NAFCU Compliance Blog

Obtaining A Consensual Security Interest For Credit Cards

Written by Stephanie Lyon, Regulatory Compliance Counsel

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

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

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

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

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

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

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

"Friday Fun: Regulatory Requirements for Online Account Openings"

Written by: Andre' B. Cotten, Regulatory Compliance Counsel

Greetings, Compliance Friends! Opening accounts online is a major convenience for members. However, for compliance officers, the online account opening process is riddled with potential pitfalls. For example, when and how does the credit union provide the account opening disclosures. Today's blog is meant to be a high-level review of some of the relevant requirements credit unions may want to consider when establishing online account opening policies and procedures.

Bank Secrecy Act

From a BSA standpoint, opening accounts online can represent risks related to a credit union's Customer Identification Program (CIP) and Know Your Customer requirements. Generally, a credit union's CIP program is based on its own risk assessment and not prescriptive requirements. Although, from a CIP perspective, members opening accounts online is generally considered higher risk. From NAFCU's understanding, many financial institutions utilize complex vendor software in order to ensure the CIP requirements are met when individuals seek to open accounts online.

The FFIEC BSA/AML exam manual discusses "non documentary" methods of verifying identity that may also be helpful to the credit union. Note, the BSA requires that the credit union know the member's identity with reasonable certainty and have the member's name, address, date of birth and identification number so that guides what needs to be verified.

NCUA

However, a consumer must fall within the field of membership before they can be admitted as a member in the credit union. This determination will depend on the credit union's statement of its field of membership, the clause of the statement relied on by the potential member, and the credit union's policies and procedures.

Note, Article II, Section 2 of NCUA's FCU Bylaws requires a member to sign an application for membership. The credit union might verify this language in its own bylaws, and if it does appear, consider electronic signatures under the E-SIGN Act or whether it will require a member to come in and provide a wet signature for the signature card and to establish insurance under Part 745.

As an additional reference, NCUA Opinion Letter 2004-0543 discusses electronic signatures in the membership context.

E-SIGN

The E-Sign Act requires credit unions to receive the member's affirmative consent to receive electronic records. See, 15 U.S.C. § 7001(c). . As an industry standard, it seems many credit unions require members to comply with the E-SIGN consent and procedures when registered for online banking to give legal effect to the disclosures transmitted to the members  through the online banking platform.

For more information, NCUA issued a Risk Alert soon after the E-SIGN Act became effective in March 2001. Here is an additional link for your reference: Consumer Compliance Outlook 4Q Article on ESIGN .

Regulation E

The determination whether a credit union is required to provide additional disclosures when a member establishes an account online depends on what other types of products or services the member is requesting. For example, if the member requests a debit card to execute electronic fund transfers, then the credit union would need to comply with Regulation E.

Regulation E requires initial disclosures be provided "at the time a consumer contracts for an electronic fund transfer service or before the electronic fund transfer is made involving the consumer's account." Below are some Regulation E links of interest:

• Section 1005.4 contains general disclosure requirements and references providing disclosures electronically (E-SIGN)
• Section 1005.7 contains requirements for initial account disclosures
• Supplement I to Part 1005 contains commentary to both sections that clarify requirements
• Appendix A contains Model Forms for Regulation E – Model Form A-2 applies to initial account disclosures

Truth in Savings

NCUA's Truth in Savings Rule has a similar requirement that specifies that credit union must provide account opening disclosures before the account is opened or a service is provide din connection with the account. See, 12 C.F.R. § 707.4(a)(1)(ii).

Here are some Truth in Savings links of interest:

• Section 707.4 contains the requirements for delivery or initial account disclosures
• Section 707.3 describes how disclosures can be provided electronically (i.e., following E-SIGN) and the relationship to Regulation E
• Appendix C contains commentary to both sections that clarify requirements
• Appendix B contains Model Forms for TIS – Model Form B-1 applies to initial account disclosures

Privacy

Under the GLBA, Initial Privacy Notices and Opt-Out Notices can be provided electronically. The notieces can be delivered pursuant to the E-SIGN Act, or  in certain circumstances, the notices can be delivered when the consumer is conducting transactions electronically. Under section 1016.9(b)(1)(iii), it is considered valid delivery to post the privacy notice on a website and require the consumer to acknowledge receipt of the notice as a necessary step to obtaining a particular financial product or service.

Another privacy consideration for online banking is the Children’s Online Privacy Protection Act (COPPA). COPPA imposes certain requirements on operators of websites or online services directed to children. Credit unions are subject to COPPA if they operate a website or online service directed to children, or have actual knowledge that they are collecting or maintaining personal information from a child online. Making COPPA determinations generally requires an analysis of the specific facts and circumstances surrounding a credit union’s online activities against the requirements of COPPA. Thus, a credit union may want to work with local counsel to see if COPPA applies. The FTC’s website has an excellent overview of COPPA.

State Law

Lastly, there may be state law considerations. An online banking agreement establishes contractual obligations between the credit union and the member. The credit union may consider consulting with local counsel to develop a comprehensive agreement that includes, but is not limited to: balance and transaction information; password creation and maintenance; access authorization; and technical assistance.

Additional Resources

Below are a few resources on authentication, cybersecurity, and other issues related to online banking:

• NCUA Official Sign is required on a webpage where a credit union accepts deposits or opens accounts under section 740.4(a). Downloadable graphics of the sign are available here.
• Regulation CC requires the credit union to provide disclosures relating to funds availability “before opening a new account,” under section 229.17.
• NCUA Letter to Credit Unions 2011-CU-09 discusses Online Member Authentication Guidance
• FFIEC IT Booklets provides guidance on cybersecurity considerations.

CFPB Supervisory Highlights; More HMDA Guidance

Written by: André B. Cotten, Regulatory Compliance Counsel

Hello, Compliance Friends. We are counting down the days to San Diego. The NAFCU Compliance Team will be hosting our Regulatory Compliance School and Regulatory Compliance Seminar the week of October 9^th.

