit union should treat the employer as its customer and does not need to apply its CIP to each employee unless the card allows the employee to access credit through the card or reload the payroll card from sources other than the employer. In these cases, the bank or credit union would be required to treat the employee as its customer and apply its CIP to the employee.

For government benefit cards, the guidance reminds banks and credit unions that government agencies are not typically considered “customers” for CIP purposes and therefore the institution is not normally required to apply its CIP to government benefit cards. That being said, if the card program allows the cardholder-beneficiary to load non-government funds onto the card or provides access to credit, then a customer relationship is established and the institution must perform its CIP on the cardholder-beneficiary.

For health benefit cards, the guidance discusses CIP requirements for health savings accounts, flexible spending arrangements, and health reimbursement arrangements. Since employees typically establish health savings accounts, the guidance states that the bank or credit union should treat the employee establishing the account as the institution’s customer for CIP purposes. On the other hand, for flexible spending arrangements and health reimbursement arrangements, the guidance states that banks or credit unions should treat employer as the institution’s customer since no person other than the employer establishes these types of accounts.

Finally, the guidance notes that for banks or credit unions that work with third-party program managers that design, manage, and operate prepaid card programs, the institutions should have “well-constructed, enforceable contracts” with third-party program managers that clearly outline CIP obligations and ensure the bank or credit union has access to all CIP information collected by the third-party program manager.

Ultimately, it is unclear whether this guidance will be particularly useful to credit unions since credit unions may not typically provide services to nonmembers. For credit unions operating prepaid programs, these types of services are usually offered to members whose identities have already been verified at the time the member opened his or her initial share account. That being said, the guidance may be useful to credit unions that offer payroll cards to employees of their business members or for credit unions that may want to administer government benefit programs for state or local governments.

***

Programming Note: This is just a reminder that NAFCU will be closing at 12:00pm today in celebration of the holiday weekend. We wish a happy holiday to those of you and your families who may celebrate the holiday. Personally, I’m looking forward to the discounted candy sales on Monday.

QM Balloon Loans and Rural or Underserved Areas; Free Webcast!; Compliance School

Written by Eliott C. Ponte, Regulatory Compliance Counsel

QM Balloon Loans and Rural or Underserved Areas

Yesterday, the CFPB issued an interim final rule that expands certain special provisions for small creditors that operate in rural or underserved areas.  The CFPB issued these changes to implement the Helping Expand Lending Practices in Rural Communities Act of 2015 (HELP Rural Communities Act of 2015), which Congress enacted on December 4, 2015.  The amendments affect Regulation Z in two ways. 

First, the amendment changes the definition of “rural.”  Regular blog readers may recall that we discussed a previous change to the definition of small creditor, including what is meant by “rural” area, last year.  The interim final rule establishes a new temporary application process — or third method — to have an area designated by the CFPB as a rural area for purposes of Regulation Z.  This temporary application process will expire on December 4, 2017.  Any area classified under this method will no longer be effective after December 4^th..

Second, the amendment changes the eligibility of certain small creditors that operate in a rural or underserved areas for special provision that permit the (i) origination of balloon-payment qualified mortgages, (ii) balloon-payment high cost mortgages, and (iii) for an exemption requirement to establish a higher-priced mortgage.  Prior to the HELP Rural Communities Act of 2015, the TILA escrow rule offered relief for small creditors operating predominantly in rural or underserved markets.  Predominantly was defined as a credit union, in the preceding year, that originated more than 50% of its first lien mortgages in counties that are determined to be “rural” or “underserved.”  The interim final rule removes the word predominantly from the definition of small creditor.  Thus, as of March 31, 2016, a credit union in the preceding year that originated at least one first lien mortgage in counties that are determined to be “rural” or “underserved” (instead of over 50%) is eligible for the “small creditor” exemption.  Note that this change does not affect small creditor qualified mortgages, as this type of qualified mortgage does not require a loan be made in a rural or underserved market.  See 12 C.F.R. § 1026.43(e)(5)(i)(D).

So why is this important?  Right now, all credit unions that meet the current asset and loan origination threshold requirements (assets below $2.060 billion, non-portfolio mortgage originations below 2,000, both as combined with certain affiliates), as detailed in section 1026.35(b)(2)(vi)(B) and (C), may make loans that are qualified mortgages with a balloon payment feature, as detailed in section 1026.43(f). After April 1, 2016, only the “small creditor” credit unions that also meet the rural standard set forth in section 1026.35(b)(2)(vi)(A) will continue to be able to make balloon payment qualified mortgages.  By implementing this statutory change, more credit unions may qualify for the flexibility of the permanent balloon payment QM by offering at least one first lien mortgage in a rural or underserved area and continuing to meet the rule’s asset and origination thresholds. For a good discussion on these different kinds of QM loans, check out this article from the Minneapolis Federal Reserve.

Update: Shortly after this blog posted, the CFPB released an executive summary on the interim final rule. Compliance officers briefing executives on the interim final rule may find this resource helpful. 

***

Free Webcast!  How to Create a Culture that Creates Engagement

Live Webcast: Friday, April 8 | 2:00 p.m. – 3:30 p.m. EST

Did you know that 68% of employees report being disengaged in their work?  This free webcast will discuss leadership behaviors and cultural imperatives that create engagement and grow a mission-focused, engaged organization where employees are motivated to provide exceptional member service.  The webcast is based on a top-rated session at NAFCU’s recent Strategic Growth conference, and will feature an introduction by NAFCU’s President and CEO, Dan Berger, and will be hosted by Mike Neill of Michael Neill and Associates.

***

Compliance School 2016!

If you attended the NAFCU Regulatory Compliance School last week, it was a pleasure seeing you!  I thoroughly enjoyed getting to know everyone; please keep in touch.  If you are one of our blog readers who did not attend this year’s compliance school, look at all the fun you missed:

 

 

 

 

If you have pictures with the compliance team that are not featured in this blog, please send them to me:  [email protected]. 

