NAFCU Compliance Blog

Justice Department Reaches Settlement to Resolve Lending Discrimination Case; CFPB Issues Monthly Complaint Snapshot

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Happy Friday to all of you out there in regulatory compliance land. On Wednesday, September 28, 2016, the U.S. Department of Justice announced that it reached a settlement with Charter Bank of Corpus Christi, Texas, over allegations that the bank engaged in a pattern or practice of discrimination on the basis of national origin. The Justice Department alleged that between 2009 and 2014, Charter permitted employees to adjust interest rates on vehicle title loans upward or downward by approximately three percentage points without any consideration for the borrower’s credit risk. This policy purportedly resulted in Hispanic borrowers being charged higher interest rates than similarly situated non-Hispanic borrowers. As part of the settlement, Charter agreed to maintain uniform pricing policies and pay more than $165,000 to victims of the alleged discrimination.

The Equal Credit Opportunity Act and its implementing regulation, Regulation B, prohibit discrimination on a prohibited basis in any aspect of a credit transaction. See, 12 C.F.R. § 1002.4(a). The term “prohibited basis” is defined broadly in Regulation B to include “race, color, religion, national origin, sex, marital status, or age” as well as the fact that the consumer’s income derives from a public assistance program or the fact that the consumer has exercised any right under the Consumer Credit Protection Act or any state consumer protection laws. 12 C.F.R. § 1002.2(z). Furthermore, the Act and Regulation B not only prohibit overt discrimination but facially neutral policies that have a disparate impact without an adequate business justification. See, 12 C.F.R. pt. 1002, Supp. I, comment 6(a)-2. For more information, compliance officers may want to consult the FFIEC Fair Lending Examination Manual, which provides a detailed discussion of fair lending issues and possible red flags.

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In other news, the CFPB released its monthly complaint snapshot on September 27, 2016. The report notes that the volume of student loan complains has increased by 78 percent from last year. Bank account and prepaid card complains have also increased by 26 percent and 20 percent respectively. On the other hand, complains regarding payday loans and mortgages have dropped by 18 percent and 11 percent over the same period. The largest number of complaints received by the Bureau this month appears to center around debt collection, which has seen a 50 percent increase in complaint volume from last month. The report also draws particular attention to money transfer services with some of the more common complaints relating to seller fraud and funds availability.

Depending on the structure of the program, Regulation E may impose some requirements on credit unions handling consumer complaints involving money transfer services. For example, Regulation E treats payments made through online bill pay as an “electronic funds transfer” unless the contract for the bill-payment service clearly states that all payments will be solely by check. See, 12 C.F.R. pt. 1005, Supp. I, comment 3(b)(1)-vi. This means that the member may have the right to stop payment under section 1005.10(c) as well as limitations of liability and error resolution rights for these kinds of transactions. See, 12 C.F.R. §§ 1005.6; 1005.11. One thing to note, however, is that unlike Regulation Z, Regulation E does not appear to allow the member to assert claims regarding property or services purchased through electronic funds transfer against the credit union. Compare, 12 C.F.R. § 1005.2(m) (definition of unauthorized electronic funds transfer) with 12 C.F.R. § 1026.12(c)(1).

If the money transfer service is provided to the member solely by check, such as through the sale of money orders, then state law may govern the substantive rights of the parties. Since the structure of any money transfer service program can involve some degree of risk both from a compliance and litigation standpoint, credit unions may want to consult with counsel on the appropriate policies and procedures for mitigating these kinds of risks as well as how to structure a compliant program.

Have a great weekend!

NCUA Guidance on CDFI-Certified Credit Union Supervision

Written by Shari R. Pogach, Regulatory Paralegal

Earlier this year, NCUA streamlined the application process  for a credit union to become Community Development Financial Institution (CDFI)-certified.  When CDFI-certified, a credit union receives specially tailored financial and technical assistance to help enhance and/or expand its products and services to better serve members in impoverished communities. NCUA Chairman Rick Metsger has also established a goal of adding more than 200 CDFI-certified credit unions in 2016.  The agency is actively encouraging eligible credit unions to apply for certification.

NCUA’s recently released Supervisory Letter SL 16-01  provides field staff with examination and supervision guidance in assessing a CDFI credit union’s use of CDFI grants and other nontraditional funding sources to support various financial services.  The agency notes that the business model of a CDFI, much like a low-income designated credit union, may have a very different risk profile than other credit unions.  Some risks in a business model are acceptable but the guidance is intended to ensure that a CDFI-certified credit union adequately manages those risks. 

The supervisory letter outlines common characteristics of CDFIs, including: 

• Higher operating expenses;
• Reliance on fee income;
• Low dollar transactions;
• Frequent transactions;
• Higher delinquency; and
• Use of less traditional funding sources to support various products and services.

In its guidance, the agency points out that CDFI-certified credit unions might rely on less traditional funding sources and this can present the risk that increased expenditures on new programs and services might not be viable if a funding provider decreases or discontinues funding.  NCUA finds such risk acceptable if a credit union has developed and administered a reasonable business plan (appropriate to the size and complexity of the credit union) involving CDFI funding.  If a credit union meets these conditions, examiners and examination reports will support CDFI-related activities. 

To assess a CDFI-certified credit union’s condition, NCUA expects field staff to focus on:

• If the business plan is reasonable, and whether any new or modified programs associated with reliance on any non-traditional funding are properly managed.
• Whether the credit union is faithfully following its business plan.
• Whether the credit union is using any non-traditional funding in accordance with the terms of the funding.
• The extent to which the credit union is properly accounting for the non-traditional funding.