 On September 12, 2017, the CFPB issued its latest supervisory report sharing a plethora of observations from recent examinations and other supervisory activities. The report covers issues observed by the Bureau in the areas of automobile loan servicing, credit card account management, debt collection, deposits, and fair lending. Other topics, such as small-dollar lending, collection, mortgage origination, and mortgage servicing were also addressed. Today's blog will provide some of the highlights of the Bureau's findings.

Automobile Loan Servicing. In recent examinations, CFPB examiners reviewed how servicers are overseeing repossession agents and how repossessions are conducted. The Bureau's report alleges that some servicers are repossessing vehicles after the repossession was cancelled due to a formal extension agreement or the borrower has made a payment.

In these instances, the servicers wrongfully coded the account as remaining delinquent, customer service representatives did not timely cancel the repossession order after borrowers made sufficient payments or entered agreement with the servicer to avoid repossession, or repossession agents had not checked the documentation before repossessing and thus did not learn that repossession had been cancelled.

As a result of the examiner's findings, the servicers implemented a system that requires repossession agents to verify that the repossession order is still active immediately prior to repossessing the vehicle, for example, through a specially designed mobile application for that purpose.

Credit Card Account Management. The Bureau examiners noted that generally their supervised entities are complying with Federal consumer financial laws.

However, CFPB examiners observed that one or more credit card issuers violated Regulation Z by failing to provide the requisite tabular disclosures with the account opening materials provided to numerous cardholders. The entities in question acknowledged the violations with examiners and initiated a review to ensure that the errors were limited, the root causes were identified, and corrective actions were developed.

CFPB Supervision also reviewed the calls between customer service representatives and consumers. The review revealed customer service representatives routinely veering from or abandoning their scripts, which resulted in misrepresentation and higher fees for consumers. To mitigate the deceptive practice, entities established more effective controls over communications to consumers, ensured representatives informed consumers of free payment options prior to authorization of an expedited phone payment and reimbursed fees to consumers impacted by the deceptive representations about the costs and availability of pay-by-phone options.

Debt Collection. The CFPB examiners noted that some entities made false representations to consumers about the effect on their credit score of paying a debt in full rather than settling the debt for less than the full amount. As the CFPB explained in a 2013 bulletin, representations about the impact of paying a debt on a consumer's credit score may be deceptive. The bulletin states that "in light of numerous factors that influence an individual consumer's credit score, such payments may not improve the credit score of the consumer to whom the representation is being made. Consequently, debt owners or third-party debt collectors may well deceive consumers if they make representations that paying debts in collection will improve a consumer's credit score." As a result of these findings, the entities in violation amended training materials to reflect this Bureau's guidance.

Deposits. The CFPB continues to examine financial institutions for compliance with Regulation E as well as review for any unfair, deceptive, or abusive acts or practices (UDAAPs) in connection with deposit accounts.

The CFPB examiners noted that several institutions are engaged in unfair acts or practices by placing hard holds on customer accounts to stop all activity when the institutions observed suspicious activity. These holds resulted in the consumers' accounts being locked, resulting in payments not being honored, deposits being rejected, and the consumer lacking access to his or her funds for as long as two weeks. The examination also found that some institutions also failed to clearly, consistently, and promptly communicate the nature and status of these holds.

As a result, the CFPB directed the institutions to cease unnecessarily placing hard holds on consumer deposit accounts and to develop and implement policies and procedures to clearly, consistently, and promptly communicate with consumers with respect to hard holds place on their accounts.

In addition, the CFPB's Supervisory Highlights also addressed deceptive statements about overdraft protection products. Examiners identified institutions engaged in a deceptive act or practice by misrepresenting their opt-in deposit overdraft protection products when answering inbound telephone calls from consumers, including that:

• The overdraft protection product applied to check, automated clearing house (ACH), and recurring bill payment transactions;
• The overdraft protection product allowed a consumer to withdraw more money than the daily ATM cash withdrawal limit and be subjected to only one overdraft fee; and
• The overdraft protection product would take effect on the same day as enrollment.

Supervision directed the depository institutions in violation to cease misrepresenting features of their overdraft protections products.

Fair Lending. In general, the CFPB examiners found deficiencies in oversight by board and senior management, monitoring and corrective action processes, compliance audits, and oversight of third-party service providers.

The Bureau's review also revealed data quality issues, which were related to a lack of complete and accurate loan servicing records, made certain fair lending analyses difficult or impossible to perform. The examiners attributed these data quality issues to significant weaknesses in compliance management system related policies, procedures, and service provider oversight.

These are just some of the highlights from the CFPB's report. The full report is available here.

More HMDA Guidance

On September 28^th, the CFPB released HMDA implementation materials to support the recently issued 2017 HMDA rule. The Bureau has updated the 2018 Institutional Coverage Chart, the 2018 Transactional Coverage Chart and the Key Dates Timeline.

You can find the materials here on the CFPB's HMDA implementation webpage.

Overdraft and Bounce Protection Programs– Some Frequently Asked Questions

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

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

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

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

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

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

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

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

Best Practices

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

[…]

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

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

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

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

**

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

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

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

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

Written by Stephanie Lyon, Regulatory Compliance Counsel

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

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

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

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

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

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

***

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

Deposit Reconciliation Practices (Letter to Credit Unions 16-CU-04)

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Last month, the NCUA, and four other regulatory agencies, issued interagency guidance on member account deposit reconciliation practices.  See Letter to Credit Unions 16-CU-04.  The guidance states that some financial institutions are not appropriately reconciling “credit discrepancies.”  These “credit discrepancies” arise when a consumer inaccurately records the amount of money being deposited on a deposit slip (or mobile app when using Remote Deposit Capture) and the financial institution fails to properly reconcile the discrepancy.  For example, if a consumer deposited $110 into an account, but indicated on the deposit slip that only $100 was deposited, it is the regulators expectation that $10 is credited to the consumer’s account.

