NAFCU Compliance Blog

Business Days and Holidays – Unwinding Regulation Z

Written by Brandy Bruyere, Director of Regulatory Compliance

We hope everyone had a nice weekend and any celebrations were successful and pleasant time with family and loved ones. With a couple of federal holidays falling on the weekend recently, we have had a few credit unions ask about how this impacts the Regulation Z definition of “business day.” Because Reg Z is so fun, there are two definitions of “business day” that apply to different situations:

(6) Business day means a day on which the creditor's offices are open to the public for carrying on substantially all of its business functions. However, for purposes of rescission under §§1026.15 and 1026.23, and for purposes of §§1026.19(a)(1)(ii) [limit on imposing fees for a reverse mortgage application before disclosures are provided], 1026.19(a)(2) [waiting period for good faith estimates], 1026.19(e)(1)(iii)(B) [providing Loan Estimate at least 7 business days before consummation], 1026.19(e)(1)(iv) [timing of the receipt of the Loan Estimate], 1026.19(e)(2)(i)(A) [restriction on fees before Loan Estimate is provided], 1026.19(e)(4)(ii) [limits on providing revised Loan Estimates], 1026.19(f)(1)(ii) [timing requirements for providing a Closing Disclosure], 1026.19(f)(1)(iii) [timing of receipt of the Closing Disclosure], 1026.20(e)(5) [timing of delivery of escrow cancellation notices], 1026.31 [includes timing requirements for high-cost and reverse mortgage disclosures], and 1026.46(d)(4) [private education loans], the term means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

(Emphasis and clarifications added.)

Notice that the specific definition of “business day” that includes all calendar days except Sundays and legal public holidays applies to many of timing requirements of the TILA/RESPA integrated disclosures (TRID) rule. How does this this work if a holiday is on a weekend?

To start, this only impacts a handful of holidays. Some of these federal holidays are always on a Monday, like Labor Day or Memorial Day, and Thanksgiving is always on a Thursday. But for federal holidays with set dates, specifically Christmas Day, New Year’s Day, Independence Day and Veteran’s Day, some years the holiday will fall on a weekend and be officially observed on either the previous Friday, or the following Monday.

The federal government seems to recognize Sunday holidays on the following Monday and Saturday holidays on the previous Friday. 2017 provides two examples – New Year’s Day is recognized on Monday, January 2 and Veteran’s Day, which falls on a Saturday, is recognized on Friday, November 10.

Let’s go back to the Reg Z definition of “business day.” Other than for specific provisions, like the right of rescission or certain disclosure timing requirements, a business day is based on a function test and includes days where the credit union’s “offices are open to the public for carrying out substantially all of its business functions,” as further clarified in the commentary:

1. Business function test.Activities that indicate that the creditor is open for substantially all of its business functions include the availability of personnel to make loan disbursements, to open new accounts, and to handle credit transaction inquiries. Activities that indicate that the creditor is not open for substantially all of its business functions include a retailer's merely accepting credit cards for purchases or a bank's having its customer-service windows open only for limited purposes such as deposits and withdrawals, bill paying, and related services.

But what about the rules subject to the other definition of business day like the right of rescission, or delivery of various disclosures under TRID? The commentary indicates that if the federal holiday is observed on another day, such as the Friday before the holiday, that Friday is still a “business day” for the purposes of the applicable rules:

2. Rule for rescission, disclosures for certain mortgage transactions, and private education loans.A more precise rule for what is a business day (all calendar days except Sundays and the Federal legal holidays specified in 5 U.S.C. 6103(a)) applies when the right of rescission, the receipt of disclosures for certain dwelling- or real estate-secured mortgage transactions under [TRID]…, or the receipt of disclosures for private education loans under §1026.46(d)(4) is involved. Four Federal legal holidays are identified in 5 U.S.C. 6103(a) by a specific date: New Year's Day, January 1; Independence Day, July 4; Veterans Day, November 11; and Christmas Day, December 25. When one of these holidays (July 4, for example) falls on a Saturday, Federal offices and other entities might observe the holiday on the preceding Friday (July 3). In cases where the more precise rule applies, the observed holiday (in the example, July 3) is a business day.

(Emphasis added.)

Do other rules take a similar approach? No – in fact, under Regulation CC, the Monday following a weekend holiday not a business day, by definition:

(f) Banking day means that part of any business day on which an office of a bank is open to the public for carrying on substantially all of its banking functions.

(g) Business day means a calendar day other than a Saturday or a Sunday, January 1, the third Monday in January, the third Monday in February, the last Monday in May, July 4, the first Monday in September, the second Monday in October, November 11, the fourth Thursday in November, or December 25. If January 1, July 4, November 11, or December 25 fall on a Sunday, the next Monday is not a business day.

(Emphasis added.)

Meanwhile, Regulation E follows one rule that tracks the first Regulation Z “business function” type test, here’s the definition and some of the commentary:

(d) “Business day” means any day on which the offices of the consumer's financial institution are open to the public for carrying on substantially all business functions.

[…]

2. Substantially all business functions.Substantially all business functions include both the public and the back-office operations of the institution. For example, if the offices of an institution are open on Saturdays for handling some consumer transactions (such as deposits, withdrawals, and other teller transactions), but not for performing internal functions (such as investigating account errors), then Saturday is not a business day for that institution. In this case, Saturday does not count toward the business-day standard set by the regulation for reporting lost or stolen access devices, resolving errors, etc.

Overall, different regulations have different timing requirements, and to keep things fun, do not take a uniform approach to how to tally when these timing requirements have been met. Is it by calendar days, or business days? If business days, what’s a business day? These are some of the fun things compliance officers get to tackle on a regular basis.

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Upcoming NAFCU Webcast:

CECL Update – What’s Next?

Live Webcast Tuesday, January 10, 2017 | 2:00-3:30 p.m. ET

Join this crucial webcast for an in-depth understanding of the new standard and how it can impact your credit union. You'll explore ALLL methodology, interagency guidance and learn how to plan for CECL adaptation.

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Programming Note. In observance of New Year’s Day, NAFCU will be closed on Friday, December 30 and Monday, January 2. We’ll be back to blogging on Wednesday, January 4. Have a safe and happy New Year! In the meantime, we tried taking photos at home for our holiday card, and found that this task was much easier last year when Nolan was not terribly mobile yet. Lemmy cooperates though, for treats.

“New Year, New Products and Services-Frequently Asked Questions: Advertising”

Written by André B. Cotten, Regulatory Compliance Counsel

Greetings, compliance comrades! As we head towards the start of a new year, we have noticed an uptick in advertising related questions. Before we get into the details of the advertising requirements, it is useful to remember that the type of products or services and the definition of terms have impact on the scope of regulatory requirements.

In regards to the Truth in Savings Act, an advertisement is defined by section 707.2 as a commercial message that appears in any medium and that promotes directly or indirectly the availability of, or a deposit in, a share account. This is a very broad definition. However, the official commentary provides additional guidance.

Similarly, a key to understanding Regulation Z’s advertising rule is determining which rules apply to your proposed advertisement. Regulation Z has different rules depending on whether the product is open-end or closed-end. There are also special regulatory provisions for HELOCs and promotion rate advertisements. In order to know which rules apply you will need to determine what product you are advertising.