In terms of specific CDFI grant accounting issues, NCUA states that accounting for CDFI grant revenue can differ based on the type and characteristics of the award.  The supervisory letter indicates examiners will review CDFI grant agreements to see whether a grant has any restrictions and/or conditions. Timing of CDFI grant accounting entries depends on the circumstances around the execution of a grant agreement, receipt of the disbursements and when the grant revenue is earned.   In some instances the time lag between when a credit union receives grant disbursements and earns grant revenue will dilute (lower) the credit union’s net worth ratio.  This in turn could trigger more actions in order to meet regulatory net worth requirements.  According to NCUA, it is important for a credit union to recognize grant revenue as “soon as appropriate to avoid any negative implications from these timing differences.”  Timing issues will be considered in the evaluation of the capital adequacy of the credit union.

Embedded within the guidance is an attachment with illustrative accounting entries for recording CDFI grants in accordance with generally accepted accounting principles (GAAP).  Also provided are links to additional relevant guidance for CDFI credit unions.

Fair Credit Reporting Act: What Credit Unions Should Know When Furnishing and Reporting Information to Consumer Reporting Agencies

Written by Shereefat Balogun, Regulatory Compliance Counsel

The Fair Credit Reporting Act and its requirements relating to reporting to credit reporting agencies seem to be of concern and interest to many of our members.  So, we thought we’d offer a primer to assist with compliance in this area. 

Generally speaking, there is no federal requirement that compels credit unions to provide information to credit reporting agencies (CRAs).  However, credit unions that do furnish information are subjected to various duties under the Fair Credit Reporting Act (FCRA) and it implementing regulation, Regulation V (12 C.F.R. Part 1022), including:

• The Duty to Provide Accurate Information. A credit union that furnishes information to a CRA about a member, must not provide information that it knows or has reasonable cause to believe that the information is inaccurate.  The FCRA defines the phrase knows or has reasonable cause to believe that the information is inaccurate as “having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.” See, §623(a)(1)(D).  Some violations may include:

• Misstating the balance due
• Listing member as a debtor on an account when he/she is only the authorized user
• Reporting debt as charged off when member settled it or paid it in full

*Safe harbor alert (YES!):  The FCRA provides a safe harbor if the credit union clearly and conspicuously specifies an address where members can send disputes concerning the accuracy of information about them.  See, §623(a)(1)(C).

Additionally, if the credit union determines that the information it has furnished is not complete or accurate, the FCRA requires it to promptly notify the CRA of the determination and provide updated correct information.  See, §623(a)(2).   

• The Duty to Provide Notice of Dispute. If the information that is being furnished to a CRA is being disputed by the member, the credit union may not provide that information to the CRA without a notice that the information is being disputed.  See, §623(a)(3).    

• The Duty to Provide Notice of Delinquency of Accounts. A credit union that furnishes information to a CRA about a delinquent account being placed for collection or charged to profit or loss, is required to notify the CRA of the date of the delinquency no later than 90 days after furnishing the information.  The date of delinquency is the month and year the first payment was missed.  See, §623(a)(5).    

• The Duty to Provide Notice of Negative Information to Member. The FCRA requires that a notice of negative information be provided to a member when a credit union furnishes negative information to a CRA regarding the extension of credit to a member.  See, §623(a)(7).  “Negative information” means information relating to a member’s delinquencies, late payments, insolvency, or any form of default.  See, §623(a)(7)(G)(i).  The FCRA requires the credit union to provide the notice either: (i) before furnishing the negative information to the CRA; or (ii) 30 days after furnishing the information.  The notice may be included on or with other disclosures such as a notice of default, a billing statement, or any other materials provided to the member, and must be clear and conspicuous.  Notwithstanding the general ability to provide the notice with other disclosures, if the credit union opts to provide the notice before it furnishes the information to a CRA, it may not include the notice with the initial disclosures provided under TILA AND Regulation Z. See, §623(a)(7)(B).  Regulation V contains a model notice.

• The Duty to Investigate and Report after Receiving Notice of Dispute from a Member. The FCRA provides that a credit union must take certain actions after receiving a notice of dispute from a member, including the duty to: (i) investigate the disputed information; (ii) review all relevant information provided by the member in the notice of dispute; (iii) timely complete the investigation and report the results to the member; and (iv) if it is determined that the information was inaccurate, promptly notify each CRA the information was furnished to and provide any corrections to make the information accurate.  See, §623(a)(8)(E).  Section 1022.43 of the regulation sets forth the types of disputes that are subject to the duty to investigate, as well as the exceptions. 

• The Duty to Investigate and Report after Receiving Notice of Dispute from a CRA. Sometimes members send a notice of dispute the CRA(s).  If this happens, the FCRA requires the CRA to promptly notify the credit union.  Once the credit union receives the notice of dispute from a CRA, it is required under the FCRA to: (i) investigate the disputed information; (ii) review all relevant information provided by the CRA; (iii) report the results to the CRA; and (iv) if it is determined that the information was inaccurate, report those results to all other CRAs the information was furnished to; and if the disputed information is found to be inaccurate or incomplete, promptly modify the information, delete the information, or block the reporting of that information.  The duty to investigate in this instance is triggered once the notice is received from a CRA.  See, §623(b)(1)(E). 

