NAFCU Compliance Blog

Monday Morning Compliance Round-Up; Useful Resources

Written by Brandy Bruyere, Regulatory Compliance Counsel

Happy March! With any luck, it will start to feel like spring again for those of us who are getting a bit tired of winter. Since it’s the first Monday of the month, we thought we would start this week off with a low-impact post that brings us up to date on a few different compliance-related developments.

CFPB Calls on Credit Card Companies to Provide Credit Scores

Last week, the CFPB released a report and bulletin regarding consumer complaints about credit reporting companies including accuracy in credit reports. As part of the Bureau’s response to this issue, CFPB Director Richard Cordray called on credit card companies to make “credit scores freely available on [consumers’] monthly statement or online.” While there are a few large credit card companies who are already offering this service to their customers, this is not a current regulatory requirement. However, it may be a sign of things to come from the CFPB.

CFPB Cracks Down on Student Lending

Back in December, the CFPB announced it would oversee the largest nonbank student loan servicers. The Bureau wasted little time as Discover Financial Services disclosed in its annual securities filing that the CFPB is investigating the company’s student loan servicing practices. The CFPB also filed suit last week against a for-profit college for predatory lending in relation to its student loan programs. As credit unions increase their involvement with private student lending, they may want to monitor the increased CFPB action in this area.

NCUA Releases Voluntary Liquidation Proposal

At its February 20^th meeting, the NCUA Board issued a proposed amendment to its voluntary liquidation regulation. The proposal includes a few changes that aim to reduce the burden on credit unions that are voluntarily liquidating. For example, the proposed changes would allow such credit unions to publish required creditor notices in electronic media and exempt credit unions with less than $1 million in assets from publication generally. Also, credit unions under $50 million in assets would be exempt from the requirement to make creditor publications in multiple sources.

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Below are a couple of resources you may find useful for starting off a new month.

NCUA to Hold BSA Webinar. On Wednesday, March 19^th, NCUA will host a free webinar titled “BSA-MSB Training: What You Need to Know.” The webinar will be a panel and cover topics such as the critical elements of a BSA program, Money Service Businesses, common BSA violations, and reporting requirements. Attendees who successfully complete a test at the end of the webinar will receive a certificate of training. Those interested in this program can register here.

Kaufman & Canoles. Attorneys at Kaufman & Canoles released their Credit Union Legal Update—Winter 2014. This update discusses recent court rulings that may impact credit unions.

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New Toys. Lemmy is not crated during the day while my husband and I go to work. We leave some toys out for him, but never the stuffed ones because sometimes he tears the toy open and gets into the stuffing. As a rescued yard dog, Lemmy still sometimes struggles to identify the difference between food and non-food. So, some toys must be taken away before we leave, resulting in what I call “sad mastiff face.”

2014 HMDA Reporting Threshold; CARD Act and HOEPA Annual Adjustments; Asset-Threshold for HPML Escrow Exemption; Early Bird Savings for NAFCU’s Regulatory Compliance School

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

2014 HMDA Asset Threshold. The CFPB has issued a final rule, effective January 1, 2014, adjusting the asset-size exemption threshold for banks, savings associations, and credit unions under Regulation C, which implements the Home Mortgage Disclosure Act (HMDA).

For 2014, the exemption threshold is $43 million (up from $42 million). Banks, savings associations, and credit unions with assets of $43 million or less as of December 31, 2013, are exempt from collecting data in 2014. Note that an institution’s exemption from collecting data in 2014 does not affect its responsibility to report the data it was required to collect in 2013. The CFPB’s press release is available here.

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CARD Act Penalty Fees Safe Harbor. The CFPB also issued a final rule amending the safe harbor threshold amounts for credit card penalty fees in Regulation Z, section 1026.52(b)(1)(ii)(A) and (B).

Effective January 1, 2014, the adjusted dollar amount for the penalty fees safe harbor is $26. The safe harbor for each subsequent violation within the following six months is $37.

HOEPA Annual Threshold Adjustment. In the same final rule, the CFPB adjusted the statutory fee trigger for HOPEA loans to $632, effective January 1, 2014. Keep in mind that this adjustment applies to loans consummated on or after January 1, 2014, and will apply until the revised HOEPA fee trigger adopted in the CFPB’s 2013 HOEPA final rule takes effect on January 10, 2014. This issue is discussed in the preamble to the final rule:

“The fee trigger being adjusted in this Federal Register notice pursuant to TILA section 103(bb) is used in determining whether a loan is covered by § 1026.32. Such loans have generally been known as “HOEPA loans.” On January 10, 2013, the Bureau issued a final rule pursuant to, inter alia, section 1431 of the Dodd-Frank Act, which revised the statutory fee trigger for HOEPA loans. 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule). The amendments adopted in the 2013 HOEPA Final Rule, including the revised fee trigger, apply to loans for which the creditor received an application on or after January 10, 2014. Id. at 6939. The Bureau is mindful of the need to coordinate implementation of this final rule with the effective date of the January 10th final rule adopting revisions to the HOEPA fee trigger. Accordingly, the adjustment to the fee trigger that is being published today will become effective on January 1, 2014, will apply to loans consummated on or after January 1, 2014, and will apply until the revised HOEPA fee trigger takes effect. Pursuant to section 1431 of the Dodd Frank Act and § 1026.32(a)(1)(ii) as amended by the 2013 HOEPA Final Rule, implementation of the 2013 HOEPA Final Rule will change the HOEPA fee trigger to $1,000, which will be adjusted annually thereafter in accordance with § 1026.32(a)(1)(ii) as amended by the 2013 HOEPA Final Rule. Id. at 6968.” (My emphasis)

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Asset-Threshold for HPML Escrow Exemption.  And the last threshold of mention today: the CFPB issued a final rule effective January 1, 2014 that implements an automatic adjustment to the asset-size exemption for the TILA Higher-Priced Mortgage Loans (HPMLs) escrow account regulation. The rule requires that credit unions maintain an escrow account to cover the costs of property taxes and insurance for HPMLs for a minimum of five years. There is an exemption for certain credit unions that meet the following requirements:

• Operate in a predominantly rural or underserved area;
• The credit union retains its mortgage obligations in portfolio;
• Originated less than 500 first-lien HPMLs during the preceding calendar year; and
• Do not exceed the asset-size threshold set by the CFPB

This final rule will determine which entities qualify for this exemption for 2014. The CFPB is increasing the asset-size threshold by 1.4%, from $2 billion to $2.028 billion. Credit unions that originated fewer than 500 first-lien HMPLs and whose assets were $2.028 billion or below as of December 31, 2013 will be exempt from the TILA escrow requirement for HPMLs. The CFPB’s press release is available here.

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Early Bird Savings for NAFCU’s Regulatory Compliance School. Ready to tackle the new year and get control over compliance issues? Register by January 10 for our Regulatory Compliance School and you’ll save $200 off the registration by using code “HOLIDAY”.  Need a little more time? Register by January 17 and you’ll still save $100 with early bird savings.

CFPB’s Findings on the CARD Act; NCUA’s 2014 Board Meeting Schedule; Extra! Extra! Buy NAFCU’s 2013 Credit Union Compliance GPS and Get the 2014 Manual Free!

Written by JiJi Bahhur, Regulatory Compliance Counsel

CFPB’s Findings on the CARD Act.  The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was signed into law in May 2009 with the intent of establishing fair and transparent practices in the credit card market.  Last week, the CFPB released a report detailing how the CARD Act has, as intended, increased consumer protections and fairness, including reducing penalty fees and making the cost of credit cards clearer to consumers. 

In preparing its report, the CFPB used data covering most of the credit card marketplace.  Based on this data, several findings were made.  As summarized by the press release, the report found that:

• “Total cost of credit declined: The CFPB found that the total cost of credit declined by two percentage points between 2008 and 2012. The total cost of credit includes all fees, interest, and finance charges paid by the consumer to the card issuer. The decline in the total cost of credit has occurred even as annual fees and interest rates have increased, indicating a shift from back-end pricing toward more transparent front-end pricing that consumers can understand and evaluate more easily.

• Overlimit fees have been effectively eliminated: Before the CARD Act took effect, card issuers could charge an overlimit fee for transactions that put cardholders over their credit limit. Each overlimit transaction could result in an additional overlimit fee. With the law’s requirement that consumers opt-in to fees before they are allowed to exceed their credit limit, the CARD Act essentially eliminated overlimit fees as a source of cost to consumers and revenue to issuers. The report found that consumers paid about $2.5 billion less in overlimit fees than they paid in 2008.

• Size of late fees declined: The CARD Act required that penalty fees, such as late fees, be “reasonable and proportional” to the relevant violation of account terms. As a result, the report found that the average size of late fees diminished. The CFPB estimates that the average late fee went down by $6 after the CARD Act took effect. Based on the data used to prepare the report, that reduction resulted in a $1.5 billion decrease in late fees paid by consumers in 2012.

• Responsible access to credit remains available: As the financial crisis hit, creditors faced losses and as a result, implemented more restrictive credit standards. While the amount of available credit card credit has generally decreased since the financial crisis began, there is still $2 trillion of unused credit for consumers with credit cards in the marketplace. One factor affecting credit availability is a notable drop in the number of consumers who receive unsolicited credit limit increases on their accounts. Now that consumers have to ask for their credit limit to be raised rather than having it happen automatically, these increases are happening less frequently.

• Young consumers are better protected from credit cards they cannot afford: Before the CARD Act, it was often too easy for young consumers to rack up unmanageable credit card debt and damage their credit rating. Now, consumers under the age of 21 cannot get a credit card unless they can demonstrate an independent ability to repay the debt or unless they have a cosigner over 21. The report found that the percent of young adults ages 18-20 that have at least one credit card account has dropped by half.”

Although the overall findings included a two-percentage point decline in the total cost of credit between 2008 and 2012, there are still areas of concern in the credit card market.  Some of the areas of concern include add-on products, fee harvester cards, deferred interest products, and disclosures – all of which are discussed in more detail in the report.  The CFPB will continue to monitor these areas of concern and take action where appropriate.

To view the report in its entirety, click here.  Also, you can view NAFCU’s comment letter on the subject matter here.

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NCUA’s 2014 Board Meeting Schedule. Last Friday, the NCUA Board released its monthly meeting schedule for 2014.  The schedule, subject to change, is available here. 

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NAFCU’s Credit Union Compliance GPS.  Regulatory burden got you down? Well, help is here by way of NAFCU’s 2013 Credit Union Compliance GPS! Newly updated and written by NAFCU’s compliance team, this is an essential resource for all credit union compliance officers and staff. The electronic manual explains complex regulatory language in plain English and includes user-friendly bookmarks, hyperlinks and pagination for easy navigation.  With updated resources and guidance to help your compliance research efforts, this is a must-have reference tool!

With one purchase, you can share the manual with your entire credit union staff for one affordable price - $399 for NAFCU member credit unions and $499 for nonmember credit unions. And, if you purchase the 2013 Credit Union Compliance GPS today, you will get the 2014 Credit Union Compliance GPS when it’s available in March – at no extra cost!  Also, if you register for NAFCU’s Compliance School before the 2014 version is available, you’ll get the benefits of the 2013 version until the 2014 version is available!

What are you waiting for? Get your copy today!

Ability to Pay Rules for Credit Cards Continued – Reputation Risk if Credit Unions Only Consider Independent Income and Assets?

Written by Bernadette Clair, Regulatory Compliance Counsel

Recently, I blogged about the CFPB’s final rule amending Regulation Z’s ability to pay rules for credit cards to allow card issuers to consider income and assets that a consumer has a reasonable expectation of access to when determining the consumer’s ability to pay.

In my previous blog, I mentioned that under the final rule a card issuer could choose to consider income and assets to which a consumer age 21 and over has a reasonable expectation of access, OR they could choose to limit consideration of a consumer’s income or assets to the consumer’s independent income and assets. While this flexibility may seem to be a good thing, there are potential pitfalls to keep in mind if your credit union chooses to only consider a consumer’s independent income and assets when determining ability to pay.

For example, some commenters raised concerns that if a card issuer decides to use only the independent ability to pay criterion, it could be risking Equal Credit Opportunity Act (ECOA) and Regulation B violations based on sex or marital status.  From the preamble to the final rule:

“As noted above, one trade association expressed concern that issuers who decide to use only the independent ability-to-pay criterion for applicants age 21 or older might risk violating ECOA and Regulation B—on the theory that doing so would disadvantage non-working spouses, who are likely to be predominantly female, while another industry commenter expressed concern that application of the reasonable expectation of access criterion may result in potential ECOA and Regulation B violations based on marital status. As discussed above, the final rule permits card issuers the flexibility to consider a consumer's ability to pay using the reasonable expectation of access criterion adopted in the final rule or instead using the independent ability-to-pay criterion. The Bureau recognizes that, depending on their business models, some card issuers may decide to use the independent ability-to-pay criterion. The Bureau understands that card issuers regularly make decisions about their tolerance for repayment risk and that such decisions are a proper and entirely appropriate consideration in crafting underwriting decisions. The final rule specifically provides flexibility on this point. The Bureau expects that card issuers will give careful consideration to how to use the discretion allowed under the rule's flexible approach, in light of the issuers' loss experiences, risk appetites, and other pertinent factors, including the potential effect of the decision on an ECOA protected class. The Bureau does not expect that issuers will necessarily have conducted a quantitative analysis in support of those decisions, but that they will be able to explain the reasoning that went into their decisions and the effects of those decisions. The Bureau is committed to engaging with stakeholders as they implement the new rule.” (Emphasis added).

The CFPB notes that the rule specifically allows for the flexibility to use the independent ability to pay criterion, but at the same time states that it expects card issuers to consider pertinent factors, including the potential effect of the decision on an ECOA protected class.  Comforting words indeed!

Given the current environment of increased regulatory scrutiny on fair lending issues and the reputation risk associated with even the perception of having a discriminatory lending policy, this new underwriting flexibility may be somewhat dubious.

Looking for a real world example?  Take a look at this blog post.

Ability to Pay Rules for Credit Cards – Credit Unions Can Still Require Independent Income and Assets

Written by Bernadette Clair, Regulatory Compliance Counsel

I hope everyone enjoyed the holiday weekend!  Now, it’s back to the grind…

Earlier this month, my colleague JiJi blogged about the CFPB’s final rule amending Regulation Z’s ability to pay rules for credit cards. For consumers age 21 and over, these changes allow credit unions and other card issuers to consider income and assets that a consumer has a reasonable expectation of access to as the consumer’s income or assets.

We’ve received questions from quite a few folks about this change – in particular, whether a credit union is now required to include the income and assets that a consumer has a reasonable expectation of  access to when considering a consumer’s ability to pay. Answer: No.

Under the CFPB’s final rule, card issuers can choose to establish lending policies and procedures that consider income and assets to which a consumer age 21 and over has a reasonable expectation of access, OR they can choose to limit consideration of a consumer’s income or assets to the consumer’s independent income and assets. (Keep in mind that for consumers under the age of 21, section 1026.51(b)(1)(i) requires card issuers to consider independent ability to pay.)

From the rule:

“(a) General rule— (1)(i) Consideration of ability to pay. A card issuer must not open a credit card account for a consumer under an open-end (not home-secured) consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the consumer's ability to make the required minimum periodic payments under the terms of the account based on the consumer's income or assets and the consumer's current obligations.

(ii) Reasonable policies and procedures. Card issuers must establish and maintain reasonable written policies and procedures to consider the consumer's ability to make the required minimum payments under the terms of the account based on a consumer's income or assets and a consumer's current obligations. Reasonable policies and procedures include treating any income and assets to which the consumer has a reasonable expectation of access as the consumer's income or assets, or limiting consideration of the consumer's income or assets to the consumer's independent income and assets. Reasonable policies and procedures also include consideration of at least one of the following: The ratio of debt obligations to income; the ratio of debt obligations to assets; or the income the consumer will have after paying debt obligations. It would be unreasonable for a card issuer not to review any information about a consumer's income or assets and current obligations, or to issue a credit card to a consumer who does not have any income or assets.” 12 CFR 1026.51(a)(1) (emphasis added).

 In other words, for consumers age 21 and over, a card issuer may consider income and assets to which an applicant has a reasonable expectation of access, but is not required to do so.

One issue to consider, however, is whether choosing to exclude this type of income will leave your credit union at a competitive disadvantage compared to other lenders.  Food for thought.

