NAFCU Compliance Blog

Deconstructing the QM Safe Harbor in Construction to Permanent Loans; CFPB Mortgage Servicing Guide Updates

By: Reginald Watson, Regulatory Compliance Counsel

Greetings Compliance Friends!

It has been a few years since the CFPB's implementation of the ability to repay requirements and qualified mortgage safe harbor, yet many credit unions still find the points and fees calculations confusing, particularly the scale of the exemption for construction loans in the context of a hybrid construction to permanent loan.  As a reminder, Regulation Z now requires credit unions to consider a consumer's ability to repay a residential mortgage loan and these requirements are set out in section 1026.43(c).

Loans that meet the standard of a qualified mortgage under sections 1026.43(e) or (f) are given a presumption that the borrower has the ability to repay. The calculation of all applicable points and fees are an aspect of determining whether a transaction is a qualified mortgage and therefore, whether the transaction is presumed to meet the “ability-to-repay” requirements of section 1026.43(c). The procedures for counting points and fees are the same as those provided in the high cost mortgage rule found in section 1026.32(b)(1). The credit union is required to establish a member's ability to repay for only those residential mortgage loans which are covered by the scope of section 1026.43(a), which contains a specific exemption for "a construction phase of 12 months or less of a construction-to-permanent loan." 12 C.F.R. §1026.43(a)(3)(iii). If a loan is outside the scope of section 1026.43(a), then there is no regulatory requirement to establish a consumer's ability to repay under section 1026.43 or calculate the points and fees.

So, how do we account for the points and fees calculation when the credit union is financing the permanent loan in addition to the construction phase? 

The commentary to Regulation Z seems to give us two options: for purposes of the qualified mortgage rule, the credit union may treat the construction phase and the permanent phase as one single transaction, or as two separate transactions.  Either way, the credit union would be required to follow the procedures under section 1026.32(b)(1) to calculate the points and fees for all applicable charges for both the construction phase and the life of the loan. However, it is not entirely clear how to allocate fees between the construction and permanent phase of a loan – but the preamble to the ATR/QM rule indicates that the ability to treat these kinds of loans as either one or two transactions draws upon section 1026.17(c)(6)(ii)-5. The preamble also referred back to section 1026.17(c)(6)(ii) in other areas, so while not entirely clear, it seems this rule may be helpful guidance generally.  The staff commentary to section 1026.17(c)(6)(ii)-5 seems to suggest that when separating the transactions, the points and fees may be allocated as the credit union sees fit:

5. Allocation of costs.When a creditor uses the special rule in §1026.17(c)(6) to disclose credit extensions as multiple transactions, fees and charges must be allocated for purposes of calculating disclosures. In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges under §1026.4 and points and fees under §1026.32(b)(1) that would not be imposed but for the construction financing. For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase and may not be included in the disclosures for the permanent phase. If a creditor charges separate amounts for finance charges under §1026.4 and points and fees under §1026.32(b)(1) for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges under §1026.4 and points and fees under §1026.32(b)(1) must be allocated to the permanent financing. Fees and charges that are not used to compute the finance charge under §1026.4 or points and fees under §1026.32(b)(1) may be allocated between the transactions in any manner the creditor chooses. For example, a reasonable appraisal fee paid to an independent, third-party appraiser may be allocated in any manner the creditor chooses because it would be excluded from the finance charge pursuant to §1026.4(c)(7) and excluded from points and fees pursuant to §1026.32(b)(1)(iii).

Thus, it seems that the credit union may make a risk-based business decision when allocating points and fees for purposes of the qualified mortgage safe harbor for the permanent financing phase of the loan. Appendix D to Reg Z provides specific guidance on how to make the actual calculations when these loans are treated as separate transactions in Part I or as a single transaction in Part II.

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CFPB Issues Update to Small Entity Compliance Guide

On March 29, 2018, CFPB updated the Mortgage Servicing Small Entity Compliance Guide (version 3.1) to incorporate recent amendments to the 2016 Mortgage Servicing Rules. As you may recall, we discussed these amendments in a previous NAFCU blogpost. Check out this link for our other blogs on the 2016 Mortgage Servicing Rules. CFPB also recently created a mortgage servicing coverage chart that credit unions may find helpful.

CFPB Finalizes Important Change for Lenders Dealing with Member Borrowers in Bankruptcy

Written by: André B. Cotten, Regulatory Compliance Counsel

Hi, Compliance Friends. We are finishing up another awesome week of our Regulatory Compliance School, and we now have a new cohort of NCCO's!

Earlier this month, the CFPB finalized a technical change that will allow credit unions greater flexibility when dealing with a borrower in bankruptcy or transitioning out of bankruptcy. If you can recall, the 2016 Mortgage Servicing Final Rule addresses Regulation Z's periodic statement and coupon book requirements when a person is a debtor in bankruptcy. The bankruptcy requirements will take effect on April 19, 2018. Today's blog will discuss the change and what it will mean for mortgage servicing.

To provide some overview, as early as 2013, the CFPB issued regulations requiring credit unions who meet certain thresholds to provide monthly periodic statements to member borrowers. In theory, the concept of providing periodic statements seems easy, but in implementation, it has proved to be a bit more complicated. In particular, the obligation to provide periodic statements to members in bankruptcy had become troublesome. The recent CFPB amendments give credit unions greater flexibility in complying with the periodic statement requirement for members involved in bankruptcy.

Due to the highly technical nature of the changes, I have extracted two examples from the final rule to demonstrate the CFPB's most recent amendments. Both examples assume that a mortgage loan has a monthly billing cycle, each payment due date is on the first day of the month following its respective billing cycle, and each payment due date has a 15-day courtesy period.

The CFPB's amendment made the following change as demonstrated here:

"i. explains that, if an event listed in § 1026.41€(5)(iv)(A) occurs on October 6, before the end of the 15-day courtesy period provided for the October 1 payment due date, and the servicer has not yet provided a periodic statement or coupon book for the billing cycle with a November 1 payment due date, the servicer is exempt from providing a periodic statement or coupon book for that billing cycle. The servicer is required thereafter to resume providing periodic statements or coupon books that comply with the requirements of § 1026.41 by providing a modified or unmodified periodic statement or coupon book for the billing cycle with a December 1 payment due date within a reasonably prompt time after November 1 payment due date."

Here is another example from the CFPB's recent amendment:

"ii. Provides an example for when a servicer already timely provided a periodic statement or coupon book for a billing cycle in which an event listed in § 1026.41(e)(5)(iv)(A) occurs. It provides that, if an event listed in § 1026.41(e)(5)(iv)(A) occurs on October 20, after the end of the 15-day courtesy period provided for the October 1 payment due date, and the servicer timely provided a periodic statement or coupon book for the billing cycle with a November 1 payment due date, the servicer is not required to correct the periodic statement or coupon book already provided and is exempt from providing the next periodic statement or coupon book, which is the owner that would otherwise be required for the billing cycle with a December 1 payment due date. The servicer is required thereafter to resume providing periodic statements or coupon books that comply with the requirements of § 1026.41 by providing a modified or unmodified periodic statement or coupon book for the billing cycle with a January 1 payment due date within a reasonably prompt time after December 1 or the end of the 15-day courtesy period provided for the December 1 payment due date."

The CFPB stated that it believes these amendments will provide a clearer and more straightforward standard than the timing requirement finalized in the 2016 Mortgage Servicing Final Rule. The Bureau also anticipates that the amendments will offer greater certainty for implementation and compliance, without unnecessarily disadvantaging members.

Navigating the Regulation Z Maze: Notice Requirements for Terminating Discounted Rates on Credit Cards; 2018 Rural and Underserved Counties List

Written by Jennifer Aguilar, Regulatory Compliance Counsel

Last month, I blogged on the timeframes for running promotions on your credit cards. A question then came up regarding whether credit unions have to provide notice when the promotional rate ends and how to handle situations where a member no longer qualifies for a discounted rate, such as an employee preferential rate or a special rate for autopay. This blog addresses the change in terms notice requirements for promotions and discounts that are agreed to after a credit card account is opened and are not provided for in the original card agreement.

In true regulator fashion, getting the answer to this seemingly simple question is not so easy. Once you have figured out where to start, you'll wander through obscure parts of the rule and commentary only to find yourself in a completely different section of the rule. As it can be quite easy to get lost in the maze of cross-references and confusing language, it's helpful to take it one step at a time. So, I'll guide you slowly through the maze and hopefully you won't get lost along the way.

As a starting point, the issue with credit cards is that section 1026.55 generally prohibits credit unions from increasing the rate on a credit card account unless a particular exception applies. When the promotional or discounted rate is first applied to the account, there is no need to worry about this general prohibition since the rate is actually decreasing. However, the commentary explains that this general prohibition also applies to a promotional or discounted rate. Therefore, once the rate has been discounted, credit unions cannot increase that discounted rate back to the original rate unless an exception applies.

For promotional rates, this is pretty straightforward as section 1026.55(b)(1) provides an exception for temporary rates in effect for at least six months. However, it gets a bit more complicated when a member no longer qualifies for a discounted rate. Section 1026.55(b)(3) allows credit unions to increase the rate if it provides advance notice, but there are a couple of twists to this exception. First, it creates a protected balance. This means that all transactions made during the time the rate discount was in place and those transactions made within 14 days of the advance notice must continue to receive that lower rate until the protected balance is paid off. Second, this exception cannot be used during the first year the account is opened. For example, if a member receives a discounted rate for using autopay and then cancels autopay within the first year, the rule prohibits a credit union from increasing the rate until after the first year ends.

Now that we have worked our way through the first part of the maze, let's keep going. Section 1026.55(b)(3) points you to section 1026.9(c) to determine the applicable timeframe and content requirements for the notice. Section 1026.9(c)(2) generally requires a credit union to provide 45-day advance notice when it changes the APR on an account. However, section 1026.9(c)(2)(v) provides a number of exceptions to the general 45-day advance notice requirement. The commentary to this section explains that if the rate is temporarily discounted, a change in terms notice is not required when the rate increases back to the original rate as long as the credit union previously disclosed certain terms. The commentary sends you to a different section of the rule to determine the disclosure requirements – section 1026.9(c)(2)(v)(B).

Section 1026.9(c)(2)(v)(B) requires credit unions to disclose the following: when the reduced APR will apply and the APR that will apply when the reduced APR ceases to apply. If these disclosures are made in advance (e.g. when the credit union offers the discounted rate), advance notice is not required when the member no longer qualifies for the discounted rate. If the disclosures are not made in advance, then the rule requires the credit union to provide notice 45 days before the original rate is imposed. That 45-day advance notice must comply with the content requirements in section 1026.9(c)(2)(iv)(A).

Whew, that was confusing. Congratulations on sticking with me through the end. I know it can be exhausting wandering through the rules and all that commentary. Hopefully, this blog will serve as your shortcut when dealing with these types of discounted rates. That way, you can be just like Groundskeeper Willie and reach the end of the maze in a fraction of the time:

As always, the NAFCU compliance team is here to help you find all your regulatory shortcuts.

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Yesterday, the CFPB released its updated lists of rural and underserved counties - 2018 List of Rural or Underserved Counties and 2018 List of Rural Counties. The CFPB has also updated its Rural or Underserved Areas Tool. Credit unions can use these lists and the tool to determine whether a particular property is located in a rural or underserved area. The lists and tool can be found here.

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).

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!

Breaking Down the TRID Fix: Rate Lock Revised LEs Are One and Done

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

How's 2018 treating you so far, credit union compliance world?

My year started out right. Last week, I contacted the CFPB through their Regulatory Inquiry website and got a call back same day. That's a response time that the NAFCU Regulatory Compliance Team can appreciate. And the informal answer from the Bureau: you don't have to do any extra work unless you want to. So I'm batting a thousand so far.

The Question: Rate Lock Revisions and the 2013 Preamble

Subsection 1026.19(e)(3)(iv) describes when a revised Loan Estimate can be used to reset tolerances. The subsection contains five paragraphs describing five sets of circumstances where a revised Loan Estimate can be issued and used to reset tolerance for good faith purposes. Four of these circumstances are permissive, meaning that a revised Loan Estimate can, but is not required to be, issued. In other words, if the credit union decides that reissuing the Loan Estimate is not worth the cost, it can chose not to, though it won't be able to reset tolerances due to the event.

One of the circumstances is not voluntary, it's required. That's paragraph 19(e)(3)(iv)(D). If the rate was not locked when the initial Loan Estimate was provided, and the applicant locks in the rate, a revised Loan Estimate is mandatory. The language of this paragraph is quite specific:

"(D) Interest rate dependent charges. The points or lender credits change because the interest rate was not locked when the disclosures required under paragraph (e)(1)(i) of this section were provided. No later than three business days after the date the interest rate is locked, the creditor shall provide a revised version of the disclosures required under paragraph (e)(1)(i) of this section to the consumer with the revised interest rate, the points disclosed pursuant to §1026.37(f)(1), lender credits, and any other interest rate dependent charges and terms.” 12 C.F.R. § 1026.419(e)(3)(iv)(D) (Emphasis added).

Nothing in the regulation or the commentary directly addresses what happens when a rate lock agreement is entered into, the rate is locked, and then the lock expires. The 2013 preamble to original TRID referenced rate lock expiration, but only very briefly:

"Upon a review of the proposed rule text and commentary, the Bureau acknowledges that the  requires redisclosure where a rate lock agreement does not exist. But the Bureau intended that § 1026.19(e)(3)(iv)(D) only applies in situation where a rate lock agreement has been entered into between the creditor and borrower, or where such agreement has expired." 79 Fed. Reg. 79833 (Emphasis added).

But as you can see, paragraph 19(e)(3)(iv)(D) is pretty narrowly drawn. Reading a requirement into that paragraph to redisclose at the time a locked rate expires would be difficult to do.

The Answer: TRID Fix and Informal Guidance from the Bureau

In the TRID Fix amendments, the Bureau sought to clarify that the requirement to issue a revised disclosure under paragraph 19(e)(3)(iv)(D) would not apply repeatedly. In the preamble, the Bureau stated:

"When a revised Loan Estimate is provided as required by § 1026.19(e)(3)(iv)(D), the rate lock information disclosed pursuant to § 1026.37(a)(13)(i) must be updated to reflect the expiration date of the interest rate disclosed, regardless of any changes to the disclosed interest rate or interest rate-related charges. Once the interest rate is subject to a rate lock agreement, § 1026.19(e)(3)(iv)(D) does not subsequently require the disclosure of a revised Loan Estimate." 82 Fed. Reg. 37682 (Emphasis added).

So, no revised Loan Estimate is triggered under paragraph 19(e)(3)(iv)(D) when the rate lock expires. A change in circumstances may exist allowing a revised Loan Estimate to be issued and used to reset tolerances under another paragraph in subsection 1026.19(e)(3)(iv), but that would be at the credit union's option.

However, we still wanted to check on another variable. What if a second rate lock agreement is entered into with the borrower regarding the same application? Would each rate lock agreement create a new obligation to issue a revised Loan Estimate each time the rate was locked?

The Bureau's informal guidance indicated that the answer was no. The Bureau stated that paragraph 19(e)(3)(iv)(D) would apply only once. If the rate is locked again or the rate expires again, the credit union may wish to issue a revised Loan Estimate for the borrower's information and to ensure clarity; or it may wish to issue a revised Loan Estimate under another paragraph in subsection 1026.19(e)(3)(iv) to reset tolerances; but it is not required to do so by the regulation.

Good to know!

 

CFPB Issues Consumer Protection Principles on Data Sharing

Written by Jennifer Aguilar, Regulatory Compliance Counsel

In the wake of the Equifax breach, data security has been on everyone's mind. Various stakeholders have come together to see that the industry is held responsible – everything from punishing the guilty to establishing nationwide data security standards is being suggested. With most of the conversation focused on what industry can do to improve the situation, the CFPB has come forward with a consumer-focused approach to data security and sharing. Last month, the CFPB issued its Consumer Protection Principles: Consumer-Authorized Financial Data Sharing and Aggregation.

The CFPB recognizes the importance of financial institutions and the vital role third party financial service providers have in the market. Those companies that use financial data to provide consumers with financial management tools, account verification, fraud prevention and other servicers need access to information in order to provide these services. The CFPB stresses that companies need to keep their consumers in mind when designing their information sharing policies. "Consumer interests must be the priority" and "a common understanding of consumer interests is essential so that effective consumer protections can be integrated consistently into [the] market." The Principles are intended to provide that common understanding and provide a frameworks for protecting consumer interests as data is shared between market participants.

The nine principles are:

1. Access: Consumers should have access to information about how they are using financial services and products. Financial institutions, or other service providers, should provide the information requested in a timely manner. Account agreements, or other user terms, should promote access to information.
2. Data Scope and Usability: Information that consumers have access to should include transaction data or other usage data; account terms, such as fee schedules; costs, such as interest paid; and benefits, such as interest earned. Information should be provided in a readily usable format.
3. Control and Informed Consent: Consumers should control their information. Financial institutions, or other service providers, should fully disclose, in an understandable manner, account terms relating to the access, use, storage, and disposal of information. Consumers must give prior consent before third parties may access their information and consent may be revoked at any time. Revocations should be implemented in a timely manner and include deleting information when the consumer makes such a request.
4. Authorizing Payments: Authorization to access information is not authorization to initiate payments. Financial institutions, or other service providers, should obtain separate authorizations for these two activities.
5. Security: All information should be accessed, used, stored, and distributed in a secure manner that mitigates the risk of data breaches, transmission errors, unauthorized use and fraud. Security procedures should be updated frequently.
6. Access Transparency: Consumers should be informed of each third party that has access to their information, what information that party has access to, and how that information is used.
7. Accuracy: All information should be accurate and consumers should always have a means to dispute and resolve inaccurate information.
8. Ability to Dispute and Resolve Unauthorized Access: Dispute resolution procedures should cover instances of unauthorized access, sharing or payment as well as failures to comply with the terms of a consumer's authorization. These procedures should be reasonable and practical and should not require consumers to identify the parties at fault. Parties at fault should be held accountable.
9. Efficient and Effective Accountability Mechanisms: All parties involved – those that use, share, store, or dispose of information – should have similar goals and work together to enable secure transmission of information and deter misuse. Each party should be held accountable for failure to do so.

While these Principles provide a framework for financial institutions and third party service providers to follow, it is important to keep in mind that they are not binding. The Principles are also not meant to replace or interpret any current regulations on data security. Rather, these Principles may assist credit unions in making decisions on how to use and share information. These Principles can also assist credit unions in determining a course of action in dealing with its members or other financial institutions in the event the regulations do not directly address their situation.

The FTC has also put together a few resources on data security that credit unions may find helpful: Start with Security: A Guide for Business and Protecting Personal Information: A Guide for Business. Again, these are not binding, but they do provide some key principles that credit unions may want to consider when assessing their data security programs.

The CFPB's Final Payday Rule: The PAL Exemption

Written by Jennifer Aguilar, Regulatory Compliance Counsel

On October 5, the CFPB announced it had finalized its rule on payday loans. The final rule seeks to provide "common-sense protections" for payday loans, auto title loans, deposit advance products and certain other longer term loans with balloon payments. A key protection under the new rule is that lenders will be required to conduct an ability-to-repay analysis to determine whether the borrower can repay the full amount of the loan without re-borrowing. The final rule also imposes requirements concerning withdrawal practices, disclosures and recordkeeping. The final rule covers a number of different types of loans, but the rule also provides a number of exclusions and exemptions, one of which is of particular importance for credit unions – the PAL exemption.

New section 1041.3(e) exempts "alternative loans" from the payday rule. In the preamble, the CFPB explains that this exemption applies to any loan that meets the conditions outlined in the final rule so that any lender, not just federal credit unions, may qualify for this exemption. The CFPB found that this was the best approach to ensure the rules are applied consistently to all lenders. In order to qualify as an "alternative loan," the loan must meet all of the following conditions:

1. Loan terms: the loan must not be structured as open-end credit; have a term between one and six months; have a principal between $200 - $1,000; be repayable in two or more equal payments due in equal intervals; completely amortize during the term; and no charges may be imposed other than the rate and application fees permissible under 12 C.F.R. 701.21(c)(7)(iii).
2. Borrowing history: the lender must determine that, if the lender made this loan, the borrower would not be indebted on more than three alternative loans within a 180-day period; the lender may make only one alternative loan at a time to a consumer.
3. Income documentation: the lender must have and must comply with policies and procedures for documenting proof of recurring income.

Any loan that meets all these conditions is an "alternative loan" and is exempt from the payday rule. Section 1041.3(e) goes on to provide a safe harbor for federal credit unions. The safe harbor states that any loan made in compliance with NCUA's PAL program is an "alternative loan" for purposes of the payday rule. This means that a federal credit union does not have to separately meet the conditions above for its PALs in order for that loan to be exempt from the payday rule – as long as it’s a PAL, it’s an alternative loan.

So, now that we know all PALs are alternative loans, the next question is . . . What’s a PAL? Section 707.21(c)(7)(iii) lays out the specific requirements that must be met in order for a loan to qualify as a PAL. According to the rule, all the following conditions must be met:

1. The loan must be closed end, have a principal balance between $200 - $1,000, have a maturity between one – six months, and be fully amortizing;
2. The FCU must not make more than three PALs in any rolling six-month period to any one borrower, make more than one PAL at a time to a borrower, nor roll over any PAL;
3. The borrower must be a member of the FCU for at least one month;
4. Any application fee must be charged to all members, must reflect the actual cost of processing the application, and must not exceed $20; and
5. The FCU has a written lending policy that imposes an aggregate dollar limit for PALs of a maximum of 20% of net worth and implements underwriting guidelines to minimize the risks associated with PALs.