• Duty to Establish and Implement Reasonable Policies to Ensure the Accuracy and Integrity of the Information Furnished. Under the FCRA and Regulation V, a credit union that reports information to a consumer reporting agency is required to have policies and procedures in place to ensure the accuracy and integrity of the information furnished. See, 12 C.F.R. §1022.42.  The policies and procedures should be designed to promote certain objectives, as spelled out in Appendix E, such as: (i) to furnish information about accounts or other relationships with a member that is accurate; (ii) to conduct investigations of member disputes and take appropriate actions based on the results of the investigations; and (iii) to update the information it furnishes when necessary, to reflect the current status of the member account or other relationship, including a transfer of an account by sale or assignment for collection to a third party.   See, 12 C.F.R. Part 1022, App. E.  

This is not an exhaustive list, please refer to §623 of the FCRA for a comprehensive list of duties imposed on credit unions that decide to furnish information to a CRA.

It makes sense that credit unions want to ensure compliance here.  The CFPB has stated that it “will continue to monitor furnishers’ compliance with the FCRA regarding consumer disputes of information they have furnished to CRAs.  Furnishers should take immediate steps to ensure they are fulfilling their obligations under the law.”  CFPB Bulletin 2014-01. 

If you have any questions relating to this article or any other FCRA issues, please contact NAFCU’s regulatory compliance team.  We’re here for you!

 

Oh... Check out our upcoming NAFCU Webcasts:

UDAAP – We Know It When We See It

Tuesday, September 27 | 2:00 p.m. – 3:30 p.m. ET

Identify and Monitor High-Risk and Money Service Businesses Accounts

Wednesday, September 28 | 2:00 p.m. – 3:30 p.m. ET

What's New and What's Next with NAFCU's Regulatory Affairs Team

Thursday, September 29 | 2:00 p.m. – 3:30 p.m. ET

Safeguarding Against Insider Fraud; NAFCU Regulatory Compliance Seminar

Written by Shari R. Pogach, Regulatory Paralegal

Insider fraud is the bane of any financial institution. I’ve provided you with a couple of case examples in previous posts here and here. So how does a credit union protect itself against insider fraud?  The September issue of The NCUA Report includes an article on what a credit union can do to discourage the possibility of fraud. 

The article notes it’s important that a credit union enact strong internal controls, make certain such controls are tailored to the credit union’s products and services, and controls cannot be internally overridden.  Two common internal controls are the member-account verification and the credit union’s annual audit.  Additional internal controls can include using an outside auditor or having periodic internal audits during the year done by an internal auditor or the supervisory committee.  The article also offers this list of common internal controls:

• Dual controls;
• Computer access controls;
• Reviews of file maintenance reports;
• Cash counts;
• Surprise audits; and
• Measures that prevent employees from accessing family member accounts.

According to NCUA, a credit union can also use the following to deter fraud:

• Performing background checks before hiring employees;
• Requiring employees to sign a fraud policy annually;
• Conducting basic fraud awareness training;
• Requiring mandatory vacations and having another employee perform the vacationing employee’s duties; and
• Monitoring employees, including lifestyle and behavioral changes.

NCUA indicates it is important for the board of directors and supervisory committee to have continuous ongoing training in order to establish and maintain strong internal controls.   

The article also discusses how to report suspected fraud either through channels within the credit union or to NCUA through its fraud hotline. 

Insider fraud continues to rise and the cost of fraud to institutions also continues to increase.   Strong internal control safeguards are paramount to help detect and prevent against internal fraud.   

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Seminar in New Orleans:  Our Regulatory Compliance Seminar is coming up next month in fun and fabulous New Orleans. I hope you’ll join us for the best credit union compliance training in the industry, in one of the best cities in the world! With their official motto of laissez les bons temps rouler – let the good times roll – you’re bound to have a great time exploring the city after class has ended. Check out some of their top restaurants and things to do. This popular event is almost sold out. Secure your seat today!

"Abacus: Small Enough to Jail" and Non-Traditional Underwriting Resources

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

This past week, my husband and I were on vacation in Toronto, Ontario, attending the Toronto International Film Festival. We had a tremendous time. One film we saw, and were both very excited about, was the world premiere of the documentary Abacus: Small Enough to Jail.

The film chronicles the legal struggle of family-run Abacus Federal Savings Bank, the only U.S. bank indicted for mortgage fraud related to the 2008 financial crisis. It was a gripping and sobering reminder of the damage caused by irresponsible lenders, the unfair legal burden on small financial institutions, and for me, most critically, the importance of credit unions, their mission and their role in their communities.

Abacus: Small Enough to Jail will have its U.S. premiere at the 54th New York Film Festival in October. It was produced by PBS’s Frontline and will air in early 2017. I'd recommend it to everyone.

One of the areas that got Abacus FSB in trouble was insufficient documentation when underwriting loans. Abacus FSB’s customers are frequently cash-only businesses and credit-invisible borrowers, especially Chinese immigrants. Credit unions often have similarly situated members, so, as a reminder, below are some resources for credit unions with similar memberships:

• NCUA’s April 2016 report Serving the Credit Invisible discusses loan application evaluation and underwriting programs for members who have little or no credit history.
• NCUA’s Letter to Credit Unions 10-CU-01 and its enclosure, Supervising Low Income Credit Unions and Community Development Credit Unions also contains useful discussion. The guidance describes alternative sources of funding, common characteristics of borrowers for LICUs and CDCUs, and how to properly credit risk these loans.
• NCUA’s Letter to Credit Unions 05-CU-01 regarding supervising CDCUs and its enclosed white paper: Supervising Community Development Credit Unions ― Balancing Their Mission and NCUA's Regulatory Responsibilities, may also be helpful. The enclosure describes for examiners the non-traditional underwriting practices of CDCUs due to the modest means and unique circumstances of their members. The white paper discusses the need to verify and document non-traditional income.
• FFIEC BSA/AML Examination Manual section on Cash-Intensive Businesses.
• NCUA’s December 1, 2015 webinar entitled Unique Challenges and Opportunities Servicing Hispanic Credit Union Members which discusses several issues in serving immigrant populations with unusual documentation and underwriting needs.
• NCUA’s Legal Opinion Letter 05-1219 discusses when it is permissible to underwrite an MBL using cash flow as collateral.
• NCUA’s Letter to Credit Unions 04-CU-10 discusses underwriting MBLs made to self-employed borrowers.
• NCUA’s Letter to Credit Unions 99-CU-05 on risk-based lending.