This blog covers some of the more frequently asked questions on advertisements.

If a credit union offers deferred interest on credit cards for an introductory period, should it be concerned about advertising requirements under Regulation Z?

Regulation Z contains advertising requirements specific to deferred interest programs. The term deferred interest is defined as “finance charges, accrued on balances or transactions, that a consumer is not obligated to pay or that will be waived or refunded to a consumer if those balances or transactions are paid in full by a specified date.” See, 12 C.F.R. § 1026.16(h)(2). If a deferred interest offer is advertised for a credit card (or other non-home-secured open-end loan), Regulation Z requires the credit union to state the deferred interest period in a clear and conspicuous manner in the advertisement, and include information about the terms that would apply when the transaction is not paid in full within the deferred interest period or if the account is in default before the end of the deferred interest period. These disclosures must be stated in a prominent location closely proximate to the first statement of “no interest,” “no payments,” “deferred interest,” “same as cash” or similar term. The language must be similar to that provided in Sample G-24 in Appendix G to Regulation Z.

Are there different requirements for advertisements that are inside the credit union, versus those that exist outside of a branch?

Truth in Savings has some different requirements for advertisements in these situations, but Regulation Z does not. Truth in Savings carves out advertisement-related exceptions for certain types of advertisements. Specifically, the regulation eases advertising requirements for broadcast or electronic media such as TV or radio (but not credit union websites), outdoor media (such as billboards), telephone response machines, and signs inside the premises of a credit union. See, 12 C.F.R. § 707.8(e).

Regulation Z regulates advertisements for both open and closed-end loans. See, 12 C.F.R. §§ 1026.16, 1026.24. If a credit union plans to advertise its loan products, it must comply with all of Regulation Z’s requirements regardless of whether the advertisement is placed inside or outside of the branch. However, the staff commentary does have alternative disclosure options for radio and television ads set forth in sections 1026.16(e) and 1026.24(g).

Must the credit union obtain its members’ consent under Truth in Savings or Regulation Z before delivering its advertising materials through email?

The advertising requirements of Truth in Savings (TISA) and Truth in Lending Acts (TILA) may be implicated when sending email advertisements, but credit unions do not need member consent to send email advertisements under these statutes/regulations. However, the requirements of the CAN-SPAM Act, which applies to unsolicited commercial emails, may also be triggered. CAN-SPAM generally requires unsolicited commercial ads to be labeled as an advertisement or solicitation and to include opt-out instructions along with the sender’s physical and electronic address. NCUA Regulatory Alert 04-RA-07 provides guidance on complying with CAN-SPAM. The FTC also has a document on CAN-SPAM compliance available on its website

If a “trigger term” is stated in the negative, is the credit union required to provide the additional advertising disclosures?

Under Regulation Z, “trigger terms” do require additional advertising disclosures when stated in the negative, or even when not stated explicitly, but readily implied. See, 12 C.F.R. Part 1026, Supp. I, comments 1026.16(b)(1)-1 and -2. For instance, if a credit union states its credit card had “no annual fee” is a statement of the term, this would trigger the additional disclosures. See, 12 C.F.R. § 1026.16(b)(1). Similarly, if the credit union were to claim “we will not charge you an annual fee” – the additional disclosures are still required as this statement is the same as stating “no annual fee.”

Given the differences between the rules for open-end and closed-end loans, how could a credit union convert an advertisement if a product is converted?

There are separate advertising requirements for open-end and closed-end loans in Regulation Z. The advertising requirements for open-end loans are found in 12 C.F.R. § 1026.16 and the requirements for closed-end loans are found in 12 C.F.R. § 1026.24. Unfortunately, there is no shortcut to converting open-end marketing pieces into compliant closed-end advertisements. A credit union would need to review the closed-end advertising rules and make sure its advertising includes all the necessary disclosures. The staff commentary to section 1026.24 contains additional details on the requirements.

Final Thoughts

Advertising compliance is the result of having a strong compliance management system that includes effective policies, procedures, education and communication about the applicable regulatory requirements. The advertising rules pursuant to the Truth in Savings Act and Regulation Z both generally prohibit commercial messages that are misleading, inaccurate or misrepresent a credit union’s deposit accounts or loan products.

Credit unions that fail to comply with the advertising rules also run the risk of potential UDAAP issues. The following three prongs are used to determine if an act or practice is “deceptive”: 1) it causes or is likely to cause substantial injury to consumers; 2) the injury is not reasonably avoidable by consumers; and 3) the injury is not outweighed by countervailing benefits to consumers or to competition. A “substantial injury” typically takes the form of monetary harm because of an unfair act or practice.

Also keep in mind that NCUA has an overarching advertising rule in Part 740 that prohibits all federally-insured credit unions from using any advertising that is “inaccurate or deceptive in any particular, or which in any way misrepresents its services, contracts, or financial condition…” Overall, clear and conspicuous advertisements and oversight of advertising materials can minimize potential confusion and complaints, fosters good member relations, and help reduce credit, legal, and other risks to the institution.  

Happy Holidays!

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Programming Note:

NAFCU will be closed Friday, December 23^rd and Monday, December 26^th for the Christmas Holidays.

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The Regulatory Compliance Team really enjoyed the photo booth last week at NAFCU’s Annual Holiday Party!

NCUA Issues Final Occupancy Rule Addressing Partial Occupancy and Excess Capacity

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On December 15, 2016, the NCUA Board approved amendments to the Fixed Assets Rule (now called the “Occupancy Rule”) eliminating the requirement that federal credit unions must plan for and achieve full occupancy of premises acquired for future expansion. The final rule also clarifies that credit unions may lease or sell excess capacity in facilities without an expectation that the leased excess facilities will be fully occupied by the federal credit union in the future. The lease or sale of excess equipment or services, however, remains limited to situations where the federal credit union reasonably expects that the excess capacity will eventually be used by the credit union as part of a future expansion of services to members.

Partial Occupancy.  Under the current Fixed Assets Rule, federal credit unions that acquire premises for future expansion and do not achieve full occupancy within one year are required to have a board resolution in place showing definitive plans for full occupation and make these plans available to NCUA upon request. Premises are considered “fully occupied” when “the federal credit union (or the federal credit union and a credit union service organization or a vendor) uses the entire space on a full-time basis.” Merely leasing the space to a CUSO or vendor, however, is not sufficient to demonstrate full occupancy. Rather, CUSOs and vendors “must use the space primarily to support the federal credit union or to serve the federal credit union’s members” in order for the premises to be considered fully occupied. 12 C.F.R. § 701.35(c)(1).

Federal credit unions that do not achieve full occupancy within one year must, at least, partially occupy the premises within a reasonable period but no later than six years after the date of acquisition. See 12 C.F.R. § 701.35(c)(2). Premises are “partially occupied” when the credit union, on a full-time basis, occupies a portion of the premises that is consistent with the federal credit union’s usage plan for the premises, sufficient enough that the federal credit union is deriving practical utility from the occupied portion, and sufficient to show that the federal credit union will fully occupy the premises within a reasonable time. See 12 C.F.R. § 701.35(b). Federal credit unions may request a waiver of the partial occupancy requirements from the appropriate Regional Director.

