NAFCU Compliance Blog

Obtaining A Consensual Security Interest For Credit Cards

Written by Stephanie Lyon, Regulatory Compliance Counsel

Last week, I had the pleasure of going through the CFPB's credit card agreement database to find my creditor's credit card agreement. This research project was not just for fun… I was specifically looking for similarities in the language financial institutions use to obtain a consensual security interest in their members' or customers' deposit accounts. Seeing just how different credit card agreements can be made me wonder what drive some of the disclosure language and format in this area. So let's review the regulatory requirements to obtain a consensual security agreement for credit cards.

To begin, Regulation Z has a general blanket prohibition against offsetting a member's deposit funds to cover the member's delinquent credit card. See, 12 C.F.R. § 1026.12(d)(1). This means that financial institutions cannot automatically take funds from their customer's deposit account if the customer is delinquent on their credit card.

However, the rule has an exception that permits creditors to obtain a consensual security interest. To ensure the consensual security is not a functional equivalent of a right of offset, the regulation requires the following things: (1) member must affirmatively agree to the security interest (i.e., the consensual requirement); (2) creditor must disclose security interest in account-opening disclosures; and (3) creditor must be able to evidence the member is aware and intended to provide the security interest. The regulation also suggests three ways of meeting the last requirement. Basically, the credit union can ensure its members are aware and intend to provide a security interest by doing something substantially similar to one or more of the following:

1. Obtain a separate signature or initials on the agreement indicating that a security interest is being given;
2. Place the security agreement on a separate page, or otherwise separate the security interest provisions from other contract and disclosure provisions; or
3. Make reference to a specific amount of deposited funds or to a specific deposit account number.

12 C.F.R. § 1026, Supp I, 1026.12(d)(2)—1. While the regulation provides examples of how to demonstrate awareness and intent, the appropriateness of the format a credit union chooses will be a question of fact. For example, in reviewing publicly available credit card agreements, it seems that many financial institutions are emphasizing the security lien provision by placing a text box or by highlighting/bolding the security lien provisions. While this is not a manner explicitly stated by Regulation Z, this could be one way to ensure the member is aware and consents to giving the credit union a security lien. As there has been litigation on the sufficiency of these methods, credit unions may want to consult their legal counsel or document providers to ensure the method selected will satisfy the security interest requirements of Regulation Z. For more information on the litigation side of things, see this article published in the 2016 January-February Edition of the NAFCU Journal.  

Another thing to note is that unlike the right of offset, credit unions that properly disclose the security interest as outlined above may have a security interest in after-acquired property. See, 12 C.F.R. § 1026, Supp I, 1026.12(d)(2)—2. Meaning, funds deposited after the credit card account is opened are not excluded from the credit union's security interest and these funds could be used to pay for a delinquent credit card.

Finally, credit unions wishing to obtain a security interest in currently opened credit cards may want to look at section 1026.9(c)(2)(i)(A) which requires a change in terms notice at least 45 days prior to the effective date of a significant change in account terms for credit cards. A “significant change in account terms” means “a change to a term required to be disclosed under [sections] 1026.6(b)(1) and (b)(2), an increase in the required minimum periodic payment, a change to a term required to be disclosed under [section] 1026.6(b)(4), or the acquisition of a security interest.” 12 C.F.R. § 1026.9(c)(2)(ii) (emphasis added).

Mind if I ask a favor, my credit-worthy friend? / New IRS Guidance

Written by Reginald Watson, Regulatory Compliance Counsel

Greetings! A little while ago, Stephanie blogged about the perils of being a non-member and the limited rights of nonmember joint-account owners. But do these rights extend to nonmembers in the case of co-applicants on a loan? In this day and age of hyper-connectivity and transient travel, credit unions can stand to lose some business if potential borrowers were not permitted to solicit help from a slightly more credit-worthy friend with the unfortunate reality of falling outside of the credit union's field of membership. This blogpost will address the permissible roles nonmembers can play in the loan application process. 

The Federal Credit Union Act provides credit unions with the power to make loans to its members, to other credit unions, and to other credit union organizations. Similarly, the FCU Bylaws require that federal credit unions may only extend loans to members. In response to questions about where exactly nonmembers fit in, the NCUA states in Legal Opinion Letter 2000-0605 that "nonmembers may participate in loans as long as their involvement does not distort the direct lending relationship between the FCU and the member." The NCUA General Counsel has also previously discussed similar issues in legal opinion letters 95-0616 and 94-0424, presenting a laundry list of synonymous sounding terms (such as joint-applicant, co-borrower, co-maker, co-signer, endorser, guarantor, etc.) that can become a bit head-scratching to navigate. The NCUA Examiner's Guide may help sort things out:

"The terms co-maker, co-borrower, co-signer, guarantor, and joint applicant sometimes create a degree of confusion. In general, these terms refer to one of two possible parties, either a co-maker or a co-signer.

A co-maker shares equal responsibility with the borrower for payment of the loan and receives an equal benefit in the loan proceeds, or access to future advances in an open-end loan. Regulation B (202.7(d)(1)) identifies a co-maker as a joint applicant and the resulting loan as joint credit.

A co-signer takes on liability for the obligation of another person without receiving goods, services, or money in return or, in an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the obligation. Credit unions request a cosigner’s signature as a condition for granting a member credit or as a condition for forbearance on collection of a member’s obligation in default.

(…)

The co-maker shares in the loan proceeds and bears joint liability for repayment. Thus, a credit union cannot make a loan to a nonmember co-maker. However, a credit union may permit a nonmember to sign a loan, provided the nonmember does so in the capacity of a guarantor (cosigner), rather than a loan recipient (co-maker.)"

NCUA Examiner's Guide, Chp. 10 at page 39.

So there you have it. It appears that co-makers are required to be members, whereas nonmember friends can be co-signers. After all, that's what friends are for!