CFPB Issues Final CARD Act Rule: Stay-at-Home Spouses and Partners

Written By JiJi Bahhur, Regulatory Compliance Counsel

Recently, the Consumer Financial Protection Bureau (CFPB) finalized amendments to the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), making it easier for spouses and partners who do not work outside of the home to qualify for credit cards.  In the existing regulation, card issuers were limited to consideration of only a card applicant’s independent income or assets, thus resulting in numerous creditworthy applicants – such as stay-at-home spouses and partners – being declined credit card access even though they had the means to pay the debt. 

The final amendments to the CARD Act now allow credit card issuers to consider income that a stay-at-home applicant, who is 21 or older, shares with a spouse or partner when evaluating the applicant for a new account or increased credit limit. From the summary of the final rule:

“The final rule has four main elements. First, the final rule generally removes references to an “independent” ability-to-pay standard from § 1026.51(a)(1) and associated commentary.  As a result, card issuers are no longer required to consider whether consumers age 21 or older have an independent ability to pay; instead, card issuers are now required by Regulation Z to consider the consumer’s ability to pay. Second, in determining a consumer’s ability to pay, the final rule permits issuers to consider income or assets to which an applicant or accountholder who is 21 or older – and thus subject to § 1026.51(a) rather than § 1026.51(b) ‒ has a reasonable expectation of access. The final rule clarifies by examples in the commentary those circumstances in which the expectation of access is deemed to be reasonable or unreasonable. Third, the final rule continues to require in §1026.51(b)(1)(i) that consumers under the age of 21 without a cosigner or similar party who is 21 years or older have an independent ability to pay, consistent with TILA section 127(c)(8). Finally, the final rule clarifies that application of the independent ability-to-pay standard to consumers under 21, consistent with Regulation Z, does not violate the Regulation B prohibition against age-based discrimination.”

The final rule can be found here.  The final rule took effect on May 3, 2013 and requires mandatory compliance by no later than November 4, 2013, although card issuers may, at their option, come into compliance before that date.

30 Minutes to Report Credit Card Plans?; Consumer Compliance Outlook; HELOC Webcast

Written by Steve Van Beek

Information Collection on Report for Credit Card Plans. Remember back on February 1 where I got all bent out of shape regarding the CFPB's expansion of their Credit Card Survey to certain credit unions with 10 days notice? 

Yesterday, the CFPB issued an Information Collection Request which asks whether the 30 minutes it estimates for financial institutions - including approximately 20 of the largest credit unions - is accurate. 

"Request for Comments: Comments are invited on: (a) Whether the collection of information is necessary for the proper performance of the functions of the Bureau, including whether the information shall have practical utility; (b) The accuracy of the Bureau's estimate of the burden of the collection of information, including the validity of the methods and the assumptions used; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; and (d) Ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Comments submitted in response to this notice will be summarized and/or included in the request for Office of Management and Budget (OMB) approval. All comments will become a matter of public record."  (Emphasis added).

The reporting form is FR 2572. And, you can also review the instructions and form (opens as an Excel document) for responding to the report. After reading the instructions, would you say that completing the task would take 30 minutes?  Me neither.  

For the 20 or so credit unions who were recently added to the Report - did it take your credit union 30 minutes?  For those credit unions who weren't covered - how long did it take you to determine you weren't covered?  

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Consumer Compliance Outlook. The First Quarter issue of the Philadelphia Federal Reserve's Consumer Compliance Outlook is now available. The articles this issue include:

• Servicemember Financial Protection Webinar: Questions and Answers
• 2012 Year in Review Webinar: Questions and Answers
• Credit CARD Act Requirements for Gift Certificates, Store Gift Cards, and General-Use Prepaid Cards

You can also download the full PDF here.

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HELOC Webcast. Don't miss NAFCU's webcast tomorrow on Which New Requirements Apply to HELOCs? - where I'll be walking through the new mortgage requirements that apply to HELOCs.   

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Wow - you couldn't ask for a better game last night (a different outcome, sure!).  Hats off to Louisville on a great season and an outstanding game. For Michigan - what a run and well done. 

I'll leave you with my favorite image from the game (Getty Images):

Oh, yeah - that was called a foul. One thing is for sure, the blog has definitely upped its basketball coverage since the days of Anthony's Penn State Nittany Lions. Fred also mentioned the coverage was a little too skewed to Michigan - so here is a link to Navy's season as well (does David Robinson have any eligibility left?).   

CFPB Issues New Credit Card Requirement for Certain CUs - Only Gives 10 Business Days to Comply

Written by Steve Van Beek

Hopefully that headline got your attention!  Unfortunately, this seems to be a real requirement for certain credit unions and it shows how out of touch the Consumer Financial Protection Bureau (CFPB) is with how credit unions operate.  It also shows how the CFPB says one thing - we understand the regulatory burden on credit unions - but then does another.

The Surprise from the CFPB.  On Wednesday evening (January 30th), the CFPB sent an email to 160 credit card issuers requesting information for their credit card survey under Section 136 of the Truth in Lending Act (which was added by the Fair Credit and Charge Card Disclosure Act of 1988).  The email indicated that responses needed to be returned 10 business days after January 31, 2013 (no firm date was included - institutions will have to count for themselves). 

Where do Credit Unions Fit In?  The CFPB took over responsibilities for Section 136 of TILA after the transfer of authority in July 21, 2011.  Historically, this credit card survey was performed by the Federal Reserve and credit unions were not part of the survey.  This all changed on Wednesday evening, when the CFPB sent the email to the 160 credit card issuers - including approximately 20 credit unions (the CFPB has not provided the list of the 160 institutions).    

The CFPB's Confusing Language.  The CFPB's email did not make clear that responding to the survey - for those lucky card issuers - was a legal requirement.  The CFPB stated: "Your institution was selected to participate a [sic] semiannual survey on the terms of credit card plans as mandated by the Fair Credit and Charge Card Disclosure Act of 1988."  Ok, we have the terms "selected" and "mandated."  That naturally causes confusion.  Credit unions aren't used to having regulatory requirements apply on a "selective" basis.  So, it would make sense to go to the link included in the email, right?

The credit card survey information is on the right hand side of the page - including this language:

"Survey of credit card plans

The CFPB began to survey semi-annually the terms of credit card plans (FR 2572) offered by financial institutions on January 31, 2012, and publishes a report of the findings. The report includes information from the largest credit card issuers in the country, as well as other financial institutions that wish to participate in the survey."

Read that line again - "other financial institutions that wish to participate in the survey."   Seems like a voluntary issue, right?  That clears up the "selected" versus "mandated" issue, doesn't it?  

Well, a good compliance officer is sure to check additional sources - such as the Form 2572 - which the CFPB hyperlinks.  That page includes this information:

"Background: The Fair Credit and Charge Card Disclosure Act of 1988 required the Federal Reserve Board to develop a credit card survey. The Board published the first report in March 1990, outlining credit card plans available on January 31, 1990.

Respondent Panel: The panel consists of the 25 largest issuers of bank credit cards and 125 additional institutions, based upon the outstanding amount of revolving credit reported on the Call Report. Respondents include commercial banks, savings and loans, savings banks, and finance companies that issue credit cards through a bank or thrift. Participation is required of the 25 largest issuers; other financial institutions participate voluntarily."  (emphasis added).

Case closed - right?  There can't possibly be more.  This is so clear - on its face - that this is an optional, voluntary, selective survey, right?  

Wrong. Wrong. Wrong.  The language of Section 136 of TILA includes:

"§ 136.  Dissemination of annual percentage rates; implementation, etc.

(a)  ANNUAL PERCENTAGE RATES.--The Bureau shall collect, publish, and disseminate to the public, on a demonstration basis in a number of standard metropolitan statistical areas to be determined by the Bureau, the annual percentage rates charged for representative types of nonsale credit by creditors in such areas. For the purpose of this section, the Bureau is authorized to require creditors in such areas to furnish information necessary for the Bureau to collect, publish, and disseminate such information.

(b)  CREDIT CARD PRICE AND AVAILABILITY INFORMATION.--

(1)  COLLECTION REQUIRED.--The Bureau shall collect, on a semiannual basis, credit card price and availability information, including the information required to be disclosed under section 127(c) of this chapter, from a broad sample of financial institutions which offer credit card services.

(2)  SAMPLE REQUIREMENTS.--The broad sample of financial institutions required under paragraph (1) shall include--

(A)  the 25 largest issuers of credit cards; and

(B)  not less than 125 additional financial institutions selected by the Bureau in a manner that ensures--

(i)  an equitable geographical distribution within the sample; and

(ii)  the representation of a wide spectrum of institutions within the sample.

(3)  REPORT OF INFORMATION FROM SAMPLE.--Each financial institution in the broad sample established pursuant to paragraph (2) shall report the information to the Bureau in accordance with such regulations or orders as the Bureau may prescribe.

...."

Notice the highlighted text in Section 136 of TILA.  I'm not an English major but I'm pretty sure "shall" and "required" are not synonyms for "wish to participate" and "voluntary."  Shame on the CFPB.

Voluntary or Required?  The statutory language and NAFCU's discussion with CFPB staff point toward a requirement, but the clear language on both the CFPB and the Federal Reserve websites indicate this is voluntary for all but the largest 25 credit card issuers.  Chalk another one up to regulatory uncertainty.

The End Result.  Those 20+ credit unions who received the CFPB's credit card survey have 10 business days after January 31, 2013 to respond to the survey.  Ultimately, the uncertainty regarding the required/voluntary nature of the way the CFPB communicated this issue means that credit unions receiving the survey will need to make a business decision regarding how to proceed (including, perhaps, calling the CFPB for additional clarification). 

Those lucky credit unions who did not receive the survey (by the way, what if the point person the CFPB sent the survey to was on a 2-week vacation, or mandatory leave, or just left the CU?) would not be required to submit the survey.  But, this should be a wake-up call to all credit unions that the CFPB may be talking the talk when it comes to regulatory burden - but it is more important that they walk the walk.   

What Should the CFPB have Done?  The rationale behind including credit unions in the survey is not the issue.  It probably makes sense to include credit union card issuers in the survey to get a better sense of the overall credit card market.  But, 10 business days to comply - come on!  A much more appropriate roll-out of this survey requirement would have been to send the survey to the 20+ credit unions and inform them that their participation in this first survey (due 10 business days after January 31st) was truly voluntary to help them get familiar with the process. After that, the CFPB could include those credit unions in the required portion of the survey in the future.  But, right off the bat - out of the blue - a new regulatory requirement with 10 business days to comply.  That is simply shocking in this regulatory environment and it speaks to a lack of coordination and communication inside the CFPB.  

As an alternative - the CFPB could have (but didn't) provide a "30-day notice" to these selected credit unions letting them know they would be included in the upcoming survey and to contact the CFPB if they had any questions on the process.  

But, the CFPB didn't take that approach.  Instead, the CFPB seems to have imposed a new regulatory requirement on 20+ credit unions with only 10 business days to comply.  I'm at a loss of words (not really, as I wrote about 1300 words on the issue) - but you get my point.  

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Note:  The above is a separate requirement from the Credit Card Agreement Submission required by 12 CFR 1026.58 of Regulation Z - which we blogged on January 22nd.  

We've also heard from many credit unions that the CFPB has been unresponsive to their efforts to submit their credit card agreements by yesterday's deadline.  At this point, the CFPB still hasn't provided clear instructions for the process and the best course of action is to document, document, document your efforts to comply.  If the CFPB isn't responsive and you can show a good faith effort to comply, you'd have a pretty good argument against an auditor or examiner.  

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Also, I included this blog post under the blog's UDAP category as the CFPB's action here is pretty unfair.  

Potential Credit Card Surcharges; Legal Hurdles in 2013; NAFCU Member Call-In; Save $100 on NAFCU Conferences; NCCO Exam Info

Written by Steve Van Beek

I'm sure everyone has plenty of reading to do with the mortgage regulations (I sure do!), so here are a few small items that should be on your radar.

Potential Credit Card Surcharges.  As part of a recent settlement, merchants gained the ability to surcharge for credit card purchases on January 27, 2013.  While this won’t directly impact your credit union, it has the potential to impact your members.  It is unknown how prevalent merchant credit card surcharging will be, but it might be a good idea to put an article in your credit union newsletter or some information on your website.  For more information, visit VISA’s website – which includes a list of state laws that still prohibit surcharges.  

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Legal Hurdles in 2013.  The Credit Union Times ran a great article from Andy Keeney of Kaufman & Canoles on Legal Hurdles Facing Credit Unions in 2013.  Be sure to take a look and pass along to your colleagues.

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NAFCU Members:  Don’t miss NAFCU’s first Member Call-In of 2013 – February 12 at 3:30 p.m. EST.  NAFCU’s President and CEO Fred Becker and NAFCU’s Government Affairs team will provide updates on the legislative, regulatory and compliance landscapes.  The call is free, but you must register.  New to 2013: You can submit questions in advance using the form here.  Of course, if you have a specific compliance question you can always email NAFCU’s Compliance team directly.   

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Extra Savings for School & Seminar end on Thursday.  NAFCU is offering $100 off any conference through Thursday, January 31st.  This includes NAFCU's Regulatory Compliance School (March 18-23 at National Harbor, MD) and NAFCU's Regulatory Compliance Seminar (October 22-25 in Nashville, TN).  

Use the promo code NEWYEAR when your register to get the $100 off. 

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School & NCCO Exams.  For those of you registered for School (or considering it), we've put together some FAQs on the process for taking the NAFCU Certified Compliance Officer (NCCO) exams.  We'll also have a NCCO Exam orientation on Sunday, March 17th (optional) as well as quick NCCO Study Sessions at the end of each day to help you keen in on which issues to study for the Exams.  

IRS Issues - Box 4 of 1098 & Truncated TINs Proposal; Credit Card Agreements to CFPB

Written by Steve Van Beek

Whenever I get a chance to talk to regulators directly, I make a point of explaining to them that credit unions are not able to focus solely on their regulations, even if they wanted to.  This morning's blog post is an example of that.  We've all been trying to keep up with the CFPB's final mortgage regulations, but there are plenty of other issues out there to stay on top of.  Plenty.  

***

MLO Compensation (and more) Final Rule.  Oh, and by the way, the CFPB's MLO compensation rule is finally out.  Cordray's remarks are here, the press release here, the summary is here, special regulation page here and the full rule is available here (541 pages).

Effective Date:  The majority of the rule is effective on January 10, 2014.  However, the prohibitions on mandatory arbitration and financing of credit insurance premiums are effective June 1, 2013.

*** 

Now, on to a few other items.

Mortgage Insurance Premiums & 1098s.  Throughout 2012, it was known that mortgage insurance premiums would not be deductible for tax year 2012.  But then the fiscal cliff legislation happened, and mortgage insurance premiums were made retroactively tax deductible and credit unions (and their vendors) scrambled to correct Box 4 of their 1098s.  The IRS issued Internal Revenue Bulletin 2013-3 which indicates that Box 4 - for mortgage insurance premiums - has been reinstated.  Additional information is available in the NAFCU Today.

IRS Proposal for Truncated TINs.  The IRS has been operating a pilot program since 2009 that allows certain filers to truncate Social Security Numbers and TINs on IRS information returns (more on the pilot program is available here).  On January 7th, the IRS proposed a regulation that would allow filers of certain information returns - including credit unions - to use a "truncated taxpayer identification number" (TTIN).  While this is only a proposal at this time, the feedback from the prior pilot program was overwhelming positive and it is likely that credit unions will have the option to use TTINs for next year's IRS information returns.  

Note: The proposal would not require credit unions to use TTINs.  But, you'd have the option.  

I wish other regulators took this approach.  In this situation, the IRS had been getting feedback from filers, consumers and organizations that TTINs would help protect nonpersonal public information and, potentially, reduce identity theft.  Not only did they listen to concerns, but they also proposed a rule that would make this change optional which would allow credit unions to make the transition when the time is right for their credit union (and their vendor).  

***

Credit Card Agreements Due January 31st.  Speaking of other regulators, credit card agreements are due to the CFPB by January 31st.  The underlying requirement comes from 12 CFR 1026.58(c).  These agreements need to be sent quarterly:  January 31st, April 30th, July 31st and October 31st.  I'd put those dates on your calendar if your credit union has over 10,000 credit card accounts.  For those under 10,000 credit card accounts, Section 1026.58(c)(5) includes a de minimus exception and you wouldn't need to send your agreements to the CFPB (there are still other requirements in 12 CFR 1026.58 that do apply).

The CFPB's Credit Card Agreement database is available here.  

Improvements Needed.  I'll note that the CFPB hasn't exactly made this quarterly submission process easy.  There isn't any information on their website regarding the process.  The emails the CFPB sends to institutions are sometimes late and the information is usually only sent to one person at the credit union (what happens if they left, are on extended leave or just on vacation?)  And, what happens when a credit union reaches the 10,000 threshold?  How do they learn the CFPB's process?  How do they get on the super secret "update your credit card agreement" email list?  

