NAFCU Compliance Blog

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).

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

Written by Jennifer Aguilar, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

Flag on the Play: Imposing Penalty Rates

Written by Jennifer Aguilar, Regulatory Compliance Counsel

It's December. Football weather has settled in and the playoff race is heating up. If you're anything like me, you spent the entire day yesterday glued to the RedZone or, for those lucky few, you actually got to watch your team on the local broadcast. As every sports fan knows, sometimes no matter how hard the players play, sometimes it's up to the referees to decide the outcome (eyeroll and audible groan as you remember that terrible completely wrong call the refs made that cost your team the game). Most of time, the referees are on the same page and impose the right call, like these guys:

But, sometimes, no one can agree on what right call should be, like these guys:

So, what to do then? Well, go back to the rulebook. Every once in a while, credit unions find themselves in a similar position – your member hasn't paid her bill on time or has exceeded her credit limit and now you need to be the ref and enforce the rules and impose a penalty rate. But before you do so, you may find it helpful to review the rulebook first to ensure that you're making the right call. As penalty rates are most common with open-end credit products, the rules discussed below apply to open-end not home-secured credit.

The first rulebook to review is the credit agreement. This agreement lays out the obligations between you and your member but it also lays out your rights when the member fails to live up to her obligations. Before you can impose a penalty rate for such failures, you have to have the authority to do so. The agreement will usually tell you whether or not you have such authority. The agreement will also explain the circumstances under which a penalty rate may be imposed. In the event your agreement is silent on this issue, your state law may explain whether the credit union has the authority to impose a penalty rate. While the credit agreement is an important place to start, don’t forget that there is another rulebook to review too – Regulation Z.

Penalty rates are generally permissible under Regulation Z. So, as long as you have the contractual authority to do so and one of the circumstances laid out in the credit agreement has occurred, you may impose the penalty rate. Regulation Z does, however, have a couple rules that must be followed. Section 1026.9(g) requires advance notice before you can impose the penalty rate. The notice must be provided after the event that triggered the penalty rate and at least 45 days before the effective date of the increased rate. The notice must include the following:

• Statement that the penalty rate has been triggered;
• Date the penalty rate will apply;
• Circumstances under which the penalty rate will no longer apply or a statement that the penalty rate may apply indefinitely;
• Statement of which balances the penalty rate will apply to and which balances the regular rate will continue to apply to, if any;
• If the account is a credit card, a statement of the principal reasons for the rate increase; and
• If the rate increase is the result of a failure to make a minimum periodic payment within 60 days of the due date, a statement that the increased rate will no longer apply to transactions occurring before or within 14 days of the notice if the member makes the next six consecutive minimum payments on time.

If the open-end credit plan is a credit card and the penalty rate was imposed because the member failed to make a minimum payment within 60 days of the due date, section 1026.59(e) requires credit unions to review the account periodically to determine whether the penalty rate is still applicable. The first review is required within six months of the sixth payment due date following the effective date of the penalty rate. After that, the review is required once every six months. In conducting the account review, the rule requires credit unions to review the factors that led to the application of the penalty rate. If the credit union determines that the penalty rate should no longer apply based on the review, the rule requires the credit union to reduce the rate back to the rate that previously applied within 45 days of completing the review. No review is required if the member makes the next six consecutive payments on time and, as a result, the credit union returns the rate to the rate that applied prior to imposing the penalty rate.

Don’t You Forget About Us: Prohibitions and Limitations under Regulation Z

Written by Jennifer Aguilar, Regulatory Compliance Counsel

As compliance folks in the post-Dodd–Frank Era, we sometimes get so caught up with what must be disclosed that it's easy to overlook some of the prohibitions and limitations buried in the consumer regulations. Today's post is a roundup of questions that touch on some of the prohibitions and limitations for open-end credit products.

Our credit union would like to increase the late fee for our HELOCs, are there any regulatory issues with this increase?

Section 1026.40(f)(3) generally prohibits credit unions from changing any term on an open-end home equity plan. The commentary explains that this rule prohibits credit unions from increasing fees and imposing new fees once the plan is opened. This rule covers all the plans terms, not just those terms that must be disclosed under Regulation Z.

The rule does, however, provide a number of limited exceptions to this general prohibition. One of these exceptions allows credit unions to change a term as long as it obtains the member's consent. The commentary further explains that the member must expressly agree to the stated change in writing at the time the change is made and that continued use of the credit plan does not constitute consent.

Section 1026.9(c)(1) requires a 15-day advance notice if the credit union changes any term required to be disclosed under section 1026.6(a). Section 1026.6(a) requires credit unions to disclose all finance charges and any other charges that may be imposed as part of the plan. The commentary to paragraph 6(a)(2) specifically includes late fees as other charges imposed as part of the plan, so advance notice is required. The notice must be in writing and sent to each affected member at least 15 days prior to the effective date of the change.

Our credit union would like to start charging member's a fee for paying their credit card by phone. Can we do this?

For credit card accounts, section 1026.10(e) prohibits credit unions from charging a fee to make a payment by any particular method, including payment by phone. However, if the payment method involves an expedited service by a customer service representative, then credit unions may charge a fee for that payment method. This rule covers both fees charged by the credit union as well as fees charges by a third party that collects or processes payments on the credit union's behalf.

The commentary explains that "expedited" means that the credit union actually credits payment the same day or the next day if the payment is received after the established cut-off time. The commentary goes on to explain that "service by a customer service representative" requires the payment transaction be made with the help of a live representative. An automated system is not "service by a customer service representative," but credit unions may use an automated system for a portion of the transaction as long as a live representative is involved with the transaction.

We heard recently that LIBOR may come to an end sometime in the future. We use the 6-month LIBOR as the index for our variable-rate HELOCs. Can we change to a new index now?

For open-end home equity lines of credit, section 1026.40(f)(3) states that a credit union may change the index on a plan only if three conditions are met: (1) the original index is no longer available, (2) the new index's historical movements are substantially similar to the original index, and (3) the new index and margin will result in a rate substantially similar to the rate in effect at the time the original index became unavailable. The commentary reiterates that the original index must actually be unavailable before a credit union may select a new index.