Takeaways from Regulatory Compliance School; CFPB’s Cordray Testifies and the Bureau Announces New TRID Webcast

Written by Brandy Bruyere, Director of Regulatory Compliance

Last week, NAFCU’s regulatory compliance team spent the week on site at our 2016 Regulatory Compliance School, an intense week of education and training on a variety of topics. For those who attended this year, I want to thank you again for coming and applaud all of our attendees for the hard work they put into this challenging, long, but rewarding week. I also extend my congratulations to all those who earned their NAFCU Certified Compliance Officer (NCCO) designation at the conference, or who will earn their NCCO in the near future by completing testing back at their credit union.

Here are a few takeaways from School this year:

• Compliance continues to be a challenging role as credit unions face regulatory burden as new rules continue to be proposed and implemented. Networking with colleagues can be helpful for building additional tools and resources for tackling new issues as they arise.
• Upcoming compliance implementation deadlines promise to pose some difficulties, including the Military Lending Act’s impending October 3, 2016 deadline (October 3, 2017 for credit cards), the overhaul of HMDA rules, and upcoming regulations on prepaid cards and mortgage servicing.
• Lending rules in general continue to present complex regulatory issues for credit unions with some choosing to have staff specialize in this area of compliance.
• Cybersecurity continues to be a dynamic area of risk that will likely remain a high priority for regulators for the foreseeable future.

Director Cordray Testifies, CFPB Announces TRID Webcast. While we were attending School, on Wednesday, March 16 the CFPB’s Director Richard Cordray testified before the House Financial Services Committee. Director Cordray discussed many topics and addressed numerous questions from members of Congress. For example, the director confirmed that a final rule on prepaid cards should still be expected sometime this spring. Director Cordray also addressed TRID and indicated that for the time being, the hold harmless period for these rules is indefinite. Also on March 16, and probably not coincidentally, the CFPB announced yet another upcoming TRID webcast that will cover “Frequently Asked Questions.” The webcast is scheduled for Tuesday, April 12 from 2:00 until 3:00 EST. So far, the exact topics or questions that will be addressed are unknown.

For now, webcasts are the Bureau’s preferred method of providing guidance on TRID, although it would be great if the CFPB would offer clarification in writing instead. Past webcasts have offered a few insights into the rule’s ambiguities so continuing to add to the webcasts this is a start. Stay tuned to this blog for another edition of “We Watched So You Don’t Have To” where we’ll sum up some of the highlights of the April 12 webcast.

Class Photo - Finally, here is our group photo from this year's Regulatory Compliance School!

BSA/AML Compliance Requirements: Frequently Asked Questions This Week; NAFCU’s new BSA Seminar + Certification is Here!

Written by Shereefat Balogun, Regulatory Compliance Counsel

This week NAFCU hosted its annual Regulatory Compliance School, focusing on the most important regulatory compliance issues facing credit unions. Today’s session will cover the Bank Secrecy Act (BSA) and OFAC (Office of Foreign Assets Control) regulatory framework. However, attendees seemed all too anxious and could not wait to ask their BSA/AML related questions- and understandably so. With an increase in enforcement actions for BSA/AML violations, ongoing OFAC sanctions and impending rules on customer due diligence, credit unions, and other financial institutions, are working hard to keep up with their compliance requirements under the BSA/AML regime. Today’s “FAQs” were inspired by the many BSA/AML related questions and concerns raised throughout the week.

Q: Does a credit union have an obligation to reconcile conflicting identification information provided by a member? We have a member who recently filled out a change of address form, and the SSN he put down is completely different from the one he gave to open this account. Is there any responsibility on the credit union’s part to take any action concerning this discrepancy?

A: Yes, the credit union does have an obligation to address any discrepancies as it pertains to identifying information.  Generally, before opening an account for a customer, the credit union must be able to form a reasonable belief that it knows the true identity of the customer based on the information gathered. The conflicting information may have been made in error.  In any event, the CIP procedures must specify how the credit union will resolve the discrepancies.  If the information is indeed conflicting and can’t be reconciled, the credit union may have an obligation to file a SAR.

Each credit union must have a written CIP that allows it to form a reasonable belief that it knows the true identity of each customer.  The CIP must contain procedures for opening an account that specify the identifying information that will be obtained from each customer.  The credit union must obtain, at a minimum, the following four pieces of information from the customer prior to opening an account:

• Name
• DOB for individuals
• Address
• Identification Number

In addition to gathering the four pieces of information outlined above, the credit union is required to verify the identity of the customer using the information gathered.  In verifying the information, the credit union may use documents and/or non-documentary methods, if its CIP procedures allow for that.  If there are discrepancies in the information, this may create a challenge in the credit union’s ability to form a reasonable belief that it  knows the true identity of a member.  The CIP procedures should outline steps the credit union will take to properly, and more accurately, identify an individual.  The conflicting information may have been made in error.  In any event, the CIP procedures must specify how the credit union will resolve discrepancies using documents and/or non-documentary information.   This may include calling the member to address inconsistencies, relying on other sources such as public databases, or checking references with other banks and/or credit unions.  If the information is indeed conflicting and can’t be reconciled, the credit union may have an obligation to file a SAR. Also note that the credit union is well within their right to put the account on hold while it reconciles the information.

 

Q: Can a credit union accept a current passport instead of a taxpayer identification number or social security number at account opening?

A: Generally, credit unions must obtain an identification number before opening an account for a prospective member.  For US persons, this would be a taxpayer identification number.  For non-US persons, a current passport would suffice.  It appears, however, that a credit union may accept other forms of ID if its CIP procedures provide for that, especially where the customer has applied for a taxpayer identification number, but has not yet received one.  Generally, before opening an account for a customer, the credit union must be able to form a reasonable belief that it knows the true identity of the customer based on the information gathered. The relevant rules can be found in 31 CFR 1020.220.