While not specifically stated, the guidance comes after regulators took action against Citizens Bank for improper deposit reconciliation practices.  In the consent order, the CFPB and other bank regulators alleged that Citizens Bank engaged in an unfair deposit practices because it failed to credit consumers the full amount of their deposits when the deposit slip stated an amount that was less or greater than the actual amount of cash and checks deposited.  The regulators also asserted that Citizens’ practices were deceptive because the bank’s account agreements stated that consumer deposits were subject to verification, thereby implying that Citizens Bank would take steps to ensure consumers were credited with the correct deposit amount.  In practice, however, discrepancies were corrected only if the amount indicated was over or under a certain dollar threshold ($50.00 prior to September 2012, and $25.00 thereafter).  Over a six-year period, the CFPB alleged that Citizens Bank under credited consumers accounts by approximately $12.3 million. 

This guidance does not change existing law, but rather emphasizes that financial institutions should ensure deposit reconciliation policies and practices are compliant with existing law.  The guidance highlights that failing to properly implement and carry out proper deposit reconciliation practices, financial institutions may be violating the Expedited Funds Availability Act, which is implemented by Regulation CC, Unfair and Deceptive Acts and Practices, which is enforced under the FTC, and Unfair, Deceptive, Abusive Acts or Practices, which is enforced by the CFPB. 

With regard to Regulation CC, the guidance points out that financial institutions are required to make funds available in transaction accounts within prescribed time limits.  For example, under Regulation CC certain check deposits must be made available for withdrawal the business day after the banking day on which they were received.  Failure to reconcile “credit discrepancies” within these time limits may violate Regulation CC, as consumers are unable to access the correct amount of funds that they are entitled within the time period outlined by the regulation. The guidance acknowledges that under limited circumstances items cannot be reconciled.  With the exception of an item being severely damaged, the guidance fails to provide examples of these limited circumstances. 

Going forward, credit unions should ensure that deposit reconciliation policies and practices are designed to reconcile discrepancies within regulatory timeframes.  Furthermore, disclosures made to members about the credit union’s deposit reconciliation policies and practices should be accurate.  Credit unions may want to consider implementing effective compliance management systems that include appropriate policies, procedures, internal controls, training, and oversight and review processes to ensure “credit discrepancies” are identified and corrected within a timely manner.

Two Utes Walk Into a Credit Union to Open Accounts…

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

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

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

“Article XV. Minors

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

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

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

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

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

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

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

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

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

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

Part of the Risk Webcast Series

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

Rates They Are A-Changin’ – Disclosure Requirements for Variable Rate Products

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans! With the Federal Open Market Committee (FOMC) largely expected to announce an increase in the federal-funds rate today, many of you may be wondering what obligations credit unions have under federal law to inform members should rates on some variable-rate products increase. This blog post covers some of those questions by taking a look at NCUA’s Truth in Savings Rule and Regulation Z.

Before diving into these rules, keep in mind that share accounts and consumer credit plans are, at their base, contracts between a credit union and its membership that may be subject to various state and federal requirements outside of the scope of either Truth in Savings or Regulation Z. When contemplating a change in interest rates, the credit union’s agreement with the member will determine when the credit union can change rates on existing accounts.

Truth in Savings (TIS)

TIS rules regarding subsequent disclosures require 30 calendar days’ advance written notice for some changes to share accounts. However, section 707.5(a)(1) explicitly exempts variable-rate changes. Moreover, the rule only requires disclosure of changes that are adverse to the interests of the member. Therefore, an increase in the dividend rate and corresponding annual percentage yield would not be required to be disclosed in advance.

Regulation Z

For open-end consumer credit plans, such as credit cards, unsecured loans, and home equity plans, Regulation Z does not require credit unions to provide members with change-in-terms notices before rate increases under properly disclosed variable-rate plans. 12 C.F.R. § 1026.9(c)(2)(v)(C). For this exception to the advance written notice requirement to apply, the rate change must be based on a publicly available index that is not under the credit union’s control. Official Interpretations of Regulation Z state that an index is publicly available if the member can independently obtain and use it to verify the annual percentage rate applied to the account.

The commentary provides examples of certain circumstances where the index will be considered to be under a credit union’s control such as when the index is the credit union’s own prime rate or cost of funds. Another example is where the contract specifies a rate floor that does not permit the variable rate to decrease consistent with the index. It is worth noting, however, that the commentary does allow a rate ceiling that does not permit the variable rate to increase beyond a certain threshold. Finally, an index will be considered to be under a credit union’s control where the credit union has the authority to pick the index to be used.

The commentary also notes that the change must be as a result of a change in the index, and not a change in the margin used to determine the variable rate. For example, changing the margin from LIBOR + 2.50% to LIBOR + 3.00%, would not be considered an increase “due to the index” and therefore would require additional disclosures. For credit card accounts, changing the margin would also trigger the member’s right to reject the proposed changes.

For adjustable-rate mortgages (ARMs), Regulation Z requires credit unions to provide disclosures in connection with the adjustment of interest rates that result in corresponding adjustment to the payment. 12 C.F.R. § 1026.20(c). The disclosures should be provided to members at least 60 days but no longer than 120 days before the first payment at the adjusted level is due. For ARMs with uniformly scheduled rate adjustments, such as an adjustment every 60 days, credit unions must provide disclosures at least 25 days but no more than 120 days before the first payment at the adjusted level. This rule also applies to ARMs originated prior to January 10, 2015 in which the adjusted interest rate and payment are calculated based on a date that is less than 45 days prior to the adjustment date.

It is important to note that changes that occur within the first 210 days of the closing do not trigger advance notice requirements because homeowners will have received notices of the change at closing. 12 C.F.R. § 1026.20 (d). However, if the first adjustment to an ARM occurs within 60 days of consummation and the new interest rate disclosed at consummation was an estimate, the disclosures must be provided to members as soon as practicable but no less than 25 days before the first payment at the adjusted level is due.

***

Cats and Christmas Trees: My wife and I recently put up our Christmas tree. While doing so, Hazel, the younger of our two cats decided that she wanted to help out. We adopted her from Meow Stories, a local cat rescue in Fredericksburg, VA and haven’t been happier. Her brother, Max, seems pleased to have a friend in his own haughty, cat-appropriate way.