In addition to meeting the payday rule's safe harbor for alternative loans, PALs also qualify for a higher interest rate. The rule permits credit union to charge an interest rate of 1000 basis points above the maximum interest rate set by NCUA.

FinCEN Finalizes Technical Amendments to CDD Rule; CFPB Updates HMDA Guide

Written by Stephanie Lyon, Regulatory Compliance Counsel

FinCEN recently issued technical amendments to its Customer Due Diligence (CDD) rule or as some of you may know it, the Beneficial Ownership rule. These amendments became effective the day they were published in the Federal Register but the compliance deadline is not until May 11, 2018. Unfortunately, the compliance deadline may take away from the enjoyment of celebrating Eat What You Want Day, but I will nonetheless observe this holiday.

I just wanted to note from the onset that these technical amendments do not provide additional guidance on complying with the CDD rule but we do anticipate additional FAQs before the compliance deadline—specifically on complex corporate structures and how deep to dig to find a natural person (finding the heartbeat).

Of the technical amendments, only one part is specifically relevant to credit unions while the other part deals with the training element of the AML program for mutual funds, which was inadvertently omitted from the final rule. See, 81 Fed. Reg. 45183. Here are the applicable corrections noted in the amendment:

Corrections to the Beneficial Owner Certification Form

Under the final CDD rule, credit unions are required to identify up to 4 beneficial owners who own 25% or more of legal entity customers at the time a new account is opened. To comply with this requirement, the credit union may obtain the required information on a standard certification form or through substantially similar means. Credit unions seeking to comply with this requirement through the standard certification form can find an image of the Certification Regarding Beneficial Owners of Legal Entity in Appendix A of the final rule.

The technical amendments made a couple of corrections to the model Certification Form found in Appendix A. The changes are meant to fix inadvertent mistakes instead of imposing additional requirements to obtain information for beneficial owners of legal entities. Here is a summary of the changes:

1. In the first sentence in Part I under the heading “What information do I have to provide?”, the term “foreign persons” is changed to “non-U.S. persons”.
2. In Part II, the heading of Section II b. is changed to “b. Name, Type, and Address of Legal Entity for Which the Account is Being Opened:”
3. In the headings of the last column in the Tables in Section II c and Section II d, the term “Foreign Persons” is changed to “Non-U.S. Persons” and the term “Social Security Number” is added after the term “persons”.
4. In footnote 1, the term “Foreign Persons” is changed to “Non-U.S. Persons” and “a Social Security Number,” is inserted after the word “provide”.

81 Fed. Reg. 45183. For visual learners, such as myself, I summarized the changes in red in the old model form and highlighted the last change in the new model Certification Form:

Change # 1

 

Change #2

Change #3

Change #4

Credit unions that are relying on a forms provider to create the Certification Form may want to ensure the technical amendments are incorporated before the compliance deadline sneaks up. As I recall, the process of requesting a modification to a form, reviewing the changes and approving the final form can take some time so it is important to get the ball rolling. The technical amendment did include a model Certification Form that incorporates the amendments, but the form is spread out into four parts:

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CFPB Updates HMDA Small Entity Compliance Guide. The CFPB just updated their HMDA small entity compliance guide to incorporate the amendments to its 2015 HMDA rule. The updates incorporate changes introduced in the April 2017 HMDA proposal (technical clarifications) and the July 2017 HMDA proposal regarding transactional thresholds for reporting HELOCs.

Regulatory Compliance School and Seminar. I also wanted to say on behalf of the Regulatory Compliance team, thank you for joining us at NAFCU's Regulatory Compliance School and Seminar in sunny San Diego. It is energizing to see so many engaged compliance professionals in one place!

I Am the Very Model of a Modern Arbitration Clause

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

Happy Wednesday, Credit Union Compliance World. As you know, on July 10^th, the CFPB finalized its rule on arbitration agreements. We blogged about the basics of the rule and the epic hero's journey that is trying to identify its scope. On Monday, thankfully, the CFPB released its Small Entity Compliance Guide regarding the final arbitration rule. While the amount of footnotes involved in discussing the scope should be a clue to the Bureau that the rule is painfully technical, it is nice to have a version written in Standard American English.

Thanks to the Equifax breach and the breathtaking cascade of bungled responses in its aftermath, arbitration provisions are back in the limelight. If your credit union is seeking to help assist members affected by the breach, visit NAFCU's Equifax Data Breach Resources webpage. If you're angry, know that your feelings are valid and shared. We've written to Congress, the CFPB, the FTC and NCUA to ask them to take action to protect credit unions and their members. In the meantime, perhaps this is a good time to take a deeper look at the arbitration rule's language requirements.

From Agreements to Delegates, In Order Categorical

NAFCU has gotten a few questions about when it is appropriate to use the nine different model clauses included in the rule. Below is a breakdown of the various clauses in the rule and when and how they can be used.

Firstly, all Pre-Dispute Arbitration Agreements entered into on or after March 19, 2018 must include one of two alternative clauses for the agreement:

Citation	Language	When Required
§ 1040.4(a)(2)(i)	“We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”	Generally, unless other language is applicable.
§ 1040.4(a)(2)(ii)	“We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. The following provision applies only to class action claims concerning the products or services covered by that Rule: We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”	Can be used at the credit union's option as an alternative to the generally required language when the agreement applies to multiple products or services, only some of which are covered under Part 1040.

In addition to the required clauses discussed above, the Bureau has also identified several optional, add-on clauses:

Citation	Language	When Required
§ 1040.4(a)(2)(iv)(A)(1)	“This provision does not apply to parties that entered into this agreement before March 19, 2018.”	Optional add-on to the above agreement clauses
§ 1040.4(a)(2)(iv)(A)(2)	“This provision does not apply to products or services first provided to you before March 19, 2018 that are subject to an arbitration agreement entered into before that date.”	Optional add-on to the above agreement clauses
§ 1040.4(a)(2)(iv)(B)	“This provision does not apply to persons that are excluded from the Consumer Financial Protection Bureau's Arbitration Agreements Rule.”	Optional add-on to the above agreement clauses

Finally, there are two add-on clauses for specific issues:

Citation	Language	When Required
§ 1040.4(a)(2)(iv)(B)	“This provision also applies to the delegation provision.”	For agreements that contain a delegation provision, the required clause must be included in each delegation provision. Alternatively, credit unions can add this language to the generally required clause to meet that requirement.
§ 1040.4(a)(2)(vi)	“However, the defendants in the class action may claim they cannot be sued due to their sovereign immunity. This provision does not create or waive any such immunity.”	Add-on language applicable for an entity that believes it has sovereign immunity from suit.

However, suppose a loan is originated by another lender after March 19, 2018, and the loan agreement includes a Pre-Dispute Arbitration Agreement, but it does not include either of the above required clauses. Perhaps the originating lender was exempt.

Imagine that then, a credit union purchases the loan and steps into the shoes of the original lender with regard to the agreement. When the credit union becomes a party to the agreement established on or after March 19, 2018, and the agreement does not contain either of the required clauses, the Bureau requires the credit union to either amend the agreement to add the above clause or to provide the consumer with a written notice within 60 days. If a credit union opts to send the written notice, it must contain the below model language:

Citation	Language	When Required
§ 1040.4(a)(2)(iii)	“We agree not to rely on any pre-dispute arbitration agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”	Written notice language applicable when the agreement only applies to covered products and services.
§ 1040.4(a)(2)(iii)	“This notice applies only to class action claims concerning the products or services covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau.”	Written notice language applicable when the agreement applies to some products, only some of which are covered under Part 1040.

The final rule and the commentary allow for few other changes; it discusses replacing pronouns and putting it into the same language as the rest of the agreement.

Hope springs eternal that Congress might take action to lift the regulatory burden of this rule with legislation. However, for those of you who are former scouts, you know it's wise to always be prepared. NAFCU members who have questions as they absorb this rule's implications can feel free to reach out to your NAFCU Regulatory Compliance Team.

CFPB Issues First No-Action Letter Under Project Catalyst

Written by Pamela Yu, Special Counsel for Compliance and Research

Last week, the CFPB announced the issuance of a no-action letter to Upstart Network, Inc., its first under the Bureau's Project Catalyst initiative.  The initiative, which launched in 2012, is intended to encourage consumer-friendly innovation in the financial marketplace. To do this, Project Catalyst is tasked with engaging with the innovator community, participating in initiatives that inform its policy work, and monitoring emerging trends in order to remain forward-looking. 

CFPB's Policy Statement on No-Action Letters

Under the Project Catalyst initiative, the CFPB in 2016 finalized a policy statement on no-action letters to reduce potential regulatory uncertainty and enhance compliance in specific circumstances where "a product holds the promise for significant consumer benefit and where there may be uncertainty around how the product fits within an existing regulatory scheme."  For example, the CFPB said the formal no-action policy could be appropriate for new products being developed by innovators in financial technology (fintech) or other startups that involve ground-breaking technology that did not exist, and thus wasn't contemplated, when existing regulations were first adopted.

The Bureau issued the policy statement on no-action letters under its authority in §1021 of the Dodd-Frank Act, which empowers the CFPB to exercise its authorities for the purpose of ensuring that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.  See, 12 U.S.C. 5512(b)(1). 

The no-action policy was designed to foster innovation by enhancing compliance with existing federal consumer financial law and regulation.  Essentially, the policy allows a fintech or other financial startup to seek a statement, or a "no-action letter," from the CFPB advising it that the Bureau has no present intention to recommend an enforcement or supervisory action against the entity for its new product or innovation.  Thus, fintechs concerned about running afoul of federal regulation can have the reassurance of knowing that they can bring a new product or service to market without worrying about whether the CFPB will be coming after them for a regulatory violation. 

Critics of the policy pointed out that a no-action letter would, in practice, offer little reassurance to innovators.  This is because the CFPB's no-action letters are merely a public declaration that the Bureau does not, at present, intend to pursue an enforcement action against a specific financial product or new innovation.  But, no-action letters are fact-specific, revocable at any time, and do not foreclose private enforcement or enforcement by any other regulator (such as NCUA).  In short, no-action letters are non-binding, non-enforceable, non-transferrable, and offer only limited protection to financial innovators.  The policy's clear shortcomings led some members of Congress to declare the no-action policy, and Project Catalyst as a whole, a "flop" (even after the CFPB released its optimistic Project Catalyst Innovation Highlights Report in October 2016).

Yet lo and behold, more than a year and a half after the CFPB announced its no-action policy, the Bureau has finally issued its first no-action letter under the Project Catalyst initiative.

Upstart Network, Inc. No-Action Letter

According to the CFPB's press release, Upstart Network, Inc. is a California-based online lending platform that evaluates consumer applications for personal loans like student loans, credit card refinancing, and debt consolidation, using traditional underwriting factors (e.g., credit score and income), as well as non-traditional information or alternative data (e.g., education and employment history). 

The brief no-action letter simply indicates that CFPB staff has "no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act" for Upstart's model for underwriting and pricing applicants.  Importantly, the letter clearly states that it is fact-specific and does not serve as a general endorsement of the use of any particular underwriting variables or modeling.  Also, the no-action letter is only temporary; it must be renewed after three years.  Keep in mind that the CFPB will likely be under different leadership by that time, which means there is the potential that, in just a few short years, Upstart could very well find itself in regulatory hot water after investing in technology and developing a platform that has been in the market only three years.  Very little reassurance, indeed…

As a condition to the no-action letter, Upstart has agreed to share information with the CFPB; the Bureau is hoping to learn more about alternative data sources to help "credit invisible" consumers, or those with a lack of credit history, gain greater access to credit.

I will be curious to see if, after a slow start, more financial innovators will participate in the CFPB's Project Catalyst initiative, and whether the CFPB will be issuing more no-action letters in the near-term.  The new administration has been vocal in its support for market innovation and economic growth and it will be interesting to see whether the issuance of its first no-action letter signals a shift in how the Bureau is doing things under this administration.  Stay tuned.

CFPB Cracks Down on FCRA Violations

Written by Jennifer Aguilar, Regulatory Compliance Counsel

Last month, the CFPB fined JPMorgan Chase (JPMorgan) $4.6 million for various alleged violations of the FCRA. According to the consent order, the CFPB found that JPMorgan failed to have reasonable policies and procedures in place to ensure it provided accurate information to consumer reporting agencies, failed to inform consumers of the results of dispute investigations and failed to identify the consumer reporting agency on adverse action notices.

Policies and Procedures. The FCRA does not require financial institutions to provide information to consumer reporting agencies. However, if a financial institution elects to do so, the FCRA requires it to provide accurate information. Regulation V requires these financial institutions to have reasonable policies and procedures in place to ensure that information provided to consumer reporting agencies is accurate. The procedures should be designed based on the institution's complexity and scope of activities and updated periodically. The rule also requires institutions to consider the interagency guidelines in developing their policies.

While JP Morgan had policies in place, the CFPB found that these policies were insufficient to ensure it provided accurate information to consumer reporting agencies. The policies did not contain procedures for providing information to consumer reporting agencies and did not address quality assurance, systems testing or training. The policies were also not materially altered or revised anytime between 2005 and 2014. In addition to these specific deficiencies, the CFPB determined that the policies were not appropriate given the size and complexity of JPMorgan's operations. The consent order requires JPMorgan to implement and maintain reasonable policies and procedures that fully comply with the FCRA's requirements and adequately incorporate Regulation V's guidance.

The policies at issue related to the information JPMorgan provided to consumer reporting agencies about its deposit accounts. While the consent order does not attempt to determine whether JPMorgan was providing information to a party it believed was not a consumer reporting agency under the FCRA, it may be helpful to pause for a moment and review exactly who is a consumer reporting agency. The FCRA defines "consumer reporting agency" rather broadly:

"(f) The term “consumer reporting agency” means any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports."

While this certainly covers the big three credit reporting agencies – Transunion, Equifax and Experian – it is important to keep in mind that this also covers a variety of other agencies that may be collecting information other than credit information. Consumer reporting agencies also include "specialty" agencies that collection information regarding medical records or payments, residential history, check writing history, employment history and insurance claims. When reviewing or drafting your policies and procedures on providing information to consumer reporting agencies, remember they may need to cover more than just credit information.

Dispute Investigations. Both the FCRA and Regulation V have specific procedures financial institutions must follow when they receive a direct dispute from consumers regarding the accuracy of information contained in a consumer report. The rules require institutions to conduct a reasonable investigation within 30 days of receiving the dispute, inform the consumer of the results of the investigation and provide each consumer reporting agency with corrected information, if necessary. The CFPB determined that JPMorgan had received thousands of direct disputes between 2010 and 2014 and that JPMorgan failed to provide any notice to these consumers regarding the results of the investigation. Going forward, the consent order requires JPMorgan to inform consumers about the results of all dispute investigations.

Adverse Action Notices. If a financial institution bases any adverse action on information obtained in a credit report, the FCRA requires the institution to provide an adverse action notice. The notice must include the adverse action taken; the credit score disclosure; the name, address and telephone number of the consumer reporting agency that provided the consumer report; a statement that the consumer reporting agency did not make the adverse action decision and inform the consumer of his or her right to obtain a copy of the consumer report. The CFPB found that JPMorgan failed to include the name, address and telephone number of the consumer reporting agency on approximately 17,500 adverse action notices. The notices were later corrected, however, the consent order requires JPMorgan to provide this information on all future adverse action notices.

CFPB: "Hello, hello. It's Pay by Phone Fees and UDAAP"

Written by: André B. Cotton, Regulatory Compliance Counsel

Recently, the CFPB issued a Compliance Bulletin that provides guidance to credit unions regarding fee assessments for pay-by-phone services and the potential for unfair, deceptive, or abusive acts or practices (UDAAPs) when assessing phone pay fees. The Bulletin also provides guidance to debt collectors about compliance with the Fair Debt Collection Practices Act (FDCPA) when assessing phone pay fees.

The CFPB's Compliance Bulletin summarizes the current law, highlighting relevant examples of conduct observed during supervisory examinations and enforcement investigations that may violate Federal consumer financial law. Today's post will provide an overview of some of the CFPB's fact specific examples.

Background

The CFPB has observed across various consumer financial products and services, many financial institutions provide consumers with multiple payment options. For example, a credit union may provide its members the option of making payments over the phone by using an automated system or speaking with a live representative. A credit union may also provide members the option to make phone payments by using a debit card, electronic check, or to have their payment expedited. A number of financial institutions also use third-party service providers to handle and process the payments.

Examples of Conduct that May Violate or Risk Violating the Prohibition on UDAAPs

Pursuant to the Dodd-Frank Act, "an act or practice is unfair when (i) it causes or is likely to cause substantial injury to consumers; (ii) the injury is not reasonably avoidable by consumers; and (iii) the injury is not outweighed by countervailing benefits to consumers or competition." Furthermore, an "act or practice is deceptive when (i) the act or practice misleads or is likely to mislead the consumer; (ii) the consumer's interpretation is reasonable under the circumstances; and (iii) the misleading act or practice is material" The CFPB notes that UDAAP violations depends on the facts and circumstances. Below, I have included a non-exhaustive list of examples of conduct related to phone pay fees.

Failing to Disclose the Prices of All Available Phone Pay Fees When Different Phone Pay Options Carry Materially Different Fees

For example, the CFPB has noted that many financial institutions charge different phone pay fees depending on the payment method. Some financial institutions send periodic billing statements or other documentation that discloses that "transaction fee may apply" to various payment methods, but the statements do not disclose the relevant fees to be charged for those methods. In some other instances, a financial institution may solely depend on phone representatives to disclose the relevant fees before the charge is imposed. However, in some cases, the phone representatives only reveal the higher-cost options. Consequently, this conduct poses a risk of an unfair practice.

Misrepresenting the Available Payments Options or that a Fee is Required to Pay by Phone

In an enforcement action, the CFPB alleges that a mortgage servicer engaged in a deceptive practice by misrepresenting to consumers, both expressly and by implication, that a particular pay-by-phone option was the only available payment method, or that consumers must use the particular pay-by-phone option in order to avoid negative consequences, including incurring a late fee or even facing foreclosure. To the contrary, in this case, the servicer accepted several payment options free of charge.

Failing to Disclose that a Phone Pay Fee would be Added to a Consumer's Payment could Create the Misimpression that there was No Service Fee

For example, a member owes a payment of $300. The member calls and tells the credit union's customer service representative that he will pay by phone. The member customer service representative confirms that the member borrower authorizes a payment of $300. In fact, the member's checking account is debited $315, which is the $300 for the otherwise applicable payment amount and $15 for a pay-by-phone fee.

Lack of Employee Monitoring or Service Provider Oversight may lead to Misrepresentations or Failure to Disclose Available Options and Fees

A number of financial institutions have policies and procedures that direct live representatives to disclose all available phone pay options and fees. Many entities even provide representatives with detailed phone scripts. Unfortunately, when live representatives veer off-script, they potentially misrepresent available phone payment options and fees. This may result in members being charged higher fees than otherwise would have been applicable. The CFPB recommends adequate monitoring can reduce the risk of misrepresentations.

Examples of Conduct that May Violate or Risk Violating the FDCPA

Pursuant to Section 808(1) of the FDCPA, "a debt collector may not collect any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law."

CFPB Supervision has noted that one or more mortgage services meet FDCPA definition of "debt collector". Thus, when these mortgage servicers charged fees for taking mortgage payments over the phone, they violated the FDCPA because the mortgage instruments did not expressly authorize collecting such fees. As a result, the CFPB instructed the mortgage servicers in question to review mortgage notes and applicable state law, and to only collect pay-by-phone fees where expressly authorized by contract or state law.

The Bureau's Expectations

The CFPB expects entities to review their practices on charging phone pay fees for potential risks of committing UDAAPs or violating the FDCPA. Credit Unions may consider the following suggestions in assessing whether their practices present a risk of constituting a UDAAP or FDCPA violation:

• Review applicable law (state, federal, FDCPA) to confirm whether the credit union is permitted to charge phone pay fees
• Review debt agreements to determine whether such fees are authorized by contract
• Review internal and third-party vendor policies and procedures on phone pay fees
• Review whether information on phone pay fees is shared with the membership (i.e. account disclosure, periodic statements, payment coupon books, on the company's website, over the phone, etc.)
• Incorporate pay-by-phone issues in regular monitoring or audits
• Review member complaints regarding phone pay fees
• Perform regular reviews of third-party provider practices
• Ensure that the credit union has a corrective action program to address any identified violations and reimburse members when appropriate

The CFPB will continue to closely review the practices of entities charging phone pay fees for potential UDAAPs and FDCPA violations. The CFPB will use all appropriate tools to assess whether supervisory, enforcement, or other actions may be necessary.

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Last week, I attended NAFCU Risk Seminar in Denver, Co. I learned a lot, and I am now André B. Cotten, Esq., NCCO, NCRM! Here's a photo from my hike at the Red Rocks Amphitheatre:

 

The CFPB's Final Arbitration Rule; NAFCU's Annual Federal Reserve Survey

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

On July 10^th, the CFPB finalized its rule on arbitration agreements. On July 19^th, the final rule was published in the Federal Register. If you haven't had a change to read it yet, prepare yourself -- it's already a CFPB classic. The final rule establishes Part 1040, which consists of 5 sections regarding the use of arbitration agreements and reporting of arbitration outcomes.

Despite the fact that it only establishes five sections… it still clocks in at 775 pages, making it longer than Ayn Rand's The Fountainhead (and, coincidentally, just as easy to read). In typical CFPB fashion, just understanding the scope of products and services covered in the regulatory text requires cross-referencing multiple portions of the U.S. Code (which then contain their own cross-references) and multiple regulations. It leaves you feeling a bit like this:

Definitions and Coverage in Sections 1040.2 and 1040.3

The general coverage of the rule (in extreme summary) is anyone that provides financial products or services to consumers primarily for personal, family, or household purposes -- or anyone that offers certain ancillary services to a provider of those products or services to consumers. The definition of consumer refers only to individuals, not legal entities, so the rule would not apply to incorporated member businesses or trusts.

