NAFCU Compliance Blog

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

By: Reginald Watson, Regulatory Compliance Counsel

Greetings Compliance Friends!

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

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

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

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

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

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

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CFPB Issues Update to Small Entity Compliance Guide

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

What Does the CHOICE Act Mean for Credit Unions?

Written by Brad Thaler, Vice President of Legislative Affairs

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

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

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

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

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

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

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

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

You can read our letter commenting on the bill here.

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

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

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

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

 

 

Heads Up: Another UDAAP Consent Order

Written by Pamela Yu, Special Counsel for Compliance and Research

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

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

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

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

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

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

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

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

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

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

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

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

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

Written by Stephanie Lyon, Regulatory Compliance Counsel

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

Regulation Z

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

Credit Cards

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

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

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

Ability-to-Repay/Qualified Mortgage

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

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

Home Ownership and Equity Protection Act (HOEPA) Loans

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

Escrow Requirement

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

Special Appraisal Requirements

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

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

Regulation C

HMDA Asset Size Reporting Exemption

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

Updated Resources

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

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

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

Consumer Compliance Outlook – Overview of Regulation E Requirements for Foreign Remittance Transfers + Compliance Trivia!

Written by Shereefat Balogun, Regulatory Compliance Counsel

The Second Issue 2016 of the Federal Reserve’s Consumer Compliance Outlook is now available.  This issue provides an overview of the Regulation E requirements for foreign remittance transfers. The publication also contains revised interagency questions and answers regarding community reinvestment, regulatory updates, and federal court opinions.  This post will focus on the article’s overview of the Regulation E requirements for Foreign Remittance Transfers, as we receive a lot of compliance questions relating to these transactions. 

As way of background, the CFPB published a final rule regarding remittance transfers in February 2012, which became effective on February 7, 2013.  Since the rule’s enactment in 2012 however, it has been amended several times.  The article provides an excellent summary of the rule’s requirements, incorporating the changes that have been made.  Some of the most material changes noted in the article include:

Coverage

• Clarification that U.S. military installations in foreign countries are located in a U.S. state for purposes of the rule. The general definition of a remittance transfer is the electronic transfer of funds requested by a sender in the United Stated to a designated recipient in a foreign country by a remittance transfer provider. See, 12 C.F.R. §1005.30. The rule and commentary provide guidance as to when a recipient is located in a foreign county so as to trigger the rule’s coverage.  In 2014, the CFPB clarified that a designated recipient does not include a transfer to persons at U.S. military installations in foreign countries because they are treated by the rule as being on U.S. soil.  What this means is that if the credit union receives a request from a member specifying that the funds will be received at a location on a U.S. military installation that is located in a foreign country, the transfer will be received on U.S. soil, i.e. in a state, and would not be considered a remittance transfer under the rule.  However, a transfer from a U.S. military installation abroad to a recipient in a foreign county is covered by the rule.  See, 12 C.F.R. 1005, Supp. I, comments 1005.30(c) – 2.

• Providing Guidance on how a provider can determine if a sender is making a remittance transfer primarily for personal, family, or household purposes. A remittance transfer covered by the rule is one requested by a consumer primarily for personal, family, or household purposes.  See, 12 C.F.R. §1005.30 (e), (g).  A credit union can determine if a transfer is for personal, family, or household purposes by examining the type of account from which the transfer is being made.  If the account is used for personal, family, or household purposes, the credit union can assume the transfer is for that purpose, unless the credit union has specific information that suggest otherwise.  See, 12 C.F.R. 1005, Supp. I, comments 1005.30(g) – 2.  Similarly, a credit union can assume a transfer requested from a business account is not primarily for personal, family, or household purposes.  See, 12 C.F.R. 1005, Supp. I, comments 1005.30(g) – 3.

Disclosures

• New disclosures to the prepayment form, when third-party fees and taxes may apply, stating that third-party fees or taxes may apply to the remittance transfer, which could result in the designated recipient receiving less than the amount disclosed. When a sender requests a remittance transfer, the credit union must deliver prepayment disclosures listing critical terms of the transactions. These disclosures can be found in 12 C.F.R. §1005. 31.  As part of the mandatory disclosures, a credit union must disclose any covered third-party fees imposed on the remittance transfer by a person other than the credit union.  Moreover, the credit union must also provide a statement that noncovered third-party fees or taxes may apply to the remittance transfer and result in the designated recipient receiving less than the amount disclosed.  This statement is only required to the extent that these fees or taxes do or may apply to the transaction.  For compliance purposes, credit unions may use Model Forms A-30(a)-(c), contained in Appendix A to the rule.  

Use of Estimates

• Extension of the sunset date for temporary provision allowing credit unions to rely on estimates until July 21, 2020. Generally, disclosures must be accurate when the sender makes a payment.  However, because there are circumstances where credit unions may not always be able to determine all of the transaction terms with full accuracy, the rule provides some exceptions.  One exception allows credit unions to rely on estimates that are “reasonably accurate” when the exact amounts cannot be determined for reasons beyond their control.   See, 12 C.F.R. §1005.32(a).  This exception applies only to the exchange rate fees and taxes imposed by other persons.  Note that this exception is temporary and was scheduled to sunset on July 21, 2015 pursuant to the statute; however, the CFPB extended the temporary exception until July 21, 2020.
  