Under the amended rule, NCUA eliminates the requirement that federal credit unions must plan for, and eventually achieve, full occupancy of acquired premises. Instead, federal credit unions must partially occupy premises acquired for future expansion within a reasonable period, not to exceed six years after the date of acquisition. As amended, “partially occupy” “means occupation and use, on a full-time basis, of at least fifty percent of each of the premises by the federal credit union, or the federal credit union and a credit union service organization in which the federal credit union has a controlling interest in accordance with Generally Accepted Accounting Principles (GAAP).” While some credit unions may cheer this regulatory change as much needed regulatory relief, others may be wondering exactly what it means to have a controlling interest under U.S. GAAP.

According to FASB ASC 810-10-15-8, which addresses when parent companies should consolidate assets and liabilities of subsidiaries onto the parent company’s balance sheet, “the usual condition for a controlling financial interest is ownership of a majority voting interest, and therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing towards consolidation.” The accounting standard appears to recognize, however, that the “power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.” U.S. GAAP also appears to have specific principles addressing general and limited partnerships, and variable interest entities. Therefore, it is not entirely clear without an in-depth review of the corporate structure of CUSOs, exactly which CUSOs would count towards the fifty percent partial occupancy requirement. As a result, credit unions are going to need to speak with their accountants regarding whether a CUSO would count towards the fifty percent occupancy requirement. This is significantly more complicated than using terms such as “affiliate” or “subsidiary” which have generally accepted meanings under federal banking laws. See 12 U.S.C. § 1841(d), (k).

Excess Capacity.  Under the current Incidental Powers Rule, federal credit unions that invest in or establish excess capacity in good faith and with the intention of using that excess capacity to serve future needs of credit union members  may  “sell or lease the excess capacity in facilities, equipment or services such as office space, employees and data processing.” 12 C.F.R. § 721.3(e). The credit union, however, must reasonably anticipate that the excess capacity will be eventually be used by the credit union as part of the future expansion of services to members. The final rule relaxes this requirement for facilities, since federal credit unions will now only be required to partially occupy premises within six years rather than plan for, and eventually achieve, full occupancy of acquired premises.

The text of the final rule is available here. It is effective 30 days after publication in the Federal Register (whenever that will be!). As far as rules go, this one appears to be pretty straightforward. That being said, if you have any questions and happen to be a member of NAFCU, the Regulatory Compliance Team is always available to answer your questions. I would note, however, that despite our many skills, we are not accountants and do not pretend to know the intricacies of U.S. GAAP so for more technical FASB-related questions, the credit union may want to consult with its chief financial officer or accountant. I hope you all have happy holidays and a great new year!

Consumer Compliance Outlook – Overview of Regulation E Requirements for Foreign Remittance Transfers + Compliance Trivia!

Written by Shereefat Balogun, Regulatory Compliance Counsel

The Second Issue 2016 of the Federal Reserve’s Consumer Compliance Outlook is now available.  This issue provides an overview of the Regulation E requirements for foreign remittance transfers. The publication also contains revised interagency questions and answers regarding community reinvestment, regulatory updates, and federal court opinions.  This post will focus on the article’s overview of the Regulation E requirements for Foreign Remittance Transfers, as we receive a lot of compliance questions relating to these transactions. 

As way of background, the CFPB published a final rule regarding remittance transfers in February 2012, which became effective on February 7, 2013.  Since the rule’s enactment in 2012 however, it has been amended several times.  The article provides an excellent summary of the rule’s requirements, incorporating the changes that have been made.  Some of the most material changes noted in the article include:

Coverage

• Clarification that U.S. military installations in foreign countries are located in a U.S. state for purposes of the rule. The general definition of a remittance transfer is the electronic transfer of funds requested by a sender in the United Stated to a designated recipient in a foreign country by a remittance transfer provider. See, 12 C.F.R. §1005.30. The rule and commentary provide guidance as to when a recipient is located in a foreign county so as to trigger the rule’s coverage.  In 2014, the CFPB clarified that a designated recipient does not include a transfer to persons at U.S. military installations in foreign countries because they are treated by the rule as being on U.S. soil.  What this means is that if the credit union receives a request from a member specifying that the funds will be received at a location on a U.S. military installation that is located in a foreign country, the transfer will be received on U.S. soil, i.e. in a state, and would not be considered a remittance transfer under the rule.  However, a transfer from a U.S. military installation abroad to a recipient in a foreign county is covered by the rule.  See, 12 C.F.R. 1005, Supp. I, comments 1005.30(c) – 2.

• Providing Guidance on how a provider can determine if a sender is making a remittance transfer primarily for personal, family, or household purposes. A remittance transfer covered by the rule is one requested by a consumer primarily for personal, family, or household purposes.  See, 12 C.F.R. §1005.30 (e), (g).  A credit union can determine if a transfer is for personal, family, or household purposes by examining the type of account from which the transfer is being made.  If the account is used for personal, family, or household purposes, the credit union can assume the transfer is for that purpose, unless the credit union has specific information that suggest otherwise.  See, 12 C.F.R. 1005, Supp. I, comments 1005.30(g) – 2.  Similarly, a credit union can assume a transfer requested from a business account is not primarily for personal, family, or household purposes.  See, 12 C.F.R. 1005, Supp. I, comments 1005.30(g) – 3.

Disclosures

• New disclosures to the prepayment form, when third-party fees and taxes may apply, stating that third-party fees or taxes may apply to the remittance transfer, which could result in the designated recipient receiving less than the amount disclosed. When a sender requests a remittance transfer, the credit union must deliver prepayment disclosures listing critical terms of the transactions. These disclosures can be found in 12 C.F.R. §1005. 31.  As part of the mandatory disclosures, a credit union must disclose any covered third-party fees imposed on the remittance transfer by a person other than the credit union.  Moreover, the credit union must also provide a statement that noncovered third-party fees or taxes may apply to the remittance transfer and result in the designated recipient receiving less than the amount disclosed.  This statement is only required to the extent that these fees or taxes do or may apply to the transaction.  For compliance purposes, credit unions may use Model Forms A-30(a)-(c), contained in Appendix A to the rule.  

Use of Estimates

• Extension of the sunset date for temporary provision allowing credit unions to rely on estimates until July 21, 2020. Generally, disclosures must be accurate when the sender makes a payment.  However, because there are circumstances where credit unions may not always be able to determine all of the transaction terms with full accuracy, the rule provides some exceptions.  One exception allows credit unions to rely on estimates that are “reasonably accurate” when the exact amounts cannot be determined for reasons beyond their control.   See, 12 C.F.R. §1005.32(a).  This exception applies only to the exchange rate fees and taxes imposed by other persons.  Note that this exception is temporary and was scheduled to sunset on July 21, 2015 pursuant to the statute; however, the CFPB extended the temporary exception until July 21, 2020.
  