Among the broad list of financial products and services included in coverage is the majority of credit union offerings, including deposit accounts covered by Truth in Savings and/or Regulation E, loans, check cashing and fund transfer services, and automobile leasing. Providers may also be covered if they offer certain ancillary services to institutions that offer these products, like settlement services, loan servicing, consumer reporting and debt collection. For the sake of clarity from here on out, I'm going to refer to credit unions that are providers of covered products and services under Part 1040 as "credit unions."

Requirements of Section 1040.4

Section 1040.4(a) prohibits credit unions from relying on arbitration agreement provisions with respect to any class action suits regarding the products and services that are covered. It also requires that any arbitration agreements contain the following language:

“We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”

There is separate language if the agreement includes products or services not covered by the rule, or if the agreement was originated by another party. The Bureau also offers some fun optional add-ons like:

“This provision does not apply to parties that entered into this agreement before March 19, 2018.”

Section 1040.4(b) contains the requirements for submitting records from court and arbitration proceedings. These requirements apply to any claim filed in arbitration in connection with a covered product or service that has an arbitration provision under Part 1040. In each of these cases, the section requires a credit union to submit:

• The initial claim and any counterclaim;
• Any answers to the above claims;
• The pre-dispute arbitration agreement;
• The judgment and/or award issued by the arbitrator;
• Any communication refusing or dismissing a case due to the credit union's failure to pay fees;
• Any communication from the arbitrator indicating that the arbitration agreement does not comply with applicable fairness principles, rules or other requirements for arbitration; and
• Any court filings relying on the arbitration to support dismissal, deferral or stay.

The section requires these to be provided to the Bureau within 60 days of filing the applicable document with the court or arbitrator, and allows for the redaction of certain information. The Bureau intends to post these records on the internet, and sets deadlines for itself in doing so.

Effective Dates of Section 1040.5

The rule becomes effective 60 days after publication, i.e. September 18, 2017. However, section 1028 of the Dodd-Frank Act, which was the provision requiring the CFPB to consider arbitration agreement regulations, stated that the provision would not apply to agreements until "after the end of the 180-day period beginning on the effective date of the regulation." To accommodate this delay period, the text of section 1040.5(a) specifies that it only applies to pre-dispute arbitration agreements entered into on, or after, March 19, 2018.

There is an exception for agreements already packaged into general-purpose prepaid cards where the consumer for the card is unknown. If the consumer becomes known and the credit union can contact the consumer in writing, it must amend the arbitration agreement to contain the appropriate language within 30 days of obtaining that contact information.

The commentary discusses when a pre-dispute arbitration agreement is "entered into." Obviously, this means when a new agreement is established, but it also includes when a credit union provides a member with a new covered product or service that is subject to a preexisting arbitration agreement, or when the credit union purchases a loan and obtains the rights under a preexisting arbitration agreement.

The commentary also clarifies instances that are not "entering into" an arbitration agreement, including modifying or amending the terms of a current loan subject to a preexisting arbitration agreement.

We are still digesting this rule and, given the Bureau's appetite for hyper-technical requirements, you will probably be hearing more from us on it as we pick it apart.

NAFCU's Annual Federal Reserve Survey

In preparation for NAFCU’s annual meeting with the Federal Reserve, we would like to know your opinion on a variety of topics, including lending, liquidity and housing conditions, as well as a number of regulatory issues and strategic challenges. Your responses to these survey questions are very important to both the Federal Reserve Board and to the credit union community, and every survey response is helpful and greatly appreciated! The survey results will be summarized in our annual Report on Credit Unions, a publication referenced by the Treasury Department in their recent study. Participants will receive a free copy of the 2017 report later this year.

The deadline for the survey is August 25, 2017. Participants can either complete the survey online or download a fillable pdf version.

ICYMI: The Neverending Story on Mortgage Servicing, New COPPA Guidance and More Payments Data; TRID "Fix" Final Rule

Written by Jennifer Aguilar, Regulatory Compliance Counsel

2016 Mortgage Servicing Amendments

Enforcement. Late last month the CFPB issued a policy statement on the new mortgage servicing rules set to go into effect later this year and early next year. In the statement, the CFPB explains that credit unions will be permitted to implement the new rules three days prior to the compliance deadline of October 19 and April 19. The CFPB does not intend to take enforcement action for violations of the current mortgage servicing rules that occur between October 16 – 18 and April 16 – 18 resulting from a credit union's compliance with the new rules.

The CFPB issued this statement to allow credit unions more time to update and test their systems. In its statement, the CFPB explained that it has heard concerns that the compliance deadline may raise some operational issues since both dates fall midweek, on a Thursday. This would mean that credit unions would have from the close of business on Wednesday to the start of business on Thursday to update and test systems to ensure they are set for full compliance on Thursday. The CFPB believes that credit unions will benefit from being able to update and test systems over the weekend prior to the compliance deadline. 

Technical Corrections. The CFPB has also issued a number of technical corrections to the new mortgage servicing rules. These corrections go into effect on October 19. The corrections address two errors in the new Regulation X rules – a typo in model clause MS-4(D) and a cross reference in comment 39(d)(2)-1.

The corrections also address a few of the new provisions relating to periodic statements in Regulation Z. First, the effective date of April 19, 2018 for comment 41(c)-5 is added to the relevant amendatory instruction. Second, the effective date for model forms H-30(E), H-30(F) and commentary to section 1026.41(e) and (f) is changed from October 19 to April 19. This brings these forms and the commentary into conformity with the revisions to section 1026.41(e) and (f) which are effective April 19. Finally, the corrections add 12 U.S.C. 3533 as an authority citation for the Regulation Z amendments.

Updated COPPA Guidance

Last month, the FTC issued new guidance on the Children’s Online Privacy Protection Rule (COPPA) in order to address new developments, such as internet-connected devices for kids. The revised Six-Step Compliance Plan contains updates to assist credit unions in determining whether they are covered by COPPA and what they need to do to comply. For example, the new Plan explains that internet-connected toys or other devices are included in the definition of a “website or online service.” The Plan also expands the methods for obtaining a parent’s verifiable consent to collect information from children. Now, credit unions may verify that it really is the child’s parent giving the consent by using knowledge-based authentication questions or facial recognition to get a match with a verified photo ID. For a bit of a COPPA refresher, you can find some past blog posts here.

Federal Reserve’s Payments Study

The Federal Reserve has released additional data from its 2016 Payments Study. The Payments Study was developed in 2001 to evaluate trends in noncash payments in the US and is conducted every three years. Initial data from the 2016 Study was released last December. The additional data focuses on recent changes in both consumer and business payment methods. Here are some key findings from the Study:

• Noncash payments are on the rise. Households made 79% noncash payments per month in 2015. In 2000, households made 40% noncash payments per month.
• Consumers and businesses are writing fewer checks. In 2015, checks accounted for 13% of noncash payments, compared with 58% in 2000.
• The top four noncash payments among consumers were non-prepaid debit cards, general-purpose credit cards, checks and ACH debit transfers. The top four noncash payments among businesses were ACH credit transfers, checks, general-purpose credit cards and non-prepaid debit cards.
• The number of payments made with general-purpose credit cards and non-prepaid debit cards grew the fastest among all payment types between 2012 and 2015.

CFPB Issues Final TRID "Fix" Rule

Last Friday, the CFPB announced that it has finalized the amendments to the TILA-RESPA integrated disclosures that were proposed last year. The final rule seeks to provide additional guidance and clarity on the TRID requirements and makes a few technical corrections. Among other things, the final rule addresses tolerances, housing assistance loans and sharing disclosures with third parties. In the same announcement, the CFPB also issued a proposed rule on when it is permissible to use a Closing Disclosure for determining good faith and tolerances. NAFCU is reviewing both the final rule and the proposed rule and will have blogs and other tools available for members in the coming weeks.

CFPB Cautions on Deferred Interest Credit Cards; McWatters Named NCUA Chairman

Written by Pamela Yu, Special Counsel for Compliance and Research

The CFPB is sounding the alarm on deferred interest credit cards.  Earlier this month the Bureau issued a letter to retail credit card companies, encouraging them to use more transparent promotional offers.

Citing the results of its 2015 study on deferred interest credit products, the CFPB's letter notes that these promotional products "offer substantial benefits to some consumers, but carry significant costs and risks to others."  As an alternative to deferred interest financing, CFPB is encouraging 0% interest offers, which the Bureau believes is more transparent and carries less risk for consumers.

What's the problem?           

To attract customers and to encourage spending, some private label or store brand credit cards offer deferred interest promotional financing.  These types of credit promotions generally offer "0% interest if paid in full" during a set period of time (usually 6 months to a year).  During this defined promotional window, consumers who repay the full promotional balance can obtain free financing on the purchase of big-ticket items. But consumers who do not fully repay the balance by the close of the promotional window will find themselves hit with “high, retroactive interest charges” that kick in once the promotional period ends.

We've all seen these offers and have perhaps been enticed into opening a store card to buy a big screen TV or a fancy new dishwasher.  So what's the problem?

The CFPB says the issue is primarily a lack of transparency. While deferred interest cards are generally marketed to consumers as "no interest" promotions, in actuality, interest starts accruing from the date of purchase and is retroactively added back on top of the remaining principal if the consumer does not pay the full promotional balance by the end of the defined window.  Keeping in mind that the regular interest rates on these store brand cards tend to run around 25%, consumers may be hit with a substantial lump sum interest charge when the promotion period ends. Because the costs of deferred interest financing are not evident until the end of the promotion, consumers are often surprised to have incurred this unanticipated interest charge. 

The CFPB is concerned that consumers do not fully understand how deferred interest promotions operate and how interest is assessed on these products.  Exhibit A: The CFPB's 2015 study found that a large portion of consumers who failed to repay their full promotional balance before the end of their deferred interest deadline actually paid off the full promotional balance and the lump sum interest charge shortly after the promotion expired.  This certainly seems to support the CFPB's suspicion that consumers are either unable to understand the back-end pricing features that characterize these products, or to effectively manage deferred interest promotions in a way that they may avoid paying interest.

The Bureau's concerns are even more pronounced for subprime borrowers and other at-risk consumers.  According to the CFPB’s 2015 study, subprime or deep subprime consumers fully repay their balances within the promotional period only about 50% of the time.  Meanwhile, consumers with prime or super-prime scores pay off their promotional balances almost 90% of the time.  The CFPB's letter also notes that consumers suffering financial hardship—for example, individuals experiencing job loss or facing an unexpected medical expense—are particularly vulnerable to incurring "an unexpectedly large lump-sum financial cost."

What does this mean?

This is not the first time the CFPB has raised concerns about deferred interest credit cards; the Bureau has been signaling its aversion to these types of products for years. (See, CFPB’s 2015 study; this blog; that enforcement action.)  However, the CFPB's letter is expressly encouraging retail card companies to replace deferred interest promotions with 0% promotions, clearly indicating that it views deferred interest products as "high-risk."  While the letter indicates that programs with "robust compliance management systems and third-party oversight measures," may support the successful implementation of a deferred interest program, the CFPB offers little additional guidance on what a compliant program might look like. 

Time will tell if the Bureau will follow its ongoing pattern of regulating through enforcement, by pursuing greater enforcement action relative to deferred interest cards.

 ***

McWatters Named NCUA Chairman

Good news for credit unions:  President Trump has designated Acting NCUA Board Chairman J. Mark McWatters as the tenth Chairman of the NCUA Board, effective June 23. 

McWatters was nominated to the NCUA Board by then-President Obama on January 7, 2014.  He joined the NCUA Board on August 26, 2014 following his confirmation by the Senate.  He has been serving as Acting Board Chairman since January 23.

CFPB Continues to Take Action Against Mortgage Servicers Who Don't Play by the Rules

Written by Jennifer Aguilar, Regulatory Compliance Counsel

Earlier this month, the CFPB issued a consent order against yet another mortgage servicer. The order claims that Fay Servicing, LLC (Fay) failed to inform borrowers of certain foreclosure protections, did not provide required notices informing borrowers of their options to save their homes and moved forward with the foreclosure process in violation of the mortgage servicing regulations. The CFPB ordered Fay to stop their illegal practices, create policies and procedures to ensure compliance with the mortgage servicing regulations and pay $1.15 million to harmed borrowers.

Applicable Laws. Regulation X provides a number of requirements for mortgage loan servicers. Section 1024.38 generally requires servicers to have policies and procedures in place that ensure the servicer complies with the mortgage servicing regulations. Among other things, the rule requires that these policies and procedures be reasonably designed to ensure the servicer provides timely notices and accurate information to borrowers, properly evaluates loss mitigation applications and identifies all loss mitigation options available to a borrower.

Section 1024.41 provides specific requirements regarding all loss mitigation applications. The rules require servicers to provide an acknowledgement notice that informs the borrower that her application has been received and, if the servicer needs additional information, what documents the borrower must submit in order for the servicer to evaluate the application. Once a servicer has evaluated a complete loss mitigation application, the rules require the servicer to provide an evaluation notice that informs the borrower whether she has been approved for a loss mitigation option and, if she has been denied all options, that she has the right to appeal the decision. The loss mitigation rules also prohibit a servicer from taking certain foreclosure actions, including filing for foreclosure or conducting a foreclosure sale, after the servicer has received a complete loss mitigation application.

Fay's Actions. According to the CFPB, Fay repeatedly failed to send the acknowledgement and evaluation notices within the timeframes required by the rules and, in some instances, failed to send the notices altogether. The order explains that these failures stemmed from the fact that Fay did not have proper procedures in place to ensure these notices were sent. At first, Fay's policies did not address either acknowledgment or evaluation notices at all. Fay's policies later addressed both of these notices but only regarding applications where the borrower indicated a preference for retaining her home. Even after implementing these policies, the order explains that Fay still failed to send the required notices. At no point did Fay's policies address notices for those loss mitigation applications where a borrower did not indicate a preference to retain her home.

Even where Fay did send an acknowledgment or evaluation notice, the CFPB found that these notices did not contain all required information. Where Fay needed additional documentation from the borrower, the acknowledgement notice did not adequately inform the borrower of the required documentation. For example, for a self-employed borrower, Fay needed profit and loss statements as documentation of the borrower's income; however, the acknowledgement notice simply stated "Income Documentation (e.g., two most recent paystubs)." Also, Fay's evaluation notices did not adequately inform borrowers of their right to appeal a decision. The rules allow a borrower to appeal the denial of any option as long as the servicer received the loss mitigation application more than 90 days before a foreclosure sale. Fay's evaluation notices instead stated that the borrower could appeal only if "a foreclosure sale was 90 days or more from the date on the Evaluation Notice."

In addition to the notification issues, the CFPB also determined that Fay moved forward in the foreclosure process after receiving a complete loss mitigation application by moving for foreclosure judgments and conducting foreclosure sales. Again, Fay failed to have policies and procedures in place to prevent these violations and, even after implementing such policies, the policies were only for those applications where the borrower indicated a preference to retain her home. According to the CFPB, these policies also failed to properly address when borrowers were entitled to foreclosure protections. For example, when Fay denied a borrower's application for all available options, it lifted all foreclosure holds as soon as it made this determination, rather than waiting until all appeals had been exhausted as required by Regulation X. For borrowers who submitted a loss mitigation application and did not indicate a preference for retaining their home, Fay left it up to its personnel and its Foreclosure Review Committee to determine whether the borrower was entitled to any foreclosure protections. The rule affords foreclosure protections to all borrowers.

CFPB's Judgment. As a result of these violations, the CFPB ordered Fay to comply with a number of requirements. First, Fay was ordered to stop its illegal practices. Depending on where the borrower was in the loss mitigation process, this meant that Fay must stop the foreclosure process (dismissing the complaint, vacating the judgment, etc.), properly evaluate the borrower for all loss mitigation options, or send required notices. Second, Fay was ordered to establish a compliance committee, made up of three members of Fay's board of directors, and develop a compliance plan that would ensure future compliance with the mortgage servicing regulations. Finally, Fay was ordered to pay $1.15 million to harmed borrowers.

* * *

These rules, along with a number of other servicing rules in Regulations X and Z, have been amended recently. These amendments go in effect in October 2017 and April 2018. For more on these amendments, check out NAFCU's mortgage servicing webpage and blogs.

Changes at the Credit Reporting Agencies and What It May Mean for Credit Unions

Written by: André B. Cotten, Regulatory Compliance Counsel

Hello, compliance compadres! As you are well aware, the Fair Credit Reporting Act (FCRA) and its requirements govern the furnishing of information to the credit reporting agencies ("CRAs"). The FCRA subjects data furnishers to various duties, such as, but not limited to the following: the duty to provide accurate information; the duty to provide notice of dispute; the duty to provide notice of delinquency of accounts and the duty to provide notice of negative information to members. See, 15 U.S.C. § 1681s-2(a).

Recently, I have spoken to a few members about pending changes at the big three credit reporting agencies (Transunion, Equifax, and Experian) that are aimed at improving the accuracy of consumer credit reports and better enabling consumers to dispute and correct incorrect credit information. The changes are a result of increased regulatory supervision and a 2015 consumer protection settlement with state attorneys general. Today, I will provide you with some insight into the regulatory and litigation background that and what that may mean for credit unions.

Background

The CFPB has reported that consumers continue to complain about the credit reporting industry in high numbers. The Bureau reports handling approximately 185,700 credit reporting complaints as of February 1, 2017.

Due to the widespread concerns from consumers, the CFPB recently noted in its supervisory highlights that it will be continuing to closely monitor the reporting of consumer information. The CFPB is focusing its supervision at the following issues:

• Fixing data accuracy at consumer reporting companies: Previously, examiners found more than one of the CRAs lacked good quality control to check the accuracy of their consumer records. Consequently, the CRAs have instituted quality control programs to identify whether reports are produced for the wrong consumer and whether reports contain mixed-up files. The CRAs are also taking better corrective actions when mistakes are identified.
• Repairing broken dispute processes at consumer reporting companies: CFPB examiners discovered more than one CRA was not following the federal regulatory requirement that consumers receive notice of dispute results. Examiners also found that the companies were failing to consider documentation provided by consumers on disputed items. As a result, the CRAs have improved processes for investigating disputes and are improving response letters to consumers.
• Cleaning up information from furnishers: Through reviewing information from banks and nonbanks, CFPB examiners also noticed widespread problems with furnishers supplying incorrect information, mishandling disputes, and not completing investigations. As a result, data furnishers are now better handling investigations of disputes, notifying consumers of results, and taking corrective action when inaccurate information has been supplied.

From a litigation perspective, in 2015, the CRAs reached a consumer protection settlement with the New York Attorney General's Office concerning, among other things, the accuracy of consumer credit information maintained by the CRAs; the CRAs’ practices regarding investigation of consumer disputes of alleged inaccuracies in credit reports; and the reporting of medical debt. Thirty-one other states followed suit. As a result of the 2015 settlement, CRAs are required to remove several types of data sets that report to personal credit. These are the pending changes that we are now seeing coming into effect. For example, non-loan related items such as gym memberships in default, library fines, and unpaid traffic tickets will no longer be reported. According to the terms of the settlement made in 2015, Equifax, Transunion and Experian are required to complete these additional changes 3 years and 90 days from the date of the settlement.

Moreover, as a result of the settlement with the state attorneys general, Equifax, Experian and Transunion launched the National Consumer Assistance Plan initiative to make credit reports more accurate and make it easier for consumers to correct any errors on their credit reports. The CRAs have been implementing the plan over a three year period with full implementation set for March 2018. In regards to data accuracy and quality, some of the changes include, but are not limited to the following:

• Medical debts willnot be reported until after 180-day "waiting period" to allow insurance payments to be applied. The CRAs will also remove from credit reports previously reported medical collections that have been or are being paid by insurance.
• Consistent standards will be reinforced by the CRAs to lenders and others that submit data for inclusion in a credit report (data furnishers).
• Data furnishers will be prohibited from reporting authorized users without a date of birth and the CRAs will reject data that does not comply with this requirement.
• Data furnishers will be required to report a delete for accounts that are being paid or were paid in full through medical insurance.
• The CRAs will eliminate the reporting of debts that did not arise from a contract or agreement by the consumer to pay, such as traffic tickets or fines.
• A multi-company working group of the nationwide consumer credit reporting companies has been formed to regularly review and help ensure constancy and uniformity in the data submitted by data furnishers for inclusion in a consumer's credit report.

Moving forward in application

A few members have expressed concern about the potential rise in FICO scores as a result of the forthcoming changes. Credit unions may want to temper their actions until the impact of the changes become more tangible. Since these changes are uniform, credit unions may notice a wide-spread rise in FICO scores, which may lead to natural adjustments in their risk based pricing.

Credit unions may also want to remember that the FICO score is only one of the factors used when determined whether a member qualifies for a product. There are other vital factors that will not be impacted by the CRA changes including, but not limited to the following: annual income; employment history; and debt to income ratio.

Generally, credit unions may want to continue to monitor their credit portfolios as usual for safety and soundness. If the credit union notices negative trends developing, then it should begin to make adjustments.

In the meantime, credit unions may want to revisit their lending policies, consult with their compliance officers, and contact their CRA representative to discuss the pending changes and their potential impact.

CFPB Proposes HMDA Clarifications Part II: Temporary Financing; LEI Resources

Written by Jennifer Aguilar, Regulatory Compliance Counsel

Late last month, the CFPB has issued a proposed rule that would further amend the HMDA rules. The proposed rule seeks to clarify some of the rules in the 2015 final rule and contains a few new provisions. Last month, we blogged on the new geocoding tool. Today's blog will focus on temporary financing.