These are all issues that NAFCU has raised with the CFPB.  Hopefully we'll see changes in their process in the future to make it more transparent and easy to follow.  With all the other issues going on, this is one the CFPB should streamline to reduce the burden and confusion for card issuers.    

One Improvement:  One thing we have heard is that you should be able to include additional employees onto the CFPB's emails regarding the card agreement submissions.  Send them an email request asking them to add the additional email(s) whenever they send your credit union information on your credit card agreements.   

A Few Housekeeping Reminders to Start off the Year

Written by Bernadette Clair, Regulatory Compliance Counsel

Welcome back! We hope everyone enjoyed the holidays and good times with family and friends.

Before delving into the New Year, we thought it might be useful to consolidate some of our recent blog posts highlighting compliance deadlines that have come and gone over the last week, so they don’t get lost in the shuffle.

SAFE Act Housekeeping Reminders.  The SAFE Act renewal period expired on December 31, 2012.  Credit unions and their MLOs must renew their registration during the annual renewal period each year.  Independent testing for compliance with the SAFE Act and its implementing regulations is also required annually, and may be conducted by credit union staff or an outside party.

TAG/NIBTA – Expiration of Unlimited Share Insurance Coverage.  Congress did not extend the unlimited share insurance coverage for noninterest-bearing transaction accounts, so this temporary coverage expired on December 31, 2012.  NCUA Letter to Credit Unions 12-CU-14 details steps for credit unions to take, such as communicating the change in insurance coverage to your membership and making sure account disclosures properly disclose the level of insurance coverage.

Reporting Nonresident Alien Interest.  IRS final regulations that went into effect April 19, 2012, require credit unions to report interest of $10 or more in the aggregate, paid to certain nonresident aliens on or after January 1, 2013.  The first filing will be required in 2014, for the tax year 2013.

CFPB Website Reference for Credit Card Application & Account Opening Disclosures.  As of January 1, 2013, your credit card disclosures need to reference the CFPB (in the past they mentioned the Federal Reserve). When the CFPB republished Regulation Z , sections 12 CFR 1026.60 (applications and solicitations) and 12 CFR 1026.6 (account opening disclosures) were changed to reflect the CFPB's authority over Regulation Z and credit cards.

Updates to Adverse Action Notices and Risk Based Pricing Notices.  Also as of January 1, 2013, credit unions must ensure their risk-based pricing notices refer to the CFPB as the appropriate federal regulatory authority.  Adverse action notices must also be updated to reflect either NCUA’s Office of Consumer Protection (OCP) for federal credit unions with assets under $10 billion or the CFPB for those with assets of $10 billion or more.

Reminder: CFPB Website Reference for Credit Card Application & Account Opening Disclosures; NAFCU Closed for the Holidays

Written by Michael Coleman, Regulatory Compliance Counsel

The end of 2012 is fast approaching, and so are compliance deadlines (although if you are reading this we have successfully avoided the end of the world according to the “interpretation” of the Mayan calendar, so we have that going for us). Yesterday we blogged about required updates for adverse action notices and risk based pricing notices. Today we would like to focus on credit cards updates required by January 1, 2013.

Regulation Z - Credit Card Application & Account Opening Disclosures

When the CFPB republished Regulation Z, Sections 12 CFR 1026.60 (applications and solicitations) and 12 CFR 1026.6 (account opening disclosures) were changed to reflect the CFPB's authority over Regulation Z and credit cards.  

After January 1, 2013, your credit card disclosures would need to reference the CFPB (in the past they mentioned the Federal Reserve).  You can see the small change by viewing the Fed's prior G-10(B) model form with the CFPB's current G-10(B) model form.    

Here is the language from the application and solicitations disclosure regulation - 12 CFR 1026.60(b)(15):

"(15) Web site reference. A reference to the Web site established by the Bureau and a statement that consumers may obtain on the Web site information about shopping for and using credit cards. Until January 1, 2013, issuers may substitute for this reference a reference to the Web site established by the Board of Governors of the Federal Reserve System."

Similar language is included in 12 CFR 1026.6(b)(2)(xiv) for account opening disclosures. 

Note:  This disclosure is only required for credit card accounts.  Thus, the change would only need to be made on your credit card application and solicitation disclosures and your credit card account opening disclosures.

Additional details and discussion available in this January 10, 2012 blog post.  

***

NAFCU’s Offices Closed for the Holidays – Just a reminder that NAFCU’s offices will be closed all next week and through the beginning of the new year. The blog will also be on hiatus during this period. NAFCU’s offices will re-open on Wednesday January 2, 2013, and we will be back to blogging as well to start off the new year. From all of us here at NAFCU, we wish you and yours a safe, happy, and hopefully restful holiday season!  

Change in Terms Required for Change to CFPB Website on Credit Card Disclosures?

Written by Steve Van Beek

Over the past weeks and months many credit unions, their vendors, their attorneys, their trade associations and many others have been struggling with trying to determine whether a 45-day change-in-terms notices is required solely due to a technical change to Regulation Z.  This blog post will try to provide an overview of this situation and where things stand.  Unfortunately, there is not a perfect answer as the CFPB will not provide formal guidance on this situation.  

Devil is in the Details.  The Dodd-Frank Act transferred authority for Regulation Z from the Federal Reserve to the Consumer Financial Protection Bureau.  This meant that the CFPB has authority for interpreting Regulation Z as well as providing information to consumers regarding credit cards.  To implement its authority under Reg Z, the CFPB republished Reg Z under 12 CFR 1026.  During this republishing, the CFPB indicated it was making solely technical changes and there would be no substantive changes.  However, as we all know - the devil is in the details.  

CFPB Website.  One of the changes during the republishing is that the CFPB website needs to be used by credit unions in their credit card disclosures after January 1, 2013.  This requirement comes from 12 CFR 1026.6(b)(2)(xiv) of Reg Z:

"(xiv) Web site reference. For issuers of credit cards that are not charge cards, a reference to the Web site established by the Bureau and a statement that consumers may obtain on the Web site information about shopping for and using credit cards. Until January 1, 2013, issuers may substitute for this reference a reference to the Web site established by the Board of Governors of the Federal Reserve System."

Ok, this seems simple.  In fact, we blogged on this as early as January 10th of 2012.  Credit unions have been making these updates throughout the year and most are ready to go on their disclosures for new credit card disclosures.    

Complicated, Interconnected Regulations.  However, this simple change also potentially triggered a change-in-terms notice - to existing credit cardholders - because of the complexity of Regulation Z.  Here is the requirement for when a change-in-terms notice is triggered - from 12 CFR 1026.9(c)(2):

"(2) Rules affecting open-end (not home-secured) plans. (i) Changes where written advance notice is required. (A)General. For plans other than home-equity plans subject to the requirements of § 1026.40, except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and (c)(2)(v) of this section, when a significant change in account terms as described in paragraph (c)(2)(ii) of this section is made, a creditor must provide a written notice of the change at least 45 days prior to the effective date of the change to each consumer who may be affected." (Emphasis added).

Thus, the analysis needs to jump to 1026.9(c)(2)(ii) to determine which changes are "significant changes in account terms":

"(ii) Significant changes in account terms. For purposes of this section, a “significant change in account terms” means a change to a term required to be disclosed under § 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 § 1026.6(b)(4), or the acquisition of a security interest."  (Emphasis added).

So - this is where things get weird.  The disclosure of the CFPB's website is required by 1026.6(b)(2)(xiv) which would bring it under the definition of a "significant change in account terms."  This is even though the credit union did not make the change and the disclosure of the CFPB website is not actually a "term" of the account that impacts members (rather, it is a mandated disclosure).  

Is There an Applicable Exception?  Thus, a strict reading of Regulation Z indicates that this switch to the CFPB's website would be a "significant change in account terms."  But, does this trigger the change-in-terms notice?  It doesn't seem like it would as the credit union didn't make this change.  Congress did.  Dodd-Frank transferred authority to the CFPB and this required the CFPB to change Regulation Z and include their website - rather than the Federal Reserve's - under 1026.6(b)(2)(xiv).  Why should credit unions have to send notices to their existing cardholders of this change?  Further, this disclosure of the CFPB's website is only required in the application/solicitation and account opening disclosures - why would it need to be disclosed to existing members when it is changed?

Well, there is an exception in the official staff commentary that has been pointed out by quite a few credit unions, vendors, attorneys, and others as indicating the change-in-terms notice would not be required.  It comes from the staff commentary of 1026.9(c)(2)(v):

"9(c)(2)(v) Notice not Required

1. Changes not requiring notice. The following are examples of changes that do not require a change-in-terms notice:

i. A change in the consumer's credit limit except as otherwise required by § 1026.9(c)(2)(vi).

ii. A change in the name of the credit card or credit card plan.

iii. The substitution of one insurer for another.

iv. A termination or suspension of credit privileges.

v. Changes arising merely by operation of law; for example, if the creditor's security interest in a consumer's car automatically extends to the proceeds when the consumer sells the car."  (Emphasis added).

This sounds great.  The argument is that the change to the CFPB's website is a "change arising merely by operation of law."  Dodd-Frank transferred authority to the CFPB and that is the only reason why this technical change occurred.  Done deal, right?

Informal Agreement.  I've talked with CFPB staff on this issue (as have many others) and CFPB staff agrees that this "operation of law" exception applies and credit unions do not need to send the change-in-terms notice in this situation.  Unfortunately, the CFPB staff is unwilling to put their opinions in a formal writing.  This means that credit unions are left with an informal agreement that a change-in-terms notice is not required.

***

Documentation is Key.  Because the CFPB will not put their opinion in writing, it is important that credit unions document their decision-making as to why they did not send the change-in-terms notice in this situation.  Remember, the CFPB staff is not examining and auditing your credit union - so be sure to have documentation of your decision not to send the notice in case this issue comes up.    

Notice Already Sent.  Of course, if your credit union has already decided to send the notice - you are in a great position as you can move on to many other compliance issues facing your credit union.  Additionally, if you have the wheels in motion to get the notice out to your members in the near future - there is nothing wrong with sending the notice.  

Risk-Averse.  If your credit union decides it doesn't feel comfortable relying on an informal (2nd-hand) agreement from the CFPB staff - by all means send the notice.  And, then document why you sent the notice and the burden caused by the CFPB's unwillingness to put their opinion in writing.     

***

Legal Disclaimer.  Now is a very good time to remind blog readers of the blog's legal disclaimer:

"LEGAL DISCLAIMER

This website is intended to provide general compliance information in regard to the subject(s) covered. It is provided with the intent and understanding that the publisher is not engaged in the act of rendering legal, accounting or any other professional advice. The information provided in this website is not intended nor should be used as a substitute for legal advice or other expert opinions and services in specific situations. NAFCU is not responsible for the content of comments and reserves the right to delete or block comments that it finds inappropriate."

CFPB Proposes Changes to Credit CARD Act: Ability-to-Repay for Stay-At-Home Spouses

Written by Steve Van Beek

Yesterday, the CFPB followed a NAFCU recommendation (see page 3) and proposed a rule to change 12 CFR 1026.51 of Regulation Z.  The CFPB's press release provides an explanation on how the changes would help stay-at-home spouses and partners:

"The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) became law in 2009.  The CARD Act requires that card issuers evaluate a consumer’s ability to make the necessary payments before opening a new credit card account. Under current CARD Act regulations issued by the Federal Reserve, a card issuer generally may only consider the individual card applicant’s income or assets.

Data made available to the Bureau suggest that some otherwise credit-worthy individuals have been declined for credit card accounts under the current regulation, even though they have the ability to make the required payments.  Discussions with industry sources indicate that a significant number of these individuals may be stay-at-home spouses or partners with access to income from an employed spouse or partner.

The Bureau’s proposed revision would allow credit card applicants who are 21 or older to rely on third-party income to which they have a reasonable expectation of access.  Although the proposal applies to all applicants regardless of marital status, the Bureau expects that it will ease access to credit particularly for stay-at-home spouses or partners who have access to a working spouse or partner’s income."

The proposed rule can be found here.  The summary in the proposed rule is also a useful overview:

"SUMMARY:  The Bureau of Consumer Financial Protection (Bureau) is proposing to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation, which interprets the requirements of Regulation Z.  Regulation Z generally prohibits a card issuer from opening a credit card account for a consumer, or increasing the credit limit applicable to a credit card account, unless the card issuer considers the consumer’s ability to make the required payments under the terms of such account.  Regulation Z currently requires that issuers consider the consumer’s independent ability to pay, regardless of the consumer’s age; in contrast, TILA expressly requires consideration of an independent ability to pay only for applicants who are under the age of 21.  The Bureau requests comment on proposed amendments that would remove the independent ability-to-pay requirement for consumers who are 21 and older, and permit issuers to consider income to which such consumers have a reasonable expectation of access."  (Emphasis added).

The comment period will extend for 60 days after the proposal is published in the Federal Register.  NAFCU's Regulatory Affairs team will be providing a Regulatory Alert for NAFCU members and soliciting comments on the proposal.  

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

Written by Steve Van Beek

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

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

Prerule Stage:

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

Proposed Stage:

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

Final Rule Stage:

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

Long-Term Actions:

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

Completed Actions: 

• Disclosure Rules for Remittance Transactions (Regulation E)

***

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

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

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

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

CFPB Launches Consumer Complaint Database; Final Regulation; Comment Letters

Written By JiJi Bahhur, Regulatory Compliance Counsel

Consumer Complaint Database.  The Consumer Financial Protection Bureau (CFPB) has launched a Consumer Complaint Database on credit cards.  The database is available to the public and can be accessed here. 

The idea behind the Consumer Complaint Database is to allow the public access to information such as what is being complained about, when it was complained about, why it was complained about, and the company that the complaint concerns.  Also, if action has been taken on the complaint, the database will hold information as to whether the company’s response was timely, how the company responded, and whether the consumer disputed the company’s response.  The consumer’s identity will be withheld. 

The database will include only those credit card complaints received by the CFPB on or after June 1, 2012.  The complaints will be uploaded only after the company verifies that it has been correctly identified by the complainant, but the company will only have 15 days to make the verification. 

It should be noted that the database will only contain information of credit unions directly supervised by the CFPB - those with over $10 billion in assets. 

As of now, the database’s focus is on credit cards, but this will eventually be expanded to other consumer issues as well.  As a head start, the CFPB has also released a snapshot of the complaints it has received on credit cards, mortgages, private student loans, and bank products through June 1, including six stories of success. These can be located here. 

Final Regulation.  NAFCU’s Regulatory Affairs Team has issued its Final Regulation on Loan Workouts and TDR Reporting.  It can be located here (12-EF-05) and is available to NAFCU members only.

Comment Letters.  Yesterday, NAFCU submitted two comment letters, one on Overdraft Protection Programs and the other on Information Collections.  NAFCU’s Comment Letters are available to the public. 

Risk-Based Pricing Webinar & FAQs; NAFCU Compliance Webcast

Written by Steve Van Beek

In February 2011, the Philadelphia Federal Reserve conducted a webinar on risk-based pricing notices.  The archived webinar is still available and the Questions & Answers from the webinar were included in the First Quarter 2012 Consumer Compliance Outlook.    

Below are two that might be of interest:

• Must risk-based pricing notices be provided for denied applicants?  Section 1022.72(a) of Regulation V (12 C.F.R. 1022) specifies when a creditor must provide a risk-based pricing notice to a consumer applying for credit, subject to exceptions in 1022.74.  If an application is denied and an adverse action notice is provided, a risk-based pricing or exception notice is not required.  See 1022.74(b).

• If the same rates are charged to all approved applicants for a particular product, do notices need to be provided?  As discussed in 1022.74(a), if a lender offers one rate for a product and the applicant either receives that rate or is denied, no risk-based pricing or exception notice is required for approved applicants but an adverse action notice is still required for denied applicants.

Additional Q&As are available here.  The CFPB's risk-based pricing rules are located in Subpart H to Regulation V (1022.70 - 75).  

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NAFCU Compliance Webcast.  On July 11th, Carrie Hunt, NAFCU's Vice President of Regulatory Affairs and General Counsel, and I will be presenting a NAFCU webcast that will prepare you for upcoming regulatory changes - from NCUA and the CFPB.  We'll talk about some of the following - which may change as the regulators publish new information between now and July 11:

• Preparing your credit union for numerous, fast-paced regulatory changes;
• How to track and monitor the CFPB's rulemakings;
• Potential changes to overdraft protection and prepaid cards;
• Upcoming comprehensive changes to mortgage lending regulations; and
• Five common struggles with Credit CARD Act compliance.