• Publishing a safe-harbor list of recipient countries qualifying for the permanent exception for the use of estimates. In addition to the temporary exception, credit unions may take advantage of two other exceptions.  These exceptions are permanent and permit estimates if: (1) a credit union cannot determine the exact amounts because of a recipient nation’s laws, or (2) the methods by which transfers are made to a recipient nation do not permit the credit union to know the amount of currency to be received.  See, 12 C.F.R. §1005.32(b)(1).  For compliance purposes, the CFPB established a safe-harbor list of countries that qualify for the second exception.  Currently, five countries are on the list- Aruba, Brazil, China, Ethiopia, and Libya.  While a credit union can still use estimates for a country not on the list if the exception applies, the credit union would not obtain a safe harbor.  See, 12 C.F.R. §1005.32(b)(1)(ii).

The rule’s commentary provides helpful guidance for determining if either of the two exceptions apply.  

Error Resolution

• Explaining that when a transfer is delayed because the provider or third party was investigating suspicious, blocked, or prohibited activity that could not have been reasonably foreseen, the delay is not an error. The error resolution procedures for remittance transfers are distinct from the regular error resolution procedures for electronic funds transfers, and are contained in 12 C.F.R. §1005.33. Section 1005.33 specifies what errors are subject to the error resolution procedures, and also provides certain exceptions.  For instance, delays resulting from the credit union’s screening procedures or in accordance with the BSA, OFAC, or similar laws are not considered errors.  See, 12 C.F.R. §1005.33(a)(1)(iv)(B).  The CFPB clarified in a later amendment that this includes a credit union’s investigation of potentially suspicious, blocked, or prohibited activity that could not have been reasonably foreseen.  See, 12 C.F.R. 1005, Supp. I, comments 1005.33(a) – 7.

• Clarifying that when a credit union makes a refund because a sender provided incorrect or insufficient information that prevented the transfer from being completed as requested, any taxes collected and fees imposed by an intermediary may be deducted from the refund, except for the fees the intermediary will refund to the credit union. See, 12 C.F.R. 1005, Supp. I, comments 1005.33(c) – 12.

In light of all the changes made since 2012, the article concludes by reminding credit unions the importance of having procedures in place to monitor and implement regulatory changes, to test internal controls to ensure the changes are implemented properly, and to provide adequate training to staff.

Fun Fact: The article notes that the World Bank estimates that the global market for foreign remittance transfers was $581.6 billion in 2015.  The U.S. ranked as the top transmitter, sending $56.3 billion in transfers to recipients in foreign countries in 2014.

Compliance Resources: There are a number of resources available to assist credit unions in compliance with the remittance transfer requirements. The National Credit Union Administration’s Regulatory Alert 13-RA-06 provides a useful overview of the requirements.

Here are some other resources that can help a credit union evaluate the remittance transfer requirements:

• The CFPB’s Main Remittance Regulation page;
• Subpart B of Regulation E – containing the regulatory text for the Requirements for Remittance Transfers (12 C.F.R. § 1005.30 – 1005.36).
• Small Entity Compliance Guide (updated in August 2014 to reflect recent technical amendments to the remittances rule);
• Safe Harbor Countries List;
• The CFPB’s August 2013 Webinar on the remittances requirements and the slides from that presentation;
• The CFPB’s (unofficial) consolidated regulatory text and commentary for the various final rules;
• The remittance transfer examination procedures that will be used by the CFPB to examine entities that provide remittance transfers; and
• The CFPB’s eRegulations tool for the remittance transfer rule on eRegulations;

Compliance Trivia: What are the safe harbor requirements for the remittance transfer rule?

Ringing in the New Year (With a 2017 NCUSIF Premium Charge?)

Written by Pamela Yu, Special Counsel for Compliance and Research

At the NCUA Board’s monthly meeting in November, the agency indicated that a National Credit Union Share Insurance Fund (NCUSIF) premium charge for all federally-insured credit unions (FICUs) may be necessary in 2017 due to a continuing downward trend of the NCUSIF equity ratio.  The agency provided additional details about its 2017 share insurance premium range recommendations set in the December 2016 NCUA Report, which was published on NCUA’s website yesterday.  NAFCU opposes any unnecessary premium charges and has been communicating with NCUA to express our members’ concerns about potential charges in 2017. We are strongly urging NCUA to consider all means to mitigate the need for a premium. While NAFCU is hopeful that a premium will not be necessary in 2017, if the agency decides to move forward with a premium charge, NAFCU will continue working to ensure our members have the information and guidance they need to properly plan for this expense.

Although a premium charge is not certain, many credit unions are already taking steps to address the possibility of a 2017 premium.  One question that has come up is whether Generally Accepted Accounting Principles (GAAP) requires credit unions to immediately recognize a loss on their balance sheets.

By way of brief background, the NCUSIF equity ratio is a general measure of the health of the NCUSIF. The equity ratio is calculated as the sum of FICUs’ capital contribution of one percent of insured shares and the fund’s retained earnings, divided by total insured shares.  The four primary drivers that impact the equity ratio are: investment returns, insurance losses, insured share growth, and expense growth.

The Federal Credit Union Act requires the NCUA Board to specify a normal operating level for the NCUSIF, falling somewhere between 1.20 percent and 1.50 percent. Since 2007, the Board-approved normal operating level for the equity ratio has been 1.30 percent.  To keep the fund at its normal operating level, the Board may charge a premium if the equity ratio falls below 1.30 percent, but a premium is not mandatory unless the equity ratio is below 1.20 percent.  NCUA has provided a handy diagram to illustrate the statutory parameters of the NCUSIF equity ratio:

According to NCUA, the growth in credit unions’ insured shares coupled with the continued low interest rate environment has resulted in a steady decline in the equity ratio.  Based on current projections, the equity ratio is expected to fall to between 1.24 percent and 1.27 percent in 2017.  It is important to note that, even under the agency’s most adverse modeling scenario, NCUA does not anticipate that the equity ratio will fall below the statutory minimum of 1.2 percent in 2017.  Thus, a premium charge is not required under federal law.  However, assuming it will continue to be difficult to generate sufficient retained earnings in the current interest rate environment, in order to bring the equity ratio up to 1.30 percent, NCUA is projecting that the Board will likely need to charge a premium for 2017 of three to six basis points to return the equity ratio to its normal operating level.

While GAAP is within accounting professionals' expertise rather than legal expertise, under GAAP, a credit union should recognize a liability if:

1. It is probable that a liability has been incurred; and
2. The amount of the loss can be reasonably estimated.

Given that NCUA is reasonably estimating that at least a 3 basis point premium is probable in 2017, several of NAFCU’s members have asked if GAAP requires the credit union to immediately recognize a loss.

Based on informal conversations with agency staff, the answer is no.

NCUA has indicated that a premium is expensed immediately when specified.  In 2010, the last time credit unions were charged an NCUSIF premium, NCUA instructed in Letter to Credit Unions 10-17 that “credit unions using the accrual basis of accounting should calculate the amount of the premium and record the premium” on the next Call Report after the premium was charged as a “Member Insurance expense (Call Report Account Code 310).”  Since that time, however, NCUA has broken that account code into several sub-accounts and it would now go under NCUSIF Premium Expense (Call Report Account Code 311A). 

In short, credit unions do not have to recognize a premium expense until and unless the Board specifies an exact premium amount and approves it at a Board meeting.  For more information on GAAP requirements, credit unions may need to consult with their accountant.