Currently, §1003.4(d) exempts temporary financing from HMDA reporting. The current rule does not define temporary financing, but it provides bridge and construction-only loans as examples of temporary financing. The 2015 HMDA final rule moved §1003.4(d) to new §1003.3(c) and added commentary and examples of temporary financing.

Under the 2015 final rule, a loan or line of credit is temporary if it is "designed to be replaced by permanent financing at a later time." In the preamble to the final rule, the CFPB explains that it declined to provide a bright-line rule for temporary financing, such as all construction loans are temporary or all loans with a term of less than one year are temporary, because that would be contrary to HMDA's purposes. Under a bright-line rule, financing for the same property could be reported twice while other financings may not be reported at all. Rather, the CPFB included a number of examples in the staff commentary to the final rule to help explain which loans are temporary. Here are a couple of those examples:

"ii. Lender A extends credit to finance construction of a dwelling. A new extension of credit for permanent financing for the dwelling will be obtained, either from Lender A or from another lender, and either through a refinancing of the initial construction loan or a separate loan. The initial construction loan is excluded as temporary financing.

iii. Assume the same scenario as in comment 3(c)(3)-1.ii, except that the initial construction loan is, or may be, renewed one or more times before the permanent financing is made. The initial construction loan, including any renewal thereof, is excluded as temporary financing.

iv. Lender A extends credit to finance construction of a dwelling. The loan automatically will convert to permanent financing with Lender A once the construction phase is complete. Under §1003.3(c)(3), the loan is not designed to be replaced by permanent financing and therefore the temporary financing exclusion does not apply."

The preamble to the proposed rule explains that the CFPB believes the 2015 final rule created some ambiguities regarding whether the permanent financing must be a separate transaction and whether the same borrower must obtain both the temporary and permanent financing. The proposed rule would revise the staff commentary to state that a loan or line of credit is temporary if it is "designed to be replaced by separate permanent financing extended to the same borrower at a later time" (emphasis added). The proposed rule would also revise the examples to make these requirements more clear.

The proposed rule also seeks to clarify that a loan obtained to construct a home for sale is temporary financing. The CFPB believes that reporting these loans would not further HMDA's purposes because these loans would provide limited data on "whether financial institutions are serving the housing needs of their communities." Additionally, the loan to purchase the newly built home would be reportable under HMDA. The proposed rule would add an additional comment to specifically include loans obtained to construct a home for sale as temporary financing, meaning these loans are not HMDA reportable.

The CFPB goes on to explain that it believes loans to construct a home for sale are different from loans to an investor who purchases a home, renovates it, and then sells the home. The CFPB believes that these types of loans to investors would provide data that serves HMDA's purposes. For example, a public official would be able to determine the added value of the renovations by comparing the value of the home determined at the time the investor applies for the loan to the value of the home determined at the time the buyer applies for a loan to purchase the home. The proposed rule seeks to clarify that these types of loans to investors are HMDA reportable.

Comments on the proposed rule are due to the CFPB by May 25, 2017.

* * *

Lately, we have received a number of questions in the compliance box on where credit unions can obtain an LEI. The HMDA final rule, that will go into effect on January 1, 2018, requires all credit unions that are subject to HMDA reporting to have a “legal entity identifier.” NAFCU did a blog on this last year which may be a helpful starting point.

If a credit union must obtain an LEI, §1003.4(a)(1)(i) of the final rule requires credit union obtain the LEI from a utility endorsed by either the LEI Regulatory Oversight Committee (LEI ROC) or the Global LEI Foundation (GLEIF). The LEI ROC has put together a "How to obtain an LEI" page on their website that provides some of the basic principles for obtaining an LEI. It explains the self-registration process and outlines what documentation will be needed. The page also provides a link to the GLEIF's list of approved LEI issuing organizations. Specific information on how to apply for an LEI can be found on each of the organizations' websites.

What Does the CHOICE Act Mean for Credit Unions?

Written by Brad Thaler, Vice President of Legislative Affairs

Happy Friday everyone! The Legislative Affairs team is taking over the Compliance Blog this morning to bring you updates on the Financial CHOICE Act – a piece of legislation that has gotten quite a bit of news recently. At nearly 600 pages, the Act contains dozens of detailed provisions – some NAFCU is in favor of, and some not. To save you the trouble of reading through the entire bill and enduring the portions that aren't relevant to credit unions, I thought I'd write this blog to give you a brief summary of the salient parts, what to expect in the coming weeks, and what NAFCU is doing to make sure the bill helps your credit union.

But before we get started, I want to provide a bit of context. First introduced and passed in the House Financial Services Committee last year, the CHOICE Act is designed to replace large portions of the Dodd-Frank Act. Although the bill passed Committee last year, it never made it to a full House vote. Fulfilling his promise in this new Congress, Chairman Jeb Hensarling (R-TX) reintroduced the CHOICE Act on Wednesday as H.R. 10. This version contains several changes to last year's version – hence the informal moniker, CHOICE 2.0.

NAFCU is supportive of the Financial CHOICE Act as it contains a number of regulatory relief provisions for credit unions.   Issues we are pleased to see covered in CHOICE 2.0 include:   

• CFPB Reform – Although not likely to elicit bipartisan support, CHOICE 2.0 would (1) maintain sole director, but make him or her removable at-will; (2) limit rulemaking authority to enumerated statues; (3) repeal UDAAP authority; (4) repeal supervisory authority; (5) repeal the consumer complaint database; (6) restructure CFPB as a civil law enforcement agency; and (7) repeal mandatory advisory boards. The bill would also change the name of the CFPB to the Consumer Law Enforcement Agency (CLEA), tasking it with the dual mission of consumer protection and ensuring competitive markets, with cost-benefit analyses of rules.

Overall, NAFCU finds these changes to be favorable, with some note. NAFCU believes that a board structure provides the most advantageous mechanism for any agency to approve regulations since it ensures debate representative of multiple points of view.  Accordingly, NAFCU believes a commission structure is the ideal way to govern the CFPB.  NAFCU also believes that enforcement orders should not take the place of regulation.

• Repeal of Durbin Amendment – The provision eliminating the Durbin interchange price cap and routing restrictions in the discussion draft is among the most significant aspects of this legislation for credit unions. We wrote to the Committee, strongly urging it to maintain the repeal language throughout the legislative process. We also urge credit unions to take action to express support for this provision.
• Capital 'Off-Ramp' – This “off-ramp” would provide relief from the post-Dodd-Frank supervisory regime and Basel-like rules, i.e., Risk-Based Capital (RBC). So long as a credit union retains a 10 percent net-worth ratio, it will be exempt from RBC requirements and risk-weighting. NAFCU is in support of this much simpler capital framework, but we will continue to push the Committee to make more capital concessions for credit unions in recognition of their inability to raise capital in financial markets.
• NCUA Transparency and Independent Oversight – The discussion draft creates many opportunities for appropriate oversight of NCUA. First, NCUA's budget will have the opportunity to be reviewed in a budget hearing.  Second, an independent appeals process will be created for credit union exams.  Third, transparency regarding the overhead transfer rate will be ensured.
• Cost-Benefit Analysis – NAFCU supports cost-benefit analysis, and in any final legislation wants to ensure that we have an effective regulatory environment where positive regulations may be easily implemented and negative ones may be quickly eliminated.
• Mortgage Rule Relief – CHOICE 2.0 contains several provisions that would alleviate burdens from recent mortgage rules, including the Qualified Mortgage rule, HMDA, and TRID.

While NAFCU supports the legislation, there are some areas that we would like to see changed or improved upon as the bill moves through the legislative process.

• Removal of NCUA being subject to Congressional appropriations – NAFCU feels is unnecessary given that credit unions fund the NCUA, and we would urge further revision of this provision to only require approval of NCUA budget increases above inflation.
• Credit Union Exemption from CFPB Rulemakings - NAFCU would like to amend Sec. 1022 of the Dodd-Frank Act to explicitly detail that credit unions are a covered class for the purposes of CFPB’s rulemaking exemption authority. NAFCU’s proposed changes also ensure that the CFPB will take non-profit status into account when determining possible exemptions. Sec. 1022 is not currently contemplated in the CHOICE Act. This could also be address by adding the language of H.R. 1264, the Community Financial Institutions Exemption Act.  
• 18-month exams - NAFCU would like to add language to clarify that NCUA should not interpret the CHOICE Act as curtailing the agency’s ability to establish exam cycles for credit unions over $1 billion in assets. The intent of the Act is to statutorily mandate an 18-month exam cycle for well-run federal credit unions under $1 billion in assets. However, NAFCU’s language would clarify that the agency maintains its current authority to determine exam cycles for federal credit unions not covered by the Act. 
• 1-4 MBL Exemption - NAFCU has suggested pairing this language with the Thrift Charter Flexibility provision found in the bill, as that language would give thrifts relief from their business lending cap.
• Underserved Areas - NAFCU has suggested adding language from the Financial Services for the Underserved Act which would clarify the ability for credit unions of all types to seek to add underserved areas to their field of membership.

You can read our letter commenting on the bill here.

The Committee held a hearing on the bill on Wednesday, and is holding another one at the request of Committee Democrats this morning.  A Committee mark-up of the bill is expected to commence Tuesday, May 2.  We expect that the mark-up will be a partisan fight, with Chairman Hensarling ultimately able to report the bill to the full House on a party-line vote.  The measure is then expected to come before the full House for consideration by mid-to-late May.

The 2.0 version of the Financial CHOICE Act is a broad package of reforms offered by Chairman Hensarling.  It is unlikely to garner any Democratic support, and it is possible that some Republicans will seek changes to the legislation throughout the process as well.  It remains unlikely that the Financial CHOICE Act will be considered by the Senate in its current form, as Senate Banking Committee Chairman Mike Crapo (R-ID) has indicated that he would like to find a relief package that can draw some Democratic support so it can get the 60 votes needed to avoid a filibuster on the Senate floor.  You may recall that NAFCU just submitted a list of regulatory relief and economic growth ideas to the Senate Banking Committee earlier this month.  It is expected that Chairman Crapo will work on his own bill later this year based on what he thinks will get the necessary votes in the Senate. 

Should the Senate pass a relief package, we would then likely see a House-Senate conference on relief ideas to determine whether an agreement is possible.  To win passage in both chambers, any final measure would likely have to be much more limited in scope. It is important to recognize that there are still a number of steps in the process before we get there.

I can assure you that NAFCU remains committed to seeking regulatory relief for credit unions through all possible channels, both legislative and regulatory.  We also welcome your feedback and thoughts on the new CHOICE Act and any legislative proposal affecting the credit union industry.  Please feel free to reach out to me at [email protected] with your thoughts.

 

 

Return to Sender: Time to Comment on Remittance Transfer Disclosures

Written by Stephanie Lyon, Regulatory Compliance Counsel

My parents and younger sister live in the south of Spain, so this past Christmas Devon and I learned the hard way that sending gifts abroad is not only difficult but incredibly expensive. To sum it up, we had to pay hefty shipping and insurance costs at the U.S. Postal Office and once the package arrived in Spain we were surprised with an additional imposition of import duties and taxes as well as a local delivery fee. Needless to say, when the package made its way to a sorting hub in Barcelona and triggered a bill that was sent to my parents for about half the cost of the presents, pragmatic me told them to just let the package return to the United States. In the end we received the package back about 4 months later, soaked in water, and mangled (picture below). After this experience we no longer send gifts abroad; rather we now use our local credit union to send international remittance transfers and kindly request that my parents take my little sister shopping.

The reason sending money abroad can be better than mailing items internationally is because of the disclosure requirements of the remittance transfer rule which helps the sender avoid unpleasant surprises similar to the one the Spanish government handed me.

Basically, the remittance transfer rule requires that credit unions provide the sender with a written prepayment disclosure full of helpful information such as the exchange rate, fees and taxes that may be imposed, and the amount of money expected to be delivered prior to the payment of the transfer. See, 12 C.F.R. § 1005.31(b)(1), (e)(1). The rule also requires that the credit union give the sender a receipt once the transfer is made. See, 12 C.F.R. § 1005.31(b)(2). As an alternative to providing two separate disclosures, the rule permits credit unions to provide a combined written disclosure prior to payment, so long as the provider also provides proof of payment once the remittance transfer is made. See, 12 CFR § 1005.31(b)(3). Examples of these three disclosures can be found in Appendix A to Regulation E and the CFPB's website.

Understanding the timing and content of these disclosures is key to comply with the rule. To help with that, here is a nifty chart from the CFPB's small entity compliance guide:

NAFCU's compliance team has been contacted before regarding how to practicably provide the required written disclosures, especially as more members bank remotely. I wanted to highlight that in cases when the member requests a remittance transfer through online-baking, the rule does permit the credit union to provide the pre-payment disclosure electronically without regard to E-SIGN consent; however the receipt must comply with E-SIGN requirements. See, 12 C.F.R. § 1005.31, Supp. I, comment (a)(2) – 1. This leaves credit unions in a bit of a compliance dilemma.

For example, remote members that have not yet consented and cannot properly consent to E-SIGN delivery at the moment but need to make a funds transfer can be highly inconvenienced. For those instances, the rule has a narrow exception for remittance transfers completed by phone. The exception allows a credit union to treat an impractical written or electronic request as an inquiry as long as the credit union then calls the member to facilitate the remittance transfer entirely by phone. See, 12 C.F.R. § 1005.31, Supp. I, comment (a)(3) – 2. By completing the remittance transfer entirely by phone, the credit union may provide the required disclosures orally instead of going through the impracticality of sending written disclosures to a member who may not be near a computer.

There are other variations of the same issue for providing required disclosures and other parts of the international remittance transfers rule. So the CFPB is requesting comments on its plan to assess the effectiveness of this rule. If your credit union struggles with the requirements of the remittance transfer rule or can otherwise think of a better system for providing these required disclosures, feel free to contact NAFCU's Regulatory Affairs team or let the CFPB know directly. The important thing is to have a channel to further improve this system for your members and to lift some of the operational burden off credit unions.

Prioritizing Your Efforts……. Superhero Style!

Written By Shereefat Balogun, Regulatory Compliance Counsel

 As compliance professionals, it's so hard being the good guy all of the time because there are so many things to focus on.   In the movies, the superhero has to choose between saving their partner, saving themselves, or completing the mission.  And of course, in the movies the superhero ends up somehow successfully doing all three.  Well, despite the common adage that "life isn't always like the movies", we can rise like the superhero by prioritizing our efforts and focus on the issues that our regulators are focusing on, specifically the CFPB and NCUA.

About three weeks ago, the CFPB issued its monthly report on consumer complaints.  Based on the report's findings, consumer debt collection continues to be a clear focus of the CFPB, as well as credit reporting. 

• Debt Collection- For a few years now, debt collection has been the source of most complaints submitted to the Bureau, and this report continues to highlight that. Debt collection was the most complained about product submitted in January 2017. Generally, consumers complain that collectors contacted them for debts that they do not owe; harass them by making multiple calls weekly or daily, or using false, deceptive, or misleading statements in connection with the debt collection; threatened to take illegal actions, such as arrests or seizure of the consumer's property; and impermissibly contacted or shared information with others, such as employers.  For more on the CFPB's efforts on debt collection practices, check out my previous blog on the topic here.

• Credit Reporting- The CFPB notes that the most common issues identified by consumers are problems with incorrect information on credit reports, which accounted for 76% of the complaints. Other issues identified include, the process for blocking and removing information resulting from identity theft.  The report states that consumers report notifying furnishers of information of identity theft with appropriate documentation, only to have accounts verified as accurate.  Notably, just two weeks ago, the Bureau issued its Supervisory Highlights which focuses on consumer reporting and concludes that the Bureau's work in the consumer reporting market is ongoing and remains a high priority.  Amongst its findings, the CFPB observes: 
  • Weaknesses in compliance management systems, such as weak oversight by management and the Board of Directors over furnishing practices; failure to update policies and procedures; weak training of employees who conduct furnishing and dispute handling operations; and weak monitoring and corrective action.
  • Absence of policies and procedures designed to: handle and investigate direct disputes from consumers; facilitate the creation and retention of documentation to substantiate final dispute decision; prevent duplicative or mixed reporting.
  • False representations by financial institutions in order to obtain a consumers' consumer report. For example, making false statements that a consumer had applied for a loan, and thus the institution had a permissible purpose to obtain the report.

These reports can be a useful tool, as they can help credit unions evaluate which products and services are more problematic and thus, should be addressed in order to avoid or mitigate regulatory risks. 

And let's not forget about our beloved…NCUA! The Supervisory Priorities for 2017 may be helpful in prioritizing our efforts.  Indeed, we referenced the 2017 priorities in a previous blog back in January.  Generally, the guidance informs credit unions of NCUA's primary areas of focus for 2017 as an effort to help prepare for this year's examination process.  As a reminder, this year's supervisory focus will be on:

• Cybersecurity- NCUA will continue to evaluate credit unions' cybersecurity risk management practices and encourages credit unions to use the Cybersecurity Assessment Tool (CAT) to bolster their security and risk management processes.  In case you may have missed it, NAFCU members can take advantage of a user-friendly workbook version of CAT here.
• Bank Secrecy Act Compliance- In 2017, NCUA field staff will focus on credit unions' relationship with money services businesses (MSBs) and other accounts that may pose a higher risk for money laundering.  NCUA expects credit unions to conduct appropriate due diligence, analysis, and monitoring when offering services to MSBs.  NCUA Letter to Credit Unions 14-CU-10 provides guidance on how credit unions can identify and mitigate risks associated with MSBs.
• Internal Controls and Fraud Prevention- NCUA field staff will continue to assess the adequacy of internal controls, as well as procedures and processes designed to prevent and control fraud.
• Interest Rate and Liquidity Risk- NCUA has started using a revised interest rate risk supervisory tool and new examination procedures to assess interest rate risk management practices.  For more information about the revised tool and new procedures, see NCUA Letter to Credit Unions 16-CU-08.  Also, examiners will focus on the relationship between interest rate risk and liquid risk.
• Commercial Lending- As you know, NCUA revised its Member Business Loans/Commercial Lending rule, which became effective January 1, 2017.  Field staff will evaluate a credit union's commercial loan policies and procedures and assess the risk management processes associated with managing a commercial loan portfolio.  NCUA warns that credit unions should be prepared to provide documentation to support management's ability to monitor and manage its commercial loan portfolio.  For more information, see NCUA Letter to Credit Unions 16-CU-11.
• Consumer Compliance- NCUA field staff will examine credit unions' compliance with the Military Lending Act (MLA), as well as the Servicemembers' Civil Relief Act (SCRA).  For more information on the MLA, see NCUA Letter to Credit Unions 16-CU-07.  NCUA Letter to Credit Unions 09-CU-12 provides guidance on complying with the SCRA. In particular, this enclosure provides a good overview of the SCRA requirements.

This month's Compliance Monitor, written by my colleague André Cotten, analyzes the NCUA's supervisory priorities for 2017 in more detail and highlights NCUA and NAFCU resources on each issue.  If you haven't checked it out already, please do!

"S..S..S.. on my chest 'cause I'm ready to save 'em."  Mantra of the year, Yes!!!  Be your credit union's superhero by focusing on the regulators' priorities to help save time, lives, and money.

As always, if you have any questions, please feel free to reach out to us.  We are here for you!

Heads Up: Another UDAAP Consent Order

Written by Pamela Yu, Special Counsel for Compliance and Research

Earlier this month, the Consumer Financial Protection Bureau (CFPB) issued another consent order for unfair, deceptive, or abusive acts or practices (UDAAP), this time against UniRush and Mastercard for “failing to conduct adequate testing and preparation” for a planned payment processing platform conversion. The CFPB ordered UniRush and Mastercard to pay an estimated $10 million in restitution to affected consumers, as well as $3 million in civil money penalties to the CFPB. 

This latest UDAAP enforcement action stems from data processing glitches that took place in October 2015 when UniRush, which manages the reloadable prepaid RushCard, transitioned to its new payment processor. RushCard, which was co-founded by famed hip-hop mogul Russell Simmons, experienced service disruptions during the botched processor conversion, which the bureau asserts “left tens of thousands of economically vulnerable RushCard users unable to access their own money to pay for basic necessities.” 

UniRush and Mastercard spent 13 months preparing for the processing platform switch, but the scheduled 2-day conversion did not go as planned.  According to the CFPB:

“In October 2015, a rash of preventable failures by Mastercard and UniRush meant that many customers could not use their RushCard to get their paychecks and other direct deposits, take out cash, make purchases, pay bills, or get accurate balance information. UniRush then failed to provide customer service to many consumers who reached out for help during the service breakdown.”

The bureau indicates that, at the time of the switch, RushCard had approximately 650,000 active users, of which about 270,000 received direct deposits on their prepaid card.  It is worth noting that the bungled direct deposits included government benefits or payroll funds. 

According to the CFPB’s press release, as a result of its “lack of preparation and testing” and “multiple preventable failures,” UniRush and Mastercard violated UDAAP as follows:

• Denied consumers access to their own money: UniRush did not accurately transfer all accounts to Mastercard. As a result, thousands of consumers could not access funds stored on their cards for days, or in some circumstances, weeks. Because of Mastercard’s actions, accounts of about 1,110 consumers were incorrectly suspended. UniRush also delayed crediting cash deposits to consumers’ accounts and shut off access to certain funds that consumers put aside for savings. UniRush did not issue a working replacement card to consumers whose cards were lost or stolen during this period.
• Botched the processing of deposits and payments: UniRush delayed processing direct deposits for more than 45,000 consumers, and did not process or improperly returned deposits of 2,000 others. As a result, consumers could not access their paychecks or government benefits. UniRush also erroneously double posted deposits and did not promptly process electronic debit transactions, which falsely inflated those RushCard holders’ account balances. As a result, thousands of consumers accidentally spent more money than was loaded on their RushCard. With no advance notice to consumers, UniRush used funds consumers subsequently loaded onto their RushCards to offset negative balances caused by its processing errors.