 

 

DOJ’s “Operation Choke Point” Targets Banks’ Indirect Relationships with Payday Lenders

Written by Brandy Bruyere, Regulatory Compliance Counsel

In a move aimed at cracking down on payday lenders, the Department of Justice (DOJ) launched an investigation last year called “Operation Choke Point.” DOJ is probing whether banks allowed third-party payment processors working on behalf of payday lenders to illegally access billions of dollars from consumer checking accounts.

In essence, Operation Choke Point is an attempt to cut off some payday lenders’ “back door” entrance to traditional banking services. Like many merchants, payday lenders often use third-party payment processors to debit their customers’ checking accounts. The third-party payment processors, in turn, establish relationships with financial institutions. This allows payday lenders to indirectly access the Automated Clearing House (ACH) network to receive payments.

So what happens when a bank has an agreement with a third-party payment processor, but that third-party does business on behalf of a payday lender who is breaking the law? As it turns out, without proper due diligence, these agreements could be quite expensive for targeted financial institutions.

In its first Operation Choke Point action, DOJ filed a lawsuit against Four Oaks Bank (Four Oaks) of North Carolina. The various allegations included violations of Customer Identification Program requirements under the Bank Secrecy Act and allowing improper access to the ACH network. According to the complaint, Four Oaks worked with a third-party payment processor called TPPP-TX, which primarily represented payday lenders. Some of these payday lenders had rates of returned transactions that exceeded 30%, over 21 times higher than the national average of 1.38%. DOJ claimed that the Bank went so far as to design its internal policy for third-party payment providers to accommodate TPPP-TX despite these “extraordinarily high” return rates. Four Oaks was also accused of failing to properly identity foreign payday lenders accessing customer accounts via TPPP-TX.

Reports indicate that DOJ and Four Oaks already reached a tentative $1.2 million settlement in this case. Two members of Congress sent a letter to Attorney General Eric Holder expressing concerns about the investigation’s impact on legitimate payday lending business operations. While many credit unions do not work with third-party payment processors, this is a good reminder that third-party relationships come with additional compliance concerns. Here are some resources about managing risks stemming from relationships with third-parties including payment processors:

• NCUA Letter to Credit Unions, “Evaluating Third Party Relationships,” 07-CU-13
• NCUA's Third Party Relationships Questionnaire
• FFIEC’s BSA/AML Examination Manual, “Third-Party Payment Processors Overview”
• FinCen Advisory, “Risk Associated with Third-Party Payment Processors,” FIN-2012-A010
• FDIC Financial Institution Letter, “Payment Processor Relationships,” FIL-3-2012

***

Eye on the Olympics. Speaking of choking, I don’t know about the rest of you, but I’m a bit of a sucker for the Olympics. Maybe it’s the combination of patriotism and pageantry. Or maybe it’s that I experience a strange sense of joy watching people careen down a mountain headfirst on a tiny sled. Anyway, while figure skating is not normally my personal favorite, 19-year-old Jason Brown is an athlete to watch. Here is Jason’s impressive performance that helped earn him a trip to Sochi.

Can a FCU use the term CD or Certificate of Deposit?; Oh No; Oh Yeah

Written by Steve Van Beek

Quite a few eagle-eyed compliance professionals wrote in about the July NCUA Report and, in particular, the article from the Office of Examination and Insurance entitled Credit Unions Shouldn't Overlook Early Withdrawals of CDs:

"One commonly overlooked area in interest-rate and liquidity risk analysis is the modeling of early withdrawals of certificates of deposit (CDs). While many credit unions will have nonmaturity share decay rate assumptions incorporated into their analysis, they rarely factor in the risk associated with early CD withdrawals because many believe that the early withdrawal penalties associated with their CDs will discourage members from cashing in their CDs prior to maturity. This line of thinking may have been reasonable and defensible prior to 2007 when interest rates—even on short-term CDs—were near 5 percent. However, it probably would not pass muster in today’s extremely low interest-rate environment." (emphasis added).

NCUA's usage of certificate of deposit and CD brought up the question of whether federal credit unions are still prohibited from using those terms. The answer is found in the Official Staff Commentary to 12 CFR 707.2(a):

"5. Use of synonyms. Generally, it is not the purpose of part 707 to prohibit specific descriptive terms for accounts. For example, credit unions can use adjectives and trade names to describe accounts such as “Best Share Draft Account,” or “Ultra Money Market Share Account.” Synonyms for share, share draft, money market share, and term share accounts may be used to describe various types of credit union share and deposit accounts as long as the synonym is accurate and not misleading and, for account disclosures, is used in conjunction with the correct legal term. For example, the following synonyms may be used:

i. The term “checking account” may be used to describe share draft accounts.

ii. The term “money market account” may be used to describe money market share accounts.

iii. The term “savings account” may be used to describe regular share and share accounts.

iv. The terms “share certificate,” “certificate account,” or “certificate” may be used to describe share certificates and other dividend-bearing term share accounts.

v. However, under no circumstances may a credit union describe a share account as a deposit account, or vice versa. For example, the term “certificate of deposit” or “CD” may not be used to describe share certificates and other dividend-bearing term share accounts. Similarly, the terms “time account” (used in Regulation DD, 12 CFR 1030.2(u)) and “time deposit” (used in Federal Reserve Board's Regulation D, 12 CFR 204.2(c)) may not be used to describe term share accounts." (emphasis added).

Why is certificate of deposit or CD prohibited for FCUs? The Official Staff Commentary to 12 CFR 707.2(i) helps explain:

"(i) Dividend and Dividends

1. General. Member savings placed in share accounts are equity investments, and the returns earned on these accounts are dividends. Federal credit unions may only offer dividend-bearing and non-dividend-bearing share accounts. State-chartered credit unions may offer both share and deposit accounts if permitted by state law. State law, including without limitation regulations and official interpretations, will determine if returns earned in accounts in state-chartered credit unions are dividends." 

Hopefully that helps clear things up a bit for everyone! 