To avoid confusion, NAFCU is urging NCUA to clearly communicate that credit unions do not have to start accounting for the 2017 premium until the agency takes official action to charge an exact premium.

In the meantime, NAFCU will continue to oppose any unnecessary premiums and encourage the agency to publicly and transparently explore all available avenues to negate the need for a premium in the New Year.

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NCUA Board to Hear Briefing on NGN Legacy Asset Disposition Strategy

On a related note, the NCUA Board meets tomorrow for its final public meeting of 2016. Included on the Board’s agenda is a briefing on the agency’s disposition strategy for the NCUA Guaranteed Note (NGN) Legacy Assets.  The Legacy Assets are distressed investment securities held by the Asset Management Estates (AMEs) of the five corporate credit unions that failed during the economic crisis.  Tomorrow’s board briefing may provide additional information as to the timing of potential rebates and capital recoveries that may become available to insured credit unions from the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund).  Read NAFCU’s FAQs about the Stabilization Fund here.

OFAC 2016 Fall Symposium: Round-Up of Recent Sanctions

By Stephanie Lyon, Regulatory Compliance Counsel

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) held its fall symposium in Washington DC, on Wednesday, December 7th. Among the items discussed in this meeting were the recent changes to the Iran and Cuba sanctions and the elimination of the Burma and Côte d'Ivoire sanctions. As the end of the year is approaching, this is the perfect time to highlight some of OFAC’s recent activities. For a comprehensive list of active OFAC sanctions, visit the Sanctions Programs and Country Information Resource Center. Guidance documents are constantly updated so remember to check back with OFAC for up-to-date information.

Iran Sanctions and JCPOA Announcement

Back in 2015, key nations reached a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program was implemented with only peaceful intent. On January 16, 2016, the International Atomic Energy Agency (IAEA) verified Iran’s implementation of key nuclear-related measures specified in the JCPOA. Upon verification from the IAEA, the United States lifted nuclear-related sanctions on Iran. What does this mean for credit unions? The JCPOA provisions included removals of Specially Designated Nationals (SDNs) and Blocked Persons List, the Foreign Sanctions Evaders List and the Non-SDN Iran Sanctions Lists which hopefully translates to less false positives. For more information on Iran’s sanctions and the JCPOA, visit the Iran Sanctions Resource Center webpage.

Cuba Sanctions

In 2014, President Obama historically announced the re-establishment of diplomatic relations and an easing of economic and travel restrictions on Cuba. As more Americans are able to travel to Cuba, credit unions began asking a question not considered in 5 decades—whether a credit union can serve members while in Cuba. To assist financial institutions, OFAC published over 100 FAQs that were recently revised in October of this year. Here are a couple of questions pertaining to financial institutions answered in the FAQ guidance:

46. Are authorized travelers in Cuba permitted to use credit or debit cards issued by a U.S. financial institution?

Yes. Travelers are advised to check with their financial institution before traveling to Cuba to determine whether the institution has established the necessary mechanisms for its issued credit or debit cards to be used in Cuba. See 31 CFR § 515.560(c)(5) and 515.584(c).

[…]

61. Is a financial institution required to independently verify that an individual’s travel is authorized when processing Cuba travel-related transactions?

No. A financial institution may rely on U.S. travelers to provide their certifications of authorized travel directly to the person providing travel or carrier services when processing Cuba travel-related transactions, unless the financial institution knows or has reason to know that the travel is not authorized by a general or specific license.

The [Cuban Assets Control Regulations] (CACR) requires persons subject to U.S. jurisdiction providing travel or carrier services to retain for at least five years from the date of the transaction a certification from each customer indicating the section of the CACR that authorizes the person to travel to Cuba. See § 515.572(b). U.S. travelers utilizing a general or specific license are also required to retain for five years records associated with their travel to Cuba.

For more information, guidance and resources on the Cuban Assets Control Regulations, visit the Cuba Sanctions Resource Center.

Elimination of Côte d'Ivoire and of Burma Sanctions

Years ago, Burma and Côte d'Ivoire were plagued with national security, human rights and other internal issues that prompted the United States to enact sanctions against these countries.  After lengthy work by several international organizations both countries held successful presidential elections and moved towards the stabilization of their nations.  On September 14, 2016, after the United Nations Security Council determined Côte d'Ivoire’s emergency situation was resolved, President Obama ended the sanctions program against this nation. See, Côte d'Ivoire Sanctions Resource Center. Similarly, in October 7, 2016, the President signed an Executive Order terminating the emergency with respect to the actions and policies of Burma. See, Burma Sanctions Resource Center.

My favorite quote of Wednesday’s meeting occurred when a panelist discussing the recent elimination of OFAC sanctions simplified the conversation by stating:  “the sanctions for Burma and Côte d'Ivoire are over, let’s just move on.” For credit unions, this means these two countries can now participate in financial markets again which may mean an increase in wire transfers to and from these countries.

OFAC ProTips

Apart from the updates concerning sanctions there were other key takeaways from the symposium:

1. OFAC does not have a requirement that credit unions have a compliance program; rather it recommends a risk-based approach to OFAC compliance. Credit unions may want to keep in mind that regardless of its OFAC approach, if the credit union facilitates a prohibited transaction it will have an OFAC violation. Some resource credit unions may use when assessing an OFAC program are: 
   • NCUA Examiner’s Guide, Ch. 18 (OFAC specific guidance within Bank Secrecy Act section)
     
   • NCUA FCU Handbook, pp. 54-55 (lists NCUA expectations for OFAC compliance)
     
   • NCUA Letter to Credit Unions 05-CU-09 (NCUA acknowledged that while both BSA and OFAC compliance are integral to any anti-money laundering program)
     
   • NCUA Letter to Credit Unions 01-CU-25 (NCUA developed an examiner checklist that may be use to document the review of a credit union’s OFAC compliance program)
     
   • FFIEC BSA/AML Examination Manual, OFAC section & App. M. (OFAC core examination procedures and risk matrix)
2. When identifying names on the SDN or other lists, it may be necessary to search more than just OFAC provided information or resources. This is where the credit union’s risk assessment and subsequent due diligence is key in determining its policies and procedures.
3. If unsure, ask! OFAC has published many resources such as interpretative documents and FAQs to its sanctions programs. It also has an OFAC Compliance Hotline ready to assist. The speakers did emphasize the need for credit unions to provide as much detail as possible when submitting questions to the helpline, especially if the credit union wants to receive a timely response. You can find the contact information for the Hotline here.

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Upcoming NAFCU Webcast

What's New in the updated FFIEC Cybersecurity Handbook

Live Webcast Tuesday, December 13, 2016 | 2:00-3:30 p.m. ET

• Explore governance of the Information Security Program, including security culture, responsibility and accountability, and resources
• Learn about Information Security Program management, including identification, measurement, mitigation and monitoring
• Discuss Security Operations such as identification, assessment, and threat monitoring
• Measure Information Security Program effectiveness
  

Finalized Field of Membership Rules: Community Common Bond Charters

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

NCUA’s efforts to modernize the field of membership rules have finally started to come to fruition. On Wednesday, NCUA’s field of membership final rule was published in the Federal Register at 81 Fed. Reg. 88412. Based on this publication date, the effective date for the final rule is February 6, 2017.