• Gave consumers inaccurate account information: Mastercard did not make sure it was sending accurate information about consumers’ account balances to UniRush when it declined to authorize certain transactions. As a result, some consumers received incorrect information telling them their account balances were zero, when the consumers actually had funds stored on their cards.

• Failed to provide customer service to consumers impacted by the breakdowns: UniRush did not have an adequate plan to step up its customer service response to meet the increased demand caused by service disruptions. Even after hiring additional personnel, UniRush failed to train customer service agents in time to meet the surge in demand. As a result, some consumers who called customer service waited on hold for hours and could not obtain critical information about the status of their funds and accounts.

Several observations about this latest enforcement action: First, it is interesting to note that the CFPB’s big focus here was the alleged lack of, or inadequacy of, the pre-launch testing prior to the scheduled processor conversion. The parties prepared for the conversion for over a year, but the CFPB says they goofed “before, during, and after the payment processor conversion” and adversely impacted consumers as a result (See, p. 6 of the Consent Order). This is significant because the CFPB seems to be expanding its focus beyond cracking down on deceptive or abusive activities to now insisting on robust pre-launch preparations for processor conversions as a matter of fairness.  Essentially, the bureau is sending a clear message that inadequate IT functionality testing is an “unfair” practice in violation of UDAAP. 

Second, much was made of UniRush’s inability to handle the unanticipated surge in customer service demands that resulted from the conversion glitch.  While UniRush prepared for the planned 2-day service disruption, the conversion took longer and the disruption was more widespread and significant than anticipated.  The CFPB says UniRush should have been ready to step up its customer service response, noting that “even after hiring additional personnel, UniRush failed to train customer service agents in time to meet the surge in demand.”  (Emphasis added).

But this seems to beg the question: Is it reasonable to expect the unexpected?  The CFPB seems to be indicating that card issuers must be sufficiently prepared—in advance—for any unexpected contingencies during a processor conversion.  But can we ever really be adequately prepared for the unexpected? Here, UniRush’s response to hire more staff was not enough because new staff could not be trained in time to assist customers during the unexpected service disruption.  The message here?  Beware of Murphy’s Law… Be ready for anything, folks.

“I’ve Got to Keep on Moving”: CFPB Continues Its Prosecution of RESPA Violations

Written By Shereefat Balogun, Regulatory Compliance Counsel

Any P.Diddy fans out there?! Well, Diddy’s 1997 hit “Can’t Nobody Hold Me Down” rings loud in my head as I read through the latest CFPB Order against a mortgage lender for violating the prohibition on “kickbacks” in Section 8(a) of RESPA.  Now many of you are aware that the CFPB’s order and penalty against PHH Corporation similarly alleging RESPA violations was reversed by a panel of the U.S. Court of Appeals for the D.C. Circuit.  Notwithstanding, the CFPB seems resilient in its efforts.

The Story

A few days ago, the CFPB announced consent orders against Prospect Mortgage, LLC (Prospect), a mortgage lender for paying illegal kickbacks for mortgage business referrals, and some of its partners.  Essentially, the order against Prospect accuses the lender of using a variety of schemes to pay kickbacks for referrals of mortgage business in violation of RESPA.  Here are some of the activities the CFPB found to be in violation of Section 8(a) of RESPA:

• Using Lead Agreements to Pay Brokers for Referrals. According to the order, Prospect entered into agreements whereby it paid real estate brokers for each lead it received.  A lead generally consisted of a prospective buyer’s name, address, email address, and phone number, which Prospect would then use to reach out to the prospective buyer to market its loans products.  Moreover, under these agreements, brokers would also take steps to steer consumers to Prospect, many times under Prospect’s encouragement.  For example, the order states that Prospect paid one broker between $25 to $500 per lead, typically totaling $2k to $3k a month.  The broker, in turn, would hand out $20 bills to their agents, one for each consumer that the agent directed to Prospect’s loan officers.
• Encouraging Brokers and their Agents to Require Buyers to Obtain Preapprovals with Prospect’s Loan Officers. The CFPB found that Prospect violated Section 8(a) by providing that a broker listing a property for sale would require any prospective buyer seeking to submit an offer to first obtain a preapproval from Prospect. For example, one lead agreement required the broker to “educate and train” its agents on the need for consumers to seek Preapproval with Prospect, and that the broker would only earn lead fees for those listings “in which Prospect has been designated as the preferred lender such that the listing agent is required to have all customers who desire to submit an offer on the property receive a Prospect Mortgage pre-qualification.”
• Paying a Mortgage Servicer for Referrals. The CFPB alleges that Prospect had a contract with a mortgage servicer whereby the mortgage servicer would market Prospect’s services to its servicing clients, and tried to persuade them to refinance their existing mortgage with Prospect.  In return, Prospect paid the mortgage servicer a portion of the proceeds received from any resulting refinance and also gave them the mortgage servicing rights on the refinance mortgage.
• Encouraging Brokers to Use Fees and Credits to Pressure Consumers into Using Prospect. The order alleges that in response to pressure from Prospect, brokers at time took steps to economically coerce consumers into using Prospect. For example, one broker made a seller’s credit conditional on using Prospect for the mortgage.  Also, other brokers allegedly imposed per diem fees (a penalty imposed on the buyer for each day beyond the contractual closing date the buyer was unable to close because financing had not been approved) unless the buyer used Prospect.

Remind Me About Section 8(a) Again.

Section 8(a) of RESPA generally prohibits any person from giving or receiving a fee, kickback, or other “thing of value” in exchange for the referral of a settlement service involving federally related mortgage.  See, 12 U.S.C § 2607(a). “Thing of value” is broadly defined, and thus many credit unions tend to be cautious regarding real estate transactions and referrals.  In short, a credit union may not pay another company or its employees for the referral of settlement service business.  

What Are Compliance Folks Saying?

“OK, I understand the general prohibition, but I thought some activities were allowed.  What about Section 8(c)?”  Interestingly, the CFPB did not even mention Section 8(c) in its orders. 

Section 8(c) lists several types of conduct that are permitted, so long as certain conditions are satisfied.   Indeed, Section 8(c), states:

Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed…

12 U.S.C § 2607(c)(emphasis added).

Regulation X further expressly permits:

• A payment to an attorney at law for services actually rendered;

• A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;

• A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;

• A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;

• A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.);

• Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or

• An employer's payment to its own employees for any referral activities.

See, 12 C.F.R. §1024.14(g)(iv)(emphasis added.).

Despite acknowledging that referrals are inherent in real estate transactions, the CFPB did not provide much guidance as to how lenders and other industry partners should structure referral arrangements to comply with RESPA.  

If it’s any consolation, the rule does advise that the CFPB “may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation.”  12 C.F.R. §1024.14(g)

What Now?

If your credit union is offered some kind of referral or similar arrangement, or is involved in referral programs that may not have previously been vetted, it may be worth calling your lawyer.  In light of RESPA’s already restrictive language, coupled with the recent CFPB interpretations and aggressive prosecution, credit unions involved in the mortgage business are advised to consult with counsel before making referrals.

If you have any questions on this or any other compliance issue, please feel free to reach out to us.  We’re here to help you!

NCUA Issues Regulatory Alerts Regarding CFPB Mortgage Rules; Fed Reserve’s Consumer Compliance Regulatory Update Webinar

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

The compliance gauntlet that is 2017 is underway and compliance officers are running through it like it’s the finals of American Ninja Warrior. NCUA has started off the year by issuing two Regulatory Alerts, both relating the CFPB regulations governing mortgages. It always helps to see the obstacle course beforehand.

Mortgage Servicing and the FDCPA

In Regulatory Alert No. 17-RA-01, NCUA highlights the CFPB’s recent amendments to the 2013 Mortgage Servicing Rules and the Interpretive Rule issued by the CFPB regarding the amendments in light of the FDCPA. The alert is intended to provide general information about the CFPB’s rules, and outlines some very high level changes. Credit unions looking for more in-depth information about these rules can review NAFCU’s 2016 Mortgage Servicing Rules & TRID Compliance webpage.

HMDA Data Collection

In Regulatory Alert No. 17-RA-02, NCUA provided a summary of HMDA’s institutional coverage for data collection in 2017:

“Regulation C requires you to collect HMDA data associated with mortgage loan applications processed during 2017, if:

1. Your credit union’s total assets as of December 31, 2016, exceeded $44 million;²
2. Your credit union had a home or branch office in a Metropolitan Statistical Area on December 31, 2016;
3. Your credit union originated at least one home purchase loan (other than temporary financing such as a construction loan) or refinanced a home purchase loan, secured by a first lien on a one-to-four-family dwelling during 2016; and
4. Your credit union originated at least 25 home purchase loans, including refinancings of home purchase loans in each of the two preceding calendar years (2015 and 2016).³

If your credit union meets all four criteria, you must collect HMDA data during calendar year 2017 and submit the data to the Consumer Financial Protection Bureau no later than March 1, 2018.

If your credit union does not meet all four criteria, you are exempt from filing HMDA data for calendar year 2017.”

Credit unions looking for more in-depth information about the new HMDA rules, their institutional or transactional coverage, or the timelines for implementation, can visit NAFCU’s HMDA Compliance webpage.

Consumer Compliance Regulatory Update Webinar

 Compliance officers looking for more information on recent regulatory changes can sign up for the Federal Reserve’s Consumer Compliance Regulatory Update webinar. The webinar will be held Thursday, February 2 at 2:00 pm eastern. It’s a great resource for compliance officers wanting to get ahead of the compliance crucible that will be the 4^th quarter of 2017. Registration for the webcast is here.

Regulatory Compliance School

Lastly, if you feel like you need a bootcamp before tackling this year’s compliance gauntlet, join us at NAFCU’s Regulatory Compliance School. Our spring school in the Washington, DC metro area is quickly approaching. Get up to speed by taking exams and earning the NCCO designation. If you are already an NCCO, earn the 24 hours you need for recertification and get your warrior face on so you can attack the implementation challenges of this upcoming year.

Enjoy $200 in savings with the code SPRINGSAVINGS if you register by February 10, 2017. Seats are filling up quickly, so check out the agenda and make your plans soon.

Consumer Compliance Outlook—Financial Innovation Technology: Fintech; NCUA Issues Supervisory Priorities

Written by André B. Cotten, Regulatory Compliance Counsel

Consumer Compliance Outlook. The Third 2016 Issue of the Philadelphia Federal Reserve’s Consumer Compliance Outlook is now available. This issue’s articles focus on the rise of financial innovation in the financial services industry. This issue’s articles include the following:

• Perspectives on Fintech: A Conversation with Governor Lael Brainard
• Fintech: Balancing the Promise and Risks of Innovation
• Fintech for the Consumer Market: An Overview
• Fintech Resources: Laws, Regulations, and Supervisory Guidance

The article on fintech discussed how consumers, especially Millennials, are accustomed to having a wide range of applications and information immediately accessible to them. The emergence of financial innovation applications has transformed consumer expectations around financial products, services and delivery. As a result, brick and mortar financial institutions, including credit unions, are feeling the increased pressure to update and diversify the way they deliver services and products to remain competitive.

Fintech is composed of a variety of different sectors. The article by Tim Marder on page 4 of this issue provides an overview of four fintech market segments: credit; digital payments; savings, investments and personal financial management; and distributed ledger technology. Note, the aforementioned segments do not encompass the entire fintech ecosystem, but they are more likely to impact current credit union products, services and delivery methods.

However, fintech products and services are not seen solely as market disrupters. Some financial institutions have focused on partnerships, collaboration, and other relationships with financial technology firms. Financial innovation has introduced advanced technology, new uses of data and created changes in customer preferences and expectations.

Although, many segments of fintech are still in the early phases, the article explains that fintech credit providers or alternative lenders have enjoyed a range of collaboration with bank partners. While credit unions have lending limitations banks do not, some examples of this innovative partnership include banks providing funding through loan purchases, credit extensions, and equity investments. Financial institutions also originate loans on behalf of alternative lenders, use technology developed by alternative lenders to originate loans themselves, and direct customers to alternative lenders in exchange for marketing and referral fees. Other banks have provided workspace, seed funding, mentoring, training, and other related support to fintech startups. Some financial institutions have even shown some interest in acquiring alternative lenders.

Another notable change sparked by financial technology innovation is the way people pay merchants and transfer money, digital payments. Smart phones are also equipped with digital wallets that store credit card, debit card, and other financial information, thus further eliminating the need for cash and checks. The growing use of fintech applications has enabled an increasing number of small businesses to accept credit cards as a payment option. Beyond payments, some fintech applications have allowed people to more easily to transfer money to other people by simply using the recipient’s email address or phone number.

The financial regulators are taking a measured approach to assess the impact of supervision on financial innovation. The Federal Reserve notes the two questions the Board is most often asked about fintech. First, “what is meant by the term fintech?” Secondly, “what is the Federal Reserve doing to understand the impact of these new technologies?”  

The Consumer Financial Protection Bureau also created Project Catalyst to facilitate consumer-friendly innovation; it includes a “No-Action Letters” policy, finalized on February 18, 2016, to reduce regulatory uncertainty for a new product or service that offers the potential for significant consumer-friendly innovation.

Last October, the Office of the Comptroller of the Currency released a white paper titled Recommendations and Decisions for Implementing a Responsible Innovation Framework. Last month, Comptroller of the Currency Thomas J. Curry announced during a speech that the OCC is developing special purpose national bank charters for fintech firms.

According to Governor Lael Brainard, generally, regulators should seek to tailor regulatory and supervisory expectations to facilitate financial technology growth that produces benefits to the financial marketplace. At the same time, any contemplated adjustments must also manage corresponding risks. The goal is to ensure financial products are fair and transparent so that consumers can make informed choices.

The Consumer Compliance Outlook also lists certain federal laws and implementing regulations for financial services and products that may be relevant to fintech firms and their depository institution partners. The authors note that this is not an exhaustive list, and the applicability of each law depends on the specific circumstances. State laws and regulations, including usury limits may also apply to fintech services and products.

Given some of the lessons from the financial crisis, the article stressed the importance that financial institutions and fintech firms consider the long-term sustainability of the products and services they offer. Fintech firms can establish sound practices by articulating a clear risk tolerance and managing risk. The Federal Reserve intends to maintain an active dialogue with market participants to continue ensuring the safety and soundness of the nation’s financial system.

In a related note, the Office of the Comptroller of the Currency (OCC) announced that it was considering a possible charter for fintech firms, seeking public comment on the concept. Today, NAFCU will file comments, noting in part that if the OCC does move forward with such charters, regulators should require fintech firms to meet basic consumer protection requirements, such as the Truth in Lending Act and applicable usury laws, just as credit unions must do now

***

Programming Note: The NAFCU office will close early today, Friday, January 13^th at 2:00pm, and the office will be closed on Monday, January 16, 2017 in observance of Martin Luther King, Jr. Day.

***

NCUA Issues Supervisory Priorities Letter. Yesterday afternoon, NCUA issued its annual Supervisory Priorities in Letter to Credit Unions 17-CU-01. As no surprise to anyone, cybersecurity and BSA compliance remain on NCUA’s radar. Other priorities include internal controls for fraud, commercial lending, interest rate and liquidity risk, and compliance with the Military Lending Act and Servicemembers Civil Relief Act. 

2017 Adjusted Threshold Levels for Regulations Z and C; Updated HMDA Resources

Written by Stephanie Lyon, Regulatory Compliance Counsel

The Consumer Financial Protection Bureau (CFPB) has been updating and adjusting threshold dollar amounts for transactions covered under Regulation Z (which implements the Truth in Lending Act) and Regulation C (which implements the Home Mortgage Disclosure Act) since the middle of last year. As most threshold adjustments became effective as of January 1^st, 2017, we thought it would be helpful to gather this information in a one-stop shop.

Regulation Z

The Dodd-Frank Act and the CARD Act require the Bureau to adjust a variety of thresholds annually for inflation. Below are a few of the most notable adjusted amounts:

Credit Cards

Regulation Z prohibits a card issuer from imposing a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) plan unless the fee “represents a reasonable proportion of the total costs” incurred for the violation, or is within the safe harbor provision of 12 C.F.R. section 1026.52(b). If a credit card issuer charges anything up to the safe harbor amount for certain violations, it is considered to be in compliance with Regulation Z.

The safe harbor amounts will remain the same as in 2016:

• $27 for a first late payment; and
• $38 for each subsequent late payment over six months.

Ability-to-Repay/Qualified Mortgage

For dollar amounts related to determining a borrower’s ability to repay a transaction secured by a dwelling, the threshold for what is a qualified mortgage in 2017 will require that total points and fees not to exceed:

• 3 percent of the total loan amount for a loan greater or equal to $102,894;
• $3,087 for a loan amount greater or equal to $61,737 and less than $102,894;
• 5 percent of the total loan amount for a loan greater or equal to $20,579 but less than $61,737;
• $1,029 for a loan amount greater or equal to $12,862 and less than $20,579; and
• 8 percent of the total loan amount for a loan less than $12,862.

Home Ownership and Equity Protection Act (HOEPA) Loans

Regulation Z sets additional requirements for high-cost mortgages. To be considered a high-cost mortgage, the transaction must be secured by the consumer’s principal dwelling and the APR and loan amount have to be over a certain threshold. For 2017, the total loan amount will be increased to $20,579 and the loan’s points and fees must exceed 5% of the total loan amount. See, 12 C.F.R. § 1026.32(a)(ii). Loans below $20,579 will also be high-cost if the points and fees exceed the lesser of 8% of the loan amount or $1,029.

Escrow Requirement

Creditors making higher priced mortgage loans must escrow the borrower’s property taxes and insurance unless the credit union meets certain exceptions. Credit unions with an asset size of less than $2.069 billion (increased from $2.052 billion in 2016) that extend a covered loan for a property that is located in rural or underserved areas and meet other requirements are exempt from establishing escrow accounts. See, 12 C.F.R. § 1026.35(b).

Special Appraisal Requirements

Higher-priced mortgage loans are considered to be higher risk and hence require that the credit union obtain a written appraisal based on a physical visit to the home’s interior.12 C.F.R. § 1026.35(c)(3)(i). The rule contains a few exceptions for the appraisal requirement including for transactions of less than an amount adjusted annually, which will remain the same as last year, $25,500.

For more information on Regulation Z’s 2017 adjusted thresholds, see the CFPB’s rule in the Federal Register or their press release.

Regulation C

HMDA Asset Size Reporting Exemption

HMDA exempts small credit unions from reporting HMDA data for the following year, using a multi-prong test that includes an asset threshold. There is no change from last year’s asset size exemption. So in 2017, credit unions with assets at or below $44 million as of December 31, 2016 will continue to be exempt from collecting and reporting HMDA data in 2017. See, 12 C.F.R. § 1003.2 (Financial Institution)(2).

Updated Resources

Also, I wanted to highlight that additional Resources for HMDA Filers were posted by the CFPB to their webpage and the FFIEC’s page. Among the additions are:

• The release of the 2017 Loan/Application Register (LAR) Formatting Tool
• Modifications to the Technology Preview, Filing Instructions Guide for data collected in or after 2018, and Frequently Asked Questions (FAQs).

The CFPB has an additional HMDA implementation page full of easy to digest coverage charts like the 2017 HMDA institutional coverage chart , which looks something like this:

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?

"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.

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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.

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

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!

CFPB Publishes 2017 Rural and Underserved Counties Lists; 18-Month Exam Cycle is Back

Written by Pamela Yu, Special Counsel for Compliance and Research

Happy Monday!  Last week, CFPB published a list of counties determined to be rural and a list of counties determined to be rural or underserved for use in 2017. 

CFPB has several rules that refer to its “rural or underserved” and “rural” counties lists.  Each year, the Bureau publishes new lists for use the following year.  As a refresher, the rules that refer to these lists are:

• Escrow requirements under TILA/Regulation Z.
• Ability to repay and qualified mortgage standards (ATR/QM) under TILA/Regulation Z.
• High-cost mortgage and homeownership counseling amendments to TILA/Regulation Z and RESPA/Regulation X.
• Appraisals for higher-priced mortgage loans (HPML).

Why does this matter? Well, the lists can significantly impact mortgage originations for certain entities. Credit unions operating predominantly in rural or underserved counties are exempt from certain regulatory requirements.

For example, as we blogged about back in September 2015, the CFPB’s final amendments to its definition of small creditors and rural or underserved areas under Regulation Z provided some credit unions with regulatory relief, specifically with respect to the HPML escrow requirement, which contains an exemption for small creditors; the high-cost mortgage rule, which exempts small creditors from a prohibition against balloon payment features on these kinds of loans; and the ATR/QM rule, which permits small creditors to make certain portfolio and balloon payment QMs.

In amending the rural definition by substituting the word “area” for “counties” within the regulation, the September 2015 final rule moved to a more granular approach than the previous standard, thus providing greater relief to certain credit unions.

CFPB’s rural counties lists are generally defined by using the United States Department of Agriculture Economic Research Service’s urban influence codes, while the underserved counties lists are defined by reference to data collected under the Home Mortgage Disclosure Act (HMDA).  The 2017 lists also include, in their entireties, the following U.S. territories as rural areas: Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, and the U.S. Virgin Islands.

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NCUA’s 18-Month Exam Cycle is Back—Hooray!

Last Thursday, the NCUA Board approved, as part of the agency’s 2017-2018 budget, ten recommendations from the agency’s Exam Flexibility Initiative  working group, including an extended 18-month exam cycle for well-managed, low-risk federal credit unions with assets of less than $1 billion.  Since NCUA moved to an annual exam cycle at the height of the financial crisis, credit unions have contended with more frequent exams of increased scope and complexity in the post-Dodd-Frank era.  However, as the industry has recovered along with the overall U.S. economy, NAFCU and its member credit unions have called for relief in this area. 