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IRS Issues Guidance on Mortgage Insurance Premiums and Home Equity Loan Deductions

Despite fears to the contrary, the deductions for interest paid on home equity loans and for private mortgage insurance were mostly preserved in the recent Tax Cuts and Jobs Act (TCJA) and corresponding tax extenders bill. The IRS issued new guidance earlier this week on the deduction for home equity loans as well as the deduction for mortgage insurance premiums. The Instructions for Form 1098 and General Instructions provide guidance on amending Form 1098. For additional information, we recently blogged about some of the major components of TCJA that affect credit union operations. Until next time compliance friends!

What's New With Marijuana Banking?

Written by Pamela Yu, Special Counsel for Compliance and Research

The complex legal and political landscape with respect to marijuana banking continues to shift.  At last count, 29 states and the District of Columbia (DC) have legalized medical marijuana.  Nine states and DC have also sanctioned adult-use recreational marijuana, with California becoming the latest and largest state to begin legal sales of recreational marijuana in January.  Massachusetts and Maine will soon follow suit later this year.  However, since marijuana remains federally illegal under the Controlled Substances Act, federal criminal statutes continue to be implicated for credit unions handling marijuana-related funds.

Here's what's new with marijuana banking—

Effect of policy shift remains unclear

 On January 4, the attorney general issued a memorandum to direct federal prosecutors to return to "previously established prosecutorial principles," in marijuana enforcement, thus eliminating the Obama-era directives (See, 2013 and 2014 Cole Memos) that provided some degree of guidance for credit unions in navigating the conflict between federal illegality and state legality of marijuana. 

While it was immediately clear that the policy shift would further complicate matters with respect to marijuana banking, it was—and continues to be—unclear whether the roll-back of marijuana guidance will mean a federal crackdown on marijuana enforcement by federal prosecutors.  Some states have quickly signaled that they will not adjust their enforcement priorities:  Colorado's Attorney General encouraged people "not to freak out," and the state's top prosecutor said his office will not be changing its approach to marijuana enforcement as a result of the policy withdrawal.  On the other hand, other states—like Massachusetts—appeared to signal that legal marijuana sellers in the state may not be "immune from federal prosecution" in light of the shift in federal policy.

BSA guidance stays intact (for now)

Meanwhile, the Financial Crimes Enforcement Network's (FinCEN) 2014 BSA guidance, which clarifies "how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations," is still in place—at least for the time being.  See, FIN-2014-G001.  Despite the fact that FinCEN's guidance relied on the enforcement posture of the now-rescinded Cole Memos, the Treasury Department has signaled that it may support banking for marijuana-related businesses.

In recent testimony before the House Financial Services Committee, Treasury Secretary Mnuchin acknowledged lawmakers' public safety concerns relative to unbanked pot businesses, saying, "I assure you that we don't want bags of cash," and adding that "We want to make sure that we can collect our necessary taxes and other things" from marijuana businesses.

Earlier, in response to a letter from a bipartisan group of 31 House members that asked FinCEN to retain the marijuana banking guidance, a Treasury official indicated that the department was "reviewing the [marijuana banking] guidance in light of the Attorney General's announcement and [was] consulting with law enforcement" about the BSA guidelines.  And last month, Treasury's deputy secretary testified at a Senate hearing that the FinCEN guidance remains in effect while the administration weighs whether to revoke it.

Fourth Corner continues legal bid to become first cannabis credit union

After a federal appellate court last year ruled in favor of The Fourth Corner Credit Union (Fourth Corner) in its lawsuit against the Federal Reserve Bank of Kansas City (Fed Bank), the beleaguered credit union has finally obtained its master account. Fourth Corner, a state-chartered credit union formed to serve Colorado's legalized marijuana industry and its supporters, was chartered under a quirky legal provision in 2014 and has been fighting to open for business ever since. 

On February 7, the Fed Bank granted Fourth Corner conditional approval of its master account application, but the credit union cannot serve marijuana-related businesses directly until serving those businesses is federally legal.  Instead, the credit union will focus on individuals and ancillary groups that support legalized marijuana, including those who partner with vendors, such as accountants and landlords, as well as security, packaging, technology and consulting companies that service marijuana businesses. The conditional approval is consistent with the 10^th Circuit opinion, which found that the Fed Bank was required to indiscriminately make Federal Reserve services available to "all depository institutions," but also concluded that "servicing marijuana-related businesses is illegal."

While this is good news for the credit union, remember that the conundrum has always been the ability to serve marijuana businesses that are legal under state law but illegal under federal law.  Fourth Corner may finally get the chance to open its doors, but it will not be serving marijuana dispensaries and other pot businesses.  Thus, marijuana-related business in Colorado will remain unbanked, despite the credit union's legal victories. 

Meanwhile, Fourth Corner's lawsuit against NCUA over share insurance is still pending.  Now that the credit union has been granted Fed system access, the only thing it needs to get up and running is share insurance.  Fourth Corner sued NCUA in 2015 after the agency denied its share insurance application but in light of the Fed Bank's approval, Fourth Corner has asked a federal court to help deliver a faster resolution in the dispute.  According to the credit union's February 15 motion to compel, NCUA asked Fourth Corner to voluntarily dismiss the case and reapply for insurance but did not give the credit union any assurances that the agency will timely act on a new application (or approve it) if they reapply. Thus, instead of dropping the suit, Fourth Corner is seeking resolution through mediation. Fourth Corner has asked that the court order mediation to take place within 30 days. The court would stay the proceedings during the dispute resolution process.

Alternative dispute resolution could be a positive step toward resolving the credit union's legal tussle with the agency and, perhaps, obtaining federal share insurance.  However, this morning, NCUA filed a Motion for Judgment on the Pleadings, arguing that the court should dismiss the case "as the controversy that gave rise to [the] lawsuit is now moot." In other words, because Fourth Corner has now made a "massive change" to its business plan and field of membership and resolved its dispute with the Fed Bank, the circumstances and key facts underlying the credit union's complaint have materially changed.  Thus, the agency asserts there is no longer a "live controversy" before the court.   In short, NCUA wants the case thrown out and Fourth Corner to file a new insurance application. 