MLA and Prescreened Offers of Credit; Caucus Kickoff

Written by Brandy Bruyere, VP of Regulatory Compliance

Many credit unions use prescreened offers of credit and similar promotions to market products, especially credit cards. With the upcoming Military Lending Act compliance deadline for credit card products, credit unions have asked how the MLA impacts these kinds of offers, particularly for obtaining a safe harbor for covered borrower status.  The MLA addresses the issue, providing a longer timeframe for "firm offers of credit" such as those provided as part of prescreening programs. Specifically, 32 CFR 232.5(b)(3)(iii) indicates that a covered borrower check performed as part of a prescreened offer of credit would be within the safe harbor if the “consumer responds to that offer not later than 60 days after the time that the creditor had provided that offer to the consumer”.  Note that this 60 day timeframe is from when the offer is provided to the member rather than when the credit union performed the “covered borrower check," here's the relevant provision:

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

[…]

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

The preamble to the final rule contains a further discussion of the prescreened timing:

The Department has designed § 232.5(b)(3) in order to enable a creditor to conduct only one covered-borrower check within the permitted safe harbor at an early stage of the transaction or the relationship with the consumer, including at the time that the creditor develops a firm offer of credit to be provided to the consumer. However, in the scenario which describes what is commonly referred to as a “prescreened” offer of credit (set forth in § 232.5(b)(3)(iii)), the Department has placed a limitation on the amount of time that may lapse between the creditor's delivery of the prescreened offer and the creditor's reliance on its covered-borrower check that formed part of the basis of the offer. The Department believes that there will be many cases when a consumer who is not a covered borrower at the time that a creditor delivers its prescreened offer (which offer is predicated, in part, on that criterion) later responds to that offer, including after becoming a covered borrower…Accordingly, § 232.5(b)(3)(iii) provides that creditor may rely on its initial covered-borrower check so long as the consumer responds to that offer not later than 60 days after the date that the creditor had provided that offer to the consumer. If the consumer responds to the creditor's offer later than 60 days after the date that the creditor had provided that offer to the consumer, then the creditor may not rely upon its initial determination in developing that offer; instead, the creditor may (but still is not required to) act on the consumer's response as if the consumer is initiating the transaction or applying to establish the account... (Emphasis added.)

http://www.federalregister.gov/a/2015-17480/p-428

But what does it mean to "provide" the offer to the member? Is it the day the credit union places the offer in the mail? Or the day the member receives the offer? The MLA is not clear on this point, so some credit unions opt to take a conservative approach and calculate the 60 day window from when the offer is mailed.

Credit unions have also asked about preapproval or prequalification promotions. Note that the carve out is specifically for "firm offers of credit" – and the MLA does not define this term. Of course, "firm offer of credit" is a defined term under the Fair Credit Reporting Act, but this is not cross-applied by the MLA. However, the MLA preamble does reference "prescreened" offers, so the FCRA meaning may at least help when determining the scope of the MLA safe harbor in these cases. Also, the way the provision is written hints at the FCRA prescreen rules, describing offers that are "developed" using certain "criteria." Credit unions will need to determine which promotions are "firm offers of credit" where the covered borrower check would provide a safe harbor for up to 60 days after providing the offer.

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Caucus Kickoff. NAFCU's Congressional Caucus starts today. Hundreds of credit union representatives will attend meetings with members of Congress and their staff to advocate on key issues, including regulatory relief. NAFCU also continues to advocate on important issues like the MLA in our constant efforts to create a better environment for credit unions. You can also participate by joining our Thunderclap campaign now to make "protect credit unions" a message that thunders across social media on September 12. By calling on Congress to help protect credit unions, you're ultimately calling on Congress to help America. For information on how your credit union can participate in these kinds of advocacy efforts, check out our Grassroots Action Center.

Another MLA FAQ: Is the Credit Card Rule Retroactive?

Written by Jennifer Aguilar, Regulatory Compliance Counsel  

Over the past several months, the NAFCU Compliance Team has written a few blogs on various aspects of the MLA credit card rules: Bona Fide Fee Exemption; Late Fees, Returned Payment Fees and More and Researching Call Reports and Card Agreements. With the credit card compliance deadline fast approaching, we continue to receive a number of questions on the MLA and its various credit card rules. Today's blog will focus on one particular issue that has come up for various credit unions lately: whether the rules apply retroactively.

The scenario goes somewhat like this: Jane Member opens a credit card before the compliance deadline. Jane is a covered borrower at the time she opens the credit card and remains a covered borrower throughout the life of the credit card. Does the MLA apply to transactions Jane makes on her credit card after October 3? What if Jane requests an increase in her credit limit after October 3, is the credit card now covered by the MLA?

Section 232.2 explains that the MLA applies to "consumer credit" extended to a "covered borrower," as determined at the time the member "becomes obligated on a credit transaction or establishes an account for credit." This suggests that whether a particular transaction is covered by the MLA is determined at consummation. This is supported by the fact that sections 232.12 and 232.13 state the rules do not "apply to [a credit card account] that is extended and consummated before October 3, [2017]." This is further supported by a couple different discussions in the preamble to the final rule:

"The Department proposed to add new subsection (a), stating: “Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit.” The Department continues to believe that defining the scope of the regulation to apply only to a covered borrower when he or she enters into a transaction or establishes an account for consumer credit is consistent with the language and structure of 10 U.S.C. 987.[167] Interpreting 10 U.S.C. 987 as applying only to a covered borrower who holds that status when he or she agrees to obtain the consumer credit is fair to the creditor who, at the outset of the transaction, should be in a position to know the status of its counterparty to the agreement." (Emphasis added.) See, 80 Fed. Reg. 43579.

Section 232.12(b) provides a general rule that the definitions, conditions, and requirements of the existing rule apply to transactions involving consumer credit that are consummated or established prior to the compliance date. Relative to the Proposed Rule, the language in § 232.12(b) has been revised to clarify that the “definitions, conditions, and requirements” of the existing rule apply. The Department believes that this provision is equitable, particularly to avoid the potential injustice and operational difficulties that could arise if new requirements under the final rule were to apply to pre-existing transactions or accounts involving consumer credit to covered borrowers. (Emphasis added.) See, 80 Fed. Reg. 43591.

All this together seems to indicate that by “establishing” an account or “extending” credit the DOD was referring to consummation. The preamble discussion indicates that the DOD believes that credit unions are in the best position to determine whether a transaction is covered at the outset and there is no ongoing requirement to ensure the transaction is still not covered. The preamble also explains that the DOD does not expect credit unions to apply the rules retroactively to existing accounts as this may cause unnecessary operational problems. If an account was not covered at consummation, it will not become covered later on.

The DOD appears to apply the same logic to certain changes to existing credit accounts. Increasing a credit is not considered "extending" credit under the MLA if the account and its terms are already established:

"A comment on behalf of certain credit card issuers seeks clarification regarding the potential effects of certain 'customer management actions, such as credit line increases.' The Department believes that an action by a creditor within an existing account, such as to increase the available credit that a consumer may draw upon in an account, does not alter the status of the creditor's prior determination for that account." (Emphasis added.) See, 80 Fed. Reg. 43578.