In response, in May 2016, NCUA Chairman Metsger established the Exam Flexibility Initiative to review NCUA’s examination and supervision program and to consider ways to modernize and improve the agency’s examination process.  A working group formed under the initiative solicited input from credit union stakeholders and, as a result of that feedback, issued a report in October 2016 making ten recommendations for approval by the NCUA Board.  Specifically, in addition to an 18-month exam cycle for certain well-run credit unions, the working group recommended the following:

• An 8- to 12- month examination cycle, timed from the prior exam completion date, for federal credit unions not meeting the criteria for an 18-month exam cycle.
• Enhanced examinations of small federal credit unions.
• Enhanced coordination of exams for federally insured, state-chartered credit unions.
• Establishment of an NCUA and state supervisor working group.
• Establishment of provisions for all federally insured credit unions relative to random sampling examinations, measurement of exam cycles, and NCUA’s authority to conduct more frequent examinations.
• Enhanced examination planning and notice procedures.
• An optional post-exam credit union survey.
• Reduction of NCUA’s onsite exam presence.
• Improved consistency of examiner training.

The working group’s full report is available here. 

While the NCUA Board’s approval of these recommendations is mostly welcome news for credit unions, NAFCU continues to call for an extended exam cycle for all well-run, healthy credit unions regardless of asset size, as well as an independent appeals process for disputing exam results.

The extended exam cycle will become effective January 1, 2017. Other improvements, including the post-exam credit union survey, will begin in July of next year.

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Upcoming NAFCU Webcast: CFPB Mortgage Servicing Rules – 2016 Final Changes

Live Webcast Wednesday, November 30, 2016 | 2:00-3:30 p.m. ET

Although most of the new requirements are not effective until October 19, 2017, our experiences with the CFPB have taught us that it's best to begin implementing reviews and processes early rather than wait to implement changes within tight timeframes. Attend this strategic webcast to explore the details of the new final rule and the potential impact on your credit union's servicing processes and procedures.

We Listened So You Don’t Have To: Interagency Overdraft Services Webinar

Written by Stephanie Lyon, Regulatory Compliance Counsel

On Wednesday, November 10^th, the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA) and other financial services regulators joined to present a webinar on overdraft practices and issues identified through consumer complaints, examinations, and enforcement actions. You can listen to the audio of the webinar here and download the presentation slides here.

Unfair, Deceptive or Abusive Acts and Practices (UDAAP)

The key issues identified by the regulators centered on unfair and deceptive practices such as failing to obtain proper opt-ins, having overdraft practices that differed to those disclosed on the opt-in forms, and misrepresentations from staff regarding the service. The NCUA representative did state that the Agency continues to be impressed with credit unions’ tendency to promote financial literacy such as educating members on the benefits and the fees associated with the use of overdraft services. However, there are a few examples of unfair and deceptive acts and practices that are worth reviewing.

Some of the practices regulators found problematic are:

• Promoting constant use of overdraft service
• Not explaining overdraft alternatives that may be cheaper
• Improperly trained staff that is unable to explain program and alternatives
• Suggesting the overdraft service is free when there is a fee associated with the use
• Transaction re-ordering to increase consumer costs

It is no secret that CFPB and other regulators have their eye set up overdraft services. Credit unions can review CFPB’s supervisory highlights to get an idea of the overdraft practices that are raising potential UDAAP concerns in the industry.

Risk Management

The regulators gave a few options for monitoring overdraft services to mitigate the risk of facing an enforcement action. Among these suggestions a couple can be beneficial for credit unions:

1. Comparing the credit union’s disclosures to its actual policy and procedures to ensure that they accurately describe the credit union’s practices.

For example, if the credit union uses the member’s available balance to decide if there is an overdraft, the disclosures should clearly and conspicuously explain the practice so members are not caught by surprise if they incur an overdraft when there would be no overdraft if the member’s ledger balance was taken into account. Another important instance is when a software change makes the system operate differently than the disclosures anticipate.

2. Monitoring member complaints to identity systemic failures that should be reported to senior management.

A credit union that actively monitors member complaints is better positioned to find trends of potential member confusion or staff misrepresentations regarding overdraft services. For instance, if one teller consistently tells members that the service is free to encourage them to opt-in and the credit union receives 3 complaints from members who were charged an overdraft fee, this can serve as an early warning signal.

3. Monitor and control risks presented by third party vendors.

This risk management strategy is best understood by reviewing a recent CFPB enforcement action against Santander’s Bank. The Bank’s third party service provider was enrolling customers without affirmative opt-in and providing deceptive information to get consumers to opt-in. According to the enforcement action, Santander did not exercise appropriate oversight of its third party overdraft service provider and was ordered to pay a whopping $10 million civil money penalty.  You can read more about this enforcement action here.

In light of the interest overdraft services are receiving from regulators and potential plaintiffs alike, credit unions may want to ensure their program follows Regulation E’s disclosure and opt-in/opt-out requirements as well as review consumer complaints to identify potential unfair, deceptive or abusive practices.

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Early Thanksgiving

This weekend, my family celebrated thanksgiving early because we will not be able to be together on the actual date. It is the third year I celebrate thanksgiving with my wonderful husband Devon, and as usual, we made enough food to feed a family of 12. I have to admit, I was thrilled to have an excuse to use the wedding china we received for our wedding.

CFPB Issues Supervisory Highlights Expressing Concerns with Automobile Loan Servicing, Debt Collection, Mortgage Origination and Fair Lending

Written by Benjamin M. Litchfield, Regulation Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On October 31, 2016, the CFPB issued its latest voluminous supervisory report sharing multiple observations from recent examinations and other supervisory activities. The report covers issues observed by the Bureau in the areas of automobile loan servicing, debt collection, mortgage origination and fair lending. Other topics, such as student loan servicing, are also addressed. Provided below is a digest of some (but not all) of the Bureau’s many findings.

Automobile Loan Servicing.  In recent examinations of nonbank auto loan servicing companies, CFPB examiners identified unfair practices relating to repossession fees. The supervisory report alleges that certain nonbank servicing companies would often hold personal property seized as part of repossessing an automobile and refuse to return the property until after the borrower paid a fee for storing the property. Supposedly, if the borrower did not pay the fee, the companies would dispose of the property rather than returning it to the borrower.

Regardless of whether these companies had the contractual authority to engage in such practices, Bureau examiners felt these practices were unfair because the tactic was often used to leverage personal situations for collection purposes with extreme examples including retaining tools essential to the consumer’s livelihood and retention of personal possessions of negligible market value but of substantial emotional attachment or practical importance to the consumer. Examiners also found that some agreements, while disclosing that property would be stored, failed to disclose that a fee would be assessed for storage.

[Authors Note: Unlike the Federal Trade Commission, which promulgated a rule prohibiting certain unfair or deceptive credit practices after extensive public hearings, the Bureau continues to define unfair practices through examination and enforcement without providing credit unions with much guidance or prior notice. Even the FTC’s statements on unfairness and deception, which have defined which practices are prohibited under the FTC Act for decades, are mere guidance to the Bureau that it does not feel obliged to follow.]

Debt Collection.  Bureau examiners also identified several violations of the Fair Debt Collection Practices Act (FDCPA), including charging unlawful convenience fees, making several false representations, and unlawfully communicating with third parties in connection with the collection of a debt. [Author’s Note: While credit unions collecting debts on their own behalf are not considered “debt collectors” subject to the FDCPA, the CFPB has signaled its intention to use its UDAAP authority against so-called first-party debt collectors that engage in the types of acts or practices prohibited by the Act. In other words, the CFPB is trying to get all actors to follow a law that, by definition, credit unions are not required to follow.]

In recent examinations, the Bureau identified situations where debt collectors imposed convenience fees to process payments by phone or online that were not explicitly authorized by the loan agreement or permitted by law in violation of Section 808(1) of the FDCPA. Likewise, debt collectors are reported to have stated that all fees were “nonnegotiable,” which examiners felt amounted to a false representation of the types of compensation which may lawfully be received by a debt collector in violation of Section 807(2)(B) of the Act.

The supervisory report also highlights circumstances where debt collectors would use false representations or deceptive means to collect a debt in violation of Section 807(10) of the FDCPA. For example, the report alleges that debt collectors would place calls to consumers purporting to assess the consumer’s creditworthiness, credit scores, or credit reports, or stating that an immediate payment would need to be made in order to prevent any negative impact on the consumer’s credit. In addition, debt collectors are reported to have also impersonated consumers while using the original creditor’s consumer-facing automated telephone system to obtain more information about the consumer’s debt.

Finally, debt collectors are stated to have disclosed both the nature and purpose of collection calls to third parties when attempting to gather more information about the consumer in violation of Sections 804 and 805 of the FDCPA. These communications were often caused by inadequate identity verification during telephone calls. Collectors would also identify their employers to third parties without first being asked for that information by the third party in violation of Section 804 of the Act.

Mortgage Origination.  CFPB examiners also found deficiencies in mortgage origination compliance management systems which allowed for violations of Regulations G, N, X, and Z. One such purported violation was the reported failure of some financial institutions to verify income using reliable third-party records when conducting an ability to repay analysis. The report notes that examiners supposedly found that income disclosed on a mortgage application was not verified but instead was tested for reasonableness using an internet-based tool that estimates income based on zip code, job title, and years at the current occupation. [Author’s Note: Aside from the rather technical Regulation Z issues raised by the Bureau, this practice could also pose some rather obvious fair lending risks if credit eligibility is being determined, in part, by zip code which can be a proxy for race. #LowHangingFruit] Bureau examiners also identified instances where institutions failed to provide Loan Estimates within 3 business days in violation of the TILA-RESPA Integrated Disclosures Rule.

Fair Lending.  Bureau examiners also observed situations in which they felt that a financial institution’s treatment of limited-English-proficiency (LEP) and non-English-speaking consumers posed fair lending risk. One example offered by the report involves an institution that marketed only some of its available credit card products to Spanish-speaking consumers, while marketing several additional credit card products to English-speaking consumers. The institution lacked the appropriate documentation describing the business decisions that were made to market some but not all products to Spanish-speaking consumers which raised fair lending concerns for CFPB examiners. The report noted that some treatment of LEP and non-English-speaking consumers has led to enforcement actions by the Bureau and the Department of Justice in the past.

The supervisory report also notes that redlining will remain a supervisory priority for the Bureau. When assessing redlining risk, the Bureau will look to several factors including the unique attributes of the relevant geographic areas, lending patterns, peer and market comparisons, marketing, mapping, and additional evidence such as whistleblower tips. Rather than identifying instances of redlining, the supervisory report discusses ways in which credit unions can have a strong compliance program and outlines the Bureau’s approach to examining for illegal redlining. [Author’s Note: Even more information on redlining can be found in this interagency webinar that was held on October 4 and available on demand.]

These are just some of the highlights from the CFPB’s report. The full report is available here. As we can see, the Bureau remains laser-focused on third-party debt collection as it prepares for a possible rulemaking in this area and possible fair lending concerns involving the treatment of LEP and non-English-speaking consumers. If that is true, I may need a stronger prescription for my glasses.

CFPB Issues Mortgage Servicing Rules – Part Four: Periodic Statements

Written by Shereefat Balogun, Regulatory Compliance Counsel

On August 4, 2016, the CFPB amended its mortgage servicing requirements.  Since then, NAFCU has been combing through and analyzing the 900+ page rule to help our members better understand the changes and new requirements.  We have already blogged on the changes relating to Successors in Interest, Force-Placed Insurance, and Loss Mitigation.  Today, we will highlight some of the notable changes made to the periodic statement requirements under Regulation Z’s servicing provisions. 

Before getting into the specifics though, here are some resources from the CFPB that break down the final rule to make it easier to digest:

• Here’s a link to the Final Rule. This final regulation includes the preamble with rulemaking background, and a section-by section analysis with the provisions of the final rule and public comments.
• There’s a 9-page summary of the major changes which gives a high-level discussion of the major provisions of the rule. View the overview here.
• The actual amended rule with model forms and commentary (and 100+ pages), can be found here.

Moving on…the final rule makes several significant changes to the periodic statement requirements under Regulation Z, including:

Clarifies certain periodic statement disclosure requirements relating to mortgage loans that have been accelerated, have been permanently modified, or are in temporary loss mitigation programs (12 C.F.R. Part 1026, comment 1026.41(d)(1)).  Section 1026.41(d)(1)(iii) provides that the periodic statement required by §1026.41(d) must include the amount due.  The CFPB added commentary to clarify that:

• If the balance of a mortgage loan has been accelerated but the servicer has agreed to accept a lesser amount to reinstate the loan, the servicer MUST disclose the LESSER amount, i.e. the reinstatement amount, on the periodic statement; not the entire accelerated balance.  In the preamble, the CFPB reasoned that displaying the lesser amount rather than the full accelerated balance would make the consumer more likely to pay the reinstatement amount, thereby preventing foreclosure.  The CFPB further explained that having the full acceleration amount on the periodic statement will cause confusion, particularly if the consumer was told previously that he/she was only required to pay a lesser reinstatement amount. 

• If the loan contract has been permanently modified, the servicer MUST disclose the amount due under the modified loan contract; not the pre-modified amount. 

• If the consumer has agreed to a temporary loss mitigation program, the servicer MAY disclose either: (i) the payment due under the temporary loss mitigation program; or (ii) the amount due according to the original loan contract.

Requires servicers to send periodic statements to borrowers in bankruptcy or who have discharged the loan, subject to a limited exemption (12 C.F.R. §1026.41(e)(5)).  Currently, §1026.41(e)(5) provides a blanket exemption from the requirement to send a periodic statement  if a consumer is in bankruptcy or has discharged a mortgage loan through bankruptcy. The final rule changes that, and now generally requires servicers to send periodic statements to borrowers, unless otherwise exempted.  Section 1026.41(f) of the final rule requires servicers to send modified statements to certain borrowers in bankruptcy or who have discharged the loan.  The content of the statement will vary depending on whether the borrower is in bankruptcy under Chapter 12 or 13.  These changes were driven by a general concern that borrowers in bankruptcy often lack important information about their mortgage loan account if a servicer does not send the periodic statement.  Here are some takeaways:

• The final rule limits the circumstances in which a servicer is exempted from providing a periodic statement.  Under the final rule, a servicer is exempted from providing the periodic statement if a two-prong test is satisfied.  A servicer is not required to provide a periodic statement if: (1) any borrower on the loan is a debtor in bankruptcy or has discharged personal liability for the mortgage loan through bankruptcy; and (2) any of the following occurs: (i) the borrower requests in writing that the servicer cease providing a periodic statement; (ii) the borrower’s bankruptcy plan provides that the borrower will surrender the home securing the loan, will avoid the lien, or otherwise does not provide for payment of pre-bankruptcy arrearage or maintenance of payments due under the loan; (iii) the bankruptcy court order provides for the avoidance of the lien, lifts the automatic stay, or requires the servicer to stop providing statements; or (iv) the borrower files a statement of intent to surrender the home securing the loan and has not made any payment on the loan after filing for bankruptcy.

• The final rule applies the exemption at the loan level.  Thus, a servicer is exempt with respect to all consumers on a mortgage loan if the exemption criteria are met with respect to any borrower on the loan. 

• Servicers are required to provide modified periodic statements for certain borrowers in bankruptcy.  Section 1026.41(f) lays out certain omissions and additions for these modified statements.  For example, the statement may omit information about late payment fees, certain delinquency information, and the notice of whether the servicer has issued the first notice or filing for foreclosure.  On the other hand, the periodic statement must include a statement identifying the borrower’s status as a borrower or the discharged status of the loan, as well as a statement that the periodic statement is for informational purposes only.  There are additional provisions relating to borrowers in bankruptcy under Chapter 12 or 13.  For example, these periodic statements may omit the information regarding delinquency.  Similarly, there are certain required additions as well.  For example, the statement must show all the payments received since the last statement, as well as all charges the servicer has imposed since the last statement.  Additionally, these periodic statement must disclose a statement that, as applicable: (i) the amount due includes only post-petition payments and no other payments due under the bankruptcy plan; (ii) the borrower should send post-petition payments to the trustee, and not the servicer, if the borrower’s plan so requires; (iii) the information disclosed on the periodic statement may not include payments the borrower made to the trustee, and may be inconsistent with the trustee’s records; (iv) encourages the borrower to contact his/her attorney or trustee with questions; and (v) if the borrower is more than 45 days delinquent on post-petition payments, the servicer has not received all payments that became due since the bankruptcy filing. 

Exempts servicers from sending periodic statements if the loan is charged off, provided the servicer meets certain conditions (12 C.F.R. §1026.41(e)(6)).  The final rule exempts servicers from the periodic statement requirements of §1026.41 for charged-off loans if: (i)  the servicer will  not charge additional fees or interest on the account; and (ii) the servicer provides a final periodic statement, clearly and conspicuously labeled “Suspension of Statement & Notice of Charge Off- Retain This Copy for Your Records.”  This final periodic statement must contain certain disclosures, including statements that the loan has been charged off, the servicer will not impose new fees or interest, the lien on the property remains in place and that the borrower is liable for the loan and related obligations such as taxes, and that the lien is not being cancelled or forgiven.  In the preamble, the CFPB stated that these disclosures were important to help borrowers better understand the meaning and consequence of charge-off, including the borrower’s ongoing payment obligations.  Also, the Bureau concluded that this final statement will provide important consumer protections while easing the burden for servicers associated with providing ongoing periodic statements. 

Provides sample periodic statement forms.  The final rule provides sample forms that servicers may use for borrowers in bankruptcy to ensure compliance with the requirements under §1026.41.

Rule’s Effective Date: The changes regarding the bankruptcy periodic statement exemption and modified statements for borrowers in bankruptcy are effective 18 months after publication in the Federal Register, and the other periodic statement changes are effective 12 months after publication in the Federal Register.  And yes, we’re still waiting for the rule to be published. Not there yet! 

In the meantime, while preparing for the new compliance requirements, credit unions may want to consider reviewing their policies and procedures to make sure they reflect the new servicing requirements. 

As always, if you have any questions relating to this article or any other issues concerning the amended mortgage servicing rules, please contact NAFCU’s regulatory compliance team.  We’re here for you!

CFPB Issues Final Prepaid Rule

Written by Pamela Yu, Special Counsel for Compliance and Research

Happy Wednesday!  I hope you all had a pleasant Columbus Day weekend, or, as we like to call it in my expat-Canadian household, Thanksgiving weekend.  Yes, that’s right. Canadian Thanksgiving is in October.  What else is different about Thanksgiving in Canada versus in the U.S.?  Not much—just like in America, it’s all about turkey coma and pumpkin pie.  Except instead of watching football we watch the Toronto Blue Jays sweep the Texas Rangers to advance to the American League Championship Series (Go Jays!). 

Now that NAFCU’s Compliance team is back in the office, it’s time to start diving into CFPB’s new final rule on prepaid accounts (Prepaid Rule).  The Prepaid Rule, which is a healthy 1,689 pages, mandates comprehensive consumer protections for prepaid accounts under Regulation E, which implements the Electronic Fund Transfer Act; Regulation Z, which implements the Truth in Lending Act; and the official interpretations to those regulations.

The final rule modifies Regulation E to create prepaid account provisions governing disclosures, limited liability and error resolution, and periodic statements.  It also adds new requirements regarding the posting of account agreements.  Additionally, the final rule regulates overdraft credit features that may be offered in conjunction with prepaid accounts.  Such credit features, with some exceptions, will be covered under Regulation Z where the credit feature is offered by the prepaid account issuer, its affiliate, or its business partner and credit can be accessed in the course of a transaction conducted with a prepaid card. 

The rule is effective October 1, 2017.  However, the requirement (in § 1005.19(b)) for prepaid account issuers to submit their prepaid account agreements, which must satisfy the rule’s form and content requirements, to the CFPB for posting on its website is delayed until October 1, 2018.

The final rule was issued by the CFPB last Wednesday and NAFCU’s Regulatory Affairs team will be providing a detailed summary of the final rule shortly, which will be available to NAFCU members on our website (member login required).  NAFCU issued a Regulatory Alert on the proposed rule in late 2014, which is currently available to members on our website (14-EA-27).  The CFPB has also provided a new implementation web page.  In the meantime, this post will provide a high-level overview of the scope of the “prepaid account” definition in the final rule.

The Prepaid Rule adds the term “prepaid account” to the definition of “account” in Regulation E. Accounts within the scope of the rule’s definition of prepaid account are subject to various requirements under amended Regulation E.  

Definition. The criteria for whether an account is a prepaid account under the final rule are set forth in 12 CFR 1005.2(b)(3). See p. 1425-1427 of the Prepaid Rule.

Under the rule, payroll card accounts and government benefit accounts are prepaid accounts.  Additionally, a prepaid account includes a product that is either of the following, unless a specific regulatory exclusion applies:

• An account that is marketed or labeled as “prepaid” and is redeemable upon presentation at multiple, unaffiliated merchants for goods and services or usable at automated teller machines (ATMs); or
• An account that meets all of the following: (1) Is issued on a prepaid basis in a specified amount or is capable of being loaded with funds after issuance; (2) Whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, to conduct transactions at ATMs, or to conduct person-to-person (P2P) transfers; and (3) Is not a checking account, a share draft account, or a negotiable order of withdrawal (NOW) account.