It is now up to the court to decide whether to grant Fourth Corner's request to compel mediation or to dismiss the case based on NCUA's new motion. The outcome of Fourth Corner's legal dispute with NCUA will determine if we are likely to see our first cannabis-friendly credit union operating soon.

NCUA Determines NYS Lease Security Accounts Qualify For Pass-Through Share Insurance

Written by Stephanie Lyon, Regulatory Compliance Counsel

The first NCUA Legal Opinion Letter of 2018 answers the question whether New York State Lease Security Accounts (NYS Lease Accounts) qualify as "other similar escrow accounts" for the purpose of receiving pass-through share insurance. The background for this legal opinion dates back to 2015 when NCUA amended its share insurance regulation implementing the Credit Union Share Insurance Fund Parity Act, making it possible for credit unions to offer IOLTA and other similar escrow accounts by making these types of accounts eligible for share insurance coverage. Prior to this rule amendment, credit unions were not able to offer these types of fiduciary accounts as credit unions can only offer membership shares that are eligible for insurance coverage. See, 12 C.F.R. § 741.9.

Currently, the share insurance rule defines "other similar escrow account" as "an account where a licensed professional or other individual serving in a fiduciary capacity holds funds for the benefit of a client or principal as part of a transaction or business relationship. Examples of such accounts include, but are not limited to, real estate escrow accounts and prepaid funeral accounts." 12 C.F.R. § 745.14(c)(1)(ii). Because of the relatively large scope of the definition of "other similar escrow accounts", many credit unions have been asking whether certain accounts, such as the NYS Lease Account that allows a landlord to deposit a tenant’s security deposit on rental property, are similar enough to qualify for pass-through share insurance coverage.

Factors For "Other Similar Escrow Accounts"

Just recently, NCUA decided to weigh in on this debate with Legal Opinion Letter 17-0424 to give an example of another "similar escrow account" that would qualify for share insurance coverage. Note that this legal opinion letter is not determinative for other accounts even if they are similar as the letter takes into account specific state laws and factual representations made by the credit union that submitted the question. Nonetheless the letter is helpful to better understand the concept of “other similar escrow accounts” and identify the factors that make an account eligible for pass-through share insurance coverage.

Among the items to consider when determining if an account qualifies as a similar escrow account are: (1) membership eligibility; (2) existence of fiduciary relationship; and (3) funds are held for the benefit of a client or principal as part of a transaction or business relationship. Item 1 is easy to determine as the only factor that matters is whether the attorney administering the IOLTA or the agent/individual administering the other similar escrow account is a member of the federally insured credit union in which the funds are held. This is different from other account types such as irrevocable trusts in which the ability of the credit union to open the account relies on the membership of the settlor or the beneficiary of the funds instead of the membership status of the trustee. Items 2 and 3 are slightly more complicated as they may require the credit union review its state law as this may impact whether a fiduciary relationship exists and whether the funds are held as part of a business transaction.

The legal opinion letter in question reviewed the three items above and determined that the landlord was subject to membership with the credit union. The letter also discusses that under NYS law a landlord holds the security deposit in trust for a tenant, the actual owner of the funds, in a fiduciary capacity as part of their real estate related business relationship. Hence, NYS Lease Accounts are considered to be "similar escrow accounts".

Keep In Mind…

NCUA did note that even if the NYS Lease Account qualifies as a similar escrow account, there are other requirements under the rule that must be met to ensure the funds are insured. For example, the rule has recordkeeping requirements and dictates the manner in which an IOLTA or other similar escrow account must be titled. See, 12 C.F.R. § 745.14(a)(2).

For those reasons, credit unions considering offering these types of fiduciary accounts may want to review their state law and closely follow the requirements of Part 745 to ensure members are aware of the requirements to retain adequate documentation evidencing the fiduciary relationship between the attorney/agent administering the account and the clients/principals.

Finally, for research purposes, this letter is currently housed in NCUA's webpage under Legal Opinion Letters from 2017, even though it was released February 1^st, 2018.

Curbing the CFPB Watchdog

Written by Shari R. Pogach, Regulatory Paralegal

The Consumer Financial Protection Bureau (CFPB) has gone through some significant changes since the resignation of former Director Richard Cordray last November.  Moving from continuously issuing regulations and enforcement actions, under its current leadership, the bureau appears to be heading to a kinder and gentler mode.  Acting Director Mick Mulvaney has made it clear in both a memo to CFPB staff and the bureau's recently released five-year strategic plan that going forward, the CFPB will go no further than furthering its statutory responsibilities outlined under Dodd-Frank.  According to its mission, the bureau will "regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws" and "educate and empower consumers to make better informed financial decisions."

The CFPB has three goals under the current strategic plan:

1. Ensure that all consumers have access to markets for consumer financial products and services.
2. Implement and enforce the law consistently to ensure that markets for consumer financial products and services are fair, transparent, and competitive.
3. Foster operational excellence through efficient and effective processes, governance and security of resources and information.

The plan outlines the objectives and strategies to enable the bureau to achieve these goals.  One significant objective is to "regularly identify and address outdated, unnecessary, or unduly burdensome regulations in order to reduce unwarranted regulatory burdens."  This will be done by getting input and feedback on existing regulations, looking at alternative approaches and alternatives to regulation.  Rules and regulations will be assessed and reviewed to evaluate their effectiveness and for opportunities to clarify, modernize and streamline when feasible. 

In addition to the new direction set by Acting Director Mulvaney, President Donald Trump’s budget proposal called for cutting the CFPB's funding and limiting its enforcement powers.  Since its inception, the bureau has been criticized as having too much power with too little oversight from Congress. Under this strategic plan, Acting Director Mulvaney seeks to rein in the bureau's "unparalleled powers."

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Programming Note.  NAFCU will close at noon today and be closed on Monday for President's Day weekend. We will be back to blogging on Wednesday. Enjoy your weekend!