While the DOD specifically includes credit limit increases as actions within an existing account, it does not expand on what other actions may be "within an existing account." Whether other actions, such as adding a joint owner or changing a rate, will trigger MLA protections is unclear from the rule.  For these changes, a credit union may need to review its underwriting process and internal procedures to make a determination whether new credit is being extended or a member is becoming obligated on or establishing credit. Some considerations may be whether the credit union performs new underwriting, whether the member will take on any new or different legal obligations, or whether new agreements or disclosures will be provided. The credit union may also want to reach out to its attorney to assist the credit union in making a determination or assessing the particular legal risks involved.

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.

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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.

MLA and the MAPR for Credit Cards – The Tedious Task of Researching Call Reports and Card Agreements

Written by Brandy Bruyere, VP of Regulatory Compliance

We have blogged a couple of times recently on the Military Lending Act and credit card fees. As the  MLA credit card compliance deadline is less than six months away, we receive questions on how to calculate the safe harbor for some fees that can be excluded for the Military Annual Percentage Rate on these accounts. I decided to walk through the initial stages of the process the Department of Defense described in its 2015 rule – finding financial institutions with over $3 billion in outstanding credit card debt then looking at the CFPB's credit card agreement database to compare fees. The process felt like this:

via GIPHY

Pulling call reports from NCUA and the FDIC, and then finding the corresponding publicly available credit card agreements is a bit dull and at times frustrating, but was also a helpful exercise. While this blog is not designed to calculate safe harbor fees, it may be a jumping off point for research on this issue.

The top 10 card issuers hold over 90% of all credit card debt – approximately $701 billion out of $779 billion. The largest card issuers include financial institutions that are probably not surprising – JPMorgan Chase, Bank of America, Citigroup, U.S. Bank, American Express, Discover, and Capital One.  Of course, these institutions are not the only ones with over $3 billion in outstanding credit card debts, and may not be the right or best institutions for comparing your credit union's card fees for the purposes of generating a five institution average for the bona fide & reasonable fee safe harbor. However, only one credit union has over $3 billion in outstanding cards, so comparing to just other credit unions is not an option. Meanwhile, with so much concentration in this market, even some fairly large banks do not have $3 billion in outstanding credit card accounts.  I went through over a dozen of call reports to pull together some financial institutions with over $3 billion in outstanding cards and then pulled a sample credit card agreement to aggregate some fee examples:

Financial Institution with over $3 billion in outstanding in credit card debts	Location of credit card account agreements	Balance Transfer Fee	Cash Advance Fee
Navy FCU (approximately $12.5 billion outstanding)	Various product terms and conditions		None if performed at the FCU's branch or ATM; $0.50 for domestic transactions or $1.00 for overseas transactions
US Bank (approximately $69.3 billion outstanding)	Various products	Sample from one consolidated agreement
		Either $5 to $10 or 3% to 4% of the Transfer or Advance amount, whichever is greater	For convenience checks: Either $5 to $10 or 3% to 4% of the Advance amount, whichever is greater
			In branch or ATM Fee: Either $5 to $10 or 3% to 5% of the Advance amount, whichever is greater
Capital One (approximately $68 billion outstanding)	Various products	Not available	Sample from one agreement The greater of either $10 or 3% of the amount of each cash advance
Chase Bank (approximately $93.4 billion outstanding)	Various products	Sample from one agreement
		Either $5 or 5% of the amount of each transfer, whichever is greater	Either $10 or 5% of the amount of each transaction, whichever is greater
Barclays Bank DE (approximately $23.6 billion outstanding)	Various provisions	Sample from one consolidated agreement
		Either $10 or 3­% to 4% of the amount of each transfer, whichever is greater	Either $10 or 3% to 5% of the amount of each cash advance, whichever is greater
Discover Bank (approximately $59.6 billion outstanding)	Various products	Sample from one consolidated agreement
		3% of the amount of each transfer	Either $10 or 5% of the amount of each cash advance, whichever is greater
American Express Bank, FSB (approximately $12.2 billion outstanding)	Various products	Sample from one agreement
		Either $5 or 3% of the amount of each transfer, whichever is greater	Either $5 or 3% of the amount of each transfer, whichever is greater
PNC Bank (approximately $4.4 billion outstanding)	Various products	Sample from one agreement
		The greater of $5; or ranging from 3% to 4% of the amount of the balance transfer	4% of the amount of each cash advance or $10, whichever is greater

 **Based on March 31, 2017 Call Report Data. For FDIC insured institutions, Call Reports can be searched by institution name.  Credit card agreements can also be searched by institution name on the CFPB's website.

The various agreements that are publicly available vary in terms of specificity, and many list other fees such as annual membership fees, foreign transaction fees, late fees, returned payment fees, and over the limit fees. Some agreements post ranges and some fees are in percentages while others are flat fees.

Overall, this chart is only intended to provide some examples rather than serve as a large representation of products and financial institutions for generating an average fee for MLA safe harbor purposes. This sampling is a tool that may serve as a starting point. The DoD ultimately described the safe harbor for bona fide and reasonable fees as a "flexibly adaptable standard" meaning a credit union may "select any group of 5 or more credit card issuers who each have the qualifying amount of credit card loans in order to make a determination." (Emphasis added.)

This allows credit unions to take different approaches for this process which  may include relying on a "commercially compiled" resource that may be available elsewhere. When looking for five card issuers' fees to average and generate a safe harbor for MLA purposes, it could make sense to find card products or fees that seem similar to yours. Other credit unions may decide to compare fees to other financial institutions operating in their region. Some may choose to find products with fees that align with the fees the credit union is charging although that could be difficult or time consuming given the number of products on the market. Ultimately, to have a safe harbor for excluding an eligible fee from the MAPR for a credit card account, the rule requires using the average fee charged by five or more creditors with at least $3 billion in outstanding credit card balances at any time during a three year lookback.

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Upcoming Webcasts - In one of two webcasts coming up next week, the regulatory compliance team will provide an update on the latest from NCUA, CFPB and other key regulators. NAFCU's other webcast will review NCUA's commercial lending rule:

Regulatory Compliance Update

Thursday, May 18 | 2:00 p.m. – 3:30 p.m. EST

NCUA MBL/Commercial Loan Rules – The Good, the Bad and the Ugly

Wednesday, May 17 | 2:00 p.m. – 3:30 p.m. EST 

 

Considering a Member’s Immigration Status in Evaluating Loan Applications + Trivia! + Monitor Survey

Written by Shereefat Balogun, Regulatory Compliance Counsel

Seems like immigration is on many minds these days.  In fact, we’ve received a number of questions concerning an applicant’s immigration status in evaluating loan applications.  The general question often looks like this:

A member came in applying for a VISA credit card. He is not a permanent resident of the U.S. He has a work permit that expires in July 2017. Are we able to deny a credit card to someone who is not a permanent resident of the U.S?