Monday Morning Wrap Up – FAQs and Upcoming Deadlines; NAFCU Congressional Caucus

Written by Brandy Bruyere, Director of Regulatory Compliance

NAFCU’s Congressional Caucus kicks off today, and hundreds of credit union representatives will hear from various regulators and members of Congress before heading to Capitol Hill to discuss important credit union issues with members of Congress and their staff. Regulatory burden remains a theme in many of these issues, and today I wanted to give a round-up of a couple of frequently asked questions and deadline reminders.

Mortgage Servicing Rule. Many people keep asking – when is this finally going to publish in the Federal Register? On August 4, the CFPB released changes to the 2014 mortgage servicing rules, with deadlines either 12 or 18 months after the rule is formally published.  It's been six weeks, but as of Friday when this blog was drafted, the rule had not yet hit the Federal Register so you did not miss it! NAFCU will be monitoring the Federal Register and we are in the process of completing additional resources for our members on this rule, but are holding off until we have formal compliance deadlines. We’ll continue to keep you posted on this one!

Military Lending Act. This deadline is in two weeks (October 3, 2016) and many credit unions have asked us about record retention requirements under the MLA. The DoD’s regulation does not specify the type of information that must be retained or contain a set record retention period.  Rather, the rule states that the safe harbor is available “so long as that creditor timely creates and thereafter maintains a record of the information so obtained.” Here’s the rule text for reference:

(3) Determination and recordkeeping; one-time determination permitted. A creditor who makes a determination regarding the status of a consumer by using one or both of the methods set forth in paragraph (b)(2) of this section shall be deemed to be conclusive with respect to that transaction or account involving consumer credit between the creditor and that consumer, so long as that creditor timely creates and thereafter maintains a record of the information so obtained. A creditor may make the determination described in this paragraph (b), and keep the record of that information obtained at that time, solely at the time—

(i) A consumer initiates the transaction or 30 days prior to that time;

(ii) A consumer applies to establish the account or 30 days prior to that time; or

(iii) The creditor develops or processes, with respect to a consumer, a firm offer of credit that (among the criteria used by the creditor for the offer) includes the status of the consumer as a covered borrower, so long as the consumer responds to that offer not later than 60 days after the time that the creditor had provided that offer to the consumer. If the consumer responds to the creditor's offer later than 60 days after the time that the creditor had provided that offer to the consumer, then the creditor may not rely upon its initial determination in developing or processing that offer, and, instead, may act on the consumer's response as if the consumer is initiating the transaction or applying to establish the account (as described in paragraph (b)(3)(i) or (ii) of this section).

Without an interpretation from the DoD about what precisely is sufficient, and knowing that this could be important for both demonstrating a covered borrower check to examiners as well as to assert a defense in litigation, many are opting to keep either the document from the MLA database or the credit report as the “record of the information so obtained.”  Additionally, the recent interpretative rule clarified that assignees of loans can also benefit from the safe harbor covered borrower check, if the assignee “continues to maintain the record created by the creditor that initially extended the credit.” Credit unions may want to consider what they are comfortable having as proof that the covered borrower check was performed for examination and litigation purposes.

NAFCU recently updated its MLA Compliance Guide which can be found here along with our other MLA resources.

NACHA Same Day ACH Phase 1. Phase 1 of NACHA’s same-day ACH changes go into effect on September 23, 2016 –this upcoming Friday. For more information, we blogged about this last year, NACHA has a resource center for this rule with helpful materials, the Federal Reserve has a FAQ page, and NCUA issued a Letter to Credit Unions earlier this month.

Other miscellaneous deadlines – Department of Labor, IRS Tax Reporting Changes. The DOL’s overtime rule is effective December 1, 2016 which impacts credit unions as employers.  Another deadline to keep on the radar especially if your credit union has relationships with investment providers is the DOL’s fiduciary duty rule, effective April 10, 2017 (more information is available in this NAFCU blog post). Finally, some of you may recall that the IRS made changes to the 2016 1098 mortgage interest statement, we blogged about this earlier in the year but as we approach the end of 2016, it seemed worth a reminder

Nolan and Lemmy. Nolan is almost 2, and he really likes petting Lemmy (or as he calls him, “Mem-mee”). For his part, Lemmy is a very patient guy about it! 

Seasonal Pumpkin Spice Lattes and Skip-a-Pays are Back!

Written by Stephanie Lyon, Regulatory Compliance Counsel

I recently walked into a store to buy puppy food and between the Halloween treats, fancy Thanksgiving table decor and winter holiday ornaments, I was instantly reminded that the holiday season is right around the corner. Skip-a-pay programs are offered by many credit unions and are especially popular around major holidays. These programs are designed to give members a little extra spending money by allowing certain borrowers to skip a loan payment and resume payments during the next pay period. While each credit union’s program may be unique, some regulatory guidance exists pertaining to the components of skip-a-pay programs.