• Publishing a safe-harbor list of recipient countries qualifying for the permanent exception for the use of estimates. In addition to the temporary exception, credit unions may take advantage of two other exceptions.  These exceptions are permanent and permit estimates if: (1) a credit union cannot determine the exact amounts because of a recipient nation’s laws, or (2) the methods by which transfers are made to a recipient nation do not permit the credit union to know the amount of currency to be received.  See, 12 C.F.R. §1005.32(b)(1).  For compliance purposes, the CFPB established a safe-harbor list of countries that qualify for the second exception.  Currently, five countries are on the list- Aruba, Brazil, China, Ethiopia, and Libya.  While a credit union can still use estimates for a country not on the list if the exception applies, the credit union would not obtain a safe harbor.  See, 12 C.F.R. §1005.32(b)(1)(ii).

The rule’s commentary provides helpful guidance for determining if either of the two exceptions apply.  

Error Resolution

• Explaining that when a transfer is delayed because the provider or third party was investigating suspicious, blocked, or prohibited activity that could not have been reasonably foreseen, the delay is not an error. The error resolution procedures for remittance transfers are distinct from the regular error resolution procedures for electronic funds transfers, and are contained in 12 C.F.R. §1005.33. Section 1005.33 specifies what errors are subject to the error resolution procedures, and also provides certain exceptions.  For instance, delays resulting from the credit union’s screening procedures or in accordance with the BSA, OFAC, or similar laws are not considered errors.  See, 12 C.F.R. §1005.33(a)(1)(iv)(B).  The CFPB clarified in a later amendment that this includes a credit union’s investigation of potentially suspicious, blocked, or prohibited activity that could not have been reasonably foreseen.  See, 12 C.F.R. 1005, Supp. I, comments 1005.33(a) – 7.

• Clarifying that when a credit union makes a refund because a sender provided incorrect or insufficient information that prevented the transfer from being completed as requested, any taxes collected and fees imposed by an intermediary may be deducted from the refund, except for the fees the intermediary will refund to the credit union. See, 12 C.F.R. 1005, Supp. I, comments 1005.33(c) – 12.

In light of all the changes made since 2012, the article concludes by reminding credit unions the importance of having procedures in place to monitor and implement regulatory changes, to test internal controls to ensure the changes are implemented properly, and to provide adequate training to staff.

Fun Fact: The article notes that the World Bank estimates that the global market for foreign remittance transfers was $581.6 billion in 2015.  The U.S. ranked as the top transmitter, sending $56.3 billion in transfers to recipients in foreign countries in 2014.

Compliance Resources: There are a number of resources available to assist credit unions in compliance with the remittance transfer requirements. The National Credit Union Administration’s Regulatory Alert 13-RA-06 provides a useful overview of the requirements.

Here are some other resources that can help a credit union evaluate the remittance transfer requirements:

• The CFPB’s Main Remittance Regulation page;
• Subpart B of Regulation E – containing the regulatory text for the Requirements for Remittance Transfers (12 C.F.R. § 1005.30 – 1005.36).
• Small Entity Compliance Guide (updated in August 2014 to reflect recent technical amendments to the remittances rule);
• Safe Harbor Countries List;
• The CFPB’s August 2013 Webinar on the remittances requirements and the slides from that presentation;
• The CFPB’s (unofficial) consolidated regulatory text and commentary for the various final rules;
• The remittance transfer examination procedures that will be used by the CFPB to examine entities that provide remittance transfers; and
• The CFPB’s eRegulations tool for the remittance transfer rule on eRegulations;

Compliance Trivia: What are the safe harbor requirements for the remittance transfer rule?

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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DoD Military Lending Act Interpretive Guidance out Today!

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

CFPB Issues Mortgage Servicing Rules – Part I: Successors in Interest

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On August 4, 2016, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a final rule amending certain mortgage servicing rules issued by the Bureau in 2013 and codified in various sections of Regulations X and Z. The rulemaking addresses issues such as force-placed insurance notices, early intervention, loss mitigation, prompt payment crediting, and the issuance of periodic statements. This blog highlights a topic that received more comments than any other aspect of the Bureau’s mortgage servicing proposal, the provisions addressing the rights of successors in interest.

Under the current 2013 RESPA Servicing Rules, credit unions are required to maintain policies and procedures designed to “promptly identify and facilitate communication with the successor in interest of [a] deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.” 12 C.F.R. § 1024.38(b)(1)(vi). In the October 2013 Servicing Bulletin, the Bureau provides examples of servicer practices that it believes should be part of the policies and procedures required by Regulation X, including promptly providing any party claiming to be a successor in interest with a list of all the documents that the servicer requires to establish the death of the borrower and the identity and legal interest of the successor and evaluating whether the successor is eligible for any loss mitigation options if the mortgage loan is delinquent. See, Servicing Bulletin at 2-3.

The 2016 Mortgage Servicing Rules amend commentary to Section 1024.38(b)(1)(vi) to provide further guidance on the types of documents that a servicer can reasonably require to confirm a potential successor in interest’s identity and ownership interest in the property. While these documents may vary depending on the law in the relevant jurisdiction, the Bureau provides several illustrative examples depending on the nature in which the successor in interest acquires an ownership interest in the property. In addition, the amended commentary notes that “a servicer’s policies and procedures must be reasonably designed to ensure that the servicer can promptly notify the potential successor in interest that the servicer has confirmed the potential successor in interest’s status.” See, Preamble to 2016 Mortgage Servicing Rules, pp. 821-4.

Most importantly, however, the Rules significantly expand the protections afforded to successors in interest by redefining “borrower” in Subpart C of Regulation X and “consumer” in Regulation Z to include “confirmed successors in interest.” See, Preamble to 2016 Mortgage Servicing Rules, pp. 782, 854. This means that the mortgage servicing provisions contained in Subpart C of Regulation X, including error resolution, early intervention, and loss mitigation, will apply to successors in interest that have been verified by the servicer. Credit unions will also be required to provide confirmed successors in interest with rate adjustment notices for adjustable rate mortgages, periodic statements, and to promptly credit payments according to the requirements in Section 1026.36 of Regulation Z. Furthermore, the Mortgage Servicing Rules extend the coverage of Section 1024.17 of Regulation X, which sets forth certain requirements for escrow accounts, to confirmed successors in interest.