Before opening an account for a customer, a credit union must collect identifying information, including an identification number.  For a U.S. person, this will be a taxpayer identification number.  For a non-U.S. person, one or more of the following will be acceptable: (i) a taxpayer identification number; (ii) passport number and country of issuance; (iii) alien identification card number; or (iv) number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard.

The rule does make an exception for individuals who are applying for a taxpayer identification number.  According to the rule, a credit union’s CIP may include procedures for opening an account for someone who has applied, but not received a taxpayer identification number.  This may include accepting other forms of identification number, including a current passport.  However, the procedures must ensure that the individual obtains the taxpayer identification number within a reasonable period of time after the account is opened.

(B) Exception for persons applying for a taxpayer identification number. Instead of obtaining a taxpayer identification number from a customer prior to opening the account, the CIP may include procedures for opening an account for a customer that has applied for, but has not received, a taxpayer identification number. In this case, the CIP must include procedures to confirm that the application was filed before the customer opens the account and to obtain the taxpayer identification number within a reasonable period of time after the account is opened.  31 CFR 1020.220(a)(2)(i)(B)(emphasis added.).

Also, the rules provide credit unions with the ability to verify identification through non-documentary methods.  The credit union’s CIP must specify the situations where a credit union would use non-documentary methods to verify a customer’s identity and how to handle them, including when a customer doesn’t have all the necessary documents at the time he/she comes in to open the account.

 

Q: Is a credit union required to file a CTR where a member withdraws $9,500 in cash from a rep payee account and $700 from his personal account on the same day? 

A: The answer to your question can be found in Treasury’s BSA/AML regulations, 31 CFR 1010.  Yes, in this situation, the credit union is required to file a CTR because, although there were multiple transactions, the transactions: (i) resulted in a cash withdrawal in excess of $10k; (ii) occurred during the same business day; and (iii) were made by the same person.

31 CFR 1010.311 requires that a credit union report cash transactions in excess of $10,000 during the same business day. Indeed, the rule states:

Each financial institution other than a casino shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000, except as otherwise provided in this section.  31 CFR 1010.311 (emphasis added.).

Moreover, the amount over $10,000 can be either in one transaction or a combination of cash transactions.  The credit union should treat the multiple transactions as a single transaction if the credit union knows that the transactions are by the same person. The rule provides:

(b) Multiple transactions. In the case of financial institutions other than casinos, for purposes of the transactions in currency reporting requirements in this chapter, multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day (or in the case of the U.S. Postal Service, any one day). Deposits made at night or over a weekend or holiday shall be treated as if received on the next business day following the deposit.  31 CFR 1010.313 (b)(emphasis added.).

Here, although the first cash withdrawal of $9,500 was made from a rep payee account, and thus was not his own personal account and not his own personal funds, the aggregate amount withdrew on that day was in excess of $10,000 and was made by the same person.  The credit union was asked to give a single person more than $10,000 in cash on a single day. The fact that the transactions involved multiple, or different, accounts is irrelevant.  Accordingly, the credit union should file the CTR with FinCEN.

 

Q: What steps should a credit union take when it gets an “OFAC hit”?

A: OFAC’s (Office of Foreign Assets Control) regulations prohibit all US persons from engaging in transactions with certain specified persons and countries. Specifically, credit unions must: (i) block accounts and other assets of “Specifically Designated Nationals” (SDNs) and “Blocked Persons”; and (ii) block or reject prohibited transactions with SDNs and Blocked Persons.

Generally, if the credit union gets an “OFAC” hit, the credit union needs to confirm that the individual that was flagged is indeed the individual on the SDN list. Treasury has a hotline dedicated to providing assistance with making a determination if the person is the same. If the person or entity is indeed the same included on the SDN list, the credit union cannot open the account; but rather must block the transaction and account, and also report the blocked transaction/account to OFAC.

While not required by specific regulation, NCUA expects that a credit union will establish and maintain an effective, written OFAC compliance program commensurate with its OFAC risk profile. Amongst other things, the policies, procedures and processes should address how the credit union will identify and review transactions and accounts for possible OFAC violations. The policies and procedures should also define the credit union’s criteria for comparing names provided on the OFAC “SDN” list with the names in the credit union’s files or transactions and for identifying transactions or accounts involving sanctioned countries. Furthermore, the policies and procedures should address how the credit union will determine whether an initial OFAC hit is a valid match or a false hit.

 

Q: Where can I go for assistance in developing our BSA/AML risk-based model? The rules don’t say anything. I’ve checked the FFIEC BSA/AML examination manual and it doesn’t say much on how the risk based model program should look like.

A: Honestly, the guide or the rules will not go into that level of detail. Here’s the reason. Generally, governments around the world feel that the risk-based approach is preferable to a more prescriptive approach in the BSA/AML space because it is:

1. Flexible- AML/BSA risks vary across jurisdictions, customers and products; and
2. Effective- Credit unions are better equipped than legislators to effectively assess and mitigate specific BSA/AML risks they face.

Notwithstanding the lack of specific guidance, however, there are four main things a credit union’s risk assessment should consider:

1. Members- Who are you selling your products or offering services to? Individuals or private companies? Foreign public officials? Money Servicing Businesses?
2. Products and Services- What products and services are you offering that may be vulnerable to money laundering? Online banking? Private banking? Correspondent banking? Wire transfers?
3. Geographical Location- In what countries do your members reside and what are their countries of citizenship? Where are your corporate customers headquartered and where do they conduct their business? Are you engaging in transactions involved with countries included on any government lists?

Generally, some member types , products and services, and geographical locations pose higher risks than others, and thus your program wants to properly identify those and tailor its monitoring accordingly.