Exclusions. An account that satisfies one or both of the above tests is not a prepaid account for the purposes of the rule if it is any of the following:

• An account loaded only with funds from a health savings account, flexible spending arrangement, medical savings account, health reimbursement arrangement, dependent care assistance program, or transit or parking reimbursement arrangement;
• An account that is directly or indirectly established through a third party and loaded only with qualified disaster relief payments;
• A gift certificate;
• A store gift card;
• A loyalty, award, or promotional gift card;
• A general-use prepaid card that is both marketed and labeled as a gift card or gift certificate; or
• An account established for distributing needs-tested benefits in a program established under state or local law or administered by a state or local agency.

Additionally, the P2P functionality of an account established by or through the U.S. government is not a prepaid account under the rule if the account’s primary function is to conduct closed-loop transactions on U.S. military installations or vessels, or similar government facilities.

Also, an account established for a commercial purpose is not a prepaid account because, under the existing definition of account in Regulation E, an account is subject to Regulation E only if it is established primarily for a personal, household, or family purpose.  In addition, under the existing definition in Regulation E, an account held under a bona fide trust agreement is not an account subject to Regulation E; therefore, an account held under a bona fide trust agreement is also not a prepaid account.

It is important to note, however, that the definition of prepaid account is not limited to general purpose reloadable cards or prepaid products that otherwise function as transaction account substitutes. 

CFPB has provided a flow chart that may help credit unions to determine if an account is a prepaid account under the final rule.

NAFCU’s Regulatory Compliance team is continuing to analyze the new Prepaid Rule to understand its full impact on credit unions.  Stay tuned for more information in the coming weeks.  

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Oh... Check out our upcoming NAFCU Webcasts:

UDAAP – We Know It When We See It

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

Identify and Monitor High-Risk and Money Service Businesses Accounts

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

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

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

CFPB Issues Mortgage Servicing Rules – Part Three: Loss Mitigation; DoD Military Lending Act Interpretive Guidance out Today

Written by Shereefat Balogun, Regulatory Compliance Counsel

As many of you know, the CFPB recently issued its final amendments to the mortgage servicing rules contained in Regulation X and Z.  Now we all know that compliance folks work hard, and we’re use to reading through voluminous pages of regulatory text.  However, ending our short summer with 900+ pages of mortgage servicing rules (or any rule!) is a bummer.  In an effort to make this more manageable and “pleasant”, we’re breaking this up a bit.  The changes can be grouped in broad topics including: Successors in Interest; Requests for Information; Force-Placed Insurance; Early Intervention; Loss Mitigation; Prompt Payment Crediting; Periodic Statements; and Small Servicer Exemption.  We have already covered the changes relating to “Successors in Interest” and “Force-Placed Insurance”.  This post will focus on the changes made to the loss mitigation requirements.    

Before getting into the specifics of the loss mitigation requirements, we've broken up the final rule to make it easier to digest:

• Here’s a link to the Final Rule. This final regulation includes the preamble with rulemaking background, and a section-by section analysis with the provisions of the final rule and public comments.
• There’s a 9-page summary of the major changes which gives a high-level discussion of the major provisions of the rule. View the overview here.
• The actual amended rule with model forms and commentary (and 100+ pages), can be found here.

Moving on to the changes made to the loss mitigation requirement.  The final rule makes several significant changes to loss mitigation requirements under the mortgage servicing rules, including:

• Requires servicers to notify borrowers when their loss mitigation applications are complete (§ 1024.41(c)(3)). Under the final rule, a servicer will be required to provide written notice that a borrower’s loss mitigation application is complete within 5 days (excluding legal public holidays, Saturdays, and Sundays) of receiving a complete application.  The notice must set forth certain information including: (i) a statement that the loss mitigation application is complete; (ii) the date the servicer received the completed application; (iii) a statement that the servicer will evaluate the application within 30 days; (iv) a statement that the borrower is entitled to certain foreclosure protections while the application is pending; (v) a statement that the servicer may require and request additional information, and the consequences if the borrower fails to respond to that request; and (vi) that the borrower may be entitled to additional protections under State or Federal Law. 

• Permits servicers to provide short-term loss mitigation options based on evaluation of incomplete applications (§ 1024.41(c)(2)(iii)).  Under the existing rule, a servicer may offer a short-term payment forbearance program to a borrower based upon an evaluation of an incomplete loss mitigation application.  The final rule now adds the ability for a servicer to offer a short-term repayment plan.  The final rule requires that, if accepted by the borrower, the servicer must provide a written notice stating the specific terms and duration of the plan, that other loss mitigation options may be available, and that the borrower may submit a complete application to be evaluated for those options.  Note that the servicer still cannot file for foreclosure if the borrower is performing under the plan.

• Requires servicers to exercise reasonable diligence in obtaining third party information, and prohibits servicers from denying a borrower solely because of the missing information unless efforts have been made for a significant period of time (§ 1024.41(c)(4)). Under the current rule, servicers must use reasonable diligence in obtaining documents or information from third parties, if such information is needed to determine which loss mitigation options it will offer to the borrower.  Moreover, the current rule prohibits servicers from denying an application solely because the servicer lacks the necessary third party information.  The final rule reiterates this point, but provides an exception to this general prohibition.  Under the new rule, a servicer may deny an application if a servicer has exercised reasonable diligence to obtain the required information “for a significant period of time.”  See comment 41(c)(2)(ii) for a discussion of what might be considered a “significant period of time.”

• Modifies an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the action of a superior lienholder (§ 1024.41(f)).  The current exception merely allowed the servicer to join as a subordinate lienholder. 

• Reinforces and clarifies prohibition on “dual tracking” (Commentary to § 1026.41(g)). The current rule prohibits servicers from moving for judgment or order of sale while simultaneously working with borrowers on loss mitigation options. The commentary to the final amended rule clarifies that, if a servicer has already initiated a foreclosure action and subsequently receives a timely complete application, the suit should avoid a foreclosure judgment or order of sale, unless the borrower’ application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement.  It is important to note that, according to the commentary, the responsibility falls on the servicer to ensure that the foreclosure does not move forward while an application is pending.  This is especially key where the servicer has hired outside counsel to handle the foreclosure.  The commentary makes clear that “a servicer is not relieved of its obligations because foreclosure counsel’s actions or inaction caused a violation.”

• Requires servicers to offer borrowers with loss mitigation options throughout the life of the loan (§ 1026.41(i)). The current rule requires servicers to consider loss prevention programs and avoid foreclosure one time during the life of the loan. Thus, if a delinquent borrower became current and subsequently defaulted again, a servicer was not required to consider the borrower for loss mitigation options.  However, this “one bite at the apple” provision is no longer sufficient.  The final amended rule requires a servicer to evaluate a borrower for loss mitigation whenever the borrower becomes delinquent and is otherwise eligible for a loss mitigation program, unless the borrower was delinquent at all times since submitting the prior application.  For example, if the borrower has previously submitted a complete application and fully performed under the plan and becomes current on payments, but then becomes delinquent again, the servicer must evaluate the borrower for loss mitigation options. 

• Clarifies obligations of servicers when a servicing transfer occurs (§ 1026.41(k)). The final amended rule makes clear that when a service transfer occurs while a loss mitigation application is pending, the new servicer (the transferee servicer) must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer; however the rule does provide extensions to the timeframes in certain limited circumstances.

Rule’s Effective Date: Generally, the amendments to the final rule will become effective one year after publication in the Federal Register, with some exceptions including amendments to the rule that address successors in interest, the provisions of periodic statements to borrowers in bankruptcy, and the amendments that address when servicers may stop collecting information from borrowers for a particular loss mitigation option.  These amendments will not become effective until 18 months after publication in the Federal Register.   

In preparing for the new compliance requirements, credit unions may want to consider reviewing their policies and procedures to make sure they reflect the new servicing requirements, including policies that address communications with outside foreclosure counsel. 

As always, if you have any questions relating to this article or any other issues concerning the amended mortgage servicing rules, please contact NAFCU’s regulatory compliance team.  We’re here for you!

###

DoD Military Lending Act Interpretive Guidance out Today!

A few weeks ago, NAFCU issued a statement indicating that the DOD is expected to publish interpretive guidance on the MLA rules soon.  Well, the guidance was published today in the Federal Register.  NAFCU's Regulatory Compliance team is studying the guidance and will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016).  In the meantime, you can find NAFCU’s extensive collection of MLA compliance resources here. 

Credit Union Incentive Plans Can Be a Useful Tool to Drive Performance, if Done Properly + Compliance Trivia!

Written by Shereefat Balogun, Regulatory Compliance Counsel

Credit unions generally use incentive plans to drive results, whether that be more loans or more deposits.  The overall goal is to reward employees for achieving certain results.  In May 2016, NCUA and other financial regulators issued a proposed Incentive Compensation Rule; while the rule is not yet finalized, credit unions are subject to other regulations that place restrictions on employee compensation or incentive plans.  NAFCU gets a number of question regarding employee incentives, and given NCUA’s growing concern and examination of these plans, credit unions are advised to develop an Incentive Compensation policy that is approved by the Board, and complies with the regulatory framework governing compensation and incentive structures.

NCUA Regulations

There are generally 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.

NCUA’s lending rules prohibit senior management employees from participating in a loan incentive plan.  Section 701.21(c)(8)(i) prohibits paying compensation in connection with any loan made by the credit union.  This rule regulates incentives given to employees in connection with the extension of a loan to a non-employee member.  There are some exceptions in (c)(8)(iii), which include salaries and incentives based on overall financial performance. There is also an exception for employee loan incentive programs established and monitored by a credit union’s board of directors; however, senior management is specifically excluded from this exception.  From the rule:

(8)(i) Except as otherwise provided herein, no official or employee of a Federal credit union, or immediate family member of an official or employee of a Federal credit union, may receive, directly or indirectly, any commission, fee, or other compensation in connection with any loan made by the credit union.

…

(iii) This section does not prohibit:

(A) Payment, by a Federal credit union, of salary to employees;

(B) Payment, by a Federal credit union, of an incentive or bonus to an employee based on the credit union's overall financial performance;

(C) Payment, by a Federal credit union, of an incentive or bonus to an employee, other than a senior management employee, in connection with a loan or loans made by the credit union, provided that the board of directors of the credit union establishes written policies and internal controls in connection with such incentive or bonus and monitors compliance with such policies and controls at least annually.

(D) Receipt of compensation from a person outside a Federal credit union by a volunteer official or non-senior-management employee of the credit union, or an immediate family member of a volunteer official or employee of the credit union, for a service or activity performed outside the credit union, provided that no referral has been made by the credit union or the official, employee, or family member.

12 C.F.R. §701.21(c)(8)(emphasis added).

Note that under this rule an employee, including senior management employees, may receive an incentive in connection with a loan based on the credit union’s overall financial performance.  However, only non-senior management employees may receive incentives in connection with a loan pursuant to the credit union’s written procedures that are established and approved by the Board of Directors.

Section 701.23(g) is very similar and tracks the language of 701.21(c)(8), except that the restrictions pertain to the purchase, sale, or pledge of an eligible obligation (i.e., a loan or group of loans). The rule generally has the same restriction and exceptions, as well as limitation as applied to senior management employees. 

Similarly, Section 721.7 places the same restriction but is not specific to any particular activity, and is more broadly applied to any authorized activity the credit union engages in.  See, 12 C.F.R. §721.7.

Regulation Z Prohibition on Mortgage Loan Originators’ Compensation Practices

Incentive compensation is also regulated in Regulation Z, as applied to mortgage loan originators and is indeed a much scrutinized area.   Regulation Z, §1026.36(d) prohibits mortgage loan originators from receiving compensation based on certain terms of a mortgage loan transaction, such as interest rate, APR, collateral type, and origination fees.  See, 12 C.F.R. §1026.36(d).

It’s worth flagging, the CFPB’s definition of “loan originator”, as this could include non-lending employees.  The rule’s definition of “loan originator” is broader than the definition of “loan originator” used in the SAFE Act, and includes the following activities if done for or in the expectation of compensation:

• takes an application;
• offers, arranges, assists a member in obtaining or applying to obtain credit;
• negotiates, or otherwise obtains or makes an extension of credit for another person; or
• advertises, communicates, or represents to the public that they can or will perform any loan origination activities.

See, 12 C.F.R.§1026.36(a).

NCUA in 2014 issued a Regulatory Alert discussing the CFPB’s Mortgage Loan Originator Compensation Requirements.   

Preferential Loans to Employees

On a related matter, we also receive questions relating to preferential loans to employees.  Generally, credit unions may give preferential loans, or lower loan rates, to its employees, so long as those employees do not include officials.  The relevant section to rely on is 12 CFR 701.21(d).

Section 701.21 sets forth the standards to which a federal credit union must adhere when making loans. Under this provision, a federal credit union is prohibited from granting preferential loans to its officials or an immediate family member of an official. See, 12 C.F.R. §701.21(d)(5).  This includes any member of the Board of Directors, credit committee or supervisory committee.  However, there is no prohibition against a federal credit union offering preferential loans to its employees.

For reference, here are two NCUA legal opinion letters on the topic:

• https://www.ncua.gov/Legal/OpinionLetters/OL2006-0343.pdf

• https://www.ncua.gov/Legal/OpinionLetters/OL1997-0247.pdf

In light of the current rules regulating compensation and incentive structures and the impending finalization of the Incentive Based Compensation Rule, credit unions are strongly advised to develop comprehensive Board policies regarding compensation.  The policy should comply with the regulatory framework, including the presence of strong internal controls, and should be reviewed by the Board annually. 

As always, if you have any questions relating to this article or any other compliance issue, please contact NAFCU’s regulatory compliance team.  We’re here for you!

Trivia: Under the proposed Incentive Based Compensation Rule, what would be the record retention for documenting the credit union’s incentive-based compensation arrangement?

 

CFPB Proposes Changes to TRID – Part II: Modifying Disclosures for Sharing and Disclosing the Ability to Shop; It’s Not Too Late to Attend NAFCU’s Risk Management Seminar

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

On Monday, this blog post highlighted some of the proposed revisions to the TRID rules, including:

• clarification that creditors can reset tolerances using a revised Closing Disclosure when a Closing Disclosure had already been issued; and
  
• clarification regarding post-consummation inspection fees and completing the Loan Estimate for multiple-advance construction loans.

Your NAFCU Regulatory Compliance Team is continuing to pick apart the proposal, but here are a couple other changes to highlight…

Modifying Disclosures for Sharing with Sellers and Third Parties

Whereas Regulation X required providing sellers and the parties’ agents with the HUD-1, it has not been clear how the Closing Disclosure can be shared. Section 1026.38(t)(5)(v) and (vi) state that the Closing Disclosure can be modified to create separate disclosures for buyers, sellers and third parties by removing certain information. The CFPB has provided additional guidance in the commentary on how to achieve this:

Paragraph 38(t)(5)(v).

1. Permissible form modifications to separate consumer and seller information. The modifications to the form permitted by § 1026.38(t)(5)(v) may be made by the creditor in any one of the following ways:

i. Leave the applicable disclosure blank concerning the seller or consumer on the form provided to the other party;

ii. Omit the table or label, as applicable, for the disclosure concerning the seller or consumer on the form provided to the other party; or

iii. Provide to the seller, or assist the settlement agent in providing to the seller, a modified version of the form under § 1026.38(t)(5)(vi), as illustrated by form H-25(I) of appendix H to this part. (Emphasis added). See, pg. 284.

Another roadblock to sharing this information has been privacy concerns under the Gramm-Leach-Bliley Act (GLBA) and Regulation P. The CFPB also addressed privacy concerns surrounding sharing the disclosures in the preamble:

Regulation P generally provides that a financial institution (such as a creditor or settlement agent) may not disclose its customer’s nonpublic personal information to a nonaffiliated third party without providing notice to the customer of such information sharing and an opportunity to opt-out of such sharing.

There are several exceptions to these notice and opt-out requirements, however. For example, GLBA section 502(e)(8) provides an exception that applies if a financial institution shares its customer’s non-public personal information to comply with Federal, State, or local laws, rules and other applicable legal requirements. GLBA sections 502(e)(1) and 509(7)(A) provide another exception that applies if a financial institution’s sharing of its customers’ nonpublic personal information is required, or is a usual, appropriate, or acceptable method, to provide the customer or the customer’s agent or broker with a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product.

See, pg. 147.

Requirements for Disclosing the Ability to Shop and the Written List of Providers

The amendments also add some language to comments 2 and 4 to section 1026.19(e)(1)(vi) that require the creditor to specifically identify services that are payable by the consumer and can be shopped for by the consumer. Comment 4 is being amended to specifically require that a creditor specifically identify those services payable by the consumer and for which the consumer is permitted to shop on the written list of providers. There is clarification in the commentary regarding packaged services. Below is the new language added to comment 1026.19(e)(1)(vi)-4:

If the charge for a particular service for which the consumer is permitted to shop is payable by the consumer, the creditor must specifically identify that service and an available provider of that service on the written list of providers unless, based on the best information reasonably available to the creditor at the time the disclosure is provided, the creditor knows that the service is provided as part of a package (or combination of settlement services) offered by a single service provider. Specific identification of each service in such a package is not required provided they all are services for which the consumer is permitted to shop. (Emphasis added.) See, pg. 223.

Comment 3 to section 1026.19(e)(1)(vi) is being amended to clarify that use of model form H-27 is deemed compliant, but is not required. Use of the model form was discussed in detail in the preamble to the proposed amendments:

Unlike the model forms for the Loan Estimate and the Closing Disclosure, which, under §§ 1026.37(o)(3) and 1026.38(t)(3), respectively, are mandatory forms for a transaction that is a federally related mortgage loan (as defined in Regulation X), form H-27(A) is not a mandatory form. Moreover, TILA section 105(b) permits creditors to delete non-required information or rearrange the format of a model form without losing the safe harbor protection afforded by use of the model form if, in making such deletion or rearranging the format, the creditor does not affect the substance, clarity, or meaningful sequence of the disclosure. Accordingly, the proposed revision to comment 19(e)(1)(vi)-3 would clarify that, although use of the model form H-27(A) of appendix H to this part is not required, creditors using it properly will be deemed to be in compliance with § 1026.19(e)(1)(vi)(C). (Emphasis added.) See, pg. 48.

If these provisions will affect your operations, positively or negatively, please reach out to NAFCU and let us know so that we can incorporate your feedback in NAFCU’s advocacy efforts regarding these amendments.

It’s Not Too Late to Attend NAFCU’s Risk Management Seminar…

Join us for critical compliance training in Denver during our Risk Management Seminar.  Affordable summer flights are still available from many major U.S. cities. You’ll learn firsthand how to prepare for NCUA risk-focused exams, what NCUA's Revised IRR and Adding the 'S' to CAMEL will mean for your credit union and much more. You’ll also have the unique opportunity to earn the NAFCU Certified Risk Manager (NCRM) designation, which can only be earned in-person during this event, plus 16.5 credits toward current NCRM and NCCO renewal.

ICYMI: Webinars, Resources and Enforcement Actions! O My!

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Happy Wednesday! NCUA has been issuing press releases and webinars left and right this summer. I wanted to take a moment and make sure everyone was up to date. Also, the CFPB has taken some enforcement actions and issued some new volumes of supervisory publications, which credit unions may want to be aware of.

NCUA Webinars and Resources

• On July 15, NCUA released a new video and a colorful brochure for members regarding remittance transfers. Both items are also available in Spanish.

• On August 10, NCUA will host a webinar entitled “Marketing – Effective Use of Social Media” discussing how to create, target, message and execute social media marketing. Online registration is available here. As a reminder, the FFIEC has issued guidance regarding the use of social media in its Social Media: Consumer Compliance Risk Management Guidance.

• On August 18, NCUA will host a webinar focused on its “Revised Interest Rate Risk Supervision Procedures,” and its plans for adding an “S” to CAMEL. There will be a Q&A on supervisory expectations and NCUA’s process for implementing procedures and training examiners. Online registration is available here. For credit unions who are interested, NCUA’s current resources for interest rate risk can be found here.

• Finally, on July 6, NCUA released the latest installment of its Economic Update video series, discussing the current trends, the outlook on interest rates, and the implications of Brexit.

CFPB Supervisory Publications and Enforcement Actions

• The CFPB has released issue 11 of its Supervisory Highlights, a special edition focused on mortgage servicing. The issue discussed supervisory findings surrounding loss mitigation and servicing transfers. Regarding loss mitigation, the CFPB found issues in loss mitigation acknowledgement notices, offer letters, denial notices and related communications. Regarding servicing transfers, it highlighted issues with transfer policies and procedures, especially when a loan is in the loss mitigation process.

• The CFPB also released volume 12 of its Monthly Complaint Report. This volume focused on complaints surrounding consumer loans, including auto lending. In its geographic spotlight, the Report focused on Arkansas.

• On June 29, the CFPB announced the filing of an enforcement action against BancorpSouth Bank alleging discriminatory mortgage lending practices, including redlining, charging more to similarly qualified African-American customers and implementing an explicitly discriminatory loan denial policy. As a reminder, NCUA’s Fair Lending Guide and the FFIEC Interagency Fair Lending Examination Procedures are available for credit unions seeking to comply with fair lending requirements.

• On July 14, Santander Bank entered into a Consent Order with the CFPB regarding violations in connection with its overdraft protection program. The Consent Order states that Santander Bank initiated a vigorous telemarketing campaign to enroll customers in its overdraft protection program, and misled customers regarding the nature of those sales calls and the opt-in process. The violations recited in the Consent Order included failing to obtain an affirmative opt-in and  misleading consumers about the program, including the fees involved, the consequences of not opting-in and the transactions covered by the service. Among other requirements, the Consent Order requires that Santander Bank pay a $10 million civil money penalty. Credit unions seeking to avoid Santander’s fate can consult NCUA’s Letter to Credit Unions 05-CU-03 and its enclosed Interagency Guidance on Overdraft Protection Programs.