In addition, while the limited protections in the 2013 RESPA Servicing Rules were naturally limited to the “spouse, child, or heir of a deceased borrower or other party with an interest in the property,” the 2016 Mortgage Servicing Rules expand the number of individuals who qualify as successors in interest under Regulations X and Z. As amended, mortgage servicing protections, such as loss mitigation, will now be available to transferees of property securing a mortgage loan transferred from a borrower under the following circumstances:

• A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

• A transfer to a relative following the death of a borrower;

• A transfer where the spouse or children of the borrower become an owner of the property;

• A transfer resulting from a divorce decree, legal separation agreement, or incidental property settlement agreement, by which the spouse of the borrower becomes the owner of the property; or

• A transfer into an inter vivos ("between the living") trust in which the borrower is and remains a beneficiary and which does not relate to transfer of rights of occupancy in the property.

See, Preamble to 2016 Mortgage Servicing Rules, pp. 783-4. One point of clarification here is that individuals who may otherwise qualify as successors in interest but who are already joint obligors on the mortgage loan are already protected as borrowers under Regulations X and Z and those protections are not limited to those available to successors in interest under the 2016 Mortgage Servicing Rules. For example, as a joint obligor, this individual would typically have standing to bring a Regulation Z claim not related to any mortgage servicing acts or practices committed by the servicer.

The amended commentary also clarifies that confirmed successors in interest are not required to assume a mortgage loan prior to receiving the protections of the Rules. If the confirmed successor in interest does decide to assume the mortgage loan or otherwise becomes liable on the obligation, the successor in interest is entitled to the full protections of Regulations X and Z rather than just the mortgage servicing provisions. Furthermore, even after the servicer has confirmed a successor in interest, the servicer must still comply with all applicable requirements of Regulations X and Z with respect to the transferor borrower. See, Preamble to 2016 Mortgage Servicing Rules, pp. 114-5; 813-4.

To address privacy concerns raised by NAFCU, the 2016 Mortgage Servicing Rules also amend the error resolution and request for information provisions in Sections 1024.35 and 36 of Regulation X to permit credit unions to omit certain information such as location, contact information, and personal financial information other than the terms, status, and payment history of the mortgage loan from information provided to a potential or confirmed successor in interest. See, Preamble to 2016 Mortgage Servicing Rules, pp. 787-9. When responding to a request for information from a potential successor in interest, credit unions are required to treat the potential successor as a “borrower” for purposes of Section 1024.36. This means, for example, that the credit union would be subject to the timing requirements in paragraph (d) and the prohibition on charging a fee for an information request in paragraph (g)(1) of that Section.

While the bulk of the 2016 Mortgage Servicing Rules are effective 12 months after publication in the Federal Register, the successor in interest provisions are not effective until 18 months after publication. These effective dates happen to roughly coincide with the first and second implementation phases of the CFPB’s revised HMDA Rules, which NAFCU expects will be a significant compliance challenge for credit unions. In order to help assist our members, the Regulatory Compliance Team will provide additional resources on both the Mortgage Servicing Rules and revised HMDA in the coming months through blog posts, guides, and other publications. Currently available resources can be found here and here.

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A Seaside Vacation. While not typically NAFCU policy, I happened to write this blog post on a rainy day while on vacation in Rhode Island. I found the calm ocean vistas an interesting contrast to the sturm und drang of the CFPB’s Mortgage Servicing Rules. Here are some photos of Block Island, just an hour ferry ride away from the mainland.

 

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

Similarly, Regulation X provides:

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

…

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

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

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

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

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

…

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

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

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

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

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

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

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

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

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BSA: Reports & Training for CU Boards

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

Part of the BSA Webcast Series

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

Unfair Credit Practices – Security Interests in Household Goods

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans and happy Friday! We recently received questions about whether credit unions can take security interests in household goods to secure non-purchase money loans. Since this issue is somewhat complex and involves some twists and turns, I decided to write this blog post to (hopefully) clarify the matter for you. The short answer is that, in general, this is considered an unfair practice under Section 5 of the Federal Trade Commission Act (FTC Act) and is prohibited.

The Federal Trade Commission’s Credit Practices Rule states that it is an unfair act or practice within the meaning of Section 5 of the FTC Act for “a lender or retail installment seller directly or indirectly to take or receive from a consumer an obligation that…[c]onstitutes or contains a nonpossessory security interest in household goods other than a purchase money security interest.” 16 C.F.R. § 444.2(a)(4).

The rule defines “household goods” to include the following:

• Clothing

• Furniture

• Appliances

• One radio and television

• Linens

• China

• Crockery

• Kitchenware, and

• Personal effects (including wedding rings).

16 C.F.R. § 444.1(i). Informal Staff Opinion Letters issued by FTC Staff have also indicated that items such as sewing machines, telephones and answering machines, household pets, ovens, and patio furniture are also considered “household goods.” The term “household goods,” however, does not include works of art, electronic entertainment equipment, items acquired as antiques, or jewelry (except wedding rings). FTC Staff have also said that bicycles, power tools, lawn equipment, boats, and livestock are not considered “household goods.” Furthermore, even if an item is considered a “household good,” the creditor can take a security interest if it is a “fixture,” meaning that it is attached to real property.