As many of us are aware, the Equal Credit Opportunity Act (ECOA) prohibits discrimination related to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, and income derived from public assistance.  See, 15 U.S.C. §1691(a); 12 C.F.R. §§ 1002.1(b), 1002.4(a).  That said, a credit union may consider a member’s credit status or status as a permanent resident in determining the member’s creditworthiness and the credit union’s rights and remedies regarding repayment.  Indeed, section 1002.5 of Regulation B, which implements ECOA, provides in relevant part:

§1002.5 Rules concerning requests for information.

…

(e) Permanent residency and immigration status. A creditor may inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.

12 CFR 1002.5(e)(emphasis added.)

Moreover, in section 1002.6, the rule states:

§1002.6   Rules concerning evaluation of applications.

(a) General rule concerning use of information. Except as otherwise provided in the Act and this part, a creditor may consider any information obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis. The legislative history of the Act indicates that the Congress intended an “effects test” concept, as outlined in the employment field by the Supreme Court in the cases of Griggs v. Duke Power Co., 401 U.S. 424 (1971), and Albemarle Paper Co. v. Moody, 422 U.S. 405 (1975), to be applicable to a creditor's determination of creditworthiness.

…

(7) Immigration status. A creditor may consider the applicant's immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor's rights and remedies regarding repayment.

12 CFR 1002.6(b)(7) (emphasis added.)

The Official Interpretation to 1002.6(b)(7) provides more detail:

Paragraph 6(b)(7) .

1. National origin—immigration status. The applicant's immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor's ability to obtain repayment. Accordingly, the creditor may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa.

2. National origin—citizenship. A denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin. 

12 CFR 1002, Supp. I, comments 1002.6(b)(7) – 1 and 2 (emphasis added.)

While Regulation B generally gives credit unions the ability to consider residency and immigration status in evaluating a loan application, there may be some risks associated with denying a loan based on the member’s citizenship status.  Comment 2 above indicates that a denial of credit based on citizenship status is not per se discrimination based on national origin.  This suggests that the denial in and of itself may not be discriminatory; however an examination of the facts and circumstances may form the basis of a discriminatory claim exposing the credit union to litigation risks.  One issue that may arise concerns claims that the credit union’s policy is not being applied consistently.  For example, if citizens of countries A and B are ok but citizens of C and D are not, then it can be argued that the credit union is discriminating on the basis of national origin, i.e. the place of origin rather than status as a non-citizen.  The credit union may want to make sure applicants are being treated consistently across the board and that any different treatment has a legitimate business purpose.

One thing to consider is that the rule seems to focus on the credit union’s ability to look at immigration status in determining the member’s ability to repay.  See, 12 C.F.R. 1002.6.  Based on this, the credit union may want to focus on the repayment aspect and the particular risks a noncitizen applicant poses.  This is alluded to in the commentary.  See, 12 CFR 1002, Supp. I, comments 1002.6(b)(7) – 1 and 2.  For example, a member who is new to the country, with no employment, and no past credit history may pose more risks to the ability to repay, than a person who has been in the country for 10 years, working as a physician at $450k a year, with satisfactory credit history and owns a home.

Notably, Form C-1 located in Appendix C to Part 1002, is a sample adverse action form and provides a few adverse action options that may apply to these situations.  For example, some reasons listed such as “Temporary or Irregular Employment”, “Length of Employment”, “Length of Residence”, or “Temporary Residence” may be applicable.  Ultimately, though, the rule requires credit unions to look at their underwriting criteria and select the appropriate reasons. 

Also, here are some useful resources which may be helpful:

• NCUA’s Fair Lending Guide
• Letter to Credit Unions No. 174.  This letter includes a white paper that’s geared towards risk-based lending. Starting on page 3, there is a pretty good discussion of consumer compliance and discrimination issues.

As always, if you have any questions concerning ECOA/Regulation B, or any other issue, please feel free to contact the NAFCU Compliance team. We’re here for you!

Trivia: What is ECOA’s record retention period for consumer credit applications?

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Each month, NAFCU's research division sends out an Economic and CU Monitor survey which is summarized and reported in the Economic and CU Monitor. This month’s survey topic is Housing, and it includes questions on GSEs, HMDA, TRID, and chattel lending. Your responses provide us with the meaningful data we need when we represent you before policy makers. You don’t need to complete the entire survey. Every response is a helpful one!

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:

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

Written by André B. Cotten, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Final Thoughts

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

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

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

Happy Holidays!

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Programming Note:

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

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

"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!

PCI DSS Version 3.2!

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Last month, the Payment Card Industry Security Standards Council released an update to its data security standards, version 3.2. The new version of the Payment Card Industry Data Security Standard (PCI DSS) will replace the current version, version 3.1, which is set to expire on October 31, 2016.

At NAFCU compliance, from time to time, we receive general questions on PCI compliance. While no one at NAFCU holds themselves as PCI Compliance expert, I wanted to answer some general PCI questions that the compliance team frequently receives, as well as highlight some of the changes to version 3.2.

 What is PCI DSS?

PCI DSS is an information security standard for organizations designed to ensure certain intuitions process, store, or transmit credit card information. This standard provides operational requirements to protect card data against unauthorized access, use, or disclosure. PCI DSS is administered by the Payment Card Industry Security Standards Council, which is an organization founded by the major credit card brands (MasterCard, Visa, American Express, Discover, etc.).

 Who must comply with PCI DSS?

PCI is a contractual compliance requirement issued by the major card brands. PCI DSS generally applies to all entities involved in payment card processing, including merchants, processors, acquirers, issuers, and service providers as well as all other entities that store, process, or transmit cardholder data and/or sensitive authentication data. Credit unions may be both merchants, if the credit union allows cash withdrawals from credit cards at the teller line, and service providers, if their member’s credit card information stored on their systems.

Periodic validation of compliance is usually required. Non-compliance with PCI DSS requirements could result in potential liability, including fines levied by the payment card brands and the CFPB. Each payment card brand has its own program for compliance, validation levels, and enforcement. More information about compliance can be found at the links below:

• MasterCard: mastercard.com/sdp
• American Express: americanexpress.com/datasecurity
• Discover: discovernetwork.com/fraudsecurity/disc.html
• JCB International: http://partner.jcbcard.com/security/jcbprogram/
• Visa Inc: visa.com/cisp

 What Does Version 3.2 Change?