One for the Road: FinCEN

• Yesterday FinCEN issued FIN-2016-G003, entitled Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions. The FAQs provide 26 Q&As designed to assist credit unions in understanding and implementing the new CDD requirements. Credit unions that are covered must comply by May 11, 2018.

NAFCU member credit unions with questions or looking for resources should reach out to the NAFCU Regulatory Compliance Team. We are here to help!

CFPB Supervision: Mortgage Origination and Remittances Issues

Written by Shari R. Pogach, Regulatory Paralegal

The Consumer Financial Protection Bureau (CFPB) released the tenth edition of its Supervisory Highlights report. This report provides a rundown of the bureau’s key examination findings generally completed between September 2015 and December 2015. Although much of the report discusses consumer reporting issues under the Fair Credit Reporting Act (FCRA) and its implementing regulation, Regulation V, issues with mortgage origination and remittances were also noted.

Mortgage Origination

With some exceptions, the bureau generally found prevailing compliance with the Dodd-Frank Title XIV rules. The exceptions included a lack of the required written policies and procedures under the loan originator rule, and weak compliance management systems.

Lack of Policies and Procedures

Regulation Z requires depository institutions to establish and maintain written policies and procedures for loan originator activities. These specific activities cover prohibited payments, steering, qualification requirements and identification requirements. Yet, in one or more examinations, depository institutions had not maintained such written policies and procedures, already a violation in itself. In most cases, the violations consisted of one or more “related substantive provisions of the rule,” such as a failure to comply with the requirement to include the loan originator’s name and Nationwide Multistate Licensing System and Registry identification on loan documents.

Weak Compliance Management Systems

CFPB examiners determined that a weak compliance management system allowed for violations of Regulations X and Z. A failure to allocate sufficient resources to ensure compliance with federal consumer financial law resulted in an inability to: institute timely corrective-action measures, maintain adequate systems and implement adequate preventive controls to ensure compliance and implementation of established policies and procedures.

Remittances

The bureau reported that on the whole, remittance transfer providers it examined have implemented changes to compliance management systems (CMS) in order to comply with the remittance rule under Regulation E. Still the report noted in some instances such systems were still in the early stages of development. With both bank and nonbank providers, some resources have been dedicated to compliance with the rule – with updated policies and procedures, complaint management and training programs – but the bureau also noted some of the changes were not implemented until sometime after the rule’s effective date. Examiners noted implementation gaps or systems issues with a lack of prior testing or post-implementation monitoring and audit. Such weaknesses led to consumers either getting inaccurate disclosures or, in some cases, none at all.

Violations

The CFPB reported that examiners found the following violations of the remittance rule at one or more providers:

• Providing incomplete, and in some instances, inaccurate disclosures;
• Failing to adhere to the regulatory timeframes (typically three business days) for refunding cancelled transactions;
• Failing to communicate the results of error investigations at all or within the required timeframes, or communicating the results to an unauthorized party instead of the sender; and
• Failing to promptly credit consumers’ accounts (for amounts transferred and fees) when errors occurred.

Remittance providers have been cited by the CFPB for not giving oral disclosures and/or the written results of investigations to satisfy the rule’s foreign language requirements. And, some entities were directed to review marketing materials to stop deceptive statements regarding any conditions for designated recipients to be able to access transmitted funds

“Zero-Money-Received”

Examiners also found instances where providers told consumers “that the recipients would receive zero dollars after fees were deducted.” Some consumers went ahead and completed these transactions. After being informed of such transactions, some providers went ahead and took steps to alter systems to either provide consumers with an added warning or to simply not allow the transactions to be completed. The bureau stated that while “zero-money-received” transactions were not a violation of the rule, it is continuing to compile information on such transactions.

"If You Scratch My Back, I'll Scratch Yours"... Maybe Not Says CFPB

Written by Shereefat Balogun, Regulatory Compliance Counsel

The CFPB is embroiled in an enforcement action involving RESPA Section 8, and this case is being closely monitored because of the significant impact any decision will have on the mortgage industry.  If the court accepts the CFPB’s interpretation of what constitutes a referral fee, just about any aspect of the mortgage settling business will be impacted, from loan applications and originations, to closings, and insurance on a home. In light of this significance and the growing industry concerns, here is an overview of Section 8’s regulatory requirements for credit unions involved in the mortgage business.

As way of background, in 2014, the CFPB brought an enforcement action against PHH Corp., a mortgage lender, alleging that when PHH originated mortgages, it referred consumers to mortgage insurers with which PHH had partnered. In exchange for this referral, the insurers purchased reinsurance from PHH's subsidiaries. The CFPB says this is a kickback, and thus a clear violation of Section 8. 

As you know, Section 8 of RESPA generally prohibits kickbacks and referrals. Specifically, Section 8(a) provides that no person shall give and no person shall accept any fee, kickback, or other thing of value pursuant to any oral or written agreement or understanding for the referral of a settlement service involving federally related mortgage. See, 12 U.S.C. §2607(a). “Thing of value” is broadly defined, and thus many credit unions tend to be cautious regarding real estate transactions and referrals. Regulation X, which implements RESPA, defines a “thing of value” as:

"(d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term “payment” is used throughout §§1024.14 and 1024.15 as synonymous with the giving or receiving of any “thing of value” and does not require transfer of money." 12 CFR §1024.14(d).

Regulation X also broadly defines both “agreement or understanding” and “settlement service”. With respect to “agreement or understanding,” the regulation states:

"(e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business."  12 CFR §1024.14(e)(emphasis added).

The term "settlement services," as defined in RESPA 12 U.S.C. §2602(3), includes any service provided in connection with the settlement of a loan.  Similarly, Regulation X's definition of "settlement services" contains a laundry list of activities.  

In addition to the prohibition of Section 8(a), RESPA Section 8(b) prohibits the splitting of charges for providing real estate settlement services. The section specifies:

"No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." 12 U.S.C. §2607(a).

As you can see, the definitions of some of these terms are extremely broad, and the provisions of Sections 8(a) and (b) seem very restrictive. While, these two provisions can be read to cover any type of arrangement or partnership, many players in the mortgage industry relied on Section 8(c) as a possible safe harbor… well until recently when Director Cordray expelled that notion in the PHH case.

Section 8(c), unlike the other two sections, sets forth permissive conduct. Rather than describe conduct that is prohibited, it lists several types of conduct that are permitted, so long as certain conditions are satisfied.   Indeed, Section 8(c), states:

"Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed…" 12 U.S.C. §2607(a)(emphasis added).

Similarly, Regulation X provides:

"(g) Fees, salaries, compensation, or other payments. (1) Section 8 of RESPA permits:

…

(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed…"  12 CFR §1024.14(g)(iv)(emphasis added.).

Many relied on this provision allowing the payment of a bona fide salary or compensation where services are actually performed in justifying their arrangements. However, the CFPB’s current position is that Section 8(c)(2) merely “clarifies section 8(a), providing direction as to how that section should be interpreted, but does not provide a substantive exemption from section 8(a).” See, In re PHH Corp., page 16. Director Cordray explains that in order to be lawful, payments must be bona fide, which he defined as not being tied in any way to a referral of business. This seems to be the first time that the term “bona fide” for purposes of Section 8(c) has been qualified this way. Certainly, this definition is not found in the statute or the regulation, hence the reason for the industry concern. Moreover, the Bureau’s new interpretation is a departure from other interpretations including previous guidance issued by the U.S. Department of Housing and Urban Development (HUD), which enforced RESPA prior to the CFPB.

The CFPB’s new interpretation of RESPA would essentially invalidate and make unlawful most payment arrangements. If the CFPB prevails this will definitely be a game changer. If it’s any consolation, the judges seemed to share the industry’s concerns and questioned the fairness of the Bureau’s decision to disregard HUD’s guidance and other judicial interpretations, also noting that the entire industry relied on HUD’s interpretations. NAFCU will keep you updated on any further developments.

In light of RESPA’s already restrictive language, coupled with the recent CFPB interpretation, credit unions involved in the mortgage business are advised to consult with counsel before making referrals.  Note also that Appendix B to Regulation X includes examples of the application of RESPA, which credit unions can review for additional guidance.  

Deconstructing TRID’s Application to Construction Loans: Disclosing AP Table in Single Combined Disclosures; BSA Webcast Series

Written by Shereefat Balogun, Regulatory Compliance Counsel

It has been over five months since the implementation of the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rules, yet many credit unions are still worried about disclosure requirements, particularly as they apply to construction-to-permanent loans. One issue that credit unions have had questions about is the Adjustable Payment Table under §1026.37(i) and how it should be completed if a construction-to-permanent loan is disclosed as a single transaction with one set of disclosures. Some have had some confusion as to whether the table is even required in every circumstance.

Generally, the “Adjustable Payment Table” (the “AP Table”) described in 1026.37(i) is only required if the periodic principal and interest payment may change after consummation based on a loan term other than a change to the interest rate, or the transaction contains a seasonal payment product feature. If the transaction does not include either of these loan terms, then the table should not be disclosed on the Loan Estimate.

If the creditor is required to disclose the AP Table because the periodic principal and interest payment will change after consummation, for reasons other than a change to the interest rate, or if the transaction contains a seasonal payment feature, then Section 1026.37(i)(1) through (4) requires a creditor to disclose on the Loan Estimate the periods during which the following features will be in effect: (i) interest only; (ii) optional payment; (iii) step payment; and (iv) seasonal payment product features. The periods required to be disclosed should be disclosed by describing the number of payments counting from the first periodic payment due after consummation.

In the context of a construction-to-permanent loan, if the creditor chooses to disclose this loan as a single transaction with one set of disclosures, the AP Table must be disclosed. Note that, in the construction phase of this loan, the borrower will typically make interest-only payments. Once the construction phase is complete and the permanent phase starts, the borrower will transition into making regular periodic principal and interest payments. Accordingly, with construction-to-permanent loans transactions, there will always be a payment change after consummation that will not be based on a change to the interest rate.

When a creditor elects to disclose a construction-to-permanent loan as a single transaction, the AP table is disclosed pursuant to §1026.37(i), with particular adherence to §§1026.37(i)(1) and (5). The rule provides in relevant part:

(i) Adjustable payment table. If the periodic principal and interest payment may change after consummation but not based on an adjustment to the interest rate, or if the transaction is a seasonal payment product as described in paragraph (a)(10)(ii)(E) of this section, a separate table under the master heading “Closing Cost Details” required by paragraph (f) of this section and under the heading “Adjustable Payment (AP) Table” that contains the following information and satisfies the following requirements:

(1) Interest only payments. Whether the transaction is an interest only product pursuant to paragraph (a)(10)(ii)(B) of this section as an affirmative or negative answer to the question “Interest Only Payments?” and, if an affirmative answer is disclosed, the period during which interest only periodic payments are scheduled.

…

(5) Principal and interest payments. Under the subheading “Principal and Interest Payments,” which subheading is immediately preceded by the applicable unit-period, the following information:

(i) The number of the payment of the first periodic principal and interest payment that may change under the terms of the legal obligation disclosed under this paragraph (i), counting from the first periodic payment due after consummation, and the amount or range of the periodic principal and interest payment for such payment, labeled “First Change/Amount”;

(ii) The frequency of subsequent changes to the periodic principal and interest payment, labeled “Subsequent Changes”; and

(iii) The maximum periodic principal and interest payment that may occur during the term of the transaction, and the first periodic principal and interest payment that can reach such maximum, counting from the first periodic payment due after consummation, labeled “Maximum Payment.”

12 CFR 1026.37(i)(1) and (5)(emphasis added).

As way of illustration, if the interest-only period during the 12-month construction phase has a rate that adjusts monthly, in disclosing whether there are interest-only payments as required under §1026.37(i)(1), the creditor should state “yes for your first 12 months”. Moreover, under §1026.37(i)(5)(i), the monthly principal and interest payments disclosure labeled “First Change” or “Amount” must disclose the range of minimum and maximum payments that will be made at the second payment.

Note that this general rule applies whether the construction and permanent phases have fixed rates or adjustable rates, or one phase is fixed and the other is adjustable. The key is to remember that the loan is considered a single transaction; and within that single transaction there is a change in payment after consummation as a result of the transition from construction to permanent, which therefore requires the AP Table and the corresponding disclosures under Section 1026.37(i).

On a final note, many creditors have criticized the CFPB for its lack of clear guidance on TRID’s application to construction loans and specifically cite the absence of sample forms and minimal reference to construction loans in the commentary. While some credit unions have considered whether to continue offering construction loans, TRID and Regulation Z's disclosure requirements and guidance generally apply to covered construction loans, except where otherwise mentioned. This is the case even if the guidance or rule provision is not directly on construction loans. And of course, for NAFCU members, if you have any questions on any specific disclosure requirements, please feel free to contact NAFCU’s Regulatory Compliance team, and we would be happy to address any of your specific concerns.

###

BSA: Reports & Training for CU Boards

Live Webcast: Tuesday April 19 | 2:00 p.m. – 3:30 p.m. EST

Part of the BSA Webcast Series

It’s vital to understand the roles and responsibilities of credit union board members regarding the Bank Secrecy Act (BSA). Attend this webcast to understand your board’s BSA duties such as risk assessments, policy reviews, and updates, as well as recommended additional training needs. You’ll also get tips for in-house training and learn how to properly report SARs to your board.

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

The full report is available here.

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Know the Changes: HMDA Reporting Procedures

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

Part of the HMDA Webcast Series

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

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

[...]

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

[...]

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

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

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

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

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

[...]

(h) Calculating cash to close—

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

[...]

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

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

“37(h)(1)(ii) Closing costs financed.

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

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

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

To Innovate or Not to Innovate… Ask the CFPB!

Written by Shereefat Balogun, Regulatory Compliance Counsel

Yesterday, the CFPB finalized a policy that aims to promote innovation in the financial services marketplace. Generally, the policy establishes a process for companies to apply for a “no-action letter” from the Bureau. The no-action letter essentially indicates that the Bureau has no present intention to recommend or initiate any enforcement or supervisory action with respect to the company’s product or service under consideration.

The new policy is designed to enhance regulatory compliance in instances where innovative financial products or services may be beneficial to consumers, but there is uncertainty as to whether or how the product fits in the current regulatory landscape. The CFPB acknowledges that companies may be discouraged from developing new innovations where the product or service is not explicitly addressed or even contemplated under existing law. Accordingly, the Bureau has developed this policy as a means to reduce such regulatory uncertainty.

The policy has five sections:

• Section A describes information that should be included in requests for a No-Action Letter

• Section B describes types of responses the staff may provide to requests for a No-Action Letter

• Section C lists factors the staff may consider in deciding whether to provide a No-Action Letter

• Section D describes the general content and limitations of No-Action Letters

• Section E describes disclosure of data received from entities who have requested No Action Letters

Any company considering applying for a “no-action letter” should note the following:

• No-action letters will not be widely available; rather, they will be provided only in exceptional circumstances and upon a “thorough and persuasive demonstration of the appropriateness of such treatment”;
• No-Action Letters are generally limited to emerging products involving substantial regulatory uncertainty. They are not intended for either well-established products or purely hypothetical products that may be offered in the future;
• The policy requires a substantial amount of information to be included in the application. It also makes clear that the Bureau may require additional information if necessary;
• The policy is not a waiver of any law or regulation, and will not give a requesting entity an exemption from complying with any statutory or regulatory rules;
• The no-action letters are not binding. In other words, the letters will not bind courts or other third parties, including consumers or other regulators, who may challenge the product or service;
• No-action letters will be subject to modification or revocation at any time at the discretion of the Bureau, and may be conditioned on specific undertakings by the company;
• When the Bureau issues a no-action letter, it generally will publish the letter, along with a version or summary of the company’s request, on the Bureau’s website.

As a reminder, this policy will only be applicable to credit unions directly supervised by the CFPB- those with over $10 billion in assets. The policy has been submitted to the Federal Register and is available at: http://files.consumerfinance.gov/f/201602_cfpb_no-action-letter-policy.pdf

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CFPB Releases Monthly Complaint Report and Notes Debt Collection, Mortgage, and Credit Reporting as Top Complaints; DMDC Extends MLA Database Deadline; Free Webcast - Breaking Down the NCCO Exam

Written by Shereefat Balogun, Regulatory Compliance Counsel

On January 28, 2016, the CFPB released its Monthly Complaint Report for December 2015, which provides a high-level snapshot of trends in consumer complaints. It is important to keep in mind that credit unions under $10 billion are not included in the Consumer Complaint Database, which forms the basis of the monthly reports. Notwithstanding, the reports can be a useful tool, as they can help credit unions evaluate which products and services are more problematic and thus, should be addressed in order to avoid or mitigate regulatory risks.

As of January 1, 2016, the CFPB has handled about 790,000 consumer complaints, including approximately 20,3000 complaints in December 2015. The Report notes that:

• Complaints related to prepaid products rose from 138 complaints between October- December 2014 to 459 complaints between October-December 2015, representing a 233% increase;

• For the 28^th consecutive month, the CFPB handled more complaints about debt collection than any other type of complaint. Debt collection complaints represented about 31% of complaints in December 2015.

• Debt collection, mortgage, and credit reporting complaints continue to be the top three most-complained-about consumer financial products and services, which together represented 68% of all complaints submitted in December 2015.

• Equifax, Transunion, and Experian were the most-complained-about companies for August-October 2015.

As stated previously, credit unions under $10 billion are not included in the Consumer Complaint Database.  Rather, the CFPB will forward any complaints from these credit unions to NCUA, and credit unions will need to follow NCUA's procedures for responding to member complaints.

You can view the CFPB’s Monthly Complaint Report here: http://files.consumerfinance.gov/f/201601_cfpb_monthly-complaint-report-vol-7.pdf

You can view the CFPB’s Consumer Complaint Database here: http://www.consumerfinance.gov/complaintdatabase/

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MLA Database Update. As NAFCU reported earlier this week, DMDC agreed to extend the deadline to seek direct access to the MLA database until February 15, 2016. Those credit unions who express interest in the direct connect option will receive a questionnaire in a response email. DMDC set a February 19, 2016 deadline for interested credit unions to complete and return this questionnaire. If you have any questions about this deadline or the database, please email Brandy Bruyere, NAFCU’s Director of Regulatory Compliance, [email protected].

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Free Webcast - Breaking Down the NCCO Exam

Live Webcast: Tuesday, February 9 | 3:00 p.m. – 4:00 p.m. EST

As a serious compliance professional, you either have, or are thinking about earning, your NAFCU Certified Compliance Officer (NCCO) designation. This challenging but comprehensive exam will prove that you have a solid understanding of the major regulations that govern credit union operations. Join this free webcast for an in depth look at how to best prepare for the NCCO exam and utilize the material. NAFCU’s very own Director of Regulatory Compliance and Director of Education will guide you through learning the best approach for earning this prestigious designation.

Consumer Compliance Outlook – New Flood Insurance Requirements; CFPB Assists with Application of TRID to Construction Loans; Regulatory Affairs Webcast: Update from Washington; Programming Note

Written by Shereefat Balogun, Regulatory Compliance Counsel

Consumer Compliance Outlook. The Third/Fourth Quarter 2015 issue of the Federal Reserve’s Consumer Compliance Outlook is now available. Articles in this issue, which focuses on flood insurance compliance, include:

• Agencies Issue Final Rule for New Flood Insurance Requirements
• Flood Insurance Compliance Requirements

The Editors noted that the issue is devoted to flood insurance compliance because flood insurance requirements regularly appear among the top-cited violations by examiners.

As a reminder, on July 21, 2015 NCUA, along with several other regulators, jointly published a final rule to implement new flood insurance requirements enacted by the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA). We previously blogged about the topic earlier here.

Generally, the rule requires that credit unions escrow premiums and fees for flood insurance for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after January 1, 2016, unless the credit union or a loan qualifies for a statutory exception.

We receive a lot of compliance questions relating to the statutory exceptions. Generally, our members want to know which loans and which lenders are exempted from the new flood insurance requirements. The rule provides the following exceptions to the escrow requirements:

• The loan is primarily for business, commercial or agricultural purposes;
• The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage.
• The flood insurance coverage is provided by a policy that meets the requirements of 760.3(a) and is provided by a condominium association, cooperative, homeowners association, or other applicable group as a common expense;
• The loan is a home equity line of credit;
• The loan is a nonperforming loan that is 90 or more days past due; or
• The loan is a term of less than 12 months.

Moreover, the rule includes a “small lender” exception. The rule exempts any credit union with total assets of less than $1 billion (as of December 31^st of either of the two previous calendar years) that, as of July 6, 2012,:

• was not required under federal or state law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and

• did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for loans secured by residential improved real estate or a mobile home.

The article on Agencies Issue Final Rule for New Flood Insurance Requirements provides an excellent summary of the flood insurance escrow requirements. The issue also contains a resource page with helpful flood insurance links.

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CFPB Assists with Application of TRID to Construction Loans. Earlier this week, the CFPB published a fact sheet on how construction loans are affected by TILA/RESPA Integrated Disclosure (TRID) rules. The fact sheet notes that construction loans are:

• covered by the “know before your owe” mortgage disclosures unless the loans are open-end transactions or are for a commercial purpose, and
• covered by existing provisions under Regulation Z, including the Loan Estimate and Closing Disclosure rule.

The fact sheet also covers how to disclose a construction loan with permanent financing as either one transaction or more than one transaction.

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NAFCU Regulatory Affairs Department: Update from Washington

Live Webcast: Thursday, January 28 | 2:00 p.m. – 3:30 p.m. EST

Part of the CFPB/NCUA Webcast Series

The industry’s best Regulatory Affairs team is your direct connection to credit union regulatory updates and rulemakings brought by the CFPB, NCUA and other regulators. Through this webcast you’ll receive an update on what’s new coming out of Washington, and how it could affect your most vulnerable departments. Learn about overdraft, field of membership, the future of payments and other essential topics.

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