Four Changes for Community Common Bond Charters

The final rule contains changes for community common bond charters in four areas: the “core area” service requirement, the population limitation, combined statistical areas and the addition of an area adjacent to the core-based statistical area. In the proposed rule, there was a fifth area, adding individual statewide congressional districts as a well-defined local community, but NCUA deferred action on this issue to a later time.

Currently, community charter applications for part of a core based statistical area (CBSA) are acceptable to NCUA provided 1) they include the dominant core city, county, or equivalent and 2) that the CBSA's population in its entirety is 2.5 million or less people.

“Core Area” Service Requirement

Under the new rules, the requirement that a portion of the CBSA include the dominant core area is being repealed. This requirement is not mandated by the Federal Credit Union Act. NCUA decided to repeal it stating that federal credit unions (FCUs) have been successful in providing services to low-income and underserved populations whether they are in a core area or not. See, 81 Fed. Reg. 88412, 88413.

The Population Limitation

The 2.5 million people population limitation currently applies to the entire CBSA, even when a credit union seeks only to serve a part of the CBSA. Under the new rule, the 2.5 million population cap will no longer apply to the CBSA’s population in the entirety. Instead, the cap will apply to the portion of the CBSA the credit union seeks to serve. See, 81 Fed. Reg. 88414. Also, NCUA issued a proposed rule that would increase this cap to 10 million. See, 81 Fed. Reg. 78748, 78751.

Combined Statistical Area

Under the current rule, there are two kinds of “presumptive communities” that automatically qualify as well-defined local communities: 1) a single political jurisdiction and 2) a core based statistical area (CBSA). The final rule adds a third presumptive community: a combined statistical area. A combined statistical area is two or more continuous CBSAs that have a substantial employment interchange. These are determined by the Office of Management and Budget. The same population limit would apply to these combined statistical areas (or portions thereof) as it would to CBSAs. See, 81 Fed. Reg. 88414.

Addition of Adjacent Areas

Currently, NCUA uses objective and statistical requirements to determine whether an area is a well-defined local community. Under the final rule, FCUs will be able to apply to serve an area outside of, but touching, their current CBSA or single political jurisdiction by providing narrative evidence. That written narrative should demonstrate interaction and common interests among the residence of the area and the existing community, to demonstrate the area, as a whole, is a well-defined local community.

NCUA will issue additional guidance on this process, but it will seek evidence on several factors regarding the proposed service area, including: presence of an economic hub and economic interdependence, population centers, isolated areas, quasi-governmental agencies, government designations, shared facilities and services and colleges and universities. See, 81 Fed. Reg. 88440.

It may not be the very model of a modern field of membership rule quite yet, but it is definitely a step in the right direction. For more information on the field of membership rules and proposals, have a look at NAFCU Compliance Blog post Thankful for Proposed FOM Rules? Let NCUA Know!, the NAFCU FOM Issues webpage, the NAFCU Regulatory Alert regarding the proposed rule (members only) and the NAFCU Final Regulation regarding the finalized rule (members only).

"You better watch out, You better Not Cry": CFPB Releases Bulletin on Detecting and Preventing Consumer Harm from Production Incentives

By André Cotten, Regulatory Compliance Counsel

Happy Holidays! My name is André Cotten, and I recently joined NAFCU as a Regulatory Compliance Counsel. Prior to NAFCU, I worked as a Senior Associate with PwC’s Financial Services Risk and Regulatory practice in the New York City office. I am loving my Regulatory Compliance Team, and I look forward to interacting with all of you.

We previously blogged about the NCUA’s Incentive Compensation Rule. The previous post discussed the 3 NCUA rules that limit incentive compensation practices: Section 701.21(c)(8) which restricts practices in connection with lending activities; Section 701.23(g) which places limits on compensation relating to the sale or purchase of eligible obligations; and Section 721.7 which addresses compensation related to incidental powers.

Today’s post expands on the regulatory guidance for incentives pursuant to the recently released bulletin from the Consumer Financial Protection Bureau (CFPB). On November 28, 2016, the CFPB issued a compliance bulletin providing direction on detecting and preventing consumer harm from production incentives. The Bureau discusses some specific instances of risks to consumers from incentives and the CFPB’s expectations.

Financial services companies routinely accomplish business objectives through programs that tie outcomes to certain benchmarks. If an incentive program is properly implemented and monitored, the incentives can benefit both the consumer and financial entity as well as the financial marketplace as a whole. For instance, financial services firms will be able to attract and retain top-performing talent, and consumers would benefit from enhanced customer service and exposure to products or services that are beneficial to their financial objectives.

Incentive programs are commonly found in the cross-selling of products and services to existing consumers, sales to new customers, sales at higher prices where pricing discretion exists, quotas for customer calls completed and collections benchmarks. Financial services firms may apply these production incentives to both employees and service providers. The risks these incentives may present to consumers are significant if poorly monitored. The CFPB bulletin also describes compliance management actions that its supervised entities should take to mitigate risks.

Risks to Consumers from Incentives

In light of the recent enforcement action against Wells Fargo, the CFPB is particularly keen to the culture of “unrealistic, high-pressure targets” that incentive programs can create. If incentive programs are not carefully and properly implemented and monitored, they may encourage overly aggressive marketing, sales, services and collections tactics.

Incentive programs without sound compliance monitoring may lead to blatant violations of Federal consumer financial law. Other risks to the financial services institution may include public enforcement, supervisory actions, private litigation, and reputational harm.

The CFPB Bulletin also listed some specific examples of problematic behavior related to incentive programs, which include:

• Sales goals may encourage employees, either directly or indirectly, to open accounts or enroll consumers in services without their knowledge or consent. Depending on the type of account, this may further result in, for example:
  • Improperly incurred fees;
  • Improper collections activities; and/or
  • Negative effects on consumer credit scores.

• Sales benchmarks may encourage employees or service providers to market a product deceptively to consumers who may not benefit from or even qualify for it;
• Paying compensation based on the terms or conditions of transactions (such as interest rate) may encourage employees or service providers to overcharge consumers, to place them in less favorable products than they qualify for, or to sell them more credit or services than they had requested or needed;
• Paying more compensation for some types of transactions than for others that were or could have been offered to meet consumer needs, which could lead employees or service providers to steer consumers to transactions not in their interests; and
• Unrealistic quotas to sign consumers up for financial services may incentivize employees to achieve this result without actual consent or by means of deception.

The CFPB’s Expectations

In short, the CFPB expects a robust, comprehensive compliance management system (CMS) that will utilize incentives to institute effective controls and oversight. The more strict controls will be necessary where incentives (i) apply to products or services less likely to benefit consumers or have a higher potential for consumer harm, (ii) reward outcomes that may not align with consumer interests, or (iii) involve a significant portion of an employee or service provider’s compensation. The CFPB does not mandate a particular CMS structure, and the Bureau recognizes that structures will vary based on the size and complexity of an organization.

A robust compliance program starts with the “tone from the top” set by the board of directors and management. The “tone from the top” is effectuated through policies and procedures, training, monitoring and corrective action. According to the CFPB Bulletin, a supervised entity’s corrective actions should include the termination of employees, severance of relationship with service providers, changes to the structure of incentives, additional training, and reimbursement of funds to all affected consumers.