In the Statement of Basis and Purpose for the Credit Practices Rule, the FTC explained why it believes this type of conduct to be “unfair”:

The record reflects the fact that creditors rarely engage in actual repossession of household goods. When it does occur, the furniture and other items seized frequently have little or no economic value; occasionally, the act of seizure appears to be undertaken for punitive or psychological deterrent effect.

Although seizure of household goods is rare, when it occurs it can have severe economic consequences…in the context of seizure the disproportionate economic impact of non-purchase money security interests is most apparent. Debtors lose property which is of great value to them and little value to the creditor. The value to the debtors consists primarily of the replacement cost of the goods seized, together with psychological and emotional value. The debtor is, in an economic sense, willing to pay more for the household goods than they are ever wroth to the creditor on the resale market.

49 Fed. Reg. 7740, 7763 (March 1, 1984). Since this practice appeared to the FTC to be likely to cause substantial injury to consumers that is not reasonably avoidable and not outweighed by benefits to consumers or competition, the FTC declared taking a non-possessory security interest in household goods to be unfair and a violation of the FTC Act.

In the past, NCUA had a similar rule that was applicable to federal credit unions. This rule was codified as Part 706 of NCUA’s Rules and Regulations. Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, NCUA no longer has rule writing authority under the FTC Act so the rule has been repealed. See, 79 Fed. Reg. 59627 (Oct. 3, 2014). However, NCUA and the federal banking agencies issued supervisory guidance stating that the agencies still considered these practices to be unfair and will take appropriate action under their respective authorities to enforce Section 5 of the FTC Act. See, Interagency Guidance Regarding Unfair or Deceptive Credit Practices (Aug. 22, 2014).

So, practically speaking, what does this mean? For federal credit unions, this means that even though the FTC does not have authority over federal credit unions, the FTC’s Credit Practices Rule applies since NCUA believes these practices to be unfair in themselves and to violate Section 5 of the FTC Act. For state-chartered credit unions, who have always been subject to the FTC's jurisdiction, this blog can serve as a reminder of what the Credit Practices Rule requires.

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

To Innovate or Not to Innovate… Ask the CFPB!

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

The policy has five sections:

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

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

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

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

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

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

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

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

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TILA/RESPA Implementation: “Piggyback” Loans or “Simultaneous Second” Liens

Written by Victoria Daka, Regulatory Compliance Counsel

Now that we are a couple of weeks strong in TRID implementation, some of the complexities of the rule appear to manifest themselves in application. Well, NAFCU’s compliance team is here to help.

In the past few weeks, we have been receiving quite a few questions from members about “piggyback” loans or “simultaneous second” liens under the TRID rule.

While the CFPB has not come out and clarified how to handle fees associated with a “simultaneous second” mortgage that is open-end, it may be helpful to keep in mind that these are separate transactions. In one of its webcasts clarifying some sections of TRID, the CFPB staff discussed “simultaneous seconds,” noting that the “alternative Loan Estimate” could be used for simultaneous closed end second loans.

 It seems that the Bureau does recognize that these “piggyback” transactions are separate transactions. While this guidance is rather clear in regards to the closed-end loan scenario, unfortunately we are not aware of any clear guidance from the Bureau on open-end piggyback loans. Credit unions are concerned about the “other costs” disclosure described in section 1026.37(g), which I’ll include here for reference:

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

 […]

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

(i) For any item that is a component of title insurance, the introductory description “Title —” shall appear at the beginning of the label for that item.

(ii) The parenthetical description “(optional)” shall appear at the end of the label for items disclosing any premiums paid for separate insurance, warranty, guarantee, or event-coverage products.

(iii) The number of items disclosed under this paragraph (g)(4) shall not exceed five.”

(emphasis added)

 If these are viewed as separate transactions, then arguably the fees that are associated with the second transaction are not “in connection with the transaction,” but understandably, credit unions have also noted that these fees are known at the time of application. In other words, the two transactions are linked in terms of allowing the member to consummate the loan, and the TRID rule’s overarching goal is for consumers to have as much information as possible from the Loan Estimate to, theoretically, promote knowledgeable loan shopping.

 Meanwhile, section 1026.40 requires that fees are disclosed in connection with a HELOC transaction. So these same fees should be disclosed in accordance with other requirements in Regulation Z, including the open-end credit disclosures and section 1026.40. This could mean that the fees could be disclosed twice if disclosed as part of both the closed-end loan and the open-end piggyback loan.

Credit unions can look to the available guidance and commentary and make a risk-based decision as to how to comply for the purposes of these loans. Credit unions should consider in part whether their chosen method would constitute a “good faith effort” towards “substantial compliance” as NCUA has indicated that this is what it will look for in the first round of exams post-TRID.

Financial Regulators Issue Interagency Policy Establishing Standards for Assessing the Diversity Policies and Practices of the Entities They Regulate

 Written by: Eliott C. Ponte, Regulatory Compliance Counsel

Last week, the NCUA and other financial regulators issued a final interagency policy statement establishing joint standards for assessing the diversity policies and practices of the entities they regulate.  It is important to note that these interagency standards for diversity policies are voluntary.  The NCUA and other financial regulators are issuing this interagency policy statement to comply with Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which requires financial regulators to develop standards for assessing the diversity policies and practices of the agencies’ regulated entities. 