As indicated above, we received a substantial number of BSA/AML inquiries. Indeed, compliance with the BSA/AML rules remains a top priority for financial institutions. NAFCU is here to assist you as you navigate through the rules and will keep you abreast of emerging challenges, and regulatory developments. In fact, the industry is still awaiting FinCEN’s final rule on Customer Due Diligence and beneficial ownership requirements, which is expected this year. We will keep you posted.

###

NAFCU’s new BSA Seminar + Certification is Here!

We’ve had hundreds of requests from credit unions to provide more BSA training, and I’m excited to announce, it’s here. We’ll be holding our first in-person, BSA Seminar in New Orleans October 24 – 28. If those dates and location sound familiar to you, it’s not déjà vu. We’ll be running this BSA Seminar concurrently to our Regulatory Compliance Seminar. While they are two separate educational events, the networking aspects will be co-mingled, making it an awesome way to build your network of credit union and BSA professionals from around the country.

You can expect a full week of everything you’ve ever wanted to know about BSA, but didn’t have time to ask. It’s designed for just credit union professionals. You’ll find no erroneous “bank” information that doesn’t apply to credit unions. Check out the full agenda and sessions.

There’s an optional, pre-conference workshop to help get you up-to-speed on BSA fundamentals – it’s perfect if you’re new to BSA or just want a refresher. And at the end of the week, you’ll have the opportunity to get certified when you sit and pass the NAFCU Certified Bank Secrecy Officer (NCBSO) exam.

This seminar, and the certification, is an excellent way to demonstrate to NCUA and FinCEN you’re dedicated to compliance and to protecting your credit union against financial crime. It was designed by NAFCU’s Director of Education Devon Lyon, former director of BSA at State Department Federal Credit Union – so the curriculum is extremely relevant at both a strategic and tactical level. You’ll walk away ready to master your AML responsibilities. And of course, it fulfills your yearly BSA training requirement!

We have limited seating – so register early!

We Listened So You Don’t Have To: Know Before You Owe Mortgage Disclosure Rule – Construction Lending Webcast, Part 2 of 2

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

On March 2, we blogged about the CFPB’s TRID Construction Lending webcast and the clarification it provided regarding disclosure of construction holdbacks. We also promised to tell you  about additional lessons we learned.

Guidance Regarding Estimating Unknown Fees and Costs During the Draw Period

NAFCU has received member questions about how credit unions are supposed to estimate draw fees and inspection costs which may arise during the draw period. Often these are unpredictable and rely on the pacing of construction. While the CFPB did not offer a concrete response, they did give guidance on estimating these fees that is a little more based in fact that what we have had previously. The webcast posed this question:

“Q25: How does a creditor disclose inspection and draw fees when the creditor does not know how many draws there will be?”

The CFPB’s analysis is still a good faith analysis; no surprise there. Under section 1026.19(e)(1)(i), costs estimated on a loan estimate must be made in good faith:

Ҥ1026.19 Certain mortgage and variable-rate transactions.

(e) Mortgage loans secured by real property—early disclosures—

[…]

(1) Provision of disclosures—

[…]

(i) Creditor. In a closed-end consumer credit transaction secured by real property, other than a reverse mortgage subject to §1026.33, the creditor shall provide the consumer with good faith estimates of the disclosures in §1026.37.”

The commentary to section 1026.19(e)(1)(i) defines good faith with regard to Loan Estimates by referencing section 1026.17(c)(2)(i) and its commentary. According to comment 19(e)(1)(i)-1, good faith requires that where information necessary for an accurate disclosure is unknown, the credit union makes disclosures based on the best information reasonably available to it at the time. The information “reasonably available” at the time is the information obtained after an exercise of due diligence by the credit union to determine the fee. Comment 19(e)(1)(i)-1 also specifically references comment 17(c)(2)(i)-1 for further explanation of the standard. The text of comment 17(c)(2)(i)-1 is below:

“Paragraph 17(c)(2)(i)

1. Basis for estimates. Except as otherwise provided in §§1026.19, 1026.37, and 1026.38, disclosures may be estimated when the exact information is unknown at the time disclosures are made. Information is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, or to realtors for taxes and escrow fees. The creditor may utilize estimates in making disclosures even though the creditor knows that more precise information will be available by the point of consummation. However, new disclosures may be required under §1026.17(f) or §1026.19. For purposes of §1026.17(c)(2)(i), creditors must provide the actual amounts of the information required to be disclosed under §§1026.37 and 1026.38, pursuant to §1026.19(e) and (f), subject to the estimation and redisclosure rules in those provisions.” (Emphasis added.)

The comment provides some good factual examples of due diligence, none of which are on point for a construction scenario…which brings us to the central question: What is due diligence for estimating these unpredictable construction-related fees?

In the webcast, the CFPB suggested credit unions base their estimates of these construction-related fees on previous transactions that were similar in terms of structure and scope. Hopefully, by using previous transactions as a benchmark, credit unions can feel a little more comfortable that their estimates in the LE are reasonable, good faith estimates. Of course, these estimates have further significance for a credit union; they matter in the context of the good faith determination of the Closing Disclosure. But, unfortunately, the webcast did not cover the Closing Disclosure. We will have to wait for further guidance from the CFPB regarding the other half of TRID.

The webcast will be posted here once it is available. If you wish to check out the webcast yourself, I strongly recommend reviewing the presentation slides for questions of particular interest, and then fast-forwarding to that slide for further explanation.

Identity Theft Still a Huge Issue for Consumers According to FTC Data; Programming Note

Written by Shari R. Pogach, Regulatory Paralegal

Identity theft continues to be a huge problem for consumers. According to the Federal Trade Commission’s (FTC) annual summary of consumer complaints in its Consumer Sentinel Network Data Book for January – December 2015, identity theft complaints were the second most reported by consumers in 2015. And, identity theft complaints increased more than 47 percent from 2014. The identity theft complaints dealt with: 45 percent were related to tax or wage ID theft, 2) 16 percent concerned credit card fraud and 3) 10 percent were related to phones or utilities.