For more information pertaining to the oversight of incentive programs, please review the CFPB’s Supervision and Examination Manual and Chapter 7 of the NCUA’s Examiner Guide.

***

On Monday, December 5^th, the Federal Reserve released its latest issue of Consumer Compliance Outlook. This issue provides an overview of the Regulation E requirements for foreign remittance transfers. The publication also contains revised interagency questions and answers regarding community reinvestment, regulatory updates, and federal court opinions.

***

Over the Thanksgiving holiday break, I received my second bar license and was admitted to practice law in my home-state of Mississippi.

NCUA Incorporates Guidance on Member Business Lending into Examiner’s Guide – A Deep Dive into Guidance on Section 723.4

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On Tuesday, November 29, 2016, NCUA issued Letter to Credit Unions 16-CU-11 notifying credit unions that long-awaited guidance on the revised member business lending rule has been added to the NCUA Examiner’s Guide with just over a month before the effective date of the rule. The agency originally promised that guidance would be shared with credit unions in the preamble to the final rule published in the Federal Register on March 14, 2016. See 81 Fed. Reg. 13530, 13533 (Mar. 14, 2016).

Since the final rule was released, the NAFCU compliance team has received numerous questions regarding revised section 723.4, which mandates federally insured credit unions adopt and implement commercial lending policies and procedures that address topics such as the types of commercial loans offered by the credit union, trade area, qualifications of credit union employees involved in the origination process and commercial loan underwriting standards. The updated Examiner’s Guide finally provides some much-needed guidance for credit unions drafting commercial lending policies. Here is what the guidance has to say about some specific areas of concern.

Types of Commercial Loans and Trade Areas

The guidance notes that a “credit union should analyze its membership and ensure its commercial lending staff has the necessary expertise, gained through experience and training, to understand the needs of the membership and the types of loans offered.” For example, if a credit union predominantly serves fishermen in Gloucester, Massachusetts, the guidance seems to suggest that the credit union should have staff that have the requisite experience and training to understand the needs of commercial fishermen and the types of loans they may need for their businesses to thrive.

Similarly, a “credit union must be certain it is capable of serving its identified trade area.” This means understanding local demographics, economics and industries as well as being familiar with what influences those aspects of the trade area. Returning to our Gloucester example, the economy on the North Shore of Massachusetts is largely based on commercial fishing and tourism. The guidance seems to suggest that a credit union serving this area may want to have an understanding of what factors influence the local economy (e.g., overfishing or lack of tourism). Furthermore, such a credit union may want to make sure that it has the capacity to serve businesses that may have infrequent payment streams since both commercial fishing and tourism are largely seasonal and highly depend on the weather.

Qualifications and Experience Requirements for Lending Staff

When it comes to policies addressing the qualifications and experience of commercial lending staff, the guidance recommends that credit unions “consider relevant factors specific to the credit union and to the needs of its commercial borrowing members” such as “loan volume, projected loan growth, trade area, complexity of the borrowing relationships, types of loans permitted” and any other unique factors that could influence the commercial loan portfolio of the credit union. This seems to indicate that NCUA expects credit unions with higher loan volumes, higher projected loan growth or with greater complexity in borrowing relationships to have more experienced staff but that is not explicitly stated in the guidance or preamble.

In addition, the guidance notes that when determining staffing levels “a credit union should consider appropriate levels of management, relationship managers, and support staff as may be required to ensure member’s [sic] needs are responsibly serviced in a safe and sound manner.” Likewise, a “credit union should also consider an appropriate separation of duties to prevent potential conflicts of interest and other problems in loan underwriting, collection, and portfolio monitoring functions.” In other words, the guidance suggests that credit unions developing policies regarding staffing levels in commercial lending departments consider what staffing level is sufficient to ensure adequate separation of duties and how many additional resources, in the form of managers or support staff, are needed to maintain that staffing level.

Underwriting Standards

The Examiner’s Guide also states that a policy outlining credit union commercial underwriting standards “must address the required analysis and depth of the financial review performed to support a credit decision.” For example, a “credit union’s borrower analysis should focus on the borrower’s financial condition and ability to repay. The guidance indicates that this includes income and expense trends, debt service ability, balance sheet changes, and the impact of those changes on the borrower’s ability to service debt. NCUA also expects the guidance to discuss the required evaluation of related parties and the influence those parties have on a borrower’s ability to repay a loan.”

In addition, “the policy must establish due diligence requirements to evaluate the other sources of income or losses that affect the guarantors or principals to determine the global financial condition and the debt service ability of a borrower and any associated borrowers.” Moreover, a “credit union’s underwriting standards must address the quality of the financial information used to make a credit decision and ensure that the degree of verification reflected in the financial information is sufficient to support the financial analysis and the risk assessment of a credit decision. A credit union can determine the quality of a financial statement using the level of assurance provided by a preparer and the required professional standards supporting the preparer’s opinion.”

The guidance also addresses additional aspects of a credit union commercial underwriting policy including the use of tax returns or financial statements, the types of collateral allowed, LTV ratio limits, personal guarantees, and valuation methods.

But Wait! There’s More…

These are just some areas where credit unions have expressed concerns or sought additional clarification regarding the requirements of section 723.4. Other aspects of the commercial lending policy requirement are also discussed in the guidance. The Examiner’s Guide also addresses other aspects of the revised member business lending rule including commercial loan workouts and construction and development lending. As we continue to digest the guidance, we may provide periodic updates either on the NAFCU Compliance Blog or in other publications. As always, members are encouraged to reach out to the Compliance Team with any questions.

Have a great week!

It’s the Most Wonderful Time of the Year… for Credit Card and Debit Card Error Disputes

Written by Shereefat Balogun, Regulatory Compliance Counsel

This time of year usually drums up incidents of unauthorized transactions and subsequent error disputes from consumers to recoup their money.  Shoppers ran to their favorite retailers with their debit and credit cards in tow, to catch those alluring Black Friday, Small Business Saturday, and Cyber Monday sales.  And it’s not over! Christmas and more holiday sales are still underway.  Indeed, shoppers are busy…and so are the fraudsters. 

Generally, cardholders who are victims of unauthorized transactions will notify the credit union of an error and may obtain a refund from the credit union.  If the credit union determines that the cardholder’s request is valid, it will withdraw funds that were previously deposited into the merchant’s bank account and return the money to the member.  This post will remind credit unions how to process error disputes under Regulation E (for debit cards) and Regulation Z (for credit cards). 

Processing Debit Card Error Disputes under Regulation E

Regulation E, section 1005.11 governs the error resolution procedures for electronic fund transfers (EFTs) like ATM or debit card transactions.  Section 1005.11(a)(1) provides the types of errors covered by the rule, which includes “unauthorized electronic transfers”.  An unauthorized electronic transfer is one that is initiated by a person other than the member without authority to initiate the transfer. 

Notice of Error from Member

A credit union’s obligation to investigate is triggered once it receives a written or oral notice of an error from the member.  The notice must be received by the credit union no later than 60 days after delivery of the periodic statement on which the alleged error is first reflected.  The notice must comply with the content requirements set forth in 1005.11(b).  If the credit union receives an oral notice, the credit union may require the member to give written confirmation within 10 business days of the oral notice.  See, 12 C.F.R. §1005.11(b). 