According to the interagency press release, these standards “provide a framework for regulated entities to create and strengthen their diversity policies and practices—including their organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of organizational diversity and inclusion within the entities’ U.S. operations.”  The interagency policy, which was drafted with an institution of 100 or more employees in mind, lists and explains five detailed standards.  The policy also explains that the unique characteristics of the institution will determine the appropriate application of the standards to that particular institution.  The standards that are discussed include:

1. Organizational Commitment to Diversity and Inclusion
2. Workforce Profile and Employment Practices
3. Procurement and Business Practices—Supplier Diversity
4. Practices to Promote Transparency of Organizational Diversity and Inclusion, and
5. Entities' Self-Assessment

To view the policy statement in its entirety, click this link.  Compliance officers should note that the NCUA “will not use their examination or supervisory processes in connection with these Standards.”  80 Fed. Reg. 330223.  The Dodd-Frank Act does NOT grant NCUA enforcement power to require credit unions to self-assess or implement these diversity standards.  Instead, these standards are only best practices, and the NCUA “encourage[s] each entity to use these Standards in a manner appropriate to its unique characteristics.”  80 Fed. Reg. 330223. 

Regulatory Relief: Your chance to weigh in

Written by Brad Thaler, Vice President of Legislative Affairs

I know that the compliance community is well aware of the ever-increasing regulatory burden credit unions face in a post Dodd-Frank world.  Last week, NAFCU told the Senate Banking Committee about this burden and our ideas for regulatory relief when NAFCU’s Board Chairman and SRP FCU President/CEO Ed Templeton testified Thursday before the committee at one of two hearings examining “Regulatory Relief for Community Banks and Credit Unions.”  Last Tuesday, the Committee also heard from financial regulators, including NCUA.

Now the Senate Banking Committee wants to hear from you.  They have asked NAFCU to gather stories and letters from individual credit unions about the regulatory burdens you face and ideas for where and how your credit union needs relief.  It is with this in mind that I am asking for your input.

Are there particular statutes or regulations that are especially burdensome on your institution and your ability to serve your members?  Are there some that just seem out of date? How should they be changed?  What has the impact been on your institution?  Are there examples of regulatory cost/time estimates that your institution finds are off-kilter?  (You can view NAFCU’s Top Ten Regulations to Eliminate or Amend and our new Five-Point Plan for Credit Union Regulatory Relief if you need some ideas.)

If your credit union is interested in sharing your regulatory burden stories or regulatory relief ideas with Senate Banking Committee Chairman Richard Shelby, please reach out to me at [email protected], and I will walk you through the submission steps.

The Committee’s ultimate goal is to take your suggestions and craft a common-sense regulatory relief package, which they hope to bring to the Senate floor this spring.  The Committee hopes to get comments as soon as possible, so I ask that you try to get us any letters by Thursday, February 26^th.  Please reach out to me, directly with any questions ([email protected] or 703-842-2204).   

Staying on the topic of providing feedback on regulatory review, the hearings last week also had a lot of discussion about the EGRPRA process.  The Committee noted that EGRPRA provides a lot of important insight on areas that regulators need to act and can also give Congress reform ideas.  It is with this in mind that I also want to encourage everyone to submit your comments on NAFCU’s Regulatory Alert 15-EA-03 on NCUA’s second EGRPRA review. Comments are also due to NAFCU on February 26^th.  You can complete our Regulatory Survey, or reach out to Alicia Nealon, NAFCU’s Director of Regulatory Affairs, directly ([email protected], 703-842-2266) with your thoughts. 

Thanks in advance for your participation in this process.

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NAFCU Webcast. Regulation Z: Five Challenges and Their Solutions - Regulation Z of the Truth in Lending Act (TILA) may be the oldest federal consumer credit law, but it can still be challenging to heed. Make sure you’re not overlooking its fundamental principles with a NAFCU webcast that dives into TILA’s five core issues, and examines how best to address them.  This important knowledge is just as important as staying up-to-date on the Act’s latest changes.

 

Monday Morning Tidbits

Written by Victoria Daka, Regulatory Compliance Specialist

NCUA Hosting Webinar on New TILA-RESPA Disclosure Rules (with the CFPB)

Do you have lingering questions about the new TILA-RESPA Integrated Disclosures requirements scheduled to take effect August 1^st? Do you want to get a head start on compliance? Well, you are in luck. The NCUA, with the CFPB, will host a free webinar, “Preparing for the New TILA-RESPA Integrated Disclosures,” on Wednesday, Feb. 11, 2015, starting at 2 p.m. This webinar will outline the significant changes to the disclosures and forms required and detail: 1) the new loan estimate and closing disclosure forms; 2) what types of mortgage transactions are covered by the new rules; and 3) the new timing requirements for the disclosures. You will find the registration for the webinar here. Credit unions may also submit questions in advance to [email protected].

NCUA February 10^th Town Hall Webinar Will Feature CFPB’s Cordray

For the upcoming NCUA Town Hall Webinar, set for Tuesday, February 10, 2015, starting at 3 p.m., NCUA’s Board Chairman Debbie Matz says that the webinar will feature CFPB’s Director Richard Cordray. This is a great opportunity for credit unions to discuss their issues and concerns directly with federal regulators. In this webinar, attendees can submit questions regarding the broad credit union industry and the work of the CFPB. You will find the registration for the webinar here. Credit unions may also submit questions in advance to [email protected].

CFPB Compliance Bulletin

The CFPB recently issued a Compliance Bulletin reminding CFPB supervised institutions that, among other things, non-disclosure agreements institutions may have, with third parties, do not alter or limit the CFPB’s access to information under their supervisory authority. Pursuant to Dodd-Frank, the CFPB has the authority to request reports to conduct supervisory duties, from its supervised institutions, and supervised institutions may not use non-disclosure disagreements to transact out of this request.  It should be noted that a failure to provide information required by the CFPB is a violation of federal law.

To view the Compliance Bulletin in its entirety, see here.