SALE! BOGO! DOORBUSTER!: Running Promotions on Your Credit Cards

Written by Jennifer Aguilar, Regulatory Compliance Counsel

In my opinion, the first Sunday after the Super Bowl is the most depressing day of the year. After months of having every Sunday filled with excitement and record-breaking moments, you suddenly have a day with nothing to do. And that's just depressing. So, I filled my day with a trip to the mall. Pause – I'll give you all a moment to recover from the shock that there's still someone out there who doesn't shop online. . . I always prefer the mall because most of the stores are so desperate to get people in the door that they give you really great discounts that you often can't get online. They all have these colorful signs in the windows advertising discounts on your entire purchase or free gifts with your purchase.

Like any other business, credit unions also use these kinds of flashy offers to attract customers. However, unlike the stores at the mall, credit unions have to comply with a number of different requirements for their offers. From advertising to account opening and beyond, the rules are complex and can be hard to follow. Today's post will focus on the rules for how long credit unions must honor a promotional rate on a credit card. The rules below apply for both new accounts and promotions on existing accounts.

Generally speaking, the credit card rules in Regulation Z prohibit credit unions from increasing the rate on a credit card unless a specific exception applies. One of those exceptions – contained in section 1026.55(b)(1) – allows credit unions to increase the rate after the expiration of a promotional period.  The promotional period must be at least six months. Well, that's pretty easy, right? Not so fast. The commentary actually provides two different methods for calculating the promotional period depending on the types of transactions subject to the promotional rate – multiple transactions or one-time transactions.

Multiple Transactions. The first method covers promotional rates that apply to multiple transactions. For example, all purchases made between February and September. Credit unions may limit the types of transactions that qualify for the promotional rate to particular categories – such as all purchases or a balance transfer over $1,000 – or a particular time period – such as all purchase made in December.  If the promotional rate applies to multiple transactions, it does not matter how many transactions the member actually makes – as long as multiple transactions qualify for the promotional rate than the first method applies.

So, what is the calculation method? Well, the promotional period begins on the date the credit union provides the 55(b)(1) disclosures – that is, the disclosures that explain the length of the promotional period and the APR that will apply after the end of the promotional period. However, if the date the account can first be used is later than the date the credit union provided the disclosures, then the promotional period begins on that date instead. The promotional period must end at least six months from that beginning date. Here is an example from the commentary that illustrates how this works:

On November 1, 2017 the card issuer offers the consumer a 0% rate for six months on purchases made during the months of November and December and states that a 17% rate will apply after the promotion. The following purchases are made: November 15 for $500; December 15 for $300; and January 15 for $150. The card issuer may begin charging the 17% rate on the $500 purchase and the $300 purchase starting on May 1, 2018 as this is six months from November 1. However, the issuer may charge the 17% rate on the $150 purchase beginning on January 15 since it was made after the specified time period.

One-time transactions. The second method covers promotional rates that will apply to only one transaction. For example, a balance transfer. Again, credit unions can put limitations on the transaction that will qualify for the promotional rate – such as a purchase over $5,000 or a balance transfer made in January. When the promotional rate applies only to one-time transactions, then the promotional period begins on the date of that transaction. The promotional period must end at least six months from that transaction date. Here are a couple examples from the commentary that illustrate how this works:

Example 1: On June 1, 2017, a card issuer offers a 0% APR for six months on the purchase of an appliance and an 18% rate will apply after that. On September 1, 2017 a $5,000 appliance is purchased.  The card issuer may begin charging the 18% rate on March 1, 2018 as this is six months from September 1.

Example 2: On June 1, 2017, a card issuer offers the consumer a 5% rate for six months on a balance transfer of at least $1,000 and states that a 15% rate will apply after that. On June 15, a $3,000 balance is transferred to the account. On July 15, a $200 purchase is charged to the account. The card issuer may begin charging the 15% rate on the $3,000 transferred balance on December 15 as this is six months from June 15. However, the card issuer may charge the 15% rate on the $200 purchase beginning on July 15 because this purchase did not qualify for the promotional rate.

When dealing with promotional rates, credit unions will need to first determine whether the promotional rate will apply to multiple transactions or only to one particular transaction. Once the credit union has made this determination, it can determine when the promotional period starts. Determining when the promotional period starts is essential for compliance as the period must run for at least six months.

Rumor Has It…Exams Include Website Reviews

Written by Brandy Bruyere, Vice President of Regulatory Compliance

NAFCU has been hearing from members that examiners are conducting website reviews as part of recent examinations. A credit union's website can contain advertising content as well as impact other areas of compliance. Here are some things to consider if conducting a review is on your radar.

Advertising Content

Keep in mind that federal regulations define advertisement quite broadly. For example, under Regulation Z, an ad is "a commercial message in any medium that promotes, directly or indirectly, a credit transaction." NCUA's Truth in Savings rule is similarly broad, as is NCUA's general advertising rule. As a result, much of a credit union's website could include content that federal regulation considers to be an advertisement. Below are several regulatory provisions that may impact a credit union's website due to its advertising content:

• Use of the Official NCUA Sign and Advertising Statement – Section 740.4(a) requires credit unions to display the official sign "on its Internet page, if any, where it accepts deposits or opens accounts." Section 707.5 requires a credit union's website to state "federally insured by NCUA," but this can be accomplished using the official sign. However, if a particular credit union page has information about investment-type products that are not insured, such as those offered through a CUSO, it could be problematic to include this information if it insinuates that uninsured products are insured.
• Accuracy of Advertising – Section 740.2 generally prohibits insured credit unions from any advertisement that is "inaccurate or deceptive in any particular, or which in any way misrepresents its services, contracts, or financial condition." There is no staff commentary and not much guidance as to what might be deceptive or a misrepresentation, but these kinds of considerations often involve judgement calls made from a consumer's perspective.
• Deposit Accounts and the TIS Advertising Rule – If website content promotes share accounts, section 707.8 prohibits such advertisements from being misleading or inaccurate. This includes limits on when an account can be described as "free" and a requirement to state the "annual percentage yield" if the ad states a rate of return (APY may be used after the unabbreviated term is used at least once). Where the APY is stated, additional disclosures are also triggered as applicable including:
  • A statement that the rate may change, if a variable rate account;
  • The period of time the APY will be offered for interest and dividend bearing term share accounts;
  • The minimum balance required to earn the advertised APY;
  • The minimum deposit required to open the account to hear the APY, if greater than the minimum balance;
  • A statement about fees; and
  • If a share term account, disclosures regarding the term of the account, early withdrawal penalties, and specific disclosures for noncompounding term share accounts with a stated maturity of over a year.