The top ten complaint categories for 2015:

1. Debt Collection
2. Identity Theft
3. Impostor Scams
4. Telephone and Mobile Services
5. Prizes, Sweepstakes and Lotteries
6. Banks and Lenders
7. Shop-at-Home and Catalog Sales
8. Auto-Related Complaints
9. Television and Electronic Media
10. Credit Bureaus, Information Furnishers and Report Users

Consumers also continue to complain about financial institutions with such complaints making up 4 percent of the total of 3,083,379 complaints collected in 2015. Complaints regarding financial institutions ranged from: “Deceptive or predatory mortgage lending practices; problems with modification of mortgage terms; miscellaneous customer service and account issues with bank or credit union products, including payday loans, student loans, auto title loans, fees and overdraft charges; other finance company lending products, services and practices; etc.”

The FTC’s data book breaks down the top ten consumer complaints by state and then the top six identity theft type complaints by state. Florida, Georgia and Michigan were the top three states for fraud and other complaints. Missouri, Connecticut and Florida were the top three states for identity theft complaints. This data comes from consumer complaints made directly to the FTC as well as those received by state and federal law enforcement agencies, national consumer protection organizations and non-governmental organizations.

***

Programming Note. It’s time for school! Your compliance questions will be answered but we appreciate your patience as the team will be in and out of the office giving presentations this week at NAFCU’s 2016 Regulatory Compliance School. And, be sure to send out good luck wishes to those attendees testing to obtain their NAFCU Certified Compliance Officer (NCCO) designation.

CFPB Issues Supervisory Highlights - Some Consumer Reporting, Debt Collection, Mortgage Origination, Remittances, Student Loan Servicing and Fair Lending Concerns Remain

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans! On March 8, 2016, the CFPB issued its latest supervisory report sharing observations from recent examinations and other supervisory activities. The report covers issues observed by the Bureau in the areas of consumer reporting, debt collection, mortgage origination, remittances, student loan servicing, and fair lending.

Consumer Reporting. CFPB examiners found that one or more furnishers of information to consumer reporting agencies failed to have policies and procedures addressing the furnishing of information related to deposit accounts. For example, these furnishers would update their own systems when customers paid charged-off accounts in full but would not provide updated information to the consumer reporting agencies. The CFPB recently issued Compliance Bulletin 2016-01 (Feb. 3, 2016), reminding furnishers of their responsibilities under the Fair Credit Reporting Act (FCRA) and Regulation V regarding specialty consumer reporting agencies such as ChexSystems.

Debt Collection. CFPB examiners also determined that some debt collectors failed to honor written requests to cease communications. While credit unions collecting on their own debts are not considered “debt collectors” under the Fair Debt Collection Practices Act (FDCPA), the CFPB and NCUA have separately signaled that credit unions should still strive to comply with the requirements of the FDCPA to avoid any liability for committing unfair or deceptive acts or practices (UDAAPs). See, CFPB Compliance Bulletin 2013-07 (July 10, 2013) and NCUA Consumer Compliance Handbook, p. 98. Some debt collectors also made false, deceptive or misleading representations regarding garnishment when attempting to collect on student loan debt.

Mortgage Origination. In general, the Bureau noted overall compliance with its Title XIV rules (loan originator compensation, ability-to-repay, appraisals and valuations, high-cost mortgages and escrows for higher-priced mortgage loans). Some exceptions included the absence of written policies and procedures for loan originator activities under the loan originator rule and some deficiencies in compliance management systems. The loan originator rule makes it an independent regulatory requirement that credit unions establish policies and procedures reasonably designed to ensure and monitor the compliance with the prohibited payment, anti-steering, qualification and identification requirements of the rule. See, 12 C.F.R. § 1026.32(j). The CFPB maintains a landing page with resources that credit unions can use to comply with these rules, including compliance guides and quick reference charts, here.

Remittances. As the CFPB noted in its press release touting the Supervisory Highlights report, this is the first report on exams of financial institutions in the remittance market since the CFPB issued its remittance transfer rule. While the Bureau noted overall compliance with the remittance transfer rule, a few trouble spots identified by examiners included providing incomplete or inaccurate disclosures, failing to adhere to regulatory timeframes for refunding cancelled transactions, failure to communicate the results of error investigations, or failure to promptly credit consumer accounts. Like the Title XIV rules, the CFPB maintains a landing page with resources credit unions can use to help comply with the remittance transfer rule here.

Student Loan Servicing. In the report, the CFPB noted that supervising the student loan servicing market has been a priority for its Supervision program. CFPB examiners cited private student lenders for taking advantage of auto-default clauses in student loans where either the borrower or a cosigner declared bankruptcy. The effect of the auto-default clause was to place both the borrower and the cosigner immediately into default and make the loan payable in full immediately. The Bureau found this practice to be a UDAAP. In addition, CFPB examiners “determined that servicers committed unfair practices by failing to disclose a significant adverse consequence of forbearance.” Namely, the inability of some borrowers to take advantage of cosigner release clauses in student loan contracts following the borrower’s use of forbearance.

Fair Lending. The report also provided updates on the Bureau’s administration of its fair lending enforcement settlement agreements with Ally Financial, Inc. and Ally Bank, and with Synchrony Bank, formerly known as GE Capital Retail Bank.

As this report shows, the Bureau has been very aggressive in several key areas – particularly consumer reporting, loan servicing, mortgage origination, and debt collection. The Bureau has repeatedly emphasized these areas as focal points for its supervision and enforcement activities for the next two years.. One thing to keep in mind is that the Bureau repeatedly emphasized the requirement to furnish accurate information to consumer reporting agencies under the FCRA and Regulation V throughout the report and not just as part of the consumer reporting section. This signals that the Bureau is likely to remain laser-focused on the accurate reporting of consumer information likely as part of a larger effort to examine ways to bring financial services to unbanked and underbanked populations.