Learn more here - sign up by July 5th and Save $100!

Credit CARD Act's Ability to Pay Provisions Revisited

Written By JiJi Bahhur, Regulatory Compliance Counsel

 

On Wednesday, the Financial Services Subcommittee held a hearing to examine the ability to pay provisions of the Credit CARD Act (specifically, section 1026.51 and the corresponding Official Commentary from Regulation Z).  Gail Hillebrand, the Associate Director for Consumer Education and Engagement at the CFPB, represented the CFPB’s position at the hearing.  

 

The hearing focused on the rule as it was issued by the Federal Reserve Board last April, and inherited by the CFPB on July 21, 2011. 

 

Under the rule, as currently written, lenders are required to consider individual rather than household income when determining whether someone qualifies for a credit card.  This has raised a significant concern, as it has the potential to disproportionately impact non-working spouses. 

 

On behalf of the CFPB, Gail Hillebrand testified:

 

“Concerns have been raised that for consumers in some States, one element of the ability to pay regulation we inherited could have unintended negative impacts on stay at home spouses. The CARD Act says that a credit card issuer cannot open an account for a consumer unless the issuer “…considers the ability of the consumer to make the required payments….” (2) In February 2010, the Board of Governors of the Federal Reserve System issued regulations to implement this provision. In April 2011, the Board amended those regulations to specify that when a consumer applies individually for a credit card account, the issuer must consider the consumer’s “independent ability” to make the payments. (3) The Federal Reserve Board’s amendment was accompanied by Official Staff Commentary, which interprets the regulation. That Commentary states that in determining ability to pay, a card issuer may not rely on income or assets of a person who is not liable for the debt on the account unless a Federal or State statute or regulation grants a consumer who is liable for the debt an “ownership interest” in the income or assets of the other person. (4)

 

Even before responsibility for this regulation was formally transferred to the Consumer Bureau last July, we heard concerns about the impact this rule could have on the availability of credit to some individuals. In some families, all of the adults are employed outside the home. In others, someone stays at home or works part time. This is often, although not always, a woman.

 

Concerns have been voiced that the ability to pay rule could have the effect of limiting access to credit for the
spouse or partner who is not employed outside the home (or who is employed part time) and who wants to open an individual credit card account rather than opening a joint account.” (Emphasis added). 

 

The CFPB is currently in the process of evaluating the regulation and reviewing responses and input it has received from individuals who have petitioned the Bureau to express their concerns about this issue.  The goal is to ensure access to credit to those that do have the ability to pay, but without having potentially negative consequences.  The CFPB will continue to move forward on addressing the issue during the course of this summer.

 

For more information on the CFPB’s review of the Credit Card Ability to Pay rules, check out this Press Release and a recent NAFCU Today story.  Also note, NAFCU's Comment Letter can be accessed here. 

 

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Happy Friday to you all!  

 

Common Compliance Violations: Account Opening Disclosures for Open-End Credit

Written by Steve Van Beek

We've discussed the Philadelphia Federal Reserve's Consumer Compliance Outlook a few times - including the following common compliance violations:

• Regulation B - Spousal Signatures
• Regulation B - Adverse Action Notices

Today, I wanted to highlight a common Reg Z violation (according to Federal Reserve examiners) which stems from the multitude of changes in Regulation Z over the past 3-4 years.  And, unfortunately, we ain't seen nothing yet!

Regulation Z - Account Opening Disclosures for Open-End (Not Home-Secured) Credit Plans.  Here is the description of the issue from the Philadelphia Federal Reserve:

"The Board of Governors of the Federal Reserve System (Board) amended some of the Regulation Z disclosure requirements for open-end credit (not home-secured) in a January 2009 final rule that became effective July 1, 2010.¹⁷The changes include new requirements for account-opening disclosures.¹⁸ Consumer testing revealed that consumers responded favorably to a table format that summarized key terms (based on the Schumer Box format used for credit card solicitation and application disclosures). As a result, the Board required in 12 C.F.R. §1026.6(b)  that creditors use a table format substantially similar to model form G-17 to disclose certain key account terms.¹⁹

The failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit. As with the RESPA tolerance requirements, this violation reflects the compliance challenges that arise with a significant regulatory change. Financial institutions relying on third-party software to create disclosures should verify that the software reflects the changes in regulatory requirements. For internally created software, institutions should ensure that regulatory changes are communicated in a timely manner to the IT department and that the software is tested to verify that the changes have been implemented. For a more detailed discussion of vendor risk management, refer to the Outlook article “Vendor Risk Management” in the First Quarter 2011 issue.^20"  (emphasis added).

As the underlined text indicates - this is an issue partly because of the magnitude of regulatory changes and the inability for smaller institutions to simply keep up.  

Inadequate Model Forms.  I'd also like to add another observation on why this might be a common compliance issue.  The model forms for these disclosures are located in Appendix G to Regulation Z.  From Appendix G, the account opening tables are the G-17 Series:

• G-17(A) Account Opening Model Form
• G-17(B) Account Opening Model Form
• G-17(C) Account Opening Model Form
• G-17(D) Account Opening Model Form

The article indicates that "the failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit."

If you click through the model form links above, you'd see that G-17(A); G-17(B) and G-17(C) are all designed as model forms for credit card accounts.  Only G-17(D) provides any guidance on open-end account opening disclosures for non-credit cards.  Thus, three of the four forms are designed for credit cards and not other types of open-end products. 

I wonder if that is part of the reason this is a common compliance violation?  And - this is the part of the feedback loop that the CFPB needs to improve on if it truly wants to lessen the regulatory burden on smaller institutions.  If there are numerous compliance violations - the CFPB needs to look internally and see if their regulations, forms and guidance are making the requirements clear and straightforward.  

Work with Us.  Other regulators have not succeeded in the past and they also haven't shown much effort.  Usually, the regulation gets promulgated and that is the end of it.  But that isn't good enough.  It isn't good enough for the regulator, it isn't good enough for credit unions and it isn't good enough for consumers.  The real test is whether the CFPB improves in the future or whether it follows the same old story.  

The Origin of a Q&A; Hi my name is…

Written by Michael Coleman, Regulatory Compliance Counsel

Greetings fellow compliance professionals! For those of you who do not know me, I am Mike Coleman, the newest Regulatory Compliance Counsel here at NAFCU. As this is my inaugural blog post, I promised Steve I would not “break the blog.”

***

If your credit union is a NAFCU member you are probably familiar with NAFCU’s Compliance Monitor, our monthly compliance newsletter. One of the features of the Compliance Monitor is the Compliance Forum, which includes questions and answers written by our Compliance Team. You may have asked yourself, “Where do they come up with these questions?” The answer is from our NAFCU members!

Answering compliance questions is one of the major member services NAFCU’s Regulatory Compliance Division provides our members. We get a lot of questions. Sometimes we see a pattern of questions on a particular topic, particularly after there has been a recent regulatory amendment. Sometimes we get a unique question that we just feel compelled to share. When this happens, we start drafting Q&As.

Here is an example of a Q&A that might be featured in the Compliance Monitor:

Question: At our credit union we understand that the Credit CARD Act, and the resulting changes to Regulation Z, prohibits increasing an APR within the first year of account opening. However, we want to increase the annual fee for a credit card account which is six months old. Is this permissible?

Answer: No.  Regulation Z contains special protections for credit card accounts which stem from the requirements of the Credit CARD Act of 2009. Regulation Z contains a general prohibition for the increase of an APR or a fee required to be disclosed at account opening unless an exception applies. Section 1026.55(b)(3) of Reg Z provides an “advanced notice exception”, which allows a credit union to use the 45 day change-in-terms process to increase an APR or a fee. However,  Section 1026.55(b)(3)(iii) specifically prohibits a credit union from increasing a member’s APR or certain fees required to be disclosed in the account opening table during the first year of the account:

“(iii) This exception does not permit a card issuer to increase an annual percentage rate or a fee or charge required to be disclosed under §1026.6(b)(2)(ii), (iii), or (xii) during the first year after the account is opened, while the account is closed, or while the card issuer does not permit the consumer to use the account for new transactions. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.”

(Emphasis added.) 12 C.F.R. §1026.55(b)(3)(iii).

The annual fee for a credit card account is one of the fees required to be disclosed under Section 1026.6(b)(2)(ii), therefore, increasing the annual fee during the first year after the account is opened is prohibited.

This Q&A is an example of a particular question that came in and we thought it would benefit all our members to get an answer, so we drafted a Q&A for the Compliance Monitor.

***

Just to add my own personal disclaimer, I grew up in the DC Metro area (in Falls Church, Virginia) and as such am an avid Redskins, Capitals, and UVA fan. In addition to Steve’s usual plugs about everything Michigan, I will do my best to keep you updated on the trials and tribulations of being a sports fan in DC. Here’s hoping RG3 lives up to the hype! 

CFPB Industry Discussions; Reg Z Proposal for Credit Cards

Written by Steve Van Beek

If you are located in either the Cleveland or New York City areas, you might be able to get a chance to listen to the CFPB in-person.  The CFPB has two "Industry Discussions" listed for later this spring.

• Friday, April 27th in Cleveland, Ohio
• Friday, May 4th in New York City, New York

You can also hear from CFPB Director Cordray during NAFCU's Free Webcast on April 24th.  The Webcast is open to all credit unions but registration is required.    

***

Last Thursday, the CFPB issued a proposed rule to amend Section 1026.52(a) of Regulation Z.  I know what a lot of you are thinking - another change to the Credit CARD Act regulations?  Another clarification?

Well, yes.  But, this one shouldn't impact many credit unions as it relates to the cap on fees credit unions can charge during the first year of a credit card.  Here is the current 12 CFR 1026.52(a):

"§ 1026.52   Limitations on fees.

(a) Limitations prior to account opening and during first year after account opening.(1) General rule. Except as provided in paragraph (a)(2) of this section, the total amount of fees a consumer is required to pay with respect to a credit card account under an open-end (not home-secured) consumer credit plan prior to account opening and during the first year after account opening must not exceed 25 percent of the credit limit in effect when the account is opened. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.(emphasis added).

***

What is the CFPB proposing?  The CFPB is proposing to remove the "prior to account opening" language from Section 1026.52(a) and, thus, the restriction on fees would only cover fees charged after the account is opened.  

Why is the CFPB doing this?  Isn't this weakening the rule?  The Federal Reserve originally wrote this rule and was sued by an institution arguing the Fed went beyond the requirements of the Credit CARD Act.  There are good stories on the CFPB's move here (New York Times) and here (Washington Post).   

***

The Short Version.  This proposal won't directly impact most credit unions as they are not offering credit cards with large amounts of fees in the first year or prior to account opening.  However, other card issuers might be able to move back to their prior business model of charging processing fees prior to account opening.    

To see the specifics of the proposed change, click here to see the Federal Register (the bracketed text indicates that text - "prior to account opening" would be removed if the rule was finalized).   

Note:  If you are looking for which fees count toward the 25% cap during the first year - scroll down in the staff commentary to 12 CFR 1026.52(a)(2).  

A Few CFPB Items

Written by Steve Van Beek

Below are a couple of CFPB-related items for your Tuesday morning:

• Last Thursday, the Senate failed to confirm Richard Cordray as Director of the CFPB.  It is starting to look more and more like the CFPB will be without a Director until after the 2012 Elections.

• The CFPB recently announced its Ombudsman's Office.  From the CFPB's blog:

"At the CFPB, the Ombudsman’s Office will assist in the resolution of individual and systemic issues that a depository entity, non-depository entity, or consumer has with the CFPB. People may use the Ombudsman’s Office when they have not had success with the existing CFPB processes, or to achieve an informal resolution. Others may contact the Ombudsman to keep their concerns confidential.

Starting today, the CFPB is officially opening the doors of the Ombudsman’s Office under the direction of our Acting Ombudsman, Wendy Kamenshine. Wendy now is ready to hear from the depository and non-depository entities we regulate on issues concerning our supervisory and enforcement processes. She looks forward to hearing from consumers beginning in the spring."

• The CFPB also recently issued a report on credit card complaints.  The CFPB blog post is here with the full report here.  

In addition to the report on credit card complaints, the CFPB proposed a policy statement related to disclosure of credit card complaint data.  Part of the disclosure would include a publicly available database including information on complaints to card issuers with over $10 billion in assets.  

NAFCU has issued a Regulatory Alert on this policy statement (11-EA-33).  

Know Before You Owe: Credit Cards

Wrtiten by Steve Van Beek

Well, the CFPB wasn't lying when it stated its initial focus would be on mortgages, credit cards and student loans.  We now have "Know Before You Owe" projects for each one.  

• Know Before You Owe: Mortgage Loans

• Know Before You Owe: Student Loans

• Know Before You Owe: Credit Cards

***

Yesterday, the CFPB announced their first steps toward clarifying and condensing credit card agreements.

• Press Release

• Prototype Credit Card Agreement

• Listing of Definitions for Prototype Agreement

The announcement also came with a pair of blog posts from the CFPB.  

• Shopping for a Credit Card

• Making Credit Card Agreements Understandable

Similar to the other Know Before You Owe projects, the CFPB is actively soliciting feedback on their prototype.  Importantly, this is not a proposed rule.  However, it is the CFPB's first steps toward collecting information and attempting to clarify credit cards for consumers.  (I'm sure many compliance officers are wanting some clarification as well - and not the kind of "clarifications" the Fed dropped on everyone earlier in 2011).

***

If your credit union offers credit cards, be sure to review the prototype.  It might be a good idea to have preliminary discussions with your forms provider as well.  Would they be able to make these changes?  How long would that take?  At what cost?   

This also might be a good time to put together a summary of the headaches during the last round of "tweaks" to credit card disclosures.  Detailed, specific information on the timeframe, steps and costs to comply with the most recent changes to credit cards would be very useful during the prototype stage and especially during any future proposed rulemakings.  

Regulation Z's Clarification: Track that Variable Rate

Posted by Anthony Demangone

In the past week or so, we've tried to highlight a few areas where regulations can be quite difficult to follow. Here's another example, coming out of the Fed's recent 300+ page CARD Act "clarification" rulemaking. The rule becomes effective October 1, 2011. If your credit union converted your credit card program from a variable to a fixed rate recently, please put down your coffee and move anything that you can throw that is currently within your arm's reach into a desk drawer.  And then lock that drawer. 

Ready?

Issuers are generally required to reevaluate rate increases at least every six months.  Regulation Z clarifies that a change from a variable rate to a fixed rate, or vice-versa is not a rate increase that triggers the obligation to reevaluate, if the rate in effect prior to the change is the same as, or higher than, the new rate.  However, the Board added new comment 59(a)(1)-3.iii in its "clarification." The new comment creates an obligation to reevaluate if a creditor switches an account from a variable rate to a fixed rate and the variable rate decreases at some later time, leaving the cardholder paying a higher rate than he would have absent the creditors’ decision to change from a variable to a fixed rate.  The comment below explains the situation.

“[A]ssume a new credit card account…is opened on January 1 of year 1 and that a variable annual percentage rate that is currently 15% and is determined by adding a margin of 10 percentage points to a publicly-available index not under the card issuer’s control applies to all transactions on the account.  On January 1 of year 2, upon 45 days’ advance notice pursuant to § 226.9(c)(2), the rate on all existing balances and new transactions is changed to a nonvariable rate that is currently 15%. The change from the 15% variable rate to the 15% non-variable rate on January 1 of year 2 is not a rate increase for purposes of § 226.59(a). On April 1 of year 2, the value of the variable rate that would have applied to the account decreases to 12.5%. Accordingly, on April 1 of year 2, the non-variable rate of 15% exceeds the 12.5% variable rate that would have applied but for the change in type of rate. At this time, the change to the non-variable rate of 15% constitutes a rate increase for purposes of § 226.59, and the card issuer must begin periodically conducting reviews of the account pursuant to § 226.59. 

Consequently, issuers that convert accounts from variable to nonvariable rates must track the old variable rate, which no longer applies to the account, as a decrease in that index may give rise to the obligation to reevaluate accounts that now have a fixed rate.  The example shows a hypothetical where the review is triggered on April 1, of "year 2." But this requirement to compare your fixed rate against the old, dead, variable rate could trigger a review in "year 40."  Add this to the mix: If your credit union has take part in a number of mergers and you've incorporated their card programs into your program, the complexity of the review process could be fierce. You'll need to know the history of their rate change decisions to get a good picture of your rate review responsibilities. 