There are also specific disclosures triggered if a bonus is stated in an advertisement for an account and requirements if overdraft features are promoted. However, the staff commentary to the rule allows for some flexibility here to provide some disclosures a click away:

"9. Electronic advertising. If an electronic advertisement, such as an advertisement appearing on an internet Web site, displays a triggering term, such as a bonus or annual percentage yield, the advertisement must clearly refer the member to the location where the additional required information begins. For example, an advertisement that includes a bonus or annual percentage yield may be accompanied by a link that directly takes the member to the additional information.” (Emphasis added.) See, 12 C.F.R. Part 707, App. C, comment 707.8(a)-9.

• Regulation Z – Content that promotes a credit product will have Reg Z implications. Section 1026.16 applies to open-end credit products and section 1026.24 applies to closed-end credit products. Both of these rules contain "trigger terms" that, if used, require additional disclosures. Of course, these terms are not the same for open-end versus closed-end credit, or home-secured versus non-home-secured loans. For example, the rate or APR when used for open-end credit products NAFCU has articles for members on open-end credit ads and home secured ads which may help. But like the TIS rule, Reg Z does contain commentary about providing some disclosures a click away in an electronic format, here is an excerpt:

“Paragraph 16(c)(1)

[…]

2. Electronic advertisement. If an electronic advertisement (such as an advertisement appearing on an Internet Web site) contains the table or schedule permitted under §1026.16(c)(1), any statement of terms set forth in §1026.6 appearing anywhere else in the advertisement must clearly direct the consumer to the location where the table or schedule begins. For example, a term triggering additional disclosures may be accompanied by a link that directly takes the consumer to the additional information.” (Emphasis added.) See, 12 C.F.R. Part 1026, Supp. I, comments 1026.16(c)(1)-1 and -2.

For closed-end credit, there are more specific provisions in section 1026.24(e) and its commentary.

• Other Lending Implications - Section 701.31(d) requires the "equal housing lender" logo on real estate related advertising, or "any other method reasonably calculated to satisfy the notice requirement," although there is no guidance as to what this alternative may be. As a result, the logo is generally used. Also if the credit union accepts loan applications online, keep in mind that the same fair lending type considerations would be in play on web based applications as well.

Electronic Funds Transfers and Other Account Considerations – Credit unions that offer EFTs or open accounts online may want to consider that Regulation E requires certain disclosures to be made "at the time a consumer contracts for an electronic fund transfer service or before the first [EFT] is made involving an account." Where accounts are offered or opened online, Regulation CC requirements regarding the credit union's funds availability policy and another possible disclosure requirement.

Weblinking – If the credit union links to third-party websites, keep in mind NCUA's guidance on weblinking, such as "speed bumps":

• NCUA Letter to Credit Unions 02-FCU-04
• NCUA Letter to Credit Unions 03-CU-08

COPPA – Websites can have implications under the Children's Online Privacy Protection Act (COPPA) rules. Making determinations as to the applicability of COPPA generally requires an analysis of the specific facts and circumstances of the credit union's situation against the requirements of the rule. COPPA can apply to any internet services you provide, such as online banking.  The credit union may be accessing information through things like cookies or similar internet devices that often collect nonpublic personal information. The FTC’s rule implementing COPPA is located in 16 CFR 312. If a credit union is “collecting” information from minors under the age of 13 you will need to comply with the COPPA requirements.

Overall, considering the credit union's website content from the perspective of how it would be reviewed if it were in print (e.g., an ad, an application, etc.) can be helpful in reviewing for compliance. Also, while not specific to exams, many credit unions are also considering the Americans with Disabilities Act as well when reviewing their websites.

ICYMI: An Overview of the CFPB's Payday Lending Rule

Written by: André B. Cotten, Regulatory Compliance Counsel

Happy Friday, Compliance Friends! Last fall, one of my colleagues posted a blog about the PAL exemption under the CFPB's Payday Lending Rule. To refresh your memory, the CFPB issued a final rule in early October 2017. This rule is intended to put a stop to what the Bureau coined as,  "payday debt traps", but as written does, impact some credit unions' products. Today's blog will provide a high level overview of what's included in the CFPB's Payday Lending Rule.

Scope of the Rule

Payday loans are typically for small-dollar amounts and are due in full by the borrower's next paycheck, usually two or four weeks. From some providers, they are expensive, with annual percentage rates of over 300 percent or even higher. As a condition on the loan, sometimes the borrower writes a post-dated check for the full balance, including fees, or allows the lender to electronically debit funds from their checking account.

With that being said, the Payday Lending Rule applies to two types of loans. First, it applies to short-term loans that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms, and longer-term balloon-payment loans. The rule also has underwriting requirements for these loans.

Second, certain parts of the rule apply to longer-term loans with terms of more than 45 days that have (a) a cost of credit that exceeds 36 percent per annum; and (b) a form of "leveraged payment mechanism" that gives the credit union a right to withdraw payments from the member's account. The payments part of the rule applies to both categories of loans. Note, at this time, the CFPB is not finalizing the ability-to-repay portions of the rule as to covered longer-term loans other than those with balloon payments.

The rule excludes or exempts several types of member credit, including: (1) loans extended solely to finance the purchase of a car or other member good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; (6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (i.e. meet the requirements of NCUA's PAL program); and accommodation loans.