***

Nationals Win! Yesterday was NAFCU's summer staff outing - the Washington Nationals versus the Pittsburgh Pirates. Everyone had a great time and I wanted to share my two favorite photos (featuring the former Compliance Guy) from yesterday which accurately sum up the game.

Below is the reaction when the Nationals blow a 4-run lead in the top of the ninth:

But, luckily, Bryce Harper came through with a 2-run walk-off home run in the bottom of the ninth - leading to this reaction!

Excellent use of the rally cap! Have a great weekend!

Today's Reports are Tomorrow's Regulations: Overdraft Edition

Written by Steve Van Beek

On Tuesday the CFPB issued a Study of Overdraft Programs which outlines their findings of studying the overdraft market.

The Study was supplemented by the following materials:

• Press Release: CFPB report raises concerns about impact of overdraft practices on consumers

• Prepared Remarks: Director Richard Cordray on overdraft report press call

• 3-Page Fact Sheet: CFPB report raises concerns about impact of overdraft practices on consumers

For compliance officers and risk managers, I'd start with the Fact Sheet and then dive into Cordray's speech and then the Study to get an idea of where the CFPB is heading next on overdrafts.

***

Here are a couple of items that stood out to me from Cordray's remarks:

"Our report today examined overdraft practices at some of the country’s larger financial institutions and found wide variations across them when it comes to overdraft opt-in rates and costs. At some institutions, more than 40 percent of new customers were opting in for overdraft coverage; at others, it was less than 10 percent. The gap may reflect differences in the substance of overdraft programs, or differences in customer base, or differences in marketing approaches. On this point, we are interested to dig in and learn more about the reasons why." (Emphasis added).

What is your credit union's opt-in rate? How are you marketing your overdraft programs?

"A second takeaway is that financial institutions have very different policies, procedures, and practices that can be highly complex and difficult for consumers to understand, yet greatly affect whether and how often they will incur overdraft fees...Some charge no overdraft fees on items under a certain amount (say, for example, a transaction of $5 or less); others do not charge if the total amount of the net overdraft at the end of the day is under a certain amount. At still other institutions, if you miss by as little as a penny, you may incur a hefty overdraft fee. Predicting or planning around these results can be highly complex." (Emphasis added).

Does your credit union have a de minimis exception for overdrafts?

According to the recent Pew Trusts report, 22 of the largest 36 banks had minimums before an overdraft would be charged:

One change suggested in the Pew Report was to add a "reasonable and proportional" limit on overdraft fees. In other words, if a member overdraws by $5 - you'd be limited to a $5 overdraft fee. Similar to the existing restrictions on penalty fees for credit cards under 12 CFR 1026.52(b)(2).

Which Regulatory Changes Are Coming Next?; Seminar in Nashville

Written by Steve Van Beek

Pew Charitable Trusts Report. If you haven't seen the recent Pew Report - Checks and Balances: Measuring checking accounts' safety and transparency - be sure to take a look. Pew has numerous recommendations to the CFPB, including:

Disclosure Policies

• Require depository institutions to provide information about checking account terms, conditions, and fees in a uniform, concise, easy-to-read format that would be available online and in financial institutions' branches.
• Require depository institutions to provide accountholders with clear, comprehensive terms and pricing information for all available overdraft options when a customer is considering opting in to a plan.

Overdraft Policies

• Require that overdraft penalty fees be reasonable and proportional to the institution's costs in providing the overdraft loan or to the size of the violation.
• Require depository institutions to post deposits and withdrawals in a fully disclosed, objective and neutral manner, such as in chronological order, that does not maximize overdraft fees. 

While these are recommendations at this point, there is a definite possibility the CFPB moves on amending checking account disclosures in the next year. At a minimum, be sure to pass this report along to others at your credit union - paying special attention to the suggested Model Disclosure Box on page 9 of the PDF (page 7 of the report). Would your forms provider be able to recreate that disclosure? How long would it take? At what cost? 

While Pew's Report looks at 36 of the 50 largest banks, the recommended changes are meant for all depository institutions - including credit unions. 

***

Nashville, Tennessee. NAFCU's 2013 Regulatory Compliance Seminar will be held October 22-25 in Nashville, Tennessee. Details are now available, including:

• Program-at-a-Glance

• Featured Presentation - What Does Having a Culture of Compliance Mean to Your Credit Union?

We hear again and again about the importance of fostering a culture of compliance. What exactly does that mean? Why should you invest the time and effort into creating such a culture? Join experts David A. Reed and Rusty Vellek to learn how to know if you have achieved a culture of compliance at your credit union. Also explore how to gain buy-in from all departments to support the notion of a culture of compliance.

• Detailed Session Descriptions

• Experienced Speakers

We hope to see you there! Be sure to sign-up by August 23 to Save $100!

Regulatory Burden: Update the Regulations, Please!

Written by Steve Van Beek

I have an irregular blog post series where I highlight specific examples of unnecessary regulatory burden.  You can see past blog posts at the bullets below:

• Regulatory Burden: Piles of Old Guidance

• Regulatory Burden: Short-Term

Regulatory Burden - Update the Regulations, Please!  Today I want to look at another form of regulatory burden. And, I'm going to use three different regulators as examples (equal opportunity!) The general gist is that when credit unions look at the regulations - they should be accurate. When Congress changes the law, regulators have an obligation to update their regulations so that entities they regulate - including credit unions - can rely on those regulations. If the regulations aren't updated promptly, the result is a textbook case of unnecessary regulatory burden.

***

Example 1 - Consumer Financial Protection Bureau. The CFPB has certainly been busy. However, I'd be shocked if they didn't notice that President Obama signed H.R. 4367 on December 20, 2012. This law removed the federal requirement for the "on the machine" ATM fee disclosures under the Electronic Funds Transfer Act (and implemented by Regulation E). If the CFPB did miss this, they should subscribe to the blog as they would see we were "hopeful" they would take swift action:

"Regulation E implements the EFTA and hopefully the CFPB will move very swiftly to amend Regulation E to ensure that everyone is aware of the change.

...