Notification Requirements for Loan Modifications

Regulation Z has various disclosure requirements for skip-a-pay programs depending on whether the loan is open or closed-end credit. For non-home secured open-end credit, the commentary to section 1026.9(c)(2)(v) states that credit unions are generally not required to issue a change in terms notice if the skip-a-pay program was properly explained in the account-opening disclosures. Otherwise, Regulation Z requires credit unions to give prior notice before resuming the original payment schedule even though prior notice would not be required before skipping a payment. See, 12 C.F.R. § 1026, Supp. I, cmt. 1026.9(c)(2)(v) – 2. The official interpretation to section 1026.9(c)(1)(ii) contains similar guidance for home-equity lines of credit. See, 12 C.F.R. pt. 1026, Supp. I, comment 1026.9(c)(1)(ii)-2.

As for non-home secured close-end loans, implementing a skip-a-pay program could be more challenging as the program may require a modification to the existing loan agreement. This type of modification would typically not trigger additional disclosures under Regulation Z unless the original obligation has been cancelled and substituted by a new obligation. See, 12 C.F.R. § 1026, Supp. I, cmt. 1026.20(a)-1.i. Home-secured closed-end loans add an additional layer of complexity because allowing a skipped-payment can create issues related to flood certifications and negative amortization. If the credit union is contemplating skips on real estate loans, it may want to discuss this with local counsel.  Keep in mind that real estate transactions are largely governed by state law and skips could impact the credit union’s legal recourse.

In addition to Regulation Z, a couple of things to consider when making loan modifications are:

• Will the credit union require all of the borrower(s)’ signature and consent prior to modifying the loan? From a contract enforceability perspective, when there is a co-borrower and the credit union is willing to modify the terms of the note, state law may require that both signatures be on the modification or the credit union may not be able to enforce the contract against the borrower who did not sign.

• How is the member making up the skipped payment? For example, if the credit union adds another payment at the end of the maturity, this may extend the loan period and hence require a contract modification.

Adverse Actions

In addition to notification requirements under Regulation Z, Regulation B and to some extent the Fair Credit Reporting (FCRA) may require credit unions to issue adverse action notices to members that have applied for the skip-a-pay program and are denied. Under Regulation B, a member’s request to skip may be considered an application for the extension of credit. See, 12 C.F.R. §§ 1002.2(j) (defining “credit”); 1002.2(q) (defining “extension of credit”). Hence, the refusal to grant a skip-a-pay application could be considered an “adverse action” under Regulation B and require the credit union to send an adverse action notice. See, 12 C.F.R. §§ 1002.2(c)(1)(i) (defining “adverse action”); 1002.9(a)(1)-(2) (requirement to send an adverse action notice). One thing to keep in mind is that the rule generally does not require a credit union to send an adverse action notice to members whose account is currently delinquent or in default. See, 12 C.F.R. § 1002.2(c)(2)(ii).

The credit union may also have an independent obligation under the FCRA to send an adverse action notice if the credit union relied on a “consumer report,” such as a credit report issued by a reporting agency, to deny the application. 15 U.S.C. § 1681m. The FCRA definition of “consumer report” includes any “written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living…” 15 U.S.C. § 1681a(d)(1). This term does not include, however, information relating to the credit union’s own experiences with the member. See, 15 U.S.C. § 1681a(d)(2)(A)(i).

Skip-a-pay programs can be a great service to members. The credit union may just want to ensure it either anticipates these programs in the loan agreement or is prepared to properly modify contractual agreements under state law. If the skip-a-pay program is new to the credit union, refresh your recollection of Regulation Z’s notification requirements and any adverse action requirements that may be imposed from declining a skip-a-pay request.

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In honor of the impending fall and the inspiration for my puppy’s Halloween costume, here is a cute pugkin spice latte. I think Chewie could rock this, but I am open to suggestions.

Overdraft and Bounce Protection Programs– Some Frequently Asked Questions

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. While NCUA’s Truth in Savings Rule and Regulation E address the disclosure of credit union overdraft and bounce protection programs, we sometimes receive questions regarding the substantive features of these products. For example, credit unions have asked whether federal regulations prohibit automatically enrolling members into bounce protection programs to cover checks presented for payment that may overdraw an account. This blog post covers some of these more frequently asked questions on overdrafts and bounce protection.

May Credit Unions Automatically Enroll Members in Overdraft or Bounce Protection Programs?

Regulation E prohibits credit unions from assessing a fee against a member’s account for paying an ATM or one-time debit card transaction as part of an overdraft service unless the member has affirmatively consented to participate in the overdraft program. See, 12 C.F.R. § 1005.17(b)(1)(i)-(iii). The member must be provided with “confirmation of the [member’s] consent in writing, or if the [member] agrees, electronically, which includes a statement informing the [member] of the right to revoke such consent.” 12 C.F.R. § 1005.17(b)(1)(iv). Therefore, while the rule does not specifically require that a member opt in to the overdraft program, it does prohibit the credit union from charging the member a fee for overdrawing an account.

Aside from the disclosure requirements in Section 707.11 of Truth in Savings, there does not appear to be any comparable opt-in requirement for bounce protection programs that may pay the full amount of a check even though it overdraws a member’s account. Article 4 of the Uniform Commercial Code, which sets forth model laws that have been adopted to some extent in each state, generally permits credit unions to pay checks even though they may cause an overdraft and leaves questions regarding bounce protection programs to state contract and common law principles. See, U.C.C. § 4-401. For example, specific bounce program practices may be subject to claims under state unfair or deceptive trade practices laws.