Ability-to-Repay Requirements and Alternative Requirements for Covered Short-Term Loans

The CFPB has indicated that it is concerned about payday loans being heavily marketed to financially vulnerable members. Faced with other challenging financial circumstances, these borrowers sometimes end up in a revolving cycle of debt.

Thus, the CFPB included ability to repay requirements in the Payday Lending Rule. The rule will require credit unions to determine that a member will have the ability to repay the loans according to the terms of the covered short-term or longer-term balloon-payment loans.

The first set of requirements addresses the underwriting of these loans. A credit union, before making a covered short-term or longer-term balloon-payment loan, must make a reasonable determination that the member would be able to make the payments on the loan and be able to meet the member's basic living expenses and other major financial obligations without needing to re-borrow over the following 30 days. The rule specifically lists the following requirements:

• Verify the member's net monthly income using a reliable record of income payment;
• Verify the member's monthly debt obligations using a national consumer report;
• Verify the member's monthly housing costs using a national consumer report if possible, or otherwise rely on the member's written statement of monthly housing expenses;
• Forecast a reasonable amount of basic living expenses, other than debt obligations an housing costs; and
• Determine the member's ability to repay the loan based on the credit union's projections of the member's residual income or debt-to-income ratio.

Furthermore, a credit union is prohibited from making a covered short-term loan to a member who has already taken out three covered short-term or longer-term balloon-payment loans within 30 days of each other, for 30 days after the third loan is no longer outstanding.

Second, and in the alternative, credit unions are allowed to make a covered short-term loan without meeting all the specific underwriting criteria set out above, as long as the loan satisfies certain prescribed terms, the member meets specified borrowing history conditions, and the required disclosures are provided to the member. Among other conditions, under this alternative approach, credit unions are allowed to make up to three covered short-term loans in short succession, provided that the first loan has a principal amount no larger than $500, the second loan has a principal amount at least one-third smaller than the principal amount on the first loan, i.e. below $350, and the third loan has a principal amount at least two-thirds smaller than the principal amount on the first loan, i.e. below $167.

In addition, the rule does not permit a credit union to make a covered short-term loan under the alternative requirements if it would result in the member having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period. The rule also does not permit credit unions to take vehicle security in connection with loans that are made according to this alternative approach.

Payment Practice Rules

The cycle of taking on new debt to pay back old debt can turn a single, unaffordable loan into a long-term revolving debt cycle. The consequences of this ongoing debt can be severe. For example, a credit union's repeated attempts to debit payments can add significant penalties, as overdue members get hit with insufficient funds fees and may even have their checking account closed.

As a result, the Payday Lending Rule is also intended to prevent credit unions from making multiple attempts to withdraw payment from member's accounts in connection with a short-term, longer-term balloon-payment, or high-cost longer-term loan. The rule prohibits additional attempts after the credit union's second consecutive attempt to withdraw payments from the accounts from which the prior attempts were made have failed due to a lack of sufficient funds, unless the credit union obtains the members' new and specific authorization to make further withdrawals from the accounts.

This prohibition on further withdrawal attempts applies whether the two failed attempts are initiated through a single payment channel or different channels, such as the automated clearinghouse system and the check network. The rule requires that credit unions must provide notice to members when the prohibition has been triggered and follow certain procedures in obtaining new authorizations.

In addition to the requirements related to the prohibition on further payment withdrawal attempts, a credit union is required to provide a written notice, depending on means of delivery, a certain number of days before its first attempt to withdraw payment or before an attempt to withdraw a nonconforming payment. The notice must contain key information about the upcoming payment attempt, and if applicable, alert the member to unusual payment attempts. A credit union is permitted to provide electronic notices as long as the member consents to electronic communications requirements.

Update on the Payday Lending Rule

Recently, the CFPB issued a press release that stated the Bureau intends to engage in a rulemaking process so that the CFPB may reconsider the Payday Rule. The Bureau also indicated that it may waive the April 16, 2018 deadline for preliminary approval to become a registered information system ("RIS") under the Payday Rule. NAFCU will continue to closely monitor the CFPB as its new leadership sets its pace and agenda.

The Final Prepaid Rule: Version 3.0; Refresher on the EU's GDPR

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

Since 1982, no less than seven different cuts of Ridley Scott's science fiction masterpiece Blade Runner have been shown to theater audiences. The initial workprint version didn't test well, so the studio re-cut it, adding a rightfully maligned voice-over and a preposterous "happy ending." Both the director and generations of film snobs-to-come found it insufferable. A version with extended, more violent fight scenes was released for international audiences, and a version with toned down violence and nudity was produced for television broadcast. In the early 90's, positive responses to an unauthorized release of the original workprint prompted the 1992 release of a director's cut version, but Ridley Scott still didn't feel he had sufficient time or control to finish it the way he wanted. In 2007, Scott was able to make the version he wanted -- the "Final Cut" -- which was released with the 25th Anniversary Edition blu-ray. Blade Runner is one of my favorite movies, and it proves that, sometimes to get something right you need a quarter of a century and at least seven iterations.

Which is to say, the CFPB is still working on the Prepaids Rule.

The initial proposed rule was released on December 23, 2014, with following corrections to the proposal being released February 5, 2015. The rule went final for the first time on November 22, 2016, with an effective date of October 1, 2017. Less than 4 months later, on March 15, 2017 the Bureau issued another proposal, recognizing some issues with implementation of the final rule, seeking more time for additional adjustments and suggesting the effective date be delayed six months. That proposal went final on April 25, 2017, with a new effective date of April 1, 2018. However, the Bureau did believe further adjustments were necessary, and on June 29, 2017, another proposal was issued, delaying the implementation date further and proposing changes to the regulation. While it has not yet been published in the Federal Register, the Bureau has released the third Final Rule on prepaids, and the new effective date is April 1, 2019.

With all this rule writing and rewriting, one of the more painful parts of this process has been identifying the regulatory language that would be current on the effective date. On that front, the CFPB has done us a solid: they finally released an unofficial, informal redline of the rule, allowing compliance personnel to read the rules as a whole. The redline is even bookmarked!