The full report is available here.

***

Know the Changes: HMDA Reporting Procedures

Live Webcast: Wednesday, March 16 | 2:00 p.m. – 3:30 p.m. EST

Part of the HMDA Webcast Series

Major CFPB rule changes brought new HMDA reporting procedures your credit union must comply with. Join this webcast for a comprehensive overview of the final rule, revision of Regulation C, and data collection requirements. You’ll discover the new data credit unions are required to collect and report, when these requirements will be active, and more.

Resources for Fraud Victims

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Last Friday, I became the target of a scammer.  Yes, little ol’ me. Why?  I can’t tell you.  But I was chosen.  And at around 3:30 PM, I received a phone call from a “credit card company” stating that my card was breached.  

Scammer: Hi, my name is John and I am calling to notify you that your credit card was breached.

Eliott:  Again... geez.  What credit card are you calling about?

Scammer:  Well, before I give you any additional information, I need to verify your identity.  Please verify your name, address, and credit card number?

Eliott:  What credit card are you calling about?

Scammer:  I can’t tell you what credit card I am calling about until I verify your identity.

Eliott:  What bank or credit union do you work for?

Scammer:  I am in a call center, but I work for many banks... Bank of America, Wells Fargo, Citi Bank, Capital One, Chase....

Eliott:  Almost everyone in America has a credit card with one of those banks.  Which credit card are you calling about?

Scammer:  Is your cell phone number ###-###-####

Eliott:  Yes.

Scammer: If you give me your name or social security number, I can pull up your account.

Eliott:  I understand your company does not want to give out social security numbers over the phone before a consumer’s identity is verified, but I don’t know what credit card you are calling about. 

Scammer:  Well, I need to know your name before I can pull up your account.

Eliott:  You don’t know my name?  You called me to notify me of a breach.  What’s my first name?

Scammer:  I am trying to help you and protect you from someone ruining your credit.

Eliott:  I am just going to start calling the numbers on the back of my credit cards so I can ensure that my card was actually breached.

Second Scammer:  Hello Sir, we are trying to help you.

Eliott:  Who is this?

Second Scammer:  My name is Michael, I am one of the supervisors at the credit card call center.  I was listening on the phone call, as a part of our quality control.  We need your credit card information so we can cancel your credit cards 

Eliott:  My credit card information?

Second Scammer:  Yes, if you give us your 16 digit credit card number, I can look up your account.

***Eliott Hangs Up****

After I hung up, I called all of the institutions I have credit cards with and confirmed that my cards were not breached. Feeling confident and upset, I redialed the number they called me from.  To no surprise, after one ring I received a message that stated “the magic jack customer you are trying to reach is unavailable.”

Since this week is National Consumer Protection Week, which is a coordinated campaign that encourages consumers nationwide to learn how to protect themselves from fraud and scams, I decided to put the top-three  fraud reporting resources I found to be helpful in a blog.  I hope our blog readers can use these resources to help members, who are victims of theft, report scams to the appropriate authorities.

#1 Federal Trade Commission. The FTC has the most resources available to consumers on its website www.ftc.gov.  I also found their website to be the most helpful and easy to navigate.  The FTC’s website does an excellent job educating consumers on different types of scams, as it has helpful videos and commentary broken down by scam topic.  The FTC also tracks scam trends, which may be helpful to credit union employees tasked with promoting financial literacy.  Consumers can also report identify theft to the FTC.  The FTC employs a three-step process aimed to minimize damage and bring a thief to justice.  Members who want to file a report with the FTC should be directed to www.identifytheft.gov.  A Spanish version of the site is also available at RobodeIdentidad.gov.  Consumers wishing to report mass marketing (including SPAM) and telemarketing fraud can also file a complaint with the FTC.

#2 National Credit Union Administration.  NCUA launched its own Fraud Prevention Center, which helps consumers learn about fraud prevention and online security.  Similar to the FTC’s website, the NCUA does an excellent job of presenting relevant information to consumers.  The website  is not only easy to navigate, but the website does an excellent job at categorizing certain types of fraud.  Consumers can also find consumer protection and personal finance information and resources in Spanish on espanol.MyCreditUnion.gov 

#3 FinCEN. FinCEN’s website contains links to several other websites that will help a victim report fraud.  While not as informative as the FTC’s website, FinCEN is a great place find other resources to all types of fraud.  In addition, FinCEN’s website contains a list of resources on financial education and financial literacy initiatives. 

Military Lending Act: NCUA Issues Guidance, Database Update, and Another FAQ

Written by Brandy Bruyere, Director of Regulatory Compliance

Last week, NCUA issued a regulatory alert 16-RA-04 addressing last year’s changes to the Military Lending Act, many of which have a compliance deadline of October 3, 2016. We’ve been blogging on the challenges involved with this implementation process and this regulatory alert contains a summary of the rule’s basic requirements which can be found here. It is a helpful starting point for those who are learning the MLA rules, covering the rule’s scope, limitations on credit and the disclosure requirements.

Speaking of identifying covered borrowers, if your credit union expressed interest in the Defense Manpower Data Center’s (DMDC) direct connect option for accessing the MLA covered borrower database, the DMDC is reviewing questionnaires. However, NAFCU has been advised that very few financial institutions will be selected for this option largely due to limited resources that prevent DMDC from offering a large number of connections to its database. Meanwhile, some credit unions report that the MLA database does not work for them, and this seems to be related to an expired security certificate or similar issue that causes many networks’ firewalls and other security measures to block the website. NAFCU has brought this issue to DMDC’s attention and is working towards a solution.

Another MLA FAQ. Many members have asked us what happens when someone who was a covered borrower when he or she opened a covered loan. Then, the member leaves the military, or is no longer a servicemember’s dependent, and therefore ceases to be a covered borrower. Does the MLA continue to apply to the loan?