According to the PCI press release on version 3.2, the primary changes are clarifications on requirements that help organizations ensure critical data security controls are in place, monitored, and effectively tested. Nevertheless, the updated PCI DSS changes are significant.

One major change to PCI DSS is that version 3.2 implements a multi-factor authentication process for all personnel with non-console administrative access and all personnel with remote access to the cardholder data environment. Another major change affects requirements for entities using Secure Socket Layer/early Transport Layer Security for encrypted data transmission, and the integration of Designated Entities Supplemental Validation assessment.

Credit unions that meet the definition of service providers will want to pay particular attention to the new requirements imposed on them. For example, service providers will be required to maintain a documented description of the cryptographic architecture, detect and report on failures of critical security control systems, and perform reviews at least quarterly to confirm personnel are following security policies and operational procedures. Requirements 3.5.1; 10.8; 12.11. In addition, executive management is now responsible for the protection of cardholder data and PCI DSS compliance. Requirement 12.4.1.

For a high-level overview, the Payment Card Industry Security Standards Council released a summary of the changes from version 3.1 to version 3.2. The summary places changes into three different categories: (1) clarifications to existing rules, (2) additional guidance, and (3) “evolving requirements” (updated or new requirements). Credit unions should note that “evolving requirements” have an effective date of February 1, 2018. Credit union’s that are required to conduct PCI compliance should carefully review this document to determine how the new version affects their security standards. Other resources available to credit union's include a quick reference guide, a version 3.2 resource guide, a PCI FAQ database, a guide on migrating from SSL and Early TLS, and a version 3.2 high-level webinar. The Security Standards Council also has a blog, which provides some background commentary on the changes.

It’s Just Like the Movie Inception: Increasing APRs on 60-Day Delinquent Credit Cards

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Recently, a member asked about the timing involved in providing notice of an APR increase following a 60-day delinquency on a credit card account. The member knew that the notice needed to be sent 45 days prior to the increase, but was not sure whether it could be sent 15 days after delinquency, allowing the APR to be increased on the 61^st day of delinquency, or if the 60 days needed to pass before it could be sent at all.

I wasn’t sure either, so I started to dig.

I started with the exception to the general prohibition on increasing the APR in in section 1026.55(b)(4):

Ҥ1026.55 Limitations on increasing annual percentage rates, fees, and charges.

(b) Exceptions. A card issuer may increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception set forth in this paragraph even if that increase would not be permitted under a different exception.

(4) Delinquency exception. A card issuer may increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) due to the card issuer not receiving the consumer's required minimum periodic payment within 60 days after the due date for that payment, provided that:

(i) The card issuer must disclose in a clear and conspicuous manner in the notice of the increase pursuant to §1026.9(c) or (g):

(A) A statement of the reason for the increase; and

(B) That the increased annual percentage rate, fee, or charge will cease to apply if the card issuer receives six consecutive required minimum periodic payments on or before the payment due date beginning with the first payment due following the effective date of the increase; …”

Section 1026.55 points the reader to section 1026.9 for details about sending the notice. Section 1026.9(g) contains information specific to sending a notice regarding a penalty APR:

“(g) Increase in rates due to delinquency or default or as a penalty—

(1) Increases subject to this section. For plans other than home-equity plans subject to the requirements of §1026.40, except as provided in paragraph (g)(4) of this section, a creditor must provide a written notice to each consumer who may be affected when:

(i) A rate is increased due to the consumer's delinquency or default; or

(ii) A rate is increased as a penalty for one or more events specified in the account agreement, such as making a late payment or obtaining an extension of credit that exceeds the credit limit.

(2) Timing of written notice. Whenever any notice is required to be given pursuant to paragraph (g)(1) of this section, the creditor shall provide written notice of the increase in rates at least 45 days prior to the effective date of the increase. The notice must be provided after the occurrence of the events described in paragraphs (g)(1)(i) and (g)(1)(ii) of this section that trigger the imposition of the rate increase.”

(Emphasis added.) This feels like an answer, because it says the creditor shall provide the notice AFTER the occurrence of the events. But the events it references are those “described in paragraph (g)(1)(i)" of section 1026.9... not section 1026.55. Section 1026.9(g)(1)(i) says nothing about 60 days’ delinquency. The language of (g)(1)(i) is merely the “consumer’s delinquency or default.” The consumer is typically “delinquent” following the expiration of their grace period. However, it seems strange that section 1026.9(g) would allow a notice of a rate change to be sent following a delinquency of one day, when a delinquency of 60 days is the minimum before section 1026.55 would allow the rate to actually be changed.

The commentary to section 1026.9(g) provides a little guidance regarding the relationship of the two sections:

“9(g) Increase in Rates Due to Delinquency or Default or as a Penalty

1. Relationship between § 1026.9(c) and (g) and § 1026.55—examples. Card issuers subject to § 1026.55 are prohibited from increasing the annual percentage rate for a category of transactions on any consumer credit card account unless specifically permitted by one of the exceptions in § 1026.55(b). See comments 55(a)-1 and 55(b)-3 and the commentary to § 1026.55(b)(4) for examples that illustrate the relationship between the notice requirements of § 1026.9(c) and (g) and § 1026.55.”

That tells us nothing! So the commentary to section 1026.9(g) points you to the commentary to section 1026.55(a), for more information about how to comply with sections 1026.9(g) and 1026.55(b).

 The commentary to section 1026.55(a) does provide actual examples addressing the timing question:

“B. Account becomes more than 60 days delinquent after provision of §1026.9(g) notice. Same facts as above except the payment due on June 15 of year two has not been received by August 15. Section 1026.55(b)(4) permits the card issuer to apply the 28% penalty rate to the $1,500 purchase balance and the $200 purchase because it has not received the June 15 payment within 60 days after the due date. However, in order to do so, §1026.55(b)(4)(i) requires the card issuer to first provide an additional notice pursuant to §1026.9(g). This notice must be sent no earlier than August 15, which is the first day the account became more than 60 days' delinquent. If the notice is sent on August 15, the card issuer may begin accruing interest on the $1,500 purchase balance and the $200 purchase at the 28% penalty rate beginning on September 29.” (Emphasis added.) See 12 C.F.R. Part 1026, Supp. I, comment 1026.55(a)-1.iii.B.