Oversight of CFPB; This and That; Still a Tourist

Posted by Anthony Demangone

Earlier this week, I had the pleasure of attending a luncheon where Congressman Spencer Bachus (R-Ala.) addressed a gaggle of regulatory peeps.  Rep. Bachus is a big deal in Washington, as he is the Chair of the House Committee on Financial Services.   He spoke about a number of issues, including his views of the CFPB. 

He viewed the new agency as potentially problematic, laying out three basic reasons for his view.

• While Elizabeth Warren is not technically the Director, she is hiring everyone who will "count" at the CFPB.   Those new hires will be molded by Ms. Warren. Mr. Bachus doesn't see eye-to-eye with Ms. Warren on the role of regulation, so he sees an agency of Warren-ites as troubling.  Mr. Bachus' views are very interesting in light of this article from the L.A. Times. 

In any case, Warren is already aware that fresh blood is needed in the regulatory arena. She said she wants to avoid hiring nothing but older, seen-it-all-before bureaucrats who may be set in their ways.

"We're going to hire new, young staff and train them to follow the law," Warren said.

Hey, wait a minute. Isn't that the script for "The Untouchables"?

"That's what I'll be renting this weekend," she said, laughing.

• He noted that the CFPB will increase regulatory burdens.  But he added something that is missed by many.  When a new set of regulatory hurdles is put in place, those hurdles have a greater impact on smaller businesses.  So, credit unions and community banks, entities that don't have a ton of resources to throw at compliance and legal risks, will be affected the most.  This remains to be seen, but it is a concern that I share with Mr. Bachus.  I understand that Ms. Warren wants to level the playing field so that good actors are not competing against bad actors with one arm tied behind their backs.  But if the smaller good actors are using both hands to deal with new regulatory requirements, we won't have any free hands to compete with anyone.
• Mr. Bachus also noted that financial regulators must balance consumer protection with safety and soundness.  If the only products that a financial firm is allowed to offer do not make money, that firm is in a world of trouble. 

Mr. Bachus' comments are a reminder of the complex dance that is done in Washington, D.C.  Ms. Warren has her marching orders. She is building the CFPB.  But checks and balances are in place, and Mr. Bachus has indicated that he'll use his position and power to keep an eye on things at the CFPB.  

***

Here are a few items of interest.

• The CFPB will host a "credit card conference" next Tuesday to measure the impact of the Credit CARD Act.

We will bring together academics, industry leaders, consumer advocates, and voices from within government to look at the data from multiple directions, and to analyze how the industry has reacted and how consumers are responding. The idea is to establish a fact base upon which the CFPB can improve our understanding of the impact of the CARD Act and to help us understand how we can make credit markets work better.

• The FFIEC announced its new and improved IT Examination Infobase.   The announcement doesn't signal a change to the FFIEC's IT handbook, but the FFIEC believes the change should improve access to guidance and the ability of the FFIEC to update guidance in the future. The IT Examination Handbook is a huge source of valuable guidance.
• NAFCU has entered into an agreement with Sheshunoff and Thompson that benefits the entire credit union industry. NAFCU was able to negotiate a credit union discount for the entire Sheshunoff and Thompson libraries of content. If you find a manual or product that tickles your fancy, use promo code NAFCU11 at checkout when you purchase or renew the product to save 10%.  Learn more about this new development here.

***

I arrived a bit early for the luncheon with Rep. Bachus, so I had about 5 minutes to kill.  Those five minutes became a personal pep-talk. I've lived in the D.C. area since 1996.  The traffic may be bad and the work may be hectic, but part of me will always be a tourist that is overwhelmed by Washington, D.C. and the institutions and places it hosts. 

 

NCUA Board Meeting Agenda Available; More on Elizabeth Warren

Posted by Anthony Demangone

NCUA has released the agenda for this Thursday's board meeting. This meeting practically overflows with big compliance issues.  Such as...

• NCUA will issue a final rule concerning Fiduciary Duties.  (The rule also addresses merger and conversion issues.)  This rule is a big deal, as it will create federal standards of duty and care. In addition, NCUA may clarify expectations on financial literacy and educational requirements concerning federal credit union boards. 
• A proposed rule regarding insurance coverage for non-interest bearing transaction accounts. 
• A proposal to amend NCUA's "accuracy of advertising and insured status" regulation.  
• There's other stuff as well, so please review the agenda.

More on Elizabeth Warren.  Here are a few additional items regarding Elizabeth Warren. (I keep focusing on news stories where she is quoted, as I find her views important.  She's putting the CFPB together, so her views be stamped into the new agency.)

• Earlier, I noted this article from Kiplinger.But I forgot to highlight a very telling quote from Ms. Warren. Here's the last Q and A from the article:

"What's your advice for Kiplinger's readers while they're waiting for this to happen? Anyone who carries credit-card debt from month to month is in financial trouble. This is not a normal state, nor is it sustainable over time. Not paying off that credit card is always a bad sign, so pay it off. That's my best advice."

Whoah, Nelly! Anyone who carries credit card debt month-to-month is in trouble? Really? I understand that it is sound financial advice for consumers to pay off their credit card debts each month when possible.  But to assume that anyone carrying any balance is in trouble goes a bit far. There is a product that requires consumers to pay off their balance each month.  It is called a charge card.  A credit card is designed to be used, and carrying a balance is a basic option of the product.  This quote makes it seem that Ms. Warren finds credit cards, by their very nature, to be fundamentally bad for consumers. Sort of financial cigarettes, if you will. 

• Elizabeth Warren also participated in a "question and answer" session highlighted by the U.S. Treasury.  There's no way her quotes were taken out of context here, as Treasury itself controlled the content.  I've inserted my snarky commentary as necessary in bold text. 

1) With hundreds of problems in the consumer financial products and services marketplace that the CFPB could chose to focus on, how do you decide where to dive in and begin? What have your top priorities been out of the blocks?

Credit cards are a top priority because they are the most widely held credit product in the country. Four out of five families have a credit card and 50 million American families cannot pay off their credit card debt each month in full.  Man, she hates credit cards. Forget payday lenders, fly-by-night "credit repair companies, and auto-title loan companies.  Credit cards are front and center on her agenda.  

 

Mortgages are the other top priority because they are the single most important financial decision that most families will make. We have learned from recent history that a bad mortgage can not only destabilize an entire family, but that enough of them can destabilize the entire economy.

 

2) You frequently cite streamlining disclosures as a way to level the playing field and give families better tools to make the choices that are best for them.  When will consumers start seeing a difference?

Consumers can already see a difference. Look at what the banks are advertising right now and see how often phrases like “simplicity,” “no tricks” and “clarity” are showing up. The industry recognizes that these consumer credit markets have to change.  Advertising is not always the best measure of progress.  Case in point.   Personally, I think a consumer advocate would do better to look at ads like these. (YouTube.com) Do American consumers rack up debt because of credit cards, or because we've created a national culture of consumption?

 

3) Your first week on the job, you and Secretary Geithner held a mortgage disclosure forum at Treasury and just this week, the CFPB implementation team held a follow up symposium. What have you learned from these sessions?

The current disclosures increase costs for lenders while providing very little benefit for consumers. We've been saying this for years. We want to reverse that and decrease the costs of disclosure while increasing the value to consumers. The way to do that is to make that disclosure clearer and more usable for consumers.  Amen. 

 

4) You’ve spoken a lot about how the consumer credit market is “broken.” How do we know the market isn’t working and what can the CFPB do to fix it?

When a family cannot tell the cost in full of a credit card, when it is not possible to determine the risks of a mortgage in advance, and when people can’t directly compare three or four products– apples to apples – to tell which costs the most and which bears the most risk, then the market is broken.

 

This agency will drive toward making the costs clear, making the risks clear, and making it easy for consumers to compare one product with another. When they can do that, credit markets will work for families.  Keep in mind that many regulators have gone before you with this same task in hand.  The Federal Reserve has spent a good deal of time on consumer issues and consumer testing of financial disclosures.  No matter how much work you throw into this, keep in mind that you'll run into one basic problem: many consumers simply do not attempt to read disclosures.  I agree that some credit card agreements are complex, but the Schumer Box gives consumer more than enough information to compare credit card products.  And to say that the mortgage problems we face today are due to poor disclosures while not talking about broker misrepresentations, predatory lenders, and consumer responsibility is simply not telling the whole story.  

 

5) What roles will personal responsibility and financial education play in the consumer credit market once the CFPB is stood up?

I believe in personal responsibility, but it only works when prices and risks are clear up front and not buried in pages and pages of incomprehensible fine print. But, I also believe in American families. When they have better information they will make good decisions and those good decisions will make families stronger and ultimately will make the entire economy stronger.  I am not aware of any credit union in America that buries the cost of a mortgage or credit card.  They may exist, but I don't deal with them.  The Schumer Box, MDIA, RESPA and Truth in Lending generate a ton of price-related information for consumers.  But consumers have to take responsibility.  It is disappointing that when directly asked about consumer responsibility, Ms. Warren takes another shot at lenders for their alleged sins.

This and That...

Posted by Anthony Demangone

Here are some items of interest.

• You may have caught on to the fact that I enjoy reading the works of Felix Salmon.  In this post, Mr. Salmon dissects a disclosure he received from his bank.  As you'll read, the disclosure is nearly impossible to understand.  The post is a nice reminder of this fact: we write or disclose words to communicate. What are you trying to say?  Once you know that, say it as clearly as possible.  There are times when we must use precise words or "legal terms of art."  Outside of those times, though, writing or disclosures should be clear and easy to understand.  Don't use 50-cent words when a nickel buys you exactly what you need. Don't force readers to choose between confusion and reaching for a dictionary.  And you should hire a monkey to slap you whenever you use any of the following terms in a document meant for general consumption: heretofore, whereas, or any Latin phrase.  
• The Fed has updated its Consumer Compliance Handbook.  Here's how I use these handbooks.  Someone may ask you for an overview of Regulation E.  You know all about Regulation E, but you are swamped.  Why not refer them to the Reg E portion of the handbook? Or use the handbook when building a training program to make sure you don't forget something important.  In an age of increasing work demands, always lean on trusted resources whenever possible. 
• I'll say this, Elizabeth Warren certainly isn't shy when speaking about her plans for the CFPB. In her cross-hairs? Credit cards and mortgages.   (Kiplinger.com) (Hat tip to Mr. Harrigan.)

This and That...

Posted by Anthony Demangone

Here are a few items that I wanted to share.

• NAFCU's senior management team and board of directors just visited the Federal Reserve.  For our annual visit, we always prepare our "Fed Report," which you can download here.  For those who write articles, board reports, or other industry-related items, the report provides a nice overview of the credit union industry. 
• Here's an interesting piece (Governance and Strategic Planning Blog) on the Audit/Supervisory Committee's possible role concerning credit union policies. 
• The FTC has released these gift card buying tips. If your credit union has a blog, Twitter feed or Facebook page, this might be something nice to share.
• Now that most credit card issuers must submit their agreements to Fed, we can expect more articles and blog postings like this one from Felix Salmon.  The article links to two lists - the 10 most difficult to read credit card agreements, and the 10 wordiest credit card agreements.  Credit unions are on both lists. I'd check to see if your shop is on either list. 
• In the midst of the current recession, it seems that financial illiteracy/indifference may be increasing. (Walletpop.com)  I'm all for financial literacy, but sometimes I wonder how useful all the efforts are to force financial literacy down the throats of consumers.  It seems to me that when someone is interested in their finances, there's more than enough information available to answer their questions.
• It seems the GOP will hold the CFPB's feet to the fire. (WSJ.com)  As much as they can, anyway. 
• NCUA recently issued the latest batch of its Prohibition orders.  If anyone out there thinks insider fraud isn't a problem, they should take a look at these orders.  One involves an order for restitution for more than $2 million.  

Credit cards?!?; Fiduciary Duties

Posted by Anthony Demangone

Imagine you are setting up the CFPB.  Your The Agency has the ability to regulate virtually any financial product or service.  Finally, a federal regulator can address the practices of payday lenders or check cashers. You can "level the playing field" by taking a close look at all of the entities that offer financial products and services that were once off the radar.  Elizabeth Warren is now busy setting up her the CFPB, and she gets to make that choice.  So what will be the CFPB's first priority? 

According the American Banker (subscription required), she'll focus on (wait for it...wait for it) credit cards. You have to be kidding me.

• Congratulations, Ms. Warren.  You are directing the CFPB's scarce resources to overhaul the one product that has received the most consumer-related attention in recent memory.  The ink is barely dry on the Credit CARD Act, and you're chomping at the bit to dive back in. Credit unions and banks are still writing checks to outside vendors and computer programmers for all the work that was done to periodic statements and core processors to bring them into compliance with the three sets of regulations needed to implement the Credit CARD Act.  Keep in mind that this process isn't even over yet, as the Fed recently issued another proposal to clarify issues related to credit cards.  
• This latest development must be depressing for credit union compliance officers.  We hear from government officials again and again and again that "we understand that credit unions didn't cause the problem."  That sounds nice, but it doesn't change the following.  Credit unions, you just overhauled credit card disclosures.  Get ready to do it again. Credit unions, you just overhauled mortgage disclosures, specifically related to RESPA and MDIA requirements. Get ready to do it again.  And then again.  The Fed is busy overhauling its mortgage disclosures, and then the CFPB will overhaul them again, creating one set of disclosures where Reg Z and RESPA used to mandate two. 
• For those who thought the CFPB would not create enormous new burdens for credit unions, I hope they take a fresh look at their position.  The decision to focus on credit cards first makes is very disappointing.  It is the one area that was completely overhauled.  Why not first focus on formerly unregulated entities? That would have the “level the playing field” effect of making them operate under the same regulatory requirements which credit unions adhere to already.  Also, Ms. Warren should keep in mind that with the Fed’s recent proposal, the Credit CARD Act’s final requirements are set in stone yet.  Acting to amend the rules so quickly seems premature. This simply reaffirms NAFCU's decision to oppose the CFPB's oversight for credit unions, regardless of asset size. 
• I also find it a bit presumptive for Ms. Warren to indicate what the CFBP will focus on first.  I would let the Senate-confirmed director make such statements. 
• Finally, when Elizabeth Warren talks about consumers getting into trouble with their credit cards, she always points at lenders.  Leave it to Saturday Night Live to highlight the other side of the story. (Video.)

***

We now expect NCUA to finalize its Fiduciary Duties regulation during its December 16th board meeting. 

***

Have a great weekend, everyone. Even you Hoosier fans. 

Fed Proposal; Other Stuff

Posted by Anthony Demangone

Earlier this week, the Federal Reserve issued a proposed rule designed to (in my own words) shut down a few loopholes found within Regulation Z's rules for credit cards. The rule does three main things.

1. If you waive interest charges, such a practice is deemed to be a promotion and will need to follow promotion requirements.  Some credit card issuers were planning to manage credit risk by charging a member, for example, a 16 percent APR. But as long as the member would pay on time, the issuer would waive 3 percent of the APR.  So, the member would have, in effect, a 13 percent APR credit card. If the member slips up, the issuer would revoke the benefit. This proposal says that such a practice is a promotion, so you have to give them a firm time, not less than six months, for how long the "interest waiver" will be in place, and what the rate will be after that.  You won't be able to end promotions simply because a card holder makes one late payment, for example. In addition, the proposal clarifies that existing balances earned under a waiver promotional program are protected at the lower balance, unless the borrower becomes more than 60 days delinquent.
2. Under the proposal, application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. The Fed gives a good example: "Because the total amount of these fees cannot exceed 25 percent of the account's initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening." I don't think that this is necessarily bad for credit unions.  This clarification makes it much harder for credit card "sharks" to offer these fee-heavy credit cards.  That makes our credit cards more attractive.
3. Finally, if the proposal goes final in its current form, when you evaluate a consumer's ability to make the required payments before opening a new credit card account or increase the credit limit on an existing account, you'll have to consider information regarding the member's independent, individual income, rather than his or her household income. That shouldn't be a big deal, but it could trigger a change to your policy and procedures.

Finally, here are some other things of note:

• This is a proposal, so these proposals may be tweaked when the Fed issues a final rule.  
• While the proposal tackles the three main issues noted above, it addresses quite a few other issues as well. It clarifies what would be considered a credit card and charge card, and it addresses employee preferential rates.  If your shop offers credit cards, you'll need to work through the whole rule.  NAFCU is preparing a Regulatory Alert on the Fed's proposal, so stay tuned. 