The rule generally applies based on whether the member was a covered borrower at the time they become obligated on the loan, although the definition does exclude those who are no longer covered borrowers. Here is an excerpt from the rule itself in section 232.3, note that the rule describes a “covered borrower” in terms of the time of application but states that a person can cease to be a covered borrower:

“(g)

(1) Covered borrower means a consumer who, at the time the consumer becomes obligated on a consumer credit transaction or establishes an account for consumer credit, is a covered member (as defined in paragraph (g)(2) of this section) or a dependent (as defined in paragraph (g)(3) of this section) of a covered member.

[…]

(4) Notwithstanding paragraph (g)(1) of this section, covered borrower does not mean a consumer who (though a covered borrower at the time he or she became obligated on a consumer credit transaction or established an account for consumer credit) no longer is a covered member (as defined in paragraph (g)(2) of this section) or a dependent (as defined in paragraph (g)(2) of this section) of a covered member.”

Section 232.1(a) contains some examples that help clarify what happens when a previously covered borrower does cease to be a covered borrower:

Ҥ 232.2 Applicability; examples.

(a)

(1) Applicability. This part applies to consumer credit extended by a creditor to a covered borrower, as those terms are defined in this part…Nothing in this part applies to a credit transaction or account relating to a consumer (which otherwise would be consumer credit) when the consumer no longer is a covered borrower.

(2) Examples—

(i) Covered borrower. Consumer A is a member of the armed forces but not serving on active duty, and holds an account for closed-end credit with a financial institution. After establishing the closed-end credit account, Consumer A is ordered to serve on active duty, thereby becoming a covered borrower, and soon thereafter separately establishes an open-end line of credit for personal purposes (which is not subject to any exception or temporary exemption) with the financial institution. This part applies to the open-end line of credit, but not to the closed-end credit account.

(ii) Not a covered borrower. Same facts as described [above]. One year after establishing the open-end line of credit, Consumer A ceases to serve on active duty. This part never did apply to the closed-end credit account, and because Consumer A no longer is a covered borrower, this part no longer applies to the open-end line of credit.”

This indicates that if the member is no longer a covered borrower, then the rules would not continue to apply to that product. Here’s an excerpt from the preamble that gives a bit more detail:

“(g) Covered borrower. In general, the Department has adopted the definition of “covered borrower” as proposed. ..

For the reasons discussed in connection with the modification to § 232.2(a), the Department has modified the definition of “covered borrower,” by adding a new subparagraph (4), to clarify that a consumer who had been a covered borrower ceases to hold that status when the consumer no longer is a covered member or a dependent of a covered member.”

(emphasis added)

This seems contradictory to another section of the preamble (which we highlighted in a previous blog). There is language on calculating the MAPR which seems to indicate that credit ancillary products that are purchased at any time in connection with the loan would be included based on the member’s status at the time the loan was established:

“…nothing in the MLA necessarily limits the inclusion in the MAPR of these charges only to those that are sold at the outset of the credit transaction. Particularly insofar as consumer credit now encompasses open-end credit products, the Department has concluded that the MLA should be interpreted to require a creditor to include in the MAPR the fee for any ancillary product “sold with any extension of credit to a [covered borrower]” so long as that ancillary product is “associated with the extension of credit”—which could arise at any time in an ongoing, open-end account for consumer credit. Accordingly, the Department has determined to amend [the rule] so as to require the inclusion in the MAPR of any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or (at any time in connection with) an account for open-end credit, so long as the consumer was a covered borrower at the time the account was established.”

(emphasis added)

While the rule text is controlling as compared to the preamble, it is this kind of drafting that can make implementing the MLA challenging as credit unions work to ensure compliance with the rule.

Palate Cleanser. That was a lot for a Monday morning, so here’s a picture of Lemmy and Nolan. At 17 months, Nolan is pretty mobile these days. Sometimes he pushes his playpen around and poor Lemmy gets stuck. He’s a very patient “dog brother” though.

CFPB’s Policy Priorities Confirm Rulemaking Plans on Overdraft, Debt Collection and Interest in Small Business Lending

Written by Shereefat Balogun, Regulatory Compliance Counsel

On Thursday, February 25, 2016, the CFPB held a Consumer Advisory Board meeting which generally provided an overview of the bureau’s strategic outlook. The CFPB subsequently published a report outlining its two-year supervision and enforcement priorities. Many of the stated priorities are iterations of previous comments made by the bureau, and confirm impending rulemaking. Others provide insight on new areas of interest.  Credit unions under the bureau’s jurisdiction should note the following priorities as they set their compliance goals for the next two years:

• Arbitration: The CFPB indicated that it will continue the rulemaking process to regulate the use of arbitration clauses, especially those that limit a consumer’s right to bring a class action.

• Consumer Reporting: The bureau reported that it will continue to examine and investigate consumer reporting companies and furnishers of information, with a focus on accuracy and dispute resolution processes. The CFPB also stated that it may consider rulemaking around furnisher and consumer accuracy, dispute resolution, and related issues.

• Debt Collection: The CFPB confirmed that it will initiate the rulemaking process and finalize a rule that establishes guidelines to ensure that debt collectors treat consumers with respect, substantiate the debts they collect on, and “provide consumers with appropriate information about their rights and the debt collection process.”

• Mortgages: The CFPB has restated its commitment to ensure that the Home Mortgage Disclosure Act (HMDA) rule is successfully implemented, and that its supervisory and enforcement programs work to provide equal and fair access to mortgage credit. The CFPB also indicated a particular focus on implementing its mortgage servicing rules. Lastly, the bureau stated that it will begin to assess the effectiveness of significant rules that are already in place.

• Overdraft: The bureau makes clear that it fully intends to move forward with the rulemaking process related to overdrafts, with a purported goal of making the overdraft market “fairer and more transparent”.