That being said, NCUA does recommend as a best practice that credit unions “obtain affirmative consent of [members] to receive overdraft protection. Alternatively, where overdraft protection is automatically provided, permit [members] to ‘opt out’ of the overdraft program and provide a clear consumer disclosure of this option.” Letter to Credit Unions 05-CU-03 (Feb. 2005). Even though this is couched in interagency guidance, the clear supervisory expectation here appears to be that credit unions either obtain affirmative consent or permit members to opt out of overdraft or bounce protection programs.

 Is it Necessary to Send a Cure Notice Each Time a Member Overdraws an Account?

While neither Regulation E nor Truth in Savings appears to require credit unions to provide a cure notice with each overdraft, NCUA strongly recommends that credit unions provide such notices as a best practice. Here is another excerpt from Letter to Credit Unions 05-CU-03:

Best Practices

Clear disclosures and explanations to consumers of the operation, costs, and limitations of an overdraft protection program and appropriate management oversight of the program are fundamental to enabling responsible use of overdraft protection. Such disclosures and oversight can also minimize potential consumer confusion and complaints, foster good customer relations, and reduce credit, legal, and other potential risks to the institution. Institutions that establish overdraft protection programs should, as applicable, take into consideration the following best practices, many of which have been recommended or implemented by financial institutions and others, as well as practices that may otherwise be required by applicable law. While the Agencies are concerned about promoted overdraft protection programs, the best practices may also be useful for other methods of covering overdrafts. These best practices currently observed in or recommended by the industry include:

[…]

Promptly notify consumers of overdraft protection program usage each time used. Promptly notify consumers when overdraft protection has been accessed, for example, by sending a notice to consumers the day the overdraft protection program has been accessed. The notification should identify the date of the transaction, the type of transaction, the overdraft amount, the fee associated with the overdraft, the amount necessary to return the account to a positive balance, the amount of time consumers have to return their accounts to a positive balance, and the consequences of not returning the account to a positive balance within the given timeframe. Notify consumers if the institution terminates or suspends the consumer’s access to the service, for example, if the consumer is no longer in good standing.

(Emphasis added). Again, while this is provided as a “best practice,” the guidance appears to suggest that a program that lacks some or all of these recommended practices may be considered unsafe and unsound or possibly unfair or deceptive. Therefore, even though this does not appear to be an explicit requirement contained in a regulation, credit unions may still wish to provide cure notices to members both as a member service and to possibly avoid any compliance or litigation risk.

Is it Necessary to Provide an Adverse Action Notice when the Credit Union Denies an Overdraft?

While Regulation B defines “credit” and “consumer credit” broadly enough to include credit union bounce protection and overdraft programs within its scope, the rule also contains a number of exceptions from various provisions for incidental credit including the requirement to provide adverse action notices. See, 12 C.F.R. § 1002.3(c)(2)(vi). The term “incidental credit” is defined as an extension of credit that is not made pursuant to a credit card agreement, that is not subject to a finance charge, and that is not payable by agreement in more than four installments. See, 12 C.F.R. § 1002.3(c)(1). Since most overdraft charges are not considered finance charges, it may not be necessary to provide an adverse action notice under Regulation B. See, 12 C.F.R. § 1026.4(c)(3). That being said, if the credit union denies an overdraft as part of an overdraft line of credit program, there may be an obligation to provide an adverse action notice if one would otherwise be required since fees related to overdraft lines of credit are typically considered finance charges.

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Looking for Additional Help with the Military Lending Act?  Thursday, September 15, 2016, from 2:00-3:30 p.m. ET, Director of Regulatory Compliance Brandy Bruyere and Director of Education Devon Lyon will be providing a walk through the recent interpretive guidance issued by the U.S. Department of Defense on the Military Lending Act as well as highlighting lingering compliance questions. More information on the webcast can be found here.

2016 Interagency Fair Lending Hot Topics.  Tuesday, October 4, 2016, from 2:00-3:30 p.m. ET, the Federal Reserve will be hosting an interagency webinar on fair lending issues and hot topics. During this session, representatives from six federal agencies, including NCUA, will discuss a variety of emerging fair lending issues and hot topics including redlining, auto lending, and CFPB updates. More information on the webinar can be found here.

NCUA Issues Letter to Credit Unions on Same Day ACH.  On Tuesday, September 13, 2016, NCUA issued Letter to Credit Unions 16-CU-03 (Sept. 2016) as a reminder for the upcoming Phase 1 NACHA Same Day ACH deadlines. The letter addresses upcoming changes to the NACHA Operating Rules to implement Phase 1 of NACHA's Same Day ACH amendments. The letter contains a summary of NACHA's Same Day ACH rule as well as additional resources for credit unions and is available here.

Whale and Spear Phishing Examples and Red Flags; Credit Unions and the Higher Road

Written by Shari R. Pogach, Regulatory Paralegal

I know you’ve all heard about the digital con games that target businesses and individuals and their email accounts.  The endgame goal is to get funds wire transferred into the criminal hacker’s account, usually to a bank located in Asia.  The Financial Crimes Enforcement Network (FinCEN) recently issued an advisory, FIN-2016-A003, to help financial institutions to guard against email phishing fraud that has involved $3.1 billion since 2013.  And, that’s just the 22,000 reported cases.

The two main types of email phishing fraud are:

• When a company’s business email is compromised; and
• When a victim’s personal email account is compromised.