NCUA’s December Report Addresses Concerns about Liability Under the Ability-to-Repay-Rule; Impact of DoD Proposed Rule Webcast; Programming Note

Written by Victoria Daka, Regulatory Compliance Specialist

Compliments of the season! "It’s the most wonderful time of the year.”

On Friday, Brandy blogged about the Region III Report article from the latest NCUA Report. Today, I’d like to take a look at another article from the NCUA Report, which focuses on the Ability-to-Repay Rule. This article seeks to address the concerns about liability under the CFPB’s Ability-to-Repay Rule by indicating the reason for the “qualified mortgage” definition; extending leeway to credit unions to continue using their existing successful traditional relationship-lending approach; and, summarizing the three main categories of “qualified mortgages.”

As per the article, “Congress directed [the CFPB] to define a category of loans where lenders would have certainty that their loans comply with the rule, and where borrowers would have the greatest protections. So, [the CFPB] developed criteria for what are called “qualified mortgages.” In addition, this article informs credit unions that they may continue to utilize their successful traditional relationship-lending approach, regardless of whether the mortgagees are “qualified,” as there many loans that are not qualified mortgages, yet are fundamentally sound.  

 Furthermore, this article summarizes the three types of qualified mortgages: (1) the general definition; (2) the “GSE eligible” provision; and (3) the small-creditor provision as follows:

“General Definition. Any loan for which the consumer’s income and debt have been considered and verified with a debt-to-income ratio of 43 percent or less is a qualified mortgage.

GSE or Agency-eligible” Category of Qualified Mortgages. If a mortgage is eligible to be purchased, guaranteed or insured by one of several government-sponsored enterprises or certain government agencies—Fannie Mae, Freddie Mac, the U.S. Department of Agriculture and the Rural Housing Service—it is considered a qualified mortgage…

Small-Creditor Category of Qualified Mortgages. If your credit union has less than $2 billion in assets (adjusted annually for inflation) and your credit union and affiliates made 500 or fewer first-lien, closed-end mortgages in the prior year, then all mortgages you keep in portfolio are considered qualified mortgages.”

 The article is available in its entirety here.

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Webcast: How All Credit Unions Will Be Impacted by the DoD Proposed Rule

If you offer unsecured credit of any kind, then this webcast is a must-attend event—the proposed rule doesn’t just affect military-focused credit unions. The Department of Defense’s proposed rule would amend the Military Lending Act (MLA) to make the definition of “consumer credit” cover more credit types. Learn what you can do to prepare and protect your credit union with this strategic webcast.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Thursday and Friday for the long holiday weekend. We will be back to blogging on Monday. Happy Holidays!

CFPB Updates Regulatory Agenda, Compliance Officers Get A Preview Of What Is To Come

Written by Eliott C. Ponte, Law Clerk

I believe the job of a compliance officer is a difficult job: compliance officers must have a working understanding of the vast regulatory landscape, and in addition, be aware of how the various regulators plan to shape the regulatory landscape in the near future.  To make your difficult jobs easier, I have blogged about five areas that the CFPB is planning to change in the near future after reading the CFPB’s recent blog post that highlights its new regulatory agenda.  To save you time, I have copied the relevant portion of the CFPB’s blog in the post below, and put my comments following their post. 

 

Payday Loans and Overdrafts

The CFPB stated the following on its blog:

“We’re researching and considering whether rulemaking is warranted in the areas of payday and deposit advance products, as well as consumer overdraft products. We held a field hearing in March 2014 in Nashville, Tennessee, and  also released a report that analyzed payday lending and found that four out of five payday loans are rolled over or renewed within 14 days. We’re also expecting to build on an Advance Notice of Proposed Rulemaking that we published in 2012 concerning prepaid cards by issuing a proposed rule to strengthen federal consumer protections for these products. We’ve been testing potential disclosures that we may propose to be used on the packaging of prepaid cards.

Payday regulations is not surprising because Director Cordray foreshadowed regulations during his remarks that accompanied a report on payday loans on March 25^th of this year.  The only notable difference is that the CFPB is now “officially” considering whether regulations governing payday loans are possible under its legal authority.  Unfortunately, it is not clear what the CFPB will do at the moment, but Payday regulations might include disclosures to payday borrowers, and/or lending practices in connection with payday loans.

In regards to overdrafts, the CFPB is also considering regulating (1) how consumers opt in to overdraft coverage for ATM and one-time debit card transactions, (2) overdraft coverage limits, (3) transaction posting order, (4) overdraft and insufficient funds fee structure, and (5) involuntary account closures.  This comes after a June 2013 CFPB whitepaper that summarized initial findings form an analysis of overdraft policies from supervisory data from nine large banks.  Unfortunately, it is not clear if the CFPB is interested in prohibiting specific acts or practices, or will be issuing sweeping regulation that affects everyone in the industry.

 

Mortgages

The CFPB stated the following on its blog:

“Our agenda includes a number of rulemakings mandated by the Dodd-Frank Act.  For example, we recently convened a small business review (SBREFA) panel to discuss potential amendments to the Home Mortgage Disclosure Act, some of which were mandated by Section 1094 of the Dodd-Frank Act.  We’re also focusing intensely on supporting the implementation process for our recent rulemaking to implement a Dodd-Frank Act directive to consolidate and streamline federal mortgage disclosures required under the Truth in Lending Act and Real Estate Settlement Procedures Act.  We’re also continuing work with stakeholders to address questions that have arisen with regard to the 2013 mortgage rules, including issuing additional clarifications and amendments as warranted.”