The FINAL Final Rule

The most recent final rule makes several changes to the rule, most significant of which is the April 1, 2019 effective date. Other changes include:

• Revising the error resolution and limited liability provisions so that they only apply to prepaid accounts that are registered with the credit union and for which the identity of the account holder has been verified;
• Creating limited exceptions to the credit-related provisions to address situations where a credit card is liked to a digital wallet;
• Expanding situations where an account issuer can run a negative balance, if certain conditions are met;
• Making clarifications and minor adjustments to several provisions in Regulation E, including the definition of a prepaid account, unsolicited issuance of access devices, pre-acquisition disclosure requirements and submission of prepaid account agreements; and
• Technical corrections!

Refresher on the European Union's GDPR

 The NAFCU Compliance Team has seen an uptick in questions about the scope of the European Union's General Data Protection Regulation (GDPR). Apparently some vendors are raising the red flag for their clients. NAFCU recently hosted a webcast (for purchase) on the GDPR which credit unions may find helpful. We also blogged about the GDPR in May of last year, and that might be worth revisiting: Privacy Laws from Across the Pond: Scoping Out the GDPR.

The GDPR's scope is drawn very broadly. It does not require the credit union to have a location in the EU or for the website user to be an EU citizen or resident for the rule to apply. Here is a section from that prior blog post:

"Scope

The Directive applied mostly to organizations that had an establishment or "means of processing" physically located within the EU. The GDPR, however, expands the application of EU privacy law to organizations not located in the EU, but doing certain business in the EU.

For entities that do not have an establishment in the EU, the GDPR applies to any organization that processes the personal data of natural persons in the EU under two circumstances: 1) when offering them goods or services, even if it's not in return for payment, or 2) in monitoring their behavior which takes place within the EU. See, EU Regulation 2016/679, Ch. 1, Art. 3(2)."

The full post contains more detail, including the definitions that are necessary to really understand this scope. However, even if the credit union falls within the scope, there is still a question as to whether and when compliance with the rule may be appropriate for individual credit unions. It is not clear how the European Union would enforce the law against organizations without a presence in the EU. Neither the CFPB nor NCUA have indicated an appetite to examine for it. Credit unions seeking a realistic assessment of the risk that GDPR noncompliance would pose to the credit union should speak with an attorney experienced in international law. A proper assessment of this risk should help the credit union assess whether GDPR compliance is appropriate and necessary at this time.

Home is Where You Make It: RV Loan Disclosure Rules; New HMDA Tool

Written By: Reginald Watson, Regulatory Compliance Counsel

Happy Monday! The perils of winter often lead my mind to drift back to last summer when I spent time exploring some of the beautiful American landscape with my brother and his bandmates aboard a funky-looking RV. Being more settled into my role as a compliance practitioner, I sometimes find myself wondering about the nuances in the rules and how the financing disclosures cover similar yet slightly different secured transactions. I recently embarked upon a journey to fully investigate the disclosure rules with regard to recreational vehicles and found that the more I read, the more tripped up I became. Upon returning from this expedition, I've decided to share what I learned with you, my compliance friends. This blog will discuss the disclosure rules for recreational vehicles, boats and trailers.

The confusion when it comes to recreational vehicles arises from the fact that their characterization as either personal property versus real property is state specific, with most states taking the personal property approach. This tends to get even hazier when a borrower decides to make the RV their primary dwelling. Thus, it can be difficult to figure out which regulations apply since every situation does not neatly fit into either category, which is something the TILA-RESPA integrated disclosure (TRID) rules don't seem to want anything to do with. It seems the Bureau only intended for TRID to apply to loans secured by land (and cooperatives starting October 2018). The TRID preamble explains that applying the integrated disclosure rules to loans secured by personal property, including "chattel-dwelling" loans, "could reduce the intended consumer benefit of the disclosures because of those loans' unique characteristics. Excluding them from coverage of these integrated disclosures, however, would not excuse them from [TILA/Regulation Z's general] disclosure requirements."

Although an RV would not be considered a dwelling for TRID as well as most RESPA rules, it could be considered a dwelling for other purposes under sections 1026.17 and 1026.18 of Reg Z. These rules apply to all closed-end consumer credit transactions, including those that are secured by personal property that is not a dwelling and those that are secured by personal property that is a dwelling, but is not also real property. These disclosure would include things like the itemization of the amount financed, the finance charge, the annual percentage rate, the interest rate, the payment schedule, the number of payments, and any applicable late and prepayment fees among other requirements. See, 12 C.F.R. §1026.18 and related commentary.

Parts of Regulation Z have specific scope provisions, so there are rules that discuss applicability to a “dwelling” or a “principal dwelling” depending on the rule. Meanwhile, the staff commentary to the definition of "dwelling" clarifies that this can include RVs. Here's an excerpt from the commentary for reference:

1026.2(a)(19) Dwelling

1. Scope. A dwelling need not be the consumer's principal residence to fit the definition, and thus a vacation or second home could be a dwelling. However, for purposes of the definition of residential mortgage transaction and the right to rescind, a dwelling must be the principal residence of the consumer. (See the commentary to §§1026.2(a)(24), 1026.15, and 1026.23.)
2. Use as a residence. Mobile homes, boats, and trailers are dwellings if they are in fact used as residences, just as are condominium and cooperative units. Recreational vehicles, campers, and the like not used as residences are not dwellings. (Emphasis added).

Determining that an RV is used as a residence, or a principal residence, will impact when a loan on an RV or boat would be subject to a particular rule(i.e. the right to rescind only attaches if the dwelling is the borrower's principal residence).As another example, the requirement to provide periodic statements for residential mortgages applies for closed-end loans secured by a dwelling. The higher-priced mortgage loan escrow rule applies to certain loans secured by a first position lien on a principal dwelling. Generally, the regulations permit a consumer to have only one "principal dwelling," which is discussed in further detail in the CFPB’s staff commentary.