What happens is the bad guys hack into a person’s email (either business or personal) and get as much information as they can about his or her financial institutions, account details, contacts and other related information.  Those stolen details are then used to email instructions that appear to be from the accountholder to get the financial institution to initiate an unauthorized wire transfer of funds into the criminals’ domestic or foreign bank accounts.

The advisory gives examples of the types of scenarios used and a red flag list to help identify possible email phishing fraud.  Here are a few email phishing fraud red flag triggers:

• Seemingly legitimate emailed transaction instructions using different language, timing and amounts than previously verified instructions.
• Instructions coming from an email account that looks very similar to the victim’s email account but has been slightly altered by adding, changing or deleting characters.
• Instructions that direct the payments to a known beneficiary but the beneficiary’s account information is now different.
• The instructions direct payment to a beneficiary where there is no prior payment history or documented relationship to the customer and the payment is significantly higher than payments to other beneficiaries the customer has paid in the past.
• Instructions are delivered in such a way that gives limited time or opportunity to confirm the transaction’s authenticity.
• The instructions come from an employee who is a newly authorized person on the customer’s account or someone who hasn’t previously sent wire transfer instructions.

FinCEN stresses no single transactional red flag indicates suspicious activity, additional questions and further investigation may be necessary to determine if a transaction is indeed suspicious.  It is also recommended the advisory should be widely shared within the institution with its:  cybersecurity and risk departments; fraud prevention units; BSA/AML management; AML intelligence units; and AML analysts/investigators.

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Speaking of fraud, Wells Fargo was all over the headlines last week with its historic fine for unlawful sales practices.  Just more bad bank behavior. I think our CEO said it best in his Berger Leadership Blog that this is what differentiates us and makes the credit union industry so stellar – putting members first instead of profits.  Take a moment to read his post and give yourself a pat on the back today as you start the week.

DoD’s Interpretive Guidance on MLA: Part III – Definition of "Vehicle"

Written by Shereefat Balogun, Regulatory Compliance Counsel

Earlier this summer, my colleague Stephanie Lyon wrote about the DOD’s failure to define some critical terms in the rule, namely: “vehicle”, dwelling”, and “personal property”.  As she explained, these definitions matter, as they helps us determine which loans are included in the MLA’s scope.  Well we have some good news- the DOD’s Interpretive Guidance defined one of those terms- "vehicle".  That said, the guidance does fall short and still leaves some questions unanswered. 

As we all know, there are a few credit transactions which are exempt from the MLA rule.  For purposes of this article, those include:

• Residential mortgages, meaning “any credit transaction secured by an interest in a dwelling,” including loans to finance the purchase or initial construction of a dwelling, a refinance, a HELOC or reverse mortgage;
• Loans that are expressly intended to finance the purchase of a motor vehicle or personal property, where the credit is secured by the vehicle or property being purchased;

See, 32 C.F.R. §232(f)(2).

The Interpretive Guidance released a few weeks ago “clarified” the definition of “vehicle” and specifically excluded motor homes, recreational vehicles (RVs), golf carts, and motor scooters from the definition.  Meaning, they are not exempt from the MLA as a “motor vehicle”.  Here is the question and answer on the issue, taken out of the guidance:

19. Under 32 CFR 232.3(f)(2)(ii) and 232.8(f) what methods of transportation are included within the definition of a “vehicle”?

Answer: For purposes of the MLA, the term “vehicle” means any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation. The term does not include motor homes, recreational vehicles (RVs), golf carts, or motor scooters.

Thanks DOD!

However, this “clarity” leads to a new question- if they’re not considered vehicles, what are they? Are these considered “personal property?”  Well we still don’t know, because we still don’t have a definition for “personal property”.  If these are considered personal property, this begs another question.  Why would the DOD bother to exclude boats, RVs, etc., from the definition of “vehicle”, just to include them as “personal property” and have them exempted under 232.3(f)(2)(iii)?  This is rather perplexing.

Or would they be considered a “dwelling”?  The exception for a residential mortgage requires that the credit be “secured by an interest in a dwelling”.  While the rule seems to contemplate that a dwelling-secured interest is involved in order for the residential mortgage exception to apply, we still don't have a definition for "dwelling".

As explained above, even with the recently published interpretive guidance, there are still a lot of gray areas.  Because of the ambiguity that remains with this category of loans, credit unions are strongly advised to consult with counsel.  Indeed, state law may provide helpful guidance.  Thus, having counsel familiar with your state’s property law may help avoid some of the risks associated with the ambiguity left by the rule.  For example, it is common for states to categorize property as “real property” meaning secured by land, and “personal property” which is often a catch-all for all other property, meaning non-real property.

NAFCU’s Regulatory Compliance Team is continuing to review the guidance to understand its full impact on credit unions and will make necessary updates to our Military Lending Act Guide in the coming weeks. Currently available resources can be found here at our MLA Compliance landing page.

The Adventures of a Non-Member: Joint-Owner Accounts

Written by Stephanie Lyon, Regulatory Compliance Counsel

Once upon a time, I traveled from Virginia to New York with the sole goal of recording a mortgage in the office of land records. I brought with me a cashier’s check, the mortgage deed, and an affidavit signed by the loan officer and member. When I arrived at the recording office, the clerk informed me that the check I had was insufficient to cover the recording taxes associated with the property. I started writing a personal check to cover the difference but the clerk looked at the check disapprovingly. To my dismay, the land recording office would not accept my out-of-state check or any cash. I quickly embarked on a scouting trip to the nearest credit union to purchase a cashier’s check before the office of land records closed. Unfortunately, that credit union would not provide me with a cashier’s check as I was not within its field of membership as required by section 701.30 of NCUA rules and regulations. I finally ended up driving to a U.S. postal office a town away to obtain the cashier’s check and successfully recorded the mortgage deed. While I did not make it on time to take my train, I was able to enjoy upstate New York hospitality. This story inspired me to blog about a frequently asked question regarding the extent of services non-members may receive from federal credit unions (FCUs).