***

Here are some other items of note:

• NCUA holds its NCUA Board Meeting today.  They're addressing their RegFlex regulation and its Merger Partner Registry, among other things.  The draft board items will be available this morning here.
• The Fed's Outlook Live seminar series will be offering a free webinar on HMDA and CRA reporting, to be held November 17th. Hopefully, they'll hit the HMDA stuff first.
• NCUA has issued Legal Opinion Letter 10-0856 to clarify that, for purposes of NCUA's rules and regulations, a CUSO may serve as a loan broker for loans used to finance the purchase of New York City tax cab medallions.  NCUA stresses, though, that other laws and regulations may apply. 

Credit Card Musings

Posted by Anthony Demangone

Someone forwarded this interesting article to me from the Wall Street Journal.  I take exception with the headline, "New Credit-Card Tricks."  Anytime someone from the financial industry adapts to a new set of rules, such as the Credit CARD Act, they are playing "tricks."  I guess that's life.  In any event, here's something that caught my eye:

The Card Act also stipulates that issuers can't jack up rates on existing balances unless a cardholder is at least 60 days late. But there is a creative maneuver around that: the so-called rebate card.

Citibank rolled out rebate-card offers to some of its customers last fall, offering to refund up to 70% of finance charges when customers pay on time. The problem: Rebate offers aren't governed by the Card Act, and an issuer can revoke them suddenly and hit cardholders with high charges.

The net result is the same as raising rates—and because it is perfectly legal, customers have little recourse. "Rebates on finance payments may seem like a good deal, but you could end up with a very high interest rate suddenly," says Mr. Frank, of the Center for Responsible Lending.

"The rebate offer is clear, transparent, and we believe fully within the spirit of the Card Act," says Citigroup spokesman Samuel Wang.

So, while the Credit CARD Act and resulting Reg Z changes make it difficult to increase rates on purchases and existing balances, there is an argument that it does not cover such "rebate" features.  Food for thought.

The WSJ article also serves as a good reminder.

1. Major newspapers have financial journalists.  They give advice and/or write articles that point at perceived abuses by financial institutions.  This article notes how consumers with credit cards can improve their lot by calling in to "fight back" and "raise hell."  That's why it is wise to read local newspapers.  Your members will read them, and they'll react accordingly.
2. Journalists love a good story.  This article talks about a gentlemen with a Discover card who had his interest rate increased in a way that he thought violated the Credit CARD Act.  At the end of the day, the bank didn't violate the Act. But he's still in the article, and the WSJ contacted the bank directly.  They ended up reversing the fees and interest rate increase.  Consumers who feel wronged will sometimes reach out.  There's not much you can do to prevent that, but you should always remember that it is a possibility.

***

On a semi-related note, here is a wonderful blog post written by Professor Don Boudreaux of the George Mason University.  Professor Boudreaux writes numerous "letters to the editor" that challenge statements and statistics that fly in the face of reason or sound economic theory.  This one was a beauty, and it was written to the Wall Street Journal.

You’re correct that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 will discourage lenders from extending credit to households most in need of it by arbitrarily reducing the penalties that lenders may assess against dead-beat and delinquent debtors  (“The Politics of Plastic,” August 24).  Our Leaders, though, cling to their peculiar faith that regulations never create incentives for people to do what Our Leaders would prefer people not to do.

Let’s put this faith to a real test: Ask Congress and the White House to regulate more strictly the penalties assessed by the IRS against dead-beat and delinquent taxpayers – for example, let’s reduce fees and interest charges for late payment of taxes, and eliminate jail time as a punishment for tax evasion.  If Our Leaders’ faith is sound, there will be no increase in tax evasion and delinquencies.  Revenue collected by the IRS will be unaffected.  The IRS’s stiff penalties will be seen to have been unjustified because (if Our Leaders’ faith is true) these penalties do nothing to encourage timely and full payment of taxes.

Sincerely,

Donald J. Boudreaux

August 22 Reg Z Penalty Fee Issue: Hidden Inactivity Fees?

Posted by Anthony Demangone

As you may be aware, the final amendments to Regulation Z that take effect August 22 will affect your credit union's ability to charge penalty fees on credit cards.  One of the forbidden fruits after 8/22 is the credit card "inactivity" fee.  You'll find that prohibition in 226.52(b)(2)(i)(B).  It says:

(B)No dollar amount associated with violation. A card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) consumer credit plan when there is no dollar amount associated with the violation. For purposes of paragraph (b)(2)(i) of this section, there is no dollaramount associated with the following violations:

(1) Transactions that the card issuer declines to authorize;

(2) Account inactivity; and

(3) The closure or termination of an account.

Account inactivity sounds simple enough, right?  Not so fast my friends.  The Fed views the category a bit more broadly than you might first suspect.  For example, if you waive an annual credit card fee if the member pays X dollars in interest or uses the card X amount of times, you have an impermissible inactivity fee.

The Fed explained the prohibition in the Staff Commentary via a new comment to Regulation Z.

Inactivity fees. Section 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a fee based on account inactivity (including the consumer’s failure to use the account for a particular number or dollar amount of transactions or a particular type of transaction). For example, § 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 fee when a consumer fails to use the account for $2,000 in purchases over the course of a year. Similarly, § 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 annual fee on all accounts but waiving the fee if the consumer uses the account for $2,000 in purchases over the course of a year.

If you want to know the Fed's rationale, here is how it defended its position in the final rule.

Consumer groups and individual consumers requested that the Board clarify that a card issuer cannot circumvent this (inactivity fee) prohibition by, for example, imposing a $50 annual fee on all accounts but waiving the fee if the consumer uses the account for $2,000 in purchases over the course of a year. In contrast, industry commenters argued that such arrangements should be permitted because they are no different than “cash back” rewards.  Industry commenters also argued that inactivity and closed account fees should not be treated as penalty fees because the consumer has not violated the terms of the cardholder agreement by failing to use the account for a certain amount of transactions or by closing the account. However, as discussed above with respect to comment 52(b)-1, the Board believes that these fees are properly subject to § 226.52(b) because they are fees imposed for violating other requirements of the account. And other incentives provided to encourage consumers to use their accounts. Unlike other types of incentives, however, this arrangement is inconsistent with the intent of § 226.52(b)(2)(i)(B)(2) because only consumers who do not engage in the requisite level of account activity are ultimately responsible for the fee. Thus, in these circumstances, there is no meaningful distinction between the annual fee and an inactivity fee. Accordingly, comment 52(b)(2)(i)-5 clarifies that this type of arrangement is prohibited. The Board notes that this guidance should not be construed as prohibiting “cash back” rewards or similar incentives commonly offered by card issuers to encourage account usage.

A few parting thoughts:

1. The August 22 rules only apply to credit cards.
2. You may want to review your credit card fee arrangements to see if you charge fees in this manner.  If you do, you'll need to make some adjustment by August 22. 
3. As you can see, this rule is rather tricky.  Don't forget about our July 14th webcast on the subject.

Reg Z's August 22 Rules: A First Look

Posted by Anthony Demangone

I've had a few minutes to glance through the Federal Reserve's recent final rule that implements the last two provisions of the Credit CARD Act.  Here's some help in breaking it down. 

• The final rule is 252 pages long   Yech!  But here's the thing, you shouldn't worry about reading all of it at first.  Just read the 21 pages that form the actual changes to the regulation itself.  Here are those 21 pages.  Read that first.  If something is confusing, then go the staff commentary.  If it is still confusing, then go the preamble and discussion portion of the rule.  If the issue is still unclear, you may be off the grid.  
• So, when does the rule take effect?  August 22.  Well, sort of.  The Fed does provide later compliance dates for certain things, such as corrected disclosures.  Read all about it in these 12 pages.   For example:

Special mandatory compliance date for amendments to penalty fee disclosures.
The mandatory compliance date for the amendments to the penalty fee disclosures in §§ 226.5a, 226.6, 226.7, and 226.56 and in Model Forms G-10(B), G- 10(C), G-10(E), G-17(B), G-17(C), G-18(B), G-18(D), G-18(F), G-18(G), G-21, G- 25(A), and G-25(B) is December 1, 2010. Although card issuers may not charge late payment fees, returned payment fees, or over-the-limit fees that are inconsistent with § 226.52(b) after August 22, 2010, the Board understands that it may not be possible for some card issuers to revise the disclosures for such fees prior to August 22. Accordingly, the Board has established a mandatory compliance date of December 1, 2010 for the amendments to the penalty fee disclosure requirements.

• Regarding penalty fees, the Fed had proposed that credit unions might be able to take advantage of a number of credit card penalty fee arrangements. There was the cost method, the prohibitive effect method, a percentage method, and the safe harbor.  In the final rule, the Fed limits credit unions to either a "cost" method or the "safe harbor" fee of $25.  (There is another method based on 3% of the the delinquent balance, but that is limited to charge cards.) The cost method will require an institution to show that its penalty fee represents a reasonable proportion of the costs incurred by the card issuer for that type of violation. Any card issuer using the "cost" method will have to reevaluate its determination of what those costs are, and the reasonable fee, every 12 months.  That sounds like a lot of work, so I envision a super-majority of credit unions will simply use the safe harbor fee.
• The safe harbor is $25, but for violations of the same type that occur within the next six billing cycles, credit unions will be able to charge up to $35 for such violations. 
• Keep in mind that even with the safe harbor, there are general penalty fee prohibitions that run concurrently.  So, for example, penalty fees may not be more than the underlying transaction.  So, if a member misses a minimum credit card payment of $15, that is the late fee limit for that transaction.   
• Regarding the review of credit CARD APR increases, the main question was this: how long will we have to continue to review a decision to increase a credit card's APR.  In the immortal words of Buzz Lightyear: To Infinity...And Beyond!  (Or until you lower the APR to what it was before, or lower.) Here's the actual language found in 226.59(f)

(f) Termination of obligation to review factors.  The obligation to review factors described in paragraph (a) and (d) of this section ceases to apply:

(1) If the issuer reduces the annual percentage rate applicable to a credit card account under an open-end (not home-secured) consumer credit plan to the rate applicable immediately prior to the increase, or, if the rate applicable immediately prior to the increase was a variable rate, to a variable rate determined by the same formula (index and margin) that was used to calculate the rate applicable immediately prior to the increase; or

(2) If the issuer reduces the annual percentage rate to a rate that is lower than the rate described in paragraph (f)(1) of this section.  

Well, I guess that's enough for today.  Ugh.  

Fed Issues Final Reg Z Rules, NCUA Meeting Revision; Flood

Posted by Anthony Demangone

Yesterday, the Federal Reserve issued a final regulation to implement the last two provisions of the Credit CARD Act.  The two provisions address: 1) proportional and reasonable penalty fees on credit cards; and 2) Reviews of APR increases for credit card accounts.  The Fed provided this 45,000 foot overview:

Among other things, the final rule, which amends Regulation Z (Truth in Lending):  

• Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs its incurs as a result of violations.
• Prohibits credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
• Bans "inactivity" fees, such as fees based on the consumer's failure to use the account to make new purchases.
• Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
• Requires issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.

In addition, the Fed created this consumer brochure to help explain the changes to consumers.  This may be a great training tool for front line staff. 

NAFCU is preparing a Final Regulation to give you an overview of the final rule.  I'll alert you when that is available.  With that in mind, here are some ideas on how I'd tackle this issue:

• First, keep in mind that this rule only applies to credit cards.  The limitations on fees won't affect any other products.  The requirement to revisit APR increases only affects credit cards as well.
• Contact your third party vendors that help you with your credit card portfolio.  Make sure they are aware of the final rule, and ask them how they will help you comply with the changes.  For example, the "safe harbor" fee is $25.  But you can charge $35 if the member has been late on one of his or her last six payments.  In addition, late fees generally cannot be more than the underlying transaction.  So, if a member is late on a $15 minimum payment credit card payment, you won't be able to charge more than $15.  Will your data processing system be able to handle the variables?  And what about your disclosures?  
• Keep in mind that if you change your late fees for credit cards, that is something that takes board approval for FCUs per your bylaws.  Check out your bylaws to determine if that language is in there.
• Start looking at your credit card portfolio to determine which cards have had an APR increase since January 1, 2009.  That is the universe you'll be working within for the APR review portion of the final rule. 
• Consider signing up for the NAFCU webcast, where we'll detail this final rule.  It is scheduled for July 14.  (Bastille Day, no?) It will be delivered by Steve, Sarah, et moi.    

We'll dig through the final rule to highlight issues as the weeks march forward. 

***

This Thursday's NCUA Board meeting agenda has been changed. One item has been deleted from the open session ( Proposed Rule, Interest Rate Risk Policy) and one item has been added to the closed session (Consideration of Supervisory Activities). The revised agenda for this week’s meeting is available online here.

***

The NFIP lapses have been confusing for lenders, to say the least.  NAFCU sent this letter to the Hill on Monday evening. And we joined in sending  this letter yesterday.  Both letters urge Congress to reauthorize the NFIP as soon as possible. 

Consumer Compliance Outlook Overview

Posted by Anthony Demangone

On Friday, wrote about the most recent issue of the Federal Reserve's Consumer Compliance Outlook.  In that post, I focused on its guidance on the Reg E ODP rules.  But today, I want to let you know about the rest of the issue.  This periodical is always a good read.

• There's a compliance alert about the Reg CC changes.
• There's a great overview of the Credit CARD Act provisions that have been put in place.

• How about a nice overview of some interesting court cases?

• Not to mention a regulatory update, and a calendar of upcoming deadlines.

All in all, a good issue.  And they even threw in a list of useful compliance links.

Federal Reserve Consumer Affairs Letters; San Antonio Reminder

Posted by Anthony Demangone

The Fed does a nice job with its Consumer Affairs Letters.  Consumer Affairs letters address significant policy and procedural matters related to the Federal's consumer compliance supervisory responsibilities. Even though they are not designed for us, they can be very useful.  Case in point:

• The Fed issued this CA letter to address the recent lapse of the National Flood Insurance Plan.  Attached, is a nice guidance document that answers many questions in relation to the Fed's flood insurance regulation.  NCUA has a very, very similar regulation, found in Part 760.  Here's a snippet from the guidance:

Does a lapse in FEMA flood insurance authority mean that loans secured by improved real property located in special flood hazard areas may not be made by lenders?

No, it does not. Lenders are not precluded during a lapse in flood insurance authority from making loans due to a lack of NFIP flood insurance. However, flood insurance is not available under the NFIP during a lapse. During a lapse, a lender may legally make a loan to a borrower secured by improved real property in a SFHA without requiring the borrower to obtain flood insurance coverage. This does not mean, however, that a lender is relieved of other obligations under federal flood insurance law nor does it mean that safety and soundness considerations can be disregarded. Both of these matters are dealt with in more detail below.

As always, read all of the guidance document.  There is a ton of useful information there.

• The Fed also issued this CA letter concerning the submission of consumer credit card agreements, now a requirement (with exceptions) thanks to the Credit CARD Act.
• Finally, there is this CA letter, which addresses interagency exam procedures regarding the FACT Act "Duties of Furnishers of information" requirements.  NCUA issued its own rules, in Part 717 of its rules and regulations.  Attached to the letter is a copy of the exam procedures.  The procedures give background information as well as the questions that examiners will be asking.  Good, good stuff.  

***

Reminder: I want to invite you to attend a free regulatory compliance overview that I’ll be providing during NAFCU’s upcoming Volunteers Conference in San Antonio, Texas.  The session will run from 2:00 p.m. to 4:00 p.m. on Thursday, May 20, 2010 at the Marriott San Antonio Rivercenter.  

I plan to cover a wide range of compliance topics (ramble) during these two hours.  I'm sure I'll hit on overdraft protection, Reg Z, the SAFE Act and more.  I'll probably mention Penn State football and force you to see a few pictures of my kids as well.  Attendees of this session will also obtain 1.75 credit hours for their NCCO designation.

After our compliance session, you are also invited to attend the opening cocktail party at the Volunteers Conference.  The cocktail party is from 4:00 p.m. to 5:00 p.m. at the  Marriott San Antonio Rivercenter and serves as a meet and greet opportunity for folks attending the conference.

There is no registration fee or cost for you to attend this compliance roundup, and it is open to NAFCU members and non-members.   

We do need you to RSVP ASAP so we can make arrangements for meeting space at the hotel.  So please contact NAFCU staffer Olivia Gonzaga, at [email protected] or 703-842-2205, to let us know how many from your credit union will be attending this special compliance roundup.

SCRA Exception to Reg Z - 226.55(b)(6)

Written by Steve Van Beek

This afternoon I have the pleasure of speaking at NAFCU's Regulatory Compliance School on Lending to Servicemembers.  One of the topics I will be talking about is the changes to Reg Z that require 45-days advance notice before removing the 6% interest rate cap on credit card account.  