AHA! The notice should be sent only once the account is 60 days’ delinquent. One should feel a sense of satisfaction having actually arrived at a solution… and yet…

Get Ready to Submit Credit Card Agreements; ICYMI

Written by Brandy Bruyere, Director of Regulatory Compliance

Sorry everyone, this is not an April Fool’s joke – the rule requiring credit card issuers to submit agreements to the CFPB each quarter will be back in effect at the end of this month. Last year, the CFPB temporarily suspended this rule until April 30, 2016. More details can be found in this past NAFCU blog post. Since April 30 is right around the corner, many credit unions have asked if card agreements need to be submitted this month.

Well, yesterday the CFPB answered this question in a letter indicating that the suspension is not being extended any further, but rather credit card agreements must be submitted by May 2, 2016 as applicable. As a reminder, section 1025.58(c) says the following:

“§1026.58   Internet posting of credit card agreements.

[…]

(b) Definitions—

(1) Agreement. For purposes of this section, “agreement” or “credit card agreement” means the written document or documents evidencing the terms of the legal obligation, or the prospective legal obligation, between a card issuer and a consumer for a credit card account under an open-end (not home-secured) consumer credit plan. “Agreement” or “credit card agreement” also includes the pricing information, as defined in §1026.58(b)(7).

(c) Submission of agreements to Bureau—

(1) Quarterly submissions. A card issuer must make quarterly submissions to the Bureau, in the form and manner specified by the Bureau. Quarterly submissions must be sent to the Bureau no later than the first business day on or after January 31, April 30, July 31, and October 31 of each year…”

Keep in mind that the rule does contain a de minimis exemption in section 1026.58(c)(5) for financial institutions with fewer than 10,000 open credit card accounts as of the last business day of the calendar quarter. 

A credit union’s submission must contain several pieces of information:

• Identifying information about the credit union and the agreements submitted, including the credit union’s name, address, and identifying number (such as a tax identification number);
• The credit card agreements that the credit union offered to the public as of the last business day of the preceding calendar quarter that the card issuer has not previously submitted to the Bureau;
• Any credit card agreement previously submitted to the CFPB that was amended during the preceding calendar quarter and that the card issuer offered to the public as of the last business day of the preceding calendar quarter; and
• Notification regarding any credit card agreement previously submitted to the CFPB that the credit union is withdrawing.

Because the rule’s requirement was suspended for several quarters, there may be new or withdrawn agreements that the credit union has not previously submitted or provided notice to the CFPB, as applicable.  The rule seems to require credit unions to look back over the course of the past year for any new card or withdrawn agreements that were not part of prior submissions to the CFPB. As far as amended agreements, the rule only states that those agreements amended in the past quarter require submission although NAFCU has reached out to the CFPB for clarification on this point.

How to submit credit card agreements. To meet the upcoming May 2 deadline, the CFPB will no longer send the old submitting spreadsheet to card issuers. Instead, the CFPB set up an email address for submitting card agreements:

“You can [submit agreements] by emailing [the CFPB] links to (or webpage addresses for) the consumer credit card agreements that you post on your public website. Current regulations require you to post on your public website a complete set of the consumer credit card agreements that you offer to consumers. (§ 1026.58(d).) The agreements you have to post on your public website are the same as those you need to submit to the Bureau. As a result, sending us the relevant links or webpage addresses is the easiest and most straightforward way to meet your submission requirement.

Include in your email the name and address of the issuer that offers the product, plus a unique identifying number for the issuer such as a DUNS [Data Universal Numbering System] or RSSD [Replication Server System Database] number. Sending us that identifying information plus links or webpage addresses to your properly posted agreements is sufficient to meet all your submission obligations under § 1026.58(c). No other information is required. (Comment 58(c)(1)-3.)

Although the Bureau believes that issuers will generally find that emailing agreement links or webpage addresses to the Bureau is the fastest and simplest way to submit the required agreements, you may also comply by emailing us pdf copies of all the agreements you offered to the public as of the end of March 2016. Alternatively, you may email us the agreements and information identified in § 1026.58(c)(1)(ii), (iii), and (iv). Whatever submission method you choose, remember to include your identifying information.”

The CFPB went on to clarify that these emails should not be sent in an encrypted format and that instructions will be updated for future deadlines (i.e. August 1 and October 31, 2016). Submissions should be sent to [email protected] and the CFPB will provide a confirmation of receipt within two business days.

ICYMI (In Case You Missed It). I also wanted to flag a couple of issues for our blog readers that may be of interest from earlier in the month:

• SCRA Mortgage Protection – The Servicemembers Civil Relief Act contains a provision that protects servicemembers from foreclosure without either a court order or a waiver for 90 days after active duty service ends. Congress has temporarily extended this time period multiple times for periods of up to one year. As we blogged about back in January, the most recent extension of the 90 day time period expired back on December 31, 2015. However, on March 21, 2016 Congress passed a bill that extends the one year protection period through December 31, 2017. The bill is also retroactive to January 1, 2016. President Obama is expected to sign this bill soon. Again, this is not an April Fool’s joke, Congress really did pass a bill!

• NCUA Amends Investments Rule on Bank Notes – at its March meeting, the NCUA Board finalized a rule that changes the maturity requirement for bank note investments, detailed in section 703.14(f)(5). The current rule limits federal credit unions to investing in bank notes with an original weighted average maturity of less than 5 years. The amendment removes the word “original” to provide a little more flexibility to FCUs for these investments.

• CFPB Issues Advisory on Preventing Elder Abuse – On March 21, the CFPB issued an advisory on preventing and responding to elder financial exploitation and a report of recommendations. These resources may be helpful to credit unions concerned about addressing these kinds of issues as they arise with members.

• NCUA March Edition of The NCUA Report, 2015 Annual Report – The March edition of The NCUA Report came out early last week and includes articles on moving to an 18 month exam cycle, the MBL rule and financial literacy. This month NCUA also issued its 2015 Annual Report, which reviews the agency’s objectives for last year, assesses performance such as the agency’s priority goals and includes financial information.

Finally in celebration of Friday, here’s how Lemmy recovers from a puppy play date (or how some of us may feel after a busy week):

 

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.

 

 

CFPB Issues Regulation Z Annual Threshold Adjustments; Fed Adopts Same-Day ACH Processing; A Penny for Your Thoughts

Written by Victoria Daka, Regulatory Compliance Counsel

The CFPB is required to annually adjust certain threshold amounts within various provisions of Regulation Z based on inflation. While it’s not the most exciting task, it has to be done. That said, on September 21, 2015, the bureau published a final rule implementing a few of these adjustments under the CARD Act, HOEPA, TILA, and the Dodd-Frank Act. The rule modifies the credit card penalty fee safe harbor, the HOEPA total loan amount and fee trigger thresholds, and the loan amounts for specific points and fees limits under Regulation Z’s qualified mortgage rule. These amounts are adjusted, where appropriate, based on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2015. The following will outline the adjustments of several provisions in Regulation Z, effective January 1, 2016. However, the minimum interest charge disclosure thresholds will remain unchanged in 2016.