The goal of FCUs is to “promote thrift among [their] members by affording them an opportunity to accumulate their savings and to create…a source of credit for provident or productive purposes.” 12 C.F.R. § 701, App. A, Art. I, § 2. Under certain circumstances, NCUA has permitted FCUs to provide services to nonmembers as an incidental power designed to promote credit union membership. These determinations are scattered across multiple legal opinion letters and in some portions of NCUA’s rules. We receive many questions about non-member joint accounts, so I thought I would address the issue coming off the long holiday weekend.

Federal credit unions often ask whether a non-member can be a joint owner on an account. The Federal Credit Union Act (FCU Act) provides that members may add non-member joint account owners under certain circumstances. While the FCU Act allows non-members to be joint owners on a member’s account, it prohibits non-members from voting or receiving other member benefits:

“Shares may be issued in joint tenancy with right of survivorship with any persons designated by the credit union member, but no joint tenant shall be permitted to vote, obtain loans, or hold office, unless he is within the field of membership and is a qualified member.” See, 12 U.S.C. § 1759.

Joint ownership implies the ability of one joint owner to withdraw all the funds in the account including the par value. See, e.g., Model U.C.C. § 4-403(a). Some credit unions have stumbled upon the issue when non-member join owners wish to withdraw all funds and close the account hence ending the accountholder’s membership in the credit union. In order to prevent this situation some credit unions have added language to account agreements that only allow the member joint owner to close the account. Credit unions may want to look at their specific bylaws and account agreements for similar provisions or consider working with counsel to add the necessary language to prevent non-member joint owners from closing the member’s account. Remember, even if the non-member joint owner withdraws all the funds from the account, the model bylaws have a section that allows the member a certain amount of time to bring the balance up to the par value to retain their member in good standing status. See, 12 C.F.R. § 701, App. A, Art. III § 3.

Aside from the joint-ownership, NCUA rules and regulations also allow FCUs to perform certain services for non-members that are within the field of membership of the credit union such as selling negotiable checks and offering check cashing services for a fee. See, 12 C.F.R. § 701.30(a)-(b). Additionally, FCUs that are designated as “low income credit unions” (LICUs), have the ability to accept shares from non-members such as other credit unions and public units. See, 12 U.S.C. § 1757(b). For more information on LICUs, see NCUA Letter to Credit Unions 10-CU-01.

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Here is a picture of the cozy B&B I called home for a night while attempting to record a mortgage in Saratoga, NY.

In Case You Missed It, End of Summer Round Up; Programming Note

Written by Shari R. Pogach, Regulatory Paralegal

As we close out the waning days of summer and head into the long Labor Day weekend, we’ve compiled items the agencies have pushed out in the last few weeks that you might have overlooked. 

NCUA

• Exam Video Series – Four-part learning video series for credit union board members on the purpose, process and components of a NCUA examination.

• High-Impact Community Partnerships Webinar – A 90-minute webinar on Wednesday, September 21, 2016, at 2 p.m. Eastern for credit unions looking to build community partnerships to offer more products and services. Online registration is available here.

• Going Digital: Strategies for Providing Digital Services – A Small Credit Union Learning Center guidebook with instructions on creating a strategic plan for analyzing the need for digital products and developing them to meet member needs. 

• The NCUA Report – The August 2016 issue contains articles from NCUA offices on agency initiatives and topical supervisory, regulatory and compliance issues.

• Prohibition Notices – Five notices were issued in August to individuals convicted of crimes of dishonesty.

CFPB

• HMDA Rule Implementation – Bureau resources to help understand, implement and comply with the changes to Home Mortgage Disclosure Act and Regulation C.

• Report on Fighting Elder Financial Exploitation Through Community Networks – Explains what elder financial exploitation prevention and response networks do, how they work, how they can work better and how they can be established. In addition to the report, the bureau also has developed a Resource Guide for Networks on starting and developing a network

• Technical Correction to TILA – The bureau issued a correction to add comments 1026.41(e)(5)-1, -2, and -3 to the official commentary in Regulation Z. The comments were issued earlier but were mistakenly omitted when updating the official Code of Federal Regulations (CFR). This was simply a technical correction to formally correct the official CFR.

• Monthly Complaints Snapshot Report – The latest report focuses on consumer complaints dealing with bank accounts and service issues. It also takes a look at consumer complaints from Ohio.

• Settlement Professional’s Guide – A resource to help settlement professionals through the TILA/RESPA TRID changes.

U.S. Department of the Treasury/Federal Banking Agencies

• Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement – Describes the expectations of U.S. regulators, the supervisory examination process and the use of enforcement actions concerning anti-money laundering and sanctions with foreign correspondent banking.

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Programming Note. NAFCU will close at noon today and also be closed on Monday for the long holiday weekend. We will be back to blogging on Wednesday. Enjoy the weekend!

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Corpse Flower.  One thing I did this summer was join a whole lot of other folks in the heat to check out the corpse flower (Amorphophallus titanum), also known as the stinky plant, when it bloomed in early August at the U.S. Botanic Garden here in Washington.  And, I have the pictures to prove it.