The Federal Reserve included the SCRA exception as one of the six exceptions where financial institutions could increase the APR, fees, or charges under 226.55.  However, the Federal Reserve did not provide a similar exception in 226.9(c) to the 45-day notice requirement.  Here is the Fed's rationale from the preamble (see pages 36-37) to 226.9(c):

"A number of commenters urged the Board to adopt additional exceptions to the requirement to provide 45 days’ advance notice of significant changes in account terms. Several industry commenters stated that the Board should provide an exception to the advance notice requirements for rate increases made when the provisions of the Servicemembers Civil Relief Act (SCRA), 50 U.S.C. app. 501 et seq., which in some circumstances requires reductions in consumers’ interest rates when they are engaged in military service, cease to apply. These commenters noted that proposed § 226.55 provided an exception to the substantive repricing requirements in these circumstances. However, the Board is not adopting an analogous exception to the notice requirements in § 226.9. The Board believes that consumers formerly engaged in military service should receive advance notice when a higher rate will begin to apply to their accounts. A consumer may not be aware of exactly when the SCRA’s protections cease to apply and may choose, in reliance on the notice, to change his or her account usage or utilize another source of financing in order to mitigate the impact of the rate increase."

Additionally, the preamble to 226.55 (see page 37) includes this language:

"Furthermore, because the Board believes that a consumer leaving military service should receive 45 days advance notice of this increase in rate, the Board did not propose a corresponding exception to § 226.9. Commenters were generally supportive of proposed § 226.55(b)(6). Accordingly, it is adopted as proposed. However, although industry commenters argued that a similar exception should be adopted in § 226.9(c), the Board continues to believe – as discussed above with respect to § 226.9(c) – that consumers who leave military service should receive 45 days advance notice of an increase in rate."

Thus, even if the credit union includes information and disclosures when the servicemember initially receives the SCRA protections - the 6% rate will need to apply to the protected balance at least 45 days after the credit union provides notice to the member, under 226.9(c), of the expiration of their SCRA protections.  

Note:  The SCRA protections only apply to transactions made prior to the member entering military service and do not apply to transactions made on the credit card account after the member enters military service.  

Also, keep in mind that the requirements in 226.53 regarding payment allocation may mean these protected balances at 6% may stay on accounts for longer times as the CU will need to apply payments in excess of the minimum payment to the balance with the highest APR.  

NAFCU Regulatory Alert; Late Payment Fees

Posted by Anthony Demangone

NAFCU Members: NAFCU has released a Regulatory Alert that provides an overview and seeks comment regarding the Federal Reserve's recent proposal concerning "reasonable and proportional" credit card penalty fees and the reevaluation of APR increases for credit card accounts.  Members can access it here.   (It is the alert all the way at the top.)

I think this proposal is a fairly big deal, so I urge you to review the Alert and comment.  Not a member? I wrote generally about the proposal on the blog a few weeks ago.  I fear the rule will put pressure on your credit card fee income and very well may reduce interest income for your credit card portfolio.  Come hoo-hoo or high water, the Fed is under the gun to have a final rule that will take effect on August 22, 2010.  

Case in point: look at this section of the proposal's preamble.  It should give you a good glimpse of how this rule may cause severe heartburn for compliance officers. 

1. Dollar Amount Associated With Late Payments

Proposed comment 52(b)(2)(i)–1 would clarify that the dollar amount associated with a late payment is the amount of the required minimum periodic payment that was not received on or before the payment due date. Thus, § 226.52(b)(2)(i)(A) prohibits a card issuer from imposing a late payment fee that exceeds the amount of the required minimum periodic payment on which that fee is based. For example, a card issuer would be prohibited from charging a late payment fee of $39 based on a consumer’s failure to make a $20 required minimum periodic payment by the payment due date.

Did that get your attention? If so, please read the proposal or the NAFCU Regulatory Alert.  

Beneficial Owners; Fed Proposal and Variable Rate Cards

Posted by Anthony Demangone

Last week, NCUA issued Regulatory Alert 10-RA-05, which shares Guidance Document FIN-2010-G001 with federally-insured credit unions.  The guidance clarifies regulator expectations regarding how financial institutions should gather “beneficial ownership information.”  In short, regulators are worried that individuals may use front companies or other account structures to hide the true ownership or control of an account. The beneficial owner, may dominate the account for illegal purposes in a way that shields their true identity. The guidance indicates that regulators expect financial institutions to implement internal controls to discover “beneficial owners,” especially for accounts that are higher risk for money laundering and other financial crimes.  Route this to your BSA Officer.  If you are the BSA Officer, note that many email programs will allow you to send an email to yourself.  I do this sometimes, along with a note that says something akin to "Demo, I need this analyzed by COB today." This at least gives me the feeling that I delegated the work to someone.  

***

We've discussed the Fed's proposal that will require you to review rate increases on your credit cards if the increase was done after January 1, 2009.  But wait...what if the increase was due to the operation of a variable rate? Do you still have to review it and possibly lower the rate?  Nyet. Here's what the Fed indicated on pages 57-58 of the proposal.

For increases in annual 

percentage rates applicable to a credit card account under an open-end (not home- secured) 

consumer credit plan on or after January 1, 2009 and prior to August 22, 2010, 

§ 226.59(a) requires the card issuer to review changes in factors and reduce the rate, as 

appropriate, if the rate increase is of a type for which 45 days’ advance notice would 

currently be required under § 226.9(c)(2) or (g). For example, 45 days’ notice is not 

required under § 226.9(c)(2) if the rate increase results from the increase in the index by 

which a properly-disclosed variable rate is determined in accordance with 

§ 226.9(c)(2)(v)(C) or if the increase occurs upon expiration of a specified period of time 

and disclosures complying with § 226.9(c)(2)(v)(B) have been provided. The 

requirements of § 226.59 do not apply to such rate increases. (Emphasis added.)

It Isn't the Size of the Dog in the Fight, it is the Size of the Fight in the Dog

Posted by Anthony Demangone

As I pointed out yesterday, the Fed issued a proposed rule to implement the final two provisions of the Credit CARD Act.  Those two provisions would be:

1. Penalty fees by credit card issuers must be reasonable and proportional to the violation of the account terms.
2. Credit card issuers must reevaluate at least every six months any APR increase done on or since January 1, 2009.  

There are only two provisions, so this can't be that bad, right?  Like the title of this post says, don't be fooled by the size of a proposal, or the number of provisions.  I scanned the 157 pages last night after Das Twins went to bed, and I can tell you this - this proposal is both tricky and paternalistic.  And that's a deadly combination.

Reasonable and proportional penalty fees. 

Under the proposal, if you want to charge a penalty fee, you'll have to do it in one of the allowable methods.

• Fees based on costs, if you can show that the fee represents a reasonable proportion of the total costs caused by the violation. 
• Fees based on deterrence,  if you can show that the dollar amount of the fee is reasonably necessary to deter that type of violation using an empirically derived, demonstrably and statistically sound model that reasonably estimates the effect of the amount of the fee on the frequency of violations.

If you use either of these methods, you must reevaluate your methodologies at least every 12 months.   The Fed will provide a safe harbor, but it seeks comments as to what that amount should be. 

The rule also creates a number of prohibitions regarding penalty fees.  For example:

1. You can't charge a penalty fee for more than the underlying transaction.  For example, if a member goes over the limit by $5, you can only charge a $5 over the limit fee.
2. If there is no dollar amount associated with the violation, you can't charge a fee.  So, you can't charge a fee if a transaction is declined, when the member closes an account, or if there is inactivity on the account. 
3. You may not charge more than one fee for violating the agreement based on a single event or transaction. 

Again, there is a safe harbor.  The safe harbor indicates that you can comply with these requirements by charging a fee for violating a term of the agreement, if the fee does not violate a prohibition and does not exceed the greater of: 

1. A flat, safe harbor fee that the Fed will determine; or 
2. 5% of the underlying transaction, not to exceed an amount to be determined by the Fed.  

Reevaluation of Rate Increases

The second part of the Fed's proposal will require credit unions to reevaluate the decision to increase the APR on a credit card at least every 6 months, if the increase was done on or after January 1, 2009.  These requirements will be housed in 226.59.  Here are some general thoughts:

• You'll have to review the decision that led to the rate increase.  You don't have to use the same factors that led to the rate increase, but you may.  Based on your review, you'll need to reduce their rate as appropriate.
• If you do decide that a rate reduction is required, there's no explicit requirement to reverse all of the APR increase.  BUT...the Fed is contemplating a requirement that you'll have to review such accounts every 6 months until you do reduce the rate all the way back to what it was before the increase. 

There's a thumbnail sketch of the proposed requirements.  I didn't touch on everything. For example, because the amount of penalty fees may vary given on the situation, your fee disclosures may need to be updated. Most likely, you'll disclose penalty fees as "up to $20."  Model forms have been amended accordingly.

We'll dig into the details in the coming weeks, so stay tuned.  But for now, here's my take-away points.

• We need your help.  You need to review this and comment.  Comments are due 30 days after this puppy is published in the Federal Register.  We're working on a Regulatory Alert, and we welcome NAFCU member comments.  But please consider commenting yourself.
• You need to alert your budget people that income very well may drop because of this regulation.   Remember, you may see a drop in your fees, the number of your fees, as well as the fact that may have to reduce interest rates that you raised after January 1, 2009.    

With that, have a great weekend, everyone.  

Timely Settlement of Estates; Nice Job, GPO Access!

Posted by Anthony Demangone

Now that we're living in the land of Credit CARD Act protections, I thought I'd give a small reminder concerning the new "timely settlement of estates" requirement.   This new requirement is found at 12 C.F.R. Part 226.11(c). The name can be a bit misleading.  Sure, it does involve setting up procedures to ensure that you give an administrator timely information about the credit card account of the deceased. But there's more.

Specifically, I wanted to bring this to your attention:

(3) Limitations after receipt of request from administrator. (i) Limitation on fees and increases in annual percentage rates.  After receiving a request from the administrator of an estate for the amount of the balance on a deceased consumer’s account, a card issuer must not impose any fees on the account (such as a late fee, annual fee, or overthe-limit fee) or increase any annual percentage rate, except as provided by § 226.55(b)(2).

(ii) Limitation on trailing or residual interest. A card issuer must waive or rebate any additional finance charge due to a periodic interest rate if payment in full of the balance disclosed pursuant to paragraph (c)(2) of this section is received within 30 days after disclosure.

So, with that in mind, once the administrator calls in, you have protect these accounts as noted above.  So, when assessing fees or doing APR increases on your credit card portfolio, you'll need to find a way to shield such accounts.   Also, you need to waive interest (or rebate it) if the administrator pays in full after you provide him or her with the balance as required by 12 C.F.R. 226.11(c)(2).

***

GPO is wonderful.  Our Government Printing Office maintains an electronic form of the Code of Federal Regulations.  And they have already updated their Regulation Z regulations to reflect the 2/22/2010 amendments.

Fed Clarifies Regs E and DD on Overdraft Issues; Pat Yourself on the Back

Posted by Anthony Demangone

On Friday, the Federal Reserve issued proposed changes to Regulations E and DD (their Truth in Lending regulation).  The changes were designed to answer a number of questions that arose concerning both regulations as they relate to overdraft protection issues.  But don't get excited.  None of the clarifications really go our way.

Regulation E.  The Fed's proposal clarifies the following:

• If your credit union has a policy and procedure to only pay ATM and non-recurring debit card transactions when you have a reasonable belief that funds are available, you are exempt from having to send an opt-in notice to the member  But the Fed goes to great lengths to clarify that the exception does not permit your credit union to charge an overdraft fee should a transaction somehow overdraft the account.  Here's how they dropped the hammer.

 The proposal adds new comment 17(b)(4)-1 to explain that, assuming a consumer has not opted in, if an institution with such a policy and practice authorizes an ATM  or one-time debit card transaction on the reasonable belief that the consumer has sufficient funds in the account to cover the transaction, but at settlement the consumer has insufficient funds in the account (for instance, due to intervening transactions that post to the consumer’s account), the institution may not assess an overdraft fee or charge for paying that transaction. However, institutions that have such a policy and practice are not required to comply with the requirements of §§ 205.17(b)(1)(i)-(iv), including the notice and opt-in requirements, if no fees are assessed.

• The proposal also clarifies that for credit unions with an overdraft protection program, the credit union may not charge an overdraft fee against a consumer's account until it sends the consumer a written confirmation of his or her choice to opt into the overdraft program.  Note: you don't have to wait for the consumer to receive it. As I read it, once the notice is sent - you can begin charging overdraft fees for ATM and non-recurring debit card transactions.
• If your credit union uses a tiered fee arrangement concerning negative account balances.  Rather than try to explain it, just read the following for yourself:

To the extent institutions impose tiered fees based on the amount of the consumer’s outstanding negative balance, proposed new comment 17(b)-8 clarifies that the fee or charge must be based on the amount of the negative balance attributable solely to check, ACH, or other transactions not subject to the fee prohibition. For instance, if a consumer’s negative balance of $30 is attributable in part to a debit card transaction that initially overdrew the account, and in part to a $10 check that the bank subsequently paid, the institution should base any overdraft fees solely on an outstanding negative balance of $10.

• The rule also clarifies how the restriction concerning ODP fees works in relation to daily or sustained overdraft/negative account fee.

Under the final rule, consumers who do not opt in may not be assessed any overdraft fees for paying ATM or one-time debit card transactions, including daily or sustained overdraft, negative balance, or similar fees or charges. As noted above, consumers who do not opt in may reasonably expect not to incur per-item overdraft fees for ATM and one-time debit card transactions, even if such transactions overdraw their account. Similarly, such consumers would reasonably expect not to incur daily or sustained overdraft, negative balance, or similar fees or charges due to these transactions. For clarity, proposed comment 17(b)-9.i explains that if a consumer has not opted in, the prohibition on assessing overdraft fees and charges overdraft fees or charges in § 205.17(b)(1) applies to all overdraft fees or charges, including but not limited to daily or sustained overdraft, negative balance, or similar fees or charges, assessed for paying an ATM or one-time debit card transaction. Thus, where a consumer’s negative balance is attributable solely to an ATM or one-time debit card transaction, the rule prohibits the assessment of such sustained overdraft fees if the consumer has not opted in.

Truth in Savings.  Here's what the Fed "clarified."

• The Fed now included the aggregate ODP and NSF fee (yearly and month-to-date) requirement in the section pertaining to periodic statement requirements.
• You must use the term "Total Overdraft Fees" in the aggregate fee disclosure for overdraft fees.  You cannot substitute any other name for those fees.
• It addresses retail sweep accounts, noting that the new TIS requirements concerning the disclosure of account balances does not affect retail sweep accounts.  If your credit union uses retail sweep accounts, be sure to read the discussion beginning on page 6 of the proposal.

Those comprise the biggest pieces of guidance within the two proposals, as I read them.  Again, the Fed makes no reversals that really help us.  But I really didn't expect that. 

***

Today's the big day - February 22, 2010.  I know how hard you have worked to bring your credit unions into compliance with the numerous new requirements found within the Fed's changes to Reg Z.  You are all to be commended.  Steve Van Beek is working on an article for March's Compliance Monitor that will tee-up the July 1, 2010 deadline issues.  But for now, pat yourself on the back for a job well done.

Limitations on Changes in First Year of Accounts

Posted by Steve Van Beek

Here are a couple of items to keep in mind as the February 22, 2010 deadline approaches:

• The ability to repay requirements apply to accounts opened on or after February 22, 2010, regardless of when the credit union received the application.  The rule also applies to credit limit increase requests (even on existing accounts) on or after February 22.  See pages 19-20 of the transition rules. 
• The prohibition on charging fees equaling more than 25% of the member's credit limit within the first year, 226.52, applies to credit card accounts opened on or after February 22, 2010.  It does not apply to accounts opened prior to 02/22/2010 even if they are still in their first year.  Be sure to track these new accounts, especially ones with low credit limits, as the rule requires you to refund any fees charged above the 25% level by the end of the next billing cycle.
• The restrictions on using the term "fixed" to describe your credit card accounts starts on February 22, 2010.  If you describe an account as fixed, be sure to clearly disclose the period it is fixed and the rate that will apply afterward.  If no time period is given, you will not be able to increase the APR on those accounts in the future.  So, be sure to scrub your disclosures, advertisements, statements, rate sheets and other information for any inadvertent uses of the word "fixed." 
• The prohibition on increasing APRs and fees in the first year (see page 2-3) of a credit card account via the advance notice exception in 226.55(b)(3) applies to cards opened on or after February 22, 2010.  See page 29. 
  •  Keep in mind this prohibition does not apply to increases due to other exceptions because the exceptions in 226.55 are not mutually exclusive.  For example, the APR could increase due to the ending of a properly disclosed promotional period or due to the increase in the index on a variable-rate account which is outside of the credit union's control.
  • But, this limitation would prohibit the credit union from increasing the margin on a variable-rate account within the first year the account is opened because to increase the margin you would utilizing the advance notice exception under 226.55(b)(3). 
  • This would also prohibit the credit union from increase a standard rate from 10% to 12%, for example on credit card accounts within the first year. 
  • Credit unions will need to track and monitor which credit card accounts have been opened in the past year.  The proposed increases in APR or fees can not apply to these accounts.  In other words, any changes proposed under the advance notice exception can only apply to accounts that have been opened at least a year.  This could cause operational headaches as your proposed changes will no longer be able to apply to all credit cards uniformly as some will be protected by the limitation on increase APRs or fees in the first year.       