Card Act                                                                                                                                                                              Under section 1026.52(b), fees on credit card accounts must generally be based on costs, but the rule contains safe harbor amounts that are considered compliant. The new safe harbor for a member’s first late payment will be $27 and $37 for subsequent late payments within the same six month period. Credit unions should note that while the first late payment fee remains unchanged, subsequent payments within the six month period decreased by $1 dollar to $37.

HOEPA                                                                                                                                                                       Under section 1026.32(a), for purposes of determining the total loan amount threshold that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percentis $20,350. This is an decrease from the current $20,391 figure. Additionally, for purposes of determining whether a consumer credit transaction that is secured by a consumer's principal dwelling and is not otherwise exempt is covered by § 1026.32 a loan is covered if the points and fees exceed $1,017 or 8 percent of the total loan amount, whichever is lower. This is a decrease from the current $1,020 figure.

TILA                                                                                                                                                                                    Under section 1026.43(e)(3), for purposes of determining whether a covered transaction is a qualified mortgage, a covered transaction is qualified when: the transaction's total points and fees do not exceed 3 percent of the total loan amount for a loan amount greater than or equal to $101,749; $3,052 for a loan amount greater than or equal to $61,050 but less than $101,749;  5 percent of the total loan amount for loans greater than or equal to $20,350 but less than $61,050; $1,017 for a loan amount greater than or equal to $12,719 but less than $20,350, and 8 percent of the total loan amount for loans less than $12,719. Credit unions should note that these are all increases from the current figures.

The CFPB’s final rule can be found here.

***

Fed Adopts Same-Day ACH Processing                                                                                                                         

On September 23, 2015, the Federal Reserve Board approved the NACHA mandatory same-day automated clearinghouse processing rules adopted in May. Same day transactions will begin to phase in starting September 2016. The new rule “requires receiving depository financial institutions (RDFIs) to participate in the service and originating depository financial institutions (ODFIs) to pay a fee to RDFIs for each same-day ACH forward transaction,”

The Board's Federal Register notice can be viewed here. For more information on NACHA’s same-day ACH, check out this blog post.

***

A Penny for Your Thoughts

Back when I was new to compliance, I wish there had been a “compliance officer 101” type of resource. There are so many regulations that compliance officers need to be aware of, including -- TILA/RESPA Integrated Disclosures, Regulation B, Regulation CC, Regulation D, Regulation DD, Regulation E, Regulation J, Regulation P, Regulation V, Regulation X, Regulation Z, and UDAAP -- just to name a few. Oh yea, and then there is the E-SIGN Act, too! You can’t forget about those electronic disclosures.  With all of these regulations, how do they all work in tandem? And then there are policies, which ones require board approval?

Whether you’re new to compliance and share my rookie-days sentiments, or are a seasoned compliance officer, we’re working on a new electronic resource to help you navigate your way through the regulatory-compliance land of credit unions.

My question to you – what did you use when you were brand new to compliance? Or are you still looking for that perfect resource to help you with your day-to-day compliance needs?

CFPB Issues Interpretive Rule on Homeownership Counseling Requirements, and Finalizes One-Year Suspension of TILA Requirement for Quarterly Submission of Credit Card Agreements

Written by Eliott C. Ponte

CFPB Issues Interpretive Rule on Homeownership Counseling Requirements.  The CFPB issued a final interpretive rule, amending its 2013 guidelines, to assist lender compliance with RESPA and TILA homeownership counseling requirements. 

Under RESPA, credit unions must provide applicants for a federally related mortgage loan with a clear and conspicuous written list of certified homeownership counselors.  12 C.F.R. 1024.20(a)(1).  RESPA states a credit union may use one of two methods for generating the required list.  First, a credit union can use a tool developed and maintained by the CFPB.  Second, a credit union can use data made available by the CFPB or HUD, provided the data are used in accordance with instructions provided with the data.  12 C.F.R. 1024.20(a)(1)(ii).  The interpretive rule describes instructions for credit unions to use in complying with the second method for generating a list.  The interpretive rule addresses the number of counselors that must appear on a list of counselors (according to the CFPB, listing ten housing counseling agencies ensures fairness among housing counseling agencies), the use of zip codes to generate a list of counselors, counselor contact information, and combining the list of counselors with other discourses. 

TILA prohibits a credit union from making a high-cost mortgage loan (as defined by HOEPA) unless it receives written certification that the member has obtained mortgage counseling from an approved counselor.  The interpretive rule clarifies the qualifications necessary to provide high-cost mortgage counseling, and provides guidance on the issue of credit union participation in counseling. 

With regard to the credit union’s participation in counseling, it is the CFPB’s position that “counselor independence and impartiality, which the anti-steering provision seeks to preserve, may be adversely affected by a concern that another counselor may be selected or the content of the counseling influenced if the counselor requests that the [credit union] not listen to the counseling and the [credit union] does not agree.”  See final interpretive rule page 12.  Therefore, the interpretive rule states that credit unions will “comply with the anti-steering provision if a counselor is allowed to request that the creditor not participate or listen on the call.”  Id.  However, the CFPB is not enacting a prohibition on credit union’s participation, as the CFPB states that a “counselor ... is allowed to request that a [credit union] participate in a call or a portion of a call.”  Id. 

CFPB Finalizes One-Year Suspension of TILA Requirement for Quarterly Submission of Credit Card Agreements.  Last week the CFPB issued a final rule adopting a one-year suspension of its own regulation that requires certain credit card issuers to send their credit card agreements to the CFPB each quarter. Under the final rule, credit card issuers will not be required to submit agreements that would otherwise have been due to the CFPB by the first business day on or after April 30, July 31, and October 31 of 2015, and January 31, 2016.  The suspension does not affect the requirement for issuers to post their credit card agreements on their own publicly available websites.  12 C.F.R. 1026.58(d).

The rationale behind the suspension of quarterly submissions is so the CFPB can develop a more streamlined and automated electronic submission system. In its statement, the CFPB said the new system should enable faster posting of new and revised agreements on its website.