Note:  The removal of the requirement will occur after President Obama signs the bill and enacts it into law.  Thus, credit unions' litigation and compliance risk will reduce at that point.  The CFPB moving quickly to amend Regulation E and clarify the remaining requirement will be the icing on the cake.  Hopefully we don't have to wait too many birthdays."

Well, here we are on March 12, 2013 and a look to Regulation E - 12 CFR 1005.16 - clearly shows the CFPB hasn't updated Regulation E to implement the amendments to the Electronic Funds Transfer Act.

Where is the Burden? The burden lies in the fact that if a compliance officer was reviewing Regulation E they would come to the conclusion that federal law still requires the "on the machine" disclosure. Which is wrong. The Electronic Funds Transfer Act was amended by H.R. 4367 to remove the federal requirement and the CFPB just hasn't found the time to update Regulation E.

An isolated incident?  Must be due to the unique situations related to a new regulatory agency who was given so many mandates by Dodd-Frank.  Keep reading, it gets worse.

***

Example 2 - Federal Reserve Board. Dodd-Frank adjusted the "next-day availability" requirement under Regulation CC from $100 to $200. We blogged on this issue three times in 2011 and wondered why the Federal Reserve didn't issue a proposal to amend this one section of Reg CC:

"So, the Dodd-Frank change to Regulation CC - the one that bumps the $100 next day availability amount to $200 - when does it become effective?  July 21, 2011.  Some of you are thinking that you can wait, however, until the Fed finalizes its current Regulation CC rulemaking to comply.  Wrong.  Surprise, surprise, but the Fed buried this detail into its Reg CC proposal. 

Section 1086(e) of the Dodd-Frank Act increases from $100 to $200 the minimum amount of funds deposited by check or checks on a given business day that a bank must make available by opening of business on the next business day pursuant to § 603(a)(2)(D) of the EFA Act. That provision of the EFA Act is implemented in § 229.10(c)(1)(vii) of Regulation CC, and the increase is expected to take effect on July 21, 2011, regardless of whether the Board and the Bureau have amended Regulation CC. See, 76 Fed. Reg. 16,869."  [May 9, 2011 Blog Post]

***

"Regulation CC.  A change in Regulation CC from $100 to $200 for next-day availability.  The Federal Reserve has proposed changes to Reg CC that have not been finalized.  This change to $200 becomes effective though the Federal Reserve has not changed the language of Reg CC.  

....

Reality Check: Why didn't the Fed propose two different rules?  Rather than confuse the entire financial industry, the Fed could have easily issued one rule to implement the Dodd-Frank change and a separate rule to propose its other changes to Reg CC." [July 20, 2011 Blog Post]

***

"The letter is dated August 15.  Which is interesting because the change to $200 became effective July 21, 2011.  

Dodd-Frank was signed on July 21, 2010.  The Reg CC proposal was released March 3, 2011.  I'm still puzzled why the Fed did not propose two separate rules - with one proposal solely implementing the $200 change.

These are the types of headaches that do not get captured in any data on regulatory burden." [August 21, 2011 Blog Post]

A brief amendment to that last statement - these headaches do get realized by credit unions. Now, we need the regulators to realize the impact of their actions (or inactions).

Where is the Burden? A credit union searching the requirements for next-day availability under 12 CFR 229.10 of Regulation CC would find this:

"(vi) A check deposited in a branch of the depositary bank and drawn on the same or another branch of the same bank if both branches are located in the same state or the same check processing region; and,

(vii) The lesser of—

(A) $100, or

(B) The aggregate amount deposited on any one banking day to all accounts of the customer by check or checks not subject to next-day availability under paragraphs (c)(1) (i) through (vi) of this section."

And, if they followed that language - they would have a regulatory violation.  Let me repeat that - if a credit union followed the language of Regulation CC - as published by the Federal Reserve in the Electronic Code of Federal Regulations - they would have a regulatory violation as the regulation is incorrect.  If that isn't regulatory burden, I don't know what is!

***

Example 3 - National Credit Union Administration. By now, everyone is aware that the unlimited share insurance coverage for noninterest-bearing transaction accounts expired on December 31, 2012. We blogged on this issue on December 18, 2012 and then again on January 2, 2013. We also had discussions with NCUA about updating 12 CFR 745.14 of their regulations to prevent confusion by credit unions - which we discussed in our February 7, 2013 blog post.

So, here we are on March 12, 2013 and the language of NCUA's 12 CFR 745.14 still hasn't been removed. Granted, this example isn't as egregious due to the inclusion of this language "(a) Separate insurance coverage. Through December 31, 2012, a member's funds in a 'noninterest-bearing transaction account' (as defined in § 745.1(f) of this part)" - however, it still makes a credit union researching 12 CFR 745.14 follow-up with whether this has been unlimited share insurance has been extended or not. It hasn't and NCUA should make that information clear by removing 12 CFR 745.14 from their regulations.

Where is the Burden? There were so many back-and-forths on the unlimited share insurance issue - including Footnote 1 of NCUA's Letter to Credit Unions 12-CU-14 - that it is understandable that credit unions would be unsure whether or not the unlimited coverage was extended. NCUA could ease this burden by updating their regulations.

***

But, Regulating is Difficult. I'm sometimes told that I'm too harsh on regulators. That they have very difficult jobs. I get that. I'm not denying that fact (my wife works at a federal financial regulator and I know how hard she works). However, a basic job of a regulator is to make sure their regulations are clear and understandable. And, accurate.  This last part is extremely important. Credit unions need to be able to rely on the regulations that are published by the regulators. If they have to second-guess whether the regulations are accurate, they cannot perform other tasks - such as serving their members.

***

Summary.  If you are ever looking for an example of regulatory burden to show your Congressman - this blog post is a good start. We have the following:

• One example where a federal regulator failed to promptly update their regulations after Congress explicitly amended the law to remove an unnecessary regulatory burden from financial institutions.

• One example where a federal regulator failed to promptly update their regulations after Congress explicitly amended the law to provide further protections to consumers.