In its blog, the CFPB forgot to include the specific information required by Section 1094 of Dodd-Frank, which expands the scope of information required to be complied by the Home Mortgage Disclosure Act (HMDA).  The CFPB claims Dodd-Frank act requires the following additional information be collected:

1. the ages of loan applicants and mortgagors,
2. information relating to the points and fees payable at origination,
3. the difference between the annual percentage rate associated with the loan and benchmark rates for all loans,
4. the term of any prepayment penalty,
5. the value of the property to be pledged as collateral,
6. the term of the loan and of any introductory interest rate for the loan,
7. the presence of contract terms allowing non-amortizing payments,
8. the application channel, and
9. the credit scores of applicants and mortgagors.

In addition to these additional HMDA requirements, the CFPB is considering adding three additional information categories: (1) identifiers for loans, (2) parcels, and (3) loan originators.  As of now, it is not certain the CFPB will include these three additional reporting requirements in its notice of proposed rulemaking, but it seems more than likely it will.

 

Defining Larger Participants

The CFPB stated the following on its blog:

“We’re also continuing rulemakings to implement our supervisory program for certain nonbank entities by defining “larger participants” in various markets for consumer financial products and services. For example, we’re developing a proposal to identify “larger participants” in the market for auto lending. We’ve previously defined larger participants in the consumer debt collection, credit reporting, and student loan servicing markets and are now in the process of finalizing a rule defining larger participants in the international money transfer market.”

The CFPB is developing a proposal that would identify a market for auto lending and define "larger participants" of that market that would be subject to the CFPB's supervisory authority.  In doing so, the CFPB will seek to amend the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for auto lending.

 

Debt Collection

The CFPB stated the following on its blog:

“We’ve been doing research and outreach to assess issues in various other markets for consumer financial products and services over many months. In November 2013, we issued an advance notice of proposed rulemaking seeking comment, data, and information from the public about debt collection, which is the single biggest source of complaints to the federal government. We received more than 23,000 comments in response to the notice, and in our 2014 annual report on Fair Debt Collection Practices Act, reported that we received more than 30,000 consumer complaints in this area.”

According to the CFPB, the Federal government has received more consumer complaints about debt collectors than about any other industry.  The CFPB has already issued an advance notice of public rule making last year on this topic, and is now considering whether rules governing the collection of debts are warranted under the Fair Debt Collection Practices Act or other CFPB authorities. 

 

HUD Proposes Rule on ARM Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages; NAFCU Webcast – Quarterly Economic Update & Credit Union Outlook

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

The Department of Housing and Urban Development (HUD) recently issued a proposed rule that would align adjustable rate mortgage (ARM) notification requirements and the look-back period for FHA-insured single family mortgages with the Truth in Lending Act (TILA), as implemented by the CFPB’s Regulation Z mortgage servicing rule (“mortgage servicing rule”) published in the Federal Register February 14, 2013, and which became effective January 10, 2014.

Currently, FHA regulations have a 30 day look-back period for determining the current index to use for interest rate changes on FHA-insured ARMs and require notification at least 25 days in advance of a corresponding change in the mortgagor’s monthly payment. These timeframes were consistent with the rate adjustment notification requirements of prior Regulation Z, which required notice of rate adjustments between 25 and 120 days before the due date of the new payment. However, going forward, these timeframes will not be sufficient to comply with the revised timing requirements in Regulation Z, section 1026.20(c), which generally requires advance notice of a rate change with a corresponding payment change between 60 and 120 days before the new monthly payment is due.

Noting the timing issue for existing ARMs with short look-back periods, the CFPB’s mortgage servicing rule included special timing requirements for providing the section 1026.20(c) notice for ARMs with look-back periods less than 45 days and originated prior to January 10, 2015.  For these loans, the section 1026.20(c) disclosure must be provided at least 25 days, but no more than 120 days, before the new payment is due. This “grandfathering” of loans with look-back periods of less than 45 days was intended to provide HUD with enough time to bring its regulations in line with TILA and the mortgage servicing rule.

Accordingly, HUD is now proposing two revisions to FHA regulations that would (1) establish a 45 day look-back period for FHA-insured ARMs, instead of the current 30 day look-back period; and (2) require the mortgagee of an FHA-insured ARM to comply with the disclosure and notification requirements in the mortgage servicing rule.

For additional details, the proposed rule is available here.  HUD is accepting comments until June 9, 2014.

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NAFCU Webcast – Quarterly Economic Update & Credit Union Outlook. Economic and regulatory factors can affect you just as much as your members and employees. Gain a greater understanding of the most impactful current and forecasted economic conditions. You’ll also explore key performance metrics to help you measure the health of your credit union, such as member growth, ROA, delinquencies, and mortgage lending. The webcast will take place on Thursday, June 12, 2014 at 2:00pm Eastern time. Register by June 5 to save $100. For details on this webcast, click here.

D.C. Circuit Decision is a Big Win in the Debit Interchange Battle; Free Kick; Two Helpful Webcasts

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Friday was supposed to be a quiet day for the NAFCU Compliance Department, but the U.S. Court of Appeals for the D.C. Circuit had other plans for us.  The court released its opinion in the debit interchange case (NACS v. Board of Governors of the Federal Reserve System) Friday morning, and lots of us at NAFCU spent Friday reading and analyzing the opinion so that we could give you the most important information.  Judge David Tatel, writing for the three-judge panel that also included Judges Harry Edwards and Stephen Williams, penned a concise 38-page opinion that largely overturned Judge Richard Leon’s District Court ruling from last year that had favored the merchants.

 

Interchange Fee

The bulk of the opinion is spent dissecting whether or not the Federal Reserve properly exercised its power in interpreting the Durbin Amendment and whether or not the costs that the Federal Reserve included in its interchange fee calculation were reasonable to include in the fee, as per the legislative language.  After going through several levels of legal and grammatical analysis, the court held that the Federal Reserve crafted a rule that largely fell within the constructs of the Durbin Amendment.