• Small Business Lending: The CFPB confirmed its growing interest in small business lending, and lists its plan to build a small business lending team and begin “market research and outreach for a rulemaking on business lending data collection.” The bureau also indicated that it will continue to examine small business lenders for compliance with fair lending laws. As a reminder, Dodd-Frank amended the Equal Credit Opportunity Act (ECOA), requiring financial institutions to collect and maintain certain information in connection with credit applications submitted by women-owned, minority-owned or small businesses.

This is a few of the priorities listed in the report. NAFCU previously reported on the full list of priorities. Notably, the CFPB clarifies that, in addition to the stated priority goals, it will continue its ongoing efforts in its fair lending oversight of indirect auto lenders and rulemaking on prepaid cards. The bureau also advises companies to “continue their focus on complying with the law beyond the particular issues described in the goals, whether or not they see their particular industry or product mentioned explicitly among the shared cross-Bureau priorities.”

As a reminder, this will only be applicable to credit unions directly supervised by the CFPB- those with over $10 billion in assets. For those credit unions not subject to CFPB’s supervision, the priorities may nonetheless be a useful tool. The policy priorities can be found here. Credit unions are also advised to review NCUA’s Supervisory Priorities for 2016.

We Listened So You Don’t Have To: Know Before You Owe Mortgage Disclosure Rule – Construction Lending Webcast, Part 1 of 2

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

The CFPB’s TRID Construction Lending webcast ran long, did not cover Closing Disclosures at all and was, frankly, a bit of a slog.

So, let me start by saying: You’re welcome.

But even docking points for reading directly from the regulation, the webcast was very helpful in that it answered a couple burning questions about the construction loans and the Loan Estimate. So what did we learn?

Construction Holdbacks Can Be Disclosed As “Other” Costs In Box H!

NAFCU has received multiple member questions about construction holdbacks (i.e., a portion of the loan which will not be disbursed until a later time) and how they should appear on the Loan Estimate. There is no direct guidance in the rules or the commentary on this issue, but the CFPB offered their analysis of the question. In the webcast, they posed the below question:

“Q26: How may a creditor disclose a construction holdback on the Loan Estimate?”

To begin with, the CFPB stated that the Loan Estimate should reflect the terms of the legal obligations created by the loan agreements involved. The CFPB stated that, as an amount contracted to be paid to a person other than the creditor, this can be listed as a line item under “other” costs pursuant to 12 C.F.R. § 1026.37(g)(4):

“§1026.37   Content of disclosures for certain mortgage transactions (Loan Estimate).

For each transaction subject to §1026.19(e), the creditor shall disclose the information in this section:

[...]

(g) Closing cost details; other costs. Under the master heading “Closing Cost Details,” in a table under the heading “Other Costs,” all costs associated with the transaction that are in addition to the costs disclosed under paragraph (f) of this section. The table shall contain the items and amounts listed under six subheadings, described in paragraphs (g)(1) through (6) of this section.

[...]

(4) Other. Under the subheading “Other,” an itemization of any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware at the time of issuing the Loan Estimate, a descriptive label of each such amount, and the subtotal of all such amounts.” (Emphasis added.)

The amount can be listed in Box H of the Loan Estimate and labeled “Construction Holdback,” or by some other term which clearly and conspicuously reflects the purpose of the proceeds.

Surprise Twist: Alternatively, Construction Holdbacks Can Also Be Disclosed In Cash To Close!

The CFPB offered an alternative method of disclosing holdbacks in question 27: allowing the amount to be factored into the Calculating Cash to Close table. You have to walk through the rule a bit to see how this can be done; it isn’t intuitive. We begin with what is included as “closing costs to be financed” in section 1026.37(h)(1)(ii):

“§1026.37   Content of disclosures for certain mortgage transactions (Loan Estimate).

[...]

(h) Calculating cash to close—

(1) For all transactions. Under the master heading “Closing Cost Details,” under the heading “Calculating Cash to Close,” the total amount of cash or other funds that must be provided by the consumer at consummation, with an itemization of that amount into the following component amounts:

[...]

(ii) Closing costs to be financed. The amount of any closing costs to be paid out of loan proceeds, disclosed as a negative number, labeled “Closing Costs Financed (Paid from your Loan Amount)”;” (Emphasis added.)

Straightforward enough…but not quite on point. But let’s look at the commentary to 37(h)(1)(ii) which advises how to calculate “closing costs financed:”

“37(h)(1)(ii) Closing costs financed.

1. Calculating amount. The amount of closing costs financed disclosed under §1026.37(h)(1)(ii) is determined by subtracting the estimated total amount of payments to third parties not otherwise disclosed pursuant to §1026.37(f) and (g) from the total loan amount disclosed pursuant to §1026.37(b)(1). If the result of the calculation is a positive number, that amount is disclosed as a negative number under §1026.37(h)(1)(ii), but only to the extent that it does not exceed the total amount of closing costs disclosed under §1026.37(g)(6). If the result of the calculation is zero or negative, the amount of $0 is disclosed under §1026.37(h)(1)(ii).” (Emphasis added.)

The CFPB suggests by including the construction holdback as one of these “payments to third parties not otherwise disclosed,” there is a cascading effect on the remainder of the cash to close table, which will result in an accurate disclosure. The calculation of the closing costs to be financed in section 1026.37(h)(1)(ii) affects the calculation of the “funds to the borrower” in section 1026.37(h)(1)(v). The end result, according to the CFPB, is that the cash to close box will accurately reflect the amounts the parties are actually responsible for at closing as a result of the loan agreement and the parties’ legal obligations.

We will blog again about other lessons learned in the near future. The webcast will be posted here once it is available. If you wish to check out the webcast yourself, I strongly recommend reviewing the presentation slides for questions of particular interest, and then fast-forwarding to that slide for further explanation.