Credit card issuers must resume submitting credit card agreements on a quarterly basis to the CFPB starting on April 30, 2016.  In lieu of providing new and amended agreements and notice of withdrawn agreements for the April 30, 2016 submission, issuers are permitted to submit to the CFPB a complete, updated set of agreements offered to the public as of the calendar quarter ending March 31, 2016.  See comment 58(c)(1)-3.

CFPB Proposes to Temporarily Suspend Submissions of Quarterly Credit Card Agreements; NCUA to Host FOM Webinar

Written by Brandy Bruyere, Regulatory Compliance Counsel

Proposed Suspension of Credit Card Agreement Submissions. On February 24^th, the Consumer Financial Protection Bureau (CFPB) issued a proposal to temporarily suspend the Truth in Lending Act’s (TILA) requirement that credit unions submit credit card agreements to the CFPB on a quarterly basis. See 12 C.F.R. 1026.58(c). Under this rule, credit unions must provide the CFPB with their credit card agreements every quarter unless the card agreement continues to be offered and has not been amended. Keep in mind that the rule contains exceptions for certain private label cards and those credit unions with fewer than 10,000 open credit card accounts, and the proposal would not impact these exceptions.

The CFPB’s current process for enforcing this rule requires credit unions to submit card agreements to the CFPB by email, which can be “cumbersome” and make it difficult for a credit union to track its prior submissions. CFPB staff then “manually review, catalog, and upload new or revised agreements” to the bureau’s website which can take several months. The proposal would suspend the reporting requirements under section 1026.58(c) until April 30, 2016, when credit unions would have to submit agreements from the first quarter of 2016. During the suspension, the CFPB plans to work on “develop[ing] a more streamlined and automated electronic submission system.”

The CFPB intends to create and test a new platform that would be faster and easier for credit unions to use for submissions as well as improve the bureau staff’s own management of the sizeable workload that is created by this rule. The CFPB expects an improved process would improve the bureau’s ability to keep its database updated and accurate. In the interim, the CFPB would collect card agreements from large financial institutions’ public disclosures made in accordance with 12 C.F.R. 1026.58(d) and upload these agreements to its own public database.

However, this proposal would not impact the rule’s requirements for a credit union to post its credit card agreements publically on the credit union’s website. NAFCU plans to submit comments supporting the suspension of this rule, and would like to hear from our members regarding any issues or concerns with the current submission process. Comments are due to the CFPB by March 13^th, so please share your experiences by contacting Alicia Nealon, NAFCU Director of Regulatory Affairs, at [email protected].

NCUA Field of Membership (FOM) Webinar. On Wednesday, March 25^th at 2 PM, NCUA will host a free webinar on “Successful Strategies for Field-of-Membership Expansion.”  Topics will include using data to maximize membership growth, business plan templates to assist with applying for FOM expansion, and a review of NCUA’s FOM internet application. A federal credit union will also participate and share its experiences with FOM expansion. To participate in this webinar, register here.

CFPB Warns Credit Card Companies Against Deceptively Marketing Promotional Offers; Free Kick; Farewell

Written by Ricardo Piñeres, Regulatory Compliance Counsel

CFPB Warns Credit Card Companies Against Deceptively Marketing Promotional Offers.  In a bulletin released last week, the Consumer Financial Protection Bureau (CFPB) warned credit unions, and other credit card issuers, against deceptively marketing interest-rate promotions.  The CFPB issued the bulletin because of the Bureau’s concerns regarding the marketing practices of some card issuers, especially with regards to promotional rates and balance transfer offers.

According to a press release that accompanied the bulletin’s release, “[t]he Bureau believes some companies’ marketing materials do not clearly disclose that consumers must pay off the promotional balance by their due date to avoid racking up unexpected interest charges on routine purchases for which they were not charged interest previously. For some consumers, these surprise charges can make the cost of transferring a balance more expensive than revolving the same balance on their existing card.”

After a brief discussion regarding the CFPB’s reasons for releasing the bulletin, the bulletin discusses: the risks of deceptive advertising practices; the risks of abusive practices; and Regulation Z’s disclosure requirements.  Furthermore, the bulletin has a final section that states the Bureau’s expectations for credit card issuers, as follows:

“The Bureau expects credit card issuers to incorporate into their compliance management systems adequate measures to prevent violation of Federal consumer financial laws, including the Dodd-Frank Act’s prohibitions on unfair, deceptive, or abusive acts or practices.  Consequently, credit card issuers are expected to implement internal controls sufficient to ensure that they market promotional APR offers in a manner that limits the risk of statutory or regulatory violations and related consumer harm.  These steps should include, but are not limited to, ensuring that:

• All solicitations, applications, account-opening materials, and convenience checks comply with the requirements in Regulation Z;
• All marketing materials clearly, prominently, and accurately describe the material costs, conditions, and limitations associated with the offers; and
• All marketing materials clearly, prominently, and accurately describe the effect of promotional APR offers on the grace period for new purchases.”

In addition to the bulletin and the press release, the CFPB also hammered home their perspective with a consumer-facing post on the Bureau’s blog.  The blog post warned consumers to be on the lookout for deceptive advertisements regarding promotional rates, and also warned consumers on the implications of losing the protections of the grace period.

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Free Kick.  My wife and I just got back from a great week on vacation in the city of my birth – Cartagena, Colombia.  While there, we were lucky to get to watch Colombia’s friendly against Brasil on television.  Sadly, Neymar found enough magic on a free kick to give Brasil a 1-0 victory.  That being said, watching the match at a restaurant in Cartagena reminded me of why I fell in love with football.  It may have only been a friendly, but it seemed like every other person was wearing a national team jersey and the city came to stop for those two hours while people were glued to the game cheering on their Seleccion Colombia.  It was an absolutely wonderful way to cap off a summer that brought me so much joy after having not seen Mi Seleccion in a World Cup since 1998.  I can’t wait to see wait the next four years under Jose Pekerman bring to Colombia.  In the meantime, here are two videos from Colombia’s World Cup opener that still give me goose bumps: Colombian National Anthem and Caracol Highlights.

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Farewell.  This will be my final blog post here at the NAFCU Compliance Blog.  While I have decided to leave the NAFCU Compliance team in order to head back to the government relations field, I have thoroughly enjoyed these past eight months of covering compliance hot topics and providing my take on the wonderful world of football.  It has also been a pleasure providing compliance advice to the many of you that have called or emailed with compliance questions.  I leave behind some great colleagues here at NAFCU Compliance, and I thank them for sharing their knowledge, thus making me a better attorney.  Lastly, I also want to thank all of the readers of this blog.  It has been so much fun interacting with you and trading perspectives on the beautiful game and sharing in the excitement of a truly incredible World Cup.