• One example where a federal regulator failed to update their regulations after Congress failed to extend a provision that was explicitly designed to "sunset" after a specific period of time.

I've been in the Washington D.C. area almost nine years and if I've learned one thing it is that Congress does not like to be ignored. 

CFPB Releases Semiannual Regulatory Agenda - Spring 2012; Seminar in Seattle

Written by Steve Van Beek

CFPB Regulatory Agenda.  Yesterday, the CFPB posted its Semiannual Regulatory Agenda - for spring 2012.  The previous Semiannual Regulatory Agenda was released in February 2012.  The latest release follows the same format and includes a listing of regulations in the various rulemaking stages: prerule stage, proposed rule stage, final rule stage, long-term actions and completed actions.  

Below is a listing of the various future regulations - organized by rulemaking stage.  Keep in mind the agenda is current as of April 13, 2012 and the CFPB has taken numerous actions since putting this agenda together.    

Prerule Stage:

• Registration of Certain Nonbank Covered Persons
• Supervision of Larger Depository Institutions and Affiliates
• Home Mortgage Disclosure Act (Regulation C)
• Requirements for Prepaid Cards (Regulation E) 

Proposed Stage:

• Amendments to TILA and FIRREA Concerning Appraisals
• Disclosure Rules and Substantive Protection for Certain High Cost Mortgage Loans (Regulation Z)** (proposed on July 9th)
• Mortgage Originator Standards (Regulation Z)
• Mortgage Servicing (Regulation X; Regulation Z)
• TILA/RESPA Mortgage Disclosure Integration (Regulation X; Regulation Z)** (proposed on July 9th)
• Credit Card Pre-Opening Account Fees (Regulation Z)
• Procedural Rule To Establish Supervisory Authority Over Certain Nonbank Covered Persons Based on Risk Determination
• Supervision of Certain Nonbank Covered Persons—Defining Larger Participants in Certain Consumer Financial Product and Service Markets (LP 2) 
• Copies of Appraisals or Other Valuations To Be Furnished by Creditor (Regulation B)

Final Rule Stage:

• Supervision of Certain Nonbank Covered Persons—Defining Larger Participants in Certain Consumer Financial Product and Service Markets (LP 1)** (finalized on July 16th)
• Disclosure of Records and Information
• State Official Notification Rule
• Rules Relating to Investigations
• Rules of Practice for Adjudication Proceedings
• Restatement of Federal Consumer Financial Law Regulations
• Requirements for Escrow Accounts (Regulation Z)
• TILA Ability to Repay (Regulation Z)
• Confidential Treatment of Privileged Information
• Disclosure Rules for Remittance Transactions (Regulation E)

Long-Term Actions:

• Alternative Mortgage Transaction Parity (Regulation D)
• Business Lending Data (Regulation B)
• TILA Mortgage Amendments (Regulation Z) 

Completed Actions: 

• Disclosure Rules for Remittance Transactions (Regulation E)

***

Only 27 potential rulemakings!!  The Regulatory Agenda also includes a short summary of each rulemaking that is useful for providing a quick overview of what will be covered by the rulemaking.  However, as last Monday's proposed rules show - a short summary doesn't do much when the proposals are 1099 pages and 293 pages.  

***

NAFCU's 2012 Regulatory Compliance Seminar.  Luckily, you don't have to read and understand all 27 potential rulemakings on your own.  We'll be covering quite a few of them at our 2012 Regulatory Compliance Seminar in Seattle, Washington - October 23-26.

The program-at-a-glance is available here (and we'll be including additional sessions as the proposals continue to flow).  We already have a session on the TILA/RESPA mortgage disclosures, the upcoming mortgage servicing proposal (including the periodic statement requirement) as well as a session on the remittances final rule.  Detailed session descriptions can be found here.

Remember - you do not need to be a NAFCU member to attend.  And, Save $100 if you Register by August 31st!

Member Complaints; NAFCU's 2012 Regulatory Compliance Seminar

Written by Steve Van Beek

Consumer and member complaints are at the forefront of quite a few conversations right now (including quite a few news articles).  The CFPB's promotion of their complaint process is one reason for this uptick in discussion as is the centralized complaint process for financial products.  

The CFPB issued their 2011 Annual Report on Consumer Complaints and it is full of useful information to review.  Here is a snapshot of the results:

"Between July 21 and December 31, 2011 the CFPB received 13,210 consumer complaints, including 9,307 credit card complaints and 2,326 mortgage complaints.

Forty-four percent of all complaints were submitted through the CFPB's website and 14.7 percent via telephone calls.  Referrals from other regulators accounted for 34.9 percent of all complaints received.  The rest were submitted by mail, email, and fax."

Future reports will include even more details - including complaints in new areas such as private student loans, auto loans and checking accounts.  Be sure to review the full report or pass it along to the appropriate person at your credit union.   

NCUA.  The March 2012 edition of the NCUA Report also included an article on Trends in Member Complaints and Consumer Inquiries.  Of note, the article indicates that of the complaints received in 2011 less than 1 percent involved a consumer compliance violation.  Of that 1 percent, half of those were related to timing issues related to the error resolution process under Regulation E.  

***

NAFCU Regulatory Compliance Seminar.  October seems like a long way off but it will be here before you know it.  We are in the process of putting together the content and agenda - so please feel free to send in any comments, ideas or suggestions.  We love your input and this conference is really about you all so let us know what you need.

Here is what we are tentatively looking at so far (topics are subject to change, of course):

• TILA/RESPA Mortgage Disclosures
• Upcoming Mortgage Servicing Requirements
• The Latest on Overdraft Protection
• Remittance Transfers under Regulation E
• CUSOs
• Loan Participations
• Bank Secrecy Act Changes
• Social Media
• NCUA Update
• CFPB Update

I think that is a pretty good start - but let us know what you are looking for and how we can make NAFCU's 2012 Regulatory Compliance Seminar even better than the past.  

Recertification for NCCOs.  Remember, attending Regulatory Compliance Seminar is the best way to recertify your NAFCU Certified Compliance Officer (NCCO) designation.  Seminar offers 24 CEUs which is enough to fully recertify for two years.