Investigation

After the credit union receives a timely notice from the member, the credit union must conduct an investigation.  Section 1005.11(c)(1) requires a credit union to investigate and determine whether an error occurred within 10 business days of receiving the notice and to report the determination to the member within 3 business days.  Moreover, the credit union is required to correct the error within 1 business day after determining that an error occurred.  The 10-day investigation period may be extended to 45 days, if the credit union provisionally credits the member’s account in the amount of the alleged error within 10 business days of receiving the notice. However, provisional credit can be withheld if the credit union requires, but does not receive, written confirmation within 10 business days of an oral notice of error.  Lastly, the 45 days may be extended to 90 days if the unauthorized electronic funds transfer resulted from a point-of-sale debit card transfer.  See, 12 C.F.R. §1005.11(c).  

Credit unions often ask us if they are allowed to require affidavits or police reports from members who report unauthorized use of their debit card.  Regulation E does not permit a credit union to require documentation such as affidavits or copies of police reports as a requirement to start an investigation.  Rather, as explained above, the regulation requires the credit union to start the investigation as soon as it receives notice (oral or written) of an error.  My colleague Stephanie Lyon wrote a great blog on this topic earlier this summer.

Member Liability

So even where there is unauthorized use on the car, a member may be held liable if he/she fails to timely notify the credit union.  Under Regulation E, there are three possible tiers of member liability for unauthorized EFTs depending on the situation.  A member may be liable for: (1) up to $50; (2) up to $500; or (3) an unlimited amount, depending on when the unauthorized EFT occurs.  Specifically, the $50/$500 tier and the amount of liability imposed will be based on whether “timely notice” was given to the credit union.  See, 12 C.F.R. §1005.6.

If the member notifies the credit union within two business days after learning of the unauthorized use, the member's liability is capped at $50.  If the member fails to notify the credit union within two business days, the $500 liability cap applies.  Also, note that if the member’s delay in notifying the credit union was due to extenuating circumstances, the two-day limit must be extended.  The commentary to the rule explains that extenuating circumstances include travel.  This is worth highlighting, as many people travel during the holiday season and this may come up as a reason for not notifying the credit union sooner. The member can also be subject to unlimited liability if the member fails to notify the credit union within 60 days. 

Notably, under Regulation E, negligence is not a factor in determining a consumer’s liability for unauthorized EFTs under Regulation E.  So whether the member was silly for shopping on a seemingly suspicious website, or was irresponsible for leaving her debit card in the fitting room while trying on some new items, is irrelevant.

Lastly, credit unions should be aware that the liability rules described above may be different for VISA/Master Card purposes. In late 2014, the card networks adopted zero liability provisions as applied to debit and ATM cards, thus VISA and MasterCard branded debit cards may be subject to different liability provisions.  Credit unions are advised to consult with the credit card network’s rules for compliance purposes. 

Processing Credit Card Error Disputes under Regulation Z

 Regulation Z, section 1026.13 governs billing error resolution for credit cards.  Similar to Regulation E, Regulation Z, section 1026.13(a) defines the types of errors covered by the rule, which also includes an unauthorized use of the card.  See, 12 C.F.R. §1026.13(a)(1).  Unlike Regulation E though, another error covered by the rule would be where a member alleges that, while the transaction was authorized, the good or service was not received, or it was received but not in the form he/she agreed to. See, 12 C.F.R. §1026.13(a)(3).  This may happen where Member A ordered a flat screen TV from Amazon, and although it may have shipped, it was never received by the member; or even more funky, the member order a 32” flat screen but only received a 26’’ flat screen.  The commentary gives other examples, such as when the member refuses to take delivery of goods because they did not comply with the contract; or the wrong quantity was delivered; or the delivery was late. 

Notice of Error from Member

Unlike, Regulation E where a notice of error can be oral or written, a credit union’s obligations under Regulation Z are triggered once it receives a billing error notice in writing.  Like Regulation E, the notice must be received by the credit union no later than 60 days after delivery of the periodic statement on which the alleged error is first reflected.  See, 12 C. §F.R. 1026.13 (b).

Investigation

The credit union is generally required to mail or deliver written acknowledgment to the member within 30 days of receiving a billing error notice, and to resolve the error no later than 90 days after receiving the billing error notice from the member.   See, 12 C.F.R. §1026.13(c).  The rule establishes error resolution procedures where: (i) the billing error occurred as alleged by the member; and (ii) a different billing error or no billing error occurred.  If the credit union determines that a billing error occurred as claimed by the member, the credit union would be required to correct the error and credit the member's account in the amount disputed, and mail or deliver a correction notice to the consumer within 90 days of receiving the notice of error.  See, 12 C.F.R. §1026.13(e).

Regulation Z does not have the same 10-day provisional credit requirement as Regulation E.  Although there isn’t a provisional credit requirement, note that the credit union cannot try to collect the disputed amount while conducting its investigation.  See, 12 C.F.R. §1026.13 (d)(1)(emphasis added).

Lastly, it’s worth highlighting that under Regulation Z, 12 C.F.R. §1026.12, a member has the right to assert certain claims and defenses against the credit union concerning property or services purchased with a credit card, if the merchant was unwilling to resolve the dispute; that is, as against the credit union, the member can assert any claims or defenses that can be asserted against the merchant.  So going back to our flat screen TV example, if the member disputes the receipt of the item with Amazon, and Amazon fails to resolve the issue, the member can assert certain any claims against the credit union.  Moreover, the member would be permitted to withhold payment up to the amount of credit extended for that television.  See, 12 C.F.R. §1026.12(c).  

In addition to Regulation E and Regulation Z, the credit union may also need to consider card association rules (i.e. MasterCard and Visa) because they have some specific contractual requirements dealing with provisional credit that may be more beneficial to the member than the regulatory minimums.  Accordingly, the credit union would need to review those rules for provisions governing provisional credit.

Member Liability

Regulation Z defers to Regulation E’s liability provisions where the error dispute claimed is for the unauthorized use of a credit card involving an EFT.  See, 12 C.F.R. §1005.12(g).  Notably, there aren’t any regulatory provisions that govern member liability in the situation that doesn’t involve unauthorized use, i.e., where the member makes a dispute concerning an undelivered item. 

Again, don’t forget about those Visa/Master Card rules.  In addition to Regulation E and Regulation Z liability provisions, the credit union may also need to consider the card association rules, namely the zero liability provisions. 

The use of credit cards and debit cards will be prevalent this holiday season, and with the rise in cyberattacks and other fraud schemes, we may see an uptick in error disputes in the upcoming months. 

I know this was a lot of information, but it’s real out there! Oh, and if you hadn’t had enough, on Wednesday, the Federal Reserve Board published a report containing information on debit card transactions in 2015, including information on fraud losses.  The report states that debit card fraud losses increased by 44 percent from 2013 to 2015.  See, I told you it’s real!

As always, if you have any questions relating to this issue or any other general concerns, feel free to reach out to your NAFCU compliance team. We’re here for you!