Remember, this blog posting has links to the regulatory text, staff commentary, and preamble to help pinpoint information (and don't be afraid to use "CTRL-F" to search for what you are looking for in each PDF document).  

Good luck and have a great weekend.

NAFCU's Offices Closed Today; Disclosing APRs - Fixed, Non-Variable, or Variable

The federal government's offices in Washington, D.C. are closed today.  NAFCU follows their lead, so our offices are closed as well.  It really is a mess out there, folks.

NAFCU members: If you have a compliance issue, email us at [email protected].  We'll do our best to respond remotely.

Posted by Steve Van Beek

The new Regulation Z rules, both from the Credit CARD Act and the prior final rule, have created quite a bit of confusion about the disclosure of APRs.  In order to properly disclose your APR on account opening disclosures - you will need to be clear on what type of account you are offering.  

Fixed APR.  The January 2009 final rule and the Credit CARD Act placed limitations on using the term "fixed" to describe an account.  In short, credit unions can only use the term "fixed" to describe an APR if they also state a time period for which the APR will be fixed - and the APR that will apply after the "fixed" time period.  If no time period is given, the credit union is not allowed to increase the APR on that account as it is truly fixed (like a 30-year fixed mortgage). 

Also, as this chart indicates - the limitations apply to all open-end lending (see 226.16(f)).  These limitations become effective February 22, 2010 and apply to both advertisements and account opening disclosures (see pages 16-17 and page 1 for the reference to 226.5(a)(2)(iii) referring to "fixed."  This PDF contains the regulatory text of 226.5(a)(2)(iii).  Only the "fixed" section is effective February 22, 2010 - the other parts of 226.5(a)(2)(iii) will become effective July 1, 2010.

***

Non-variable APR.  This is the term the Federal Reserve has been using to describe accounts that are not tied to an index and margin and are not fixed.  For these accounts, credit unions have a specific APR (i.e. 8.99%) that applies to the account - but they are not prohibited by increasing the APR in the future (through a 45-day change-in-term) as they would be if they referred to that account as "fixed" and did not give a specified time period.  Keep in mind that according to 226.55(b)(3), the credit union is only able to increase the APR on future transactions by using the "advance notice exception."  

So, do credit unions need to disclose the account as a "8.99% Non-variable APR" account?  No, rather the account would simply be an account with a "8.99% APR."  This is the default situation.  When the account has special characteristics (such as "fixed" or is a variable-rate account) the credit union has to disclose additional information.  However, if the account simply has a 8.99% APR - this is what the credit unions need to disclose.  The fact that the account is "non-variable" and the credit union can increase the APR on future transactions using a 45-day change-in-terms does not need to be disclosed in an advertisement or the account opening disclosures.

In the past, some credit unions had referred to these accounts as "fixed."  The Fed's January 2009 final rule explains why these limitations on the use of the term "fixed" are being adopted.  

"Advertising ‘‘fixed’’ rates. Creditors sometimes advertise the APR for open end accounts as a ‘‘fixed’’ rate even though the creditor reserves the right to change the rate at any time for any reason. Consumer testing indicated that many consumers believe that a ‘‘fixed rate’’ will not change, and do not understand that creditors may use the term ‘‘fixed’’ as a shorthand reference for rates that do not vary based on changes in an index or formula."

Credit unions will need to make sure they do not inadvertently refer to their accounts as fixed, when they are, in fact, non-variable rate accounts.  

***

Variable-rate APR.   Many credit unions have converted to variable-rate credit card accounts and are disclosing the applicable APRs for the first time.  Effective July 1, 2010, credit unions will need to change the way they disclose these variable rates on their account opening disclosures (and other disclosures).  Here is how this section will look:

"(A) Variable-rate information . If a rate disclosed under paragraph (b)(2)(i) of this section is a variable rate, the creditor shall also disclose the fact that the rate may vary and how the rate is determined. In describing how the applicable rate will be determined, the creditor must identify the type of index or formula that is used in setting the rate. The value of the index and the amount of the margin that are used to calculate the variable rate shall not be disclosed in the table. A disclosure of any applicable limitations on rate increases or decreases shall not be included in the table."  (emphasis added).  12 C.F.R. 226.6(b)(2)(i)(A).

The Fed's consumer testing indicated the disclosure of the actual index and margin was confusing to members and should not be included in the table.  Rather, inside the table the credit union will need to disclose that "This APR will vary with the market according to the [Prime Rate]."  See page 26 of this PDF for a model form (notice also the purchase APR must be in 16 point font starting July 1, 2010).

There is additional information the credit union must disclose about the variable rate account:

"(ii) Variable-rate accounts . For interest rate changes that are tied to increases in an index or formula (variable-rate accounts) specifically set forth in the account agreement:

(A) The fact that the annual percentage rate may increase.

(B) How the rate is determined, including the margin.

(C) The circumstances under which the rate may increase.

(D) The frequency with which the rate may increase.

(E) Any limitation on the amount the rate may change.

(F) The effect(s) of an increase.

(G) A rate is accurate if it is a rate as of a specified date within the last 30 days before the disclosures are provided."  12 C.F.R. 226.6(b)(4)(ii).

This detailed information can not be included in the account opening table but should be included in another part of the account opening disclosures or account agreement.  

Also, advertisements for variable-rate accounts need to state the fact that the account is variable and that the APR will vary with the market.  The detailed information in 226.6(b)(4)(ii) does not need to be included (but must include the current rate or give the rate as of a particular date.)

DUNS; Reg Z Overview Doc; NAFCU's Offices to Close Early Due to Snow

Posted by Anthony Demangone

For those of you working on Reg Z issues for the 2/22/2010 deadline, you are aware of the requirement to post your credit card agreements on your website and to submit them to the Federal Reserve.  (Note, there is a small issuer exception.)  If you haven't looked into the requirements of submitting your credit card agreements to the Fed, you'll want to view this "technical specifications document" which outlines the...well...technical specifications involved in delivering your agreements to the Fed.

In order to submit your agreement, you'll need to include your DUNS number.   A what number?

A DUNS number.   That's a Dun and Bradstreet Universal Number System number. This is a number offered by Dun and Bradstreet, a company that apparently wants to be called D&B.  Which makes me think of Dave and Busters.   Are credit unions able to get a DUNS number?  Yes.  In fact, NCUA requires that credit unions applying for technical assistance grants to have one.

***

NAFCU Members: We've updated the Reg Z Overview document, adding a section on "subsequent disclosures." 

***

As I write this, the Washington, D.C. area is staring at a monster snow storm that is due to hit early Friday morning.  Here's the snow total estimates as of late Friday morning. 16-26 inches!

NAFCU's Offices are closing at 1:30 p.m. today, as we follow the Federal Government's lead on snow closings.  Please be patient with our response times.

They are calling it the Snowacolypse, Snowmageddon, or my personal favorite, Kaiser Snowze. (You had to watch The Usual Suspects to get that one. )  

Have a great weekend, everyone. 

NCUA Guidance; Z-Thoughts of the Day

Posted By Anthony Demangone

While Regulation Z haunts us in our sleep, NCUA continues to issue guidance relevant to compliance officers.  Here's a few items that have been kicking around in my in-box.

• NCUA has issued its annual "Please Do Not Forget About Your HMDA Submission Regulatory Alert." 
• NCUA issued Legal Opinion Letter 09-1021.   Here's a snippet from the letter:

You have asked if a federal credit union (FCU) can provide residential mortgage loan processing and servicing to credit unions as a correspondent service under the incidental powers rule where the credit union receiving the service would fund the loan and the loan would close in the funding credit union’s name. 12 C.F.R. §721.3(b). We conclude this would be permissible as a correspondent service and note, as required for all incidental powers activities, FCUs must comply with any applicable NCUA regulations, policies, and legal opinions, as well as state and federal law applicable to the activity. 12 C.F.R. §721.5.

• NCUA has issued Letter to Credit Union 10-CU-01.  The letter shares a Supervisory Letter issued to all NCUA field staff regarding the supervision of low income and community development credit unions.  It is a great overview of these two types of credit unions.  NCUA also notes that the guidance would be useful for any credit union looking to serve people of "modest means."

***

It seems negligent to ignore Regulation Z.  So here are my two Z-thoughts of the day:

1. You likely rely on third party vendors for many aspects of your credit card program.  If you fear that your vendor will be unable to meet some deadline, be proactive.  Document your efforts to comply.  Save emails and other vendor communications.  Ask them to explain why they won't meet a deadline, and save their response.  Feel free to push them - remember, you are paying them for their ability to provide solutions.  Should an examiner inquire why you are not in compliance with some aspect of the rule, you'll at least be able to show your due diligence and efforts.
2. As we tinker with rates, don't forget an important Credit CARD Act provision that has yet to be implemented.   Section 101 of the Credit CARD Act contains a provision that requires creditors that increase an APR on a credit card after January 1, 2009 to revisit the increase later to see if the rate should be reduced.  The Fed has not issued regulations yet to address this, so we don't have details on what we'll have to do.  But ask yourself this: If someone asked you to provide a list of credit card accounts that might be subject to this upcoming requirement, would you be able to do so? Would you be able to pull a list of credit card accounts that had their rate increased since January 1, 2009?

Restrictions on Increasing APRs; Overview Document

Posted by Steve Van Beek

Generally, the restrictions in 226.55 limit credit unions ability to increase the APR, fees or other charges on credit card accounts.  However, the section contains six exceptions.  Importantly, the beginning to subsection (b) indicates that:

"(b) Exceptions. A card issuer may increase an annual percentage rate or a fee or charge required to be disclosed under § 226.6(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."  (emphasis added).  

In short, the exceptions are not mutually exclusive.  The staff commentary goes into more detail (see page 7):

"55(b) Exceptions. 

1. Exceptions not mutually exclusive. A card issuer may increase an annual percentage rate or a fee or charge required to be disclosed under § 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception set forth in § 226.55(b) even if that increase would not be permitted under a different exception. For example, although a card issuer cannot increase an annual percentage rate pursuant to § 226.55(b)(1) unless that rate is provided for a specified period of at least six months, the card issuer may increase an annual percentage rate during a specified period due to an increase in an index consistent with § 226.55(b)(2). Similarly, although § 226.55(b)(3) does not permit a card issuer to increase an annual percentage rate during the first year after account opening, the card issuer may increase the rate during the first year after account opening pursuant to § 226.55(b)(4) if the required minimum periodic payment is not received within 60 days after the due date."

This is an important distinction to keep in mind.  For example, the advance notice exception can not be used in the first year an account is opened.  12 C.F.R. 226.55(b)(3)(iii).  This prohibits the credit union from raising the margin on a variable-rate account within the first year the account is opened.  However, the credit union could still increase the APR on the account, according to variable rate exception in 226.55(b)(2), if the index on the account increases (assuming the index is outside of the credit union's control).  

***

NAFCU-members, we have updated our Reg Z overview document to include the following sections:

• Allocation of Payments in Excess of the Minimum Payment - 226.53
• Limitations on the Imposition of Finance Charges - 226.54 
  •  This section looks at the double-cycle billing prohibition and the restrictions on charging interest on transactions which were paid in full by the end of the grace period that Anthony mentioned on Monday.  

You can find the document at NAFCU's compliance homepage.   

Grace Periods

Posted by Anthony Demangone

The recent changes to Regulation Z's open end rules have changed the way card issuers must handle their grace period.  We're all familiar with the new prohibition against double-cycle billing.  But there's more.

Effective February 22, 2010, when a member pays some, but not all of a prior credit card balance before the expiration of the grace period, the Credit CARD Act, and Reg Z, will prohibit the card issuer from imposing finance charges on the portion of the balance that  has been repaid.   The requirement is found at 226.54, and it was part of the proposal.  I've highlighted some text in red below.

§ 226.54 Limitations on the imposition of finance charges.

(a) Limitations on imposing finance charges as a result of the loss of a grace period.  (1) General rule. Except as provided in paragraph (b) of this section, a card issuer must not impose finance charges as a result of the loss of a grace period on a credit card account under an open-end (not home-secured) consumer credit plan if those finance charges are based on:

(i) Balances for days in billing cycles that precede the most recent billing cycle; or

(ii) Any portion of a balance subject to a grace period that was repaid prior to the expiration of the grace period.

In other words, if the member had purchases of $500, and paid you $300 before the expiration of the grace period, you can only reach back and charge interest on the $200 that was not paid.  It is our understanding that many card programs were not set up this way.  The staff commentary, beginning on page 1054, gives a number of examples and shows how this will work using hypothetical transactions.

I would check to see how you handle grace periods to ensure that your practices will match with the upcoming changes.

***

NAFCU members, the February 2010 NAFCU Regulatory Compliance Monitor is now available.

Friday Grab-Bag

Posted by Anthony Demangone

We've made it to the end of the week.  If you told me I would have made it this far on Wednesday, I would have had my doubts.  Here are a few thoughts on a few items.

• NCUA has its monthly board meeting today.  Usually, they post their draft items that they considered on this site by mid-morning.
• The Fed has indicated to us that they'll soon issue guidance on the Reg Z "floor" issue.  I don't know what it will say, or in what form it will come.  Stay tuned.

• The most recent "Current Issues in Credit Unions" is available.  I'm now a co-host for this information-packed podcast.  I do feel like the pig in the parlor, though, when I see all the other legal eagles who co-host.  This issue addresses Reg Z, Reg E (ODP), Reg CC, Interest Rate Risk, and the SAFE Act.  These things are great, as there's nothing quite like listening to different points of view to hone your own understanding of an issue. 

• FinCEN has released the latest issue of SAR Activity Review: By the Numbers.   NAFCU has produced a nice overview article, which you can read here.  And this older blog post shows how you can use this guidance document to freshen up BSA training sessions.

• NCUA has released its latest batch of prohibition orders.  As I always say, these orders can drive home security training and they also underscore the need for good internal controls and audits.

• Representative Barney Frank (D-MA) released this memo on the CFPA.  It is a good read for those who think the CFPA, as currently envisioned, is not an issue for credit unions.  Because those folks would be mistaken.

Have a great weekend, everyone.  You deserve it.

NAFCU Regulatory Final on Reg Z

Posted by Anthony Demangone

NAFCU has released its Regulatory Final for the Regulation Z final rule.  It is available for members here.

Here's a snippet of the good stuff you'll find inside:

Summary of Major Differences between the Proposed Rule and the Final Rule

The following includes the section number and a brief summary of the most significant changes to the final rule that either differ from the proposed rule or that simply were not discussed in the proposed rule. For more information on any of these significant changes, please see the section-by-section analysis for the section referenced.

§ 226.55(b)(2) – Variable Rate Exception. The rule states that an issuer that includes an interest rate floor in a variable rate plan may not use the variable rate exception to increase the interest rate on an account.

§ 226.55(b)(3) – Advance Notice Exception. The rule effectively states that any issuer that did not send a change in notice terms by January 7, 2010 is prohibited from increasing the APR on an existing balance even if notices are sent out prior to the February 22, 2010 effective date of this rule.

§ 226.7(b)(11)– Due Date; Late Payment Costs. The final rule authorizes an issuer to set a due date of the last day of the month. The proposed rule would have required due dates to be the same numerical day each month, effectively prohibiting due dates on the 29th, 30th or 31st of any month.

§ 226.56 – Requirements for Over-the-Limit Transactions. The final rule requires issuers to provide consumers confirmation of the decision to opt-in to have over-the-limit transactions honored. The proposed rule sought comment on whether the Board should impose such a requirement.

***

NAFCU Members, we've also updated our Reg Z overview document to include the following sections:

• Subprime Fees on Credit Cards

• Limitations on Fees in the First Year of Credit Card Account

• Double-Cycle Billing Prohibition

You can access it here.