Seattle, Washington.  Did I mention Seminar was in Seattle?  Right Downtown?  Well, now I have.  Hope to see you October 23-26, 2012!    

Overdrafts: CFPB’s “Penalty Fee Box” Disclosure; Call for Comments; NAFCU's CFPB Page

Written by Bernadette Clair, Regulatory Compliance Counsel

We’ve previously blogged about the CFPB’s inquiry into overdraft services, but today I thought we’d take a closer look at the model disclosure form the CFPB is testing in conjunction with its inquiry – aptly named the “penalty fee box.”

This draft disclosure, designed to highlight the amount overdrawn and total overdraft fees charged, would require the following three disclosures at the top of each periodic statement: 

• A disclosure of the amount of overdraft fees paid during the billing cycle; 

• A disclosure of the amount the account was overdrawn; and 

• A disclosure that “You can lower these fees. See the three tips at the end of this statement to learn how.”

The end of the periodic statement would include an additional disclosure, spanning approximately half of one page. This disclosure provides additional details regarding the overdraft fees the member paid during the statement period and the calendar year and includes three tips for lowering overdraft fees: 

• Tracking balances and deposits carefully and signing up for text message alerts to warn when the balance is low; 

• Linking a savings account to your checking account; and 

• Consider opting out of overdraft coverage on debit or ATM transactions.

If you thought the last round of periodic statement changes to disclose overdraft fees was bad, the potential formatting requirements on this one could really drive you nuts!

******

Make Your Voice Heard – Call for Comments

Speaking of the CFPB’s inquiry into overdrafts, there are a few comment deadlines coming up over the next several weeks.  NAFCU is seeking its members’ input on the following:

• CFPB’s Proposed Rule on the Confidential Treatment of Privileged Information, designed to assure financial institutions that, in providing the CFPB information in the course of a supervisory or regulatory process, they do not waive any privilege they may claim regarding that information. Comments are due to NAFCU April 4.  Comments are due to the CFPB on April 16.  (Regulatory Alert 12-EA-08) 

• CFPB’s Inquiry on Overdraft Protection Programs, seeking information on how overdraft programs are set up, how they are marketed and who uses them. The bureau is also testing the model “Penalty Fee Box” discussed above. Comments are due to NAFCU April 6.  Comments are due to the CFPB April 30.  (Regulatory Alert 12-EA-07)

• FinCEN’s Advance Notice of Proposed Rulemaking on Customer Due Diligence (CDD).  FinCEN is considering whether to expand its rules on CDD. It is looking, for example, at whether to require identity of the beneficial owners in all transactions and verifying that identity in risk-based fashion. Comments are due to NAFCU April 17.  Comments are due to FinCEN May 4. (Regulatory Alert 12-EA-09)

 ******

NAFCU Members.  Our Regulatory Affairs team has updated NAFCU’s webpage on the CFPB.  This webpage is a great resource for keeping up-to-date on the CFPB’s activities and NAFCU’s efforts to mitigate new regulatory burdens for credit unions.  Here, you’ll find:

• Regulatory Alerts on CFPB proposed rules
• Comment letters
• Member Resources
• News
• Links to resources on the CFPB’s website

NCUA Listening Sessions; CFPB Files Amicus Brief in TILA Case; Reg Alert on Overdrafts

Written by Steve Van Beek

NCUA recently announced a series of listening sessions that will be conducted throughout the country.  Here is a snapshot of the dates and locations:

The full information on the upcoming listening sessions can be found here.  Registration for the first two sessions (May 2 in Boston and May 9 in Alexandria, VA) are now open. 

***

Yesterday, the CFPB announced it had filed an amicus brief (Wikipedia.org) in an ongoing case regarding the right of rescission under the Truth in Lending Act.  The CFPB's press release can be found here and the actual brief is here.

While the issues in the case are very important, equally important is the additional information about the CFPB's intent as a regulator.  The press release indicates the CFPB will continue to be an active participant in lawsuits in order to protect consumer rights:

"The CFPB is committed to filing amicus briefs in litigation involving the federal consumer financial protection laws that it oversees and in which the CFPB determines its views will assist the courts in correctly resolving the matters. Amicus briefs are an important way for the CFPB to ensure that the statutes it oversees are correctly and consistently interpreted by the courts, even in cases in which the CFPB is not itself a named party."

I hinted at this on Monday - but it does seem the only thing missing from the CFPB's regulatory toolbox is actual guidance or clarity to the entities it regulates.  Wouldn't that be something, huh? 

***

NAFCU Members:  Our Regulatory Alert on the CFPB's Overdraft Inquiry (12-EA-07) is available.  Please consider providing your feedback and comments to help NAFCU draft our comment letter to the CFPB.  Comments are due to NAFCU by April 6th.    

NAFCU Today: On the Hill; Derivatives; CFPB Expands Complaint Program

Written by Steve Van Beek

As we mentioned on Friday, the NAFCU Compliance Team will be in and out of the office this week as we'll have nearly 150 compliance officers in town for our Regulatory Compliance School.

***

NAFCU Today.  I wanted to pass along a couple of recent stories from the NAFCU Today which is written by NAFCU's Communications Team.  If you or someone at your organization wants to receive this daily news feature, you can subscribe to the NAFCU Today here.

As with the Compliance Blog, the NAFCU Today is open to everyone that is interested in learning more about issues impacting credit unions.

Member Business Lending.  Grassroots efforts initiated to urge support of S. 509 - the Small Business Lending Enhancement Act.  

Exam Bill.  Senate bill S. 2160 has been introduced.  This bill is a companion bill to H.R. 3461 and would bring additional transparency and consistency to bank and credit union examinations.    

CFPB Complaints.  The Consumer Financial Protection Bureau has recently expanded their complaint process and are now accepting complaints on consumer checking accounts and private student loans.  

Note:  All the links below will take you to recent NAFCU Today stories.  To see the March 12 edition of the NAFCU Today, you can go to the NAFCU homepage.