What about rules besides Reg Z and RESPA? Looking at both Regulation B's appraisal disclosure rules and HMDA's reporting rules, these have exclusions for recreational vehicles and boats. See, 12 C.F.R. 1002.14(b)(2), and Interp 1 to 12 C.F.R. §1003.2(f)-Comment 3. I hope you enjoy this photo of the RV from last summer's tour, somewhere in West Virginia I presume:

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HMDA LAR Formatting Tool

CFPB has launched a new formatting tool intended to help credit unions, typically those with small volumes of covered loans and applications, create an electronic file that can be submitted to the HMDA Platform. The 2018 LAR Formatting Tool should be used for data collected in 2018 and reported in 2019. The 2018 LAR Formatting Tool and the updated 2018 Filing Instructions Guide can be accessed from the Bureau's HMDA resources website.

ADA Litigation Update: One Down, More to Go

Written by Pamela Yu, Special Counsel for Compliance and Research

Last Friday, a federal judge in Virginia granted a credit union's motion to dismiss in a lawsuit alleging the credit union's website was not compliant with the Americans with Disabilities Act (ADA).  The ruling represents a big initial victory for credit unions facing growing litigation threats over unclear website accessibility requirements under the ADA.

The Shakedown

Credit unions nationwide have faced a tide of lawsuits and demand letters over the past year relative to the ADA.  Currently, the ADA and the Department of Justice's (DOJ) implementing regulations are silent on website accessibility standards, and the DOJ recently removed an earlier initiative from its rulemaking agenda and withdrew two advanced notices of proposed rulemaking on the subject.  See, 82 Fed. Reg. 60932 (Dec. 26, 2017).  Ambiguities in the law have spawned a new cottage industry for opportunistic plaintiffs' attorneys looking to make a quick dollar off the backs of credit unions and other well-intentioned entities.  Generally the shakedown goes something like this:  lawyers send multiple, identical demand letters alleging ADA website violations to credit unions, banks, and other entities throughout a targeted state on behalf of one unnamed, repeat complainant, then settle for several thousand dollars per case. If the case doesn't settle, the lawyers file suit. 

Some credit unions are making the business decision to settle, but others have decided to fight the charges in federal court. 

Carroll v. Northwest Federal Credit Union

In the first of these cases involving a credit union to be decided by the court, the plaintiff generally alleged that he is a visually-impaired individual who visited the credit union's website but was unable to navigate the website due to accessibility barriers and, as a result, was denied the full use and enjoyment of the facilities and services of the credit union.  However, the plaintiff did not allege he was a member of the credit union or even clearly within the credit union's limited field of membership (multiple-common bond).  See, Carroll v. Northwest Federal Credit Union, No. 1:17-cv-01205, slip. op. at 5 (E.D. Va. Jan. 26, 2018).

NAFCU filed a brief as amicus curiae (i.e., "friend of the court") in support of the defendant credit union's motion to dismiss on the grounds that, among other things, a website is not a place of public accommodation under Title III of the ADA and the plaintiff lacked standing to sue because he was not a member of the credit union.  

A Credit Union Win

The court's January 26th decision granted the credit union's motion to dismiss, ruling that the plaintiff did not have standing to sue the credit union because he was not a member or eligible for membership and would not likely use the credit union's services.  The court therefore determined the plaintiff did not sufficiently establish an injury-in-fact:

"Here, the defendant, Northwest Federal Credit Union ("Northwest FCU"), is a credit union chartered by the Federal government which only includes a specific membership field. . . . Plaintiff is not included in this membership field, nor has he alleged any facts in his Complaint to suggest he is [a member] or otherwise eligible to become a member of Northwest FCU.  As a result, Plaintiff is unable to deposit money in, or obtain a loan or other services from Defendant. 

Plaintiff is unable to show that he has suffered an injury in fact or that there is certain impending future harm.  [Plaintiff] cannot make this showing because he has not established that he is entitled, or would ever be entitled, to utilize any services provided by Northwest FCU." Carroll v. Northwest Federal Credit Union, No. 1:17-cv-01205, slip. op. at 5 (E.D. Va. Jan. 26, 2018).

In addition, the court found that a website is not a place of public accommodation subject to Title III ADA protections:

"Plaintiff's claim also fails because the website is not a place of public accommodation.  Title III of the ADA prohibits discrimination in public accommodations based on disability.  The statute provides for a list of entities that are considered public accommodations.  Notably absent from the list is the term "website".  Not only is "website" not found on the list, but the statute does not list anything that is not a brick and mortar "place".  Over the years Congress has extensively amended the ADA; however, at no point did Congress choose to add websites as a public accommodation."  Id. (citations omitted).

The War Rages On

The decision is a huge first win for credit unions in the battle against these unwarranted ADA legal actions.  But the war is not over.  The lower court's decision is not considered binding under common law principles: “A single district court decision . . . has little precedential effect[, and i]t is not binding on . . . other district judges in the same district.” See, U.S. v. Articles of Drug Consisting of 203 Paper Bags, 818 F.2d 569, 572 (7th Cir. 1987).

Other judges in the same district and in various other federal jurisdictions will likely consider similar credit union ADA cases soon. While the decision in Carroll is persuasive authority—especially as it is the first case to rule on whether credit union membership is necessary to establish standing—the decision is not binding precedent on other courts or federal jurisdictions. 

NAFCU has filed three additional amicus briefs to support credit unions in several similar cases, and on January 5th NAFCU stood with one of those credit unions while the judge heard oral arguments on their motion to dismiss.  We will continue to fight for our members against these unfair suits.  Meanwhile, the plaintiff in Carroll has filed an amended complaint.  Because the court dismissed the case "without prejudice," the plaintiff was free to amend his complaint and refile a new suit.  Notably, however, the plaintiff is still not a member of the credit union.  Stay tuned. 

For more information about ADA website litigation and NAFCU's ongoing efforts to stand up for credit unions on this issue, please visit our dedicated ADA webpage here.