Judge Tatel spent several pages discussing the modern legal theories regarding legislative construction and the important role that punctuation plays in determining the intent of the legislature.  The outcome of this analysis was the key to the opinion’s decision on interchange fees.  If the panel agreed with the lower court ruling and the merchants’ reading of the Durbin Amendment’s language and grammar, then the Federal Reserve would be deemed to have promulgated a rule that exceeded Congressional intent in allowing for card issuers to recover more than just the variable costs of a debit transaction.

After going through this analysis and quoting from such classics as E.B. White and William Strunk’s The Elements of Style and Lynn Truss’s Eats, Shoots & Leaves, the panel held that the Federal Reserve was within its right to include more than just the variable costs.

Because of this holding, the panel also had to go through an analysis as to whether each one of the individual, “non-variable” costs that were included in the Federal Reserve’s interchange fee calculation.  The panel held that the following costs were appropriately included in the fee calculation: (1) fixed authorization, clearance, and settlement costs; (2) network processing fees; and (3) fraud loss costs.

The panel believed that transaction monitoring costs could reasonably be calculated as part of the fee, but also believed that the Federal Reserve had not adequately explained its reasoning for including the transaction monitoring costs.  Therefore, the panel remanded the issue of the transaction monitoring costs to give the Federal Reserve an opportunity to explain its rationale for including the costs in the interchange fee calculation.

 

Routing & Anti-Exclusivity

Judge Tatel’s opinion for the panel stated early on in its section regarding the routing and anti-exclusivity provisions of the Federal Reserve’s rule that the merchants’ arguments had a “steep hill to climb.”  This is because the panel felt that a plain text reading of the Durbin Amendment seemed to align with the Federal Reserve’s reading of the provisions, thus allowing for the rule’s requirement that issuers activate two unaffiliated networks regardless of the method of authentication (PIN or signature).  After a fairly short analysis, the panel held that the merchants’ argument stating that cards needed to be activated on at least two unaffiliated networks per authentication method did not hold muster.

 

What does it all mean for credit unions

In the short term, credit unions will be able to continue administering their debit card programs in the same manner in which they have been since the Federal Reserve’s rule was promulgated.  Furthermore, the debit interchange fee calculation will remain unchanged while the Federal Reserve decides how to move forward with regards to the inclusion of the transaction monitoring costs.

NAFCU will continue to monitor the debit interchange legal battle, and will provide further updates, as they become available.  For further information on this issue, please visit NAFCU’s webpage devoted to the debit interchange rule.

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Free Kick.  Being a fervent supporter of a football team has its highs and lows.  This weekend brought one of the lowest lows possible, as my beloved Arsenal were utterly humiliated by Chelsea.  The 6-0 tragedy has me too depressed to write much about football, but I did want to mention two things related to that match.

First, how can a refereeing crew make such an egregious mistake in so clearly sending off the wrong player by handing Kieran Gibbs a red card for a foul committed by Alex Oxlade-Chamberlain?!  The decision made absolutely no impact on the ultimate outcome, but it is a mistake that no refereeing crew should ever make.  Hopefully, the crew is properly disciplined for such a poor performance.

Lastly, I do want to tip my hat to Arsene Wenger.  While Saturday’s outcome undoubtedly left a sour taste in his mouth, he deserves to be congratulated for managing his 1,000^th game at Arsenal.  It’s been a pleasure watching his teams fill Highbury and the Emirates with attractive and fundamentally-sound football for almost 20 years now!

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Two Helpful Webcasts

Risk-Based Capital Rule: How NCUA’s Proposal Will Impact You

Delve into NCUA’s risk-based capital proposal and learn how it could impact your operations both immediately and long-term. Register by April 3 to save $100.

 

Fair Lending II: How NCUA Guidance and the CFPB’s Focus Affect You

Gain insight into the latest guidance NCUA has issued regarding fair lending, and the best practices for implementing it. You’ll also learn the CFPB’s expectations for fair lending risk management practices. Register by April 16 to save $100.

NCUA Reveals Regulatory Review Report; NAFCU's 2014 Technology and Security Conference; BSA Blast

Written by Alicia Nealon, Regulatory Compliance Counsel

Last week, NCUA’s Office of General Counsel released  its 2013 Regulatory Review report, concluding its annual review of one-third of  NCUA’s rules and regulations, which this year included CUSOs, appraisals, member business lending and the Central Liquidity Facility. The report confirms that NCUA will be addressing a number of issues that NAFCU continues to fight for to ease regulatory burden on credit unions. Particularly, the Office of General Counsel recommended that the NCUA Board consider eliminating or amending several of the regulations raised in NAFCU’s “Dirty Dozen.” 

For those of you who haven’t had a chance to see it, NAFCU prepared a list of twelve regulations- the “dirty dozen”-  that regulators need to eliminate or amend because they are unnecessary, outdated, or overly burdensome on credit unions. This Regulatory Review report affirms that NCUA is considering a number of recommendations included on the "dirty dozen" list as it reviews possible changes in rules on incidental powers, member business lending and appraisals.

The first of NAFCU’s “Dirty Dozen” is a call to expand credit union investment authority to include permissible investments in derivatives, securitization and mortgage servicing rights. The review notes that the NCUA Board may look into expanding credit unions’ incidental powers in allowing them to securitize their own loans. The agency is also expected to issue a rule on derivatives at the board meeting on Jan. 23.

The report mentions possible updates to the agency’s MBL rule, a change NAFCU pushed for as the fifth of its “Dirty Dozen.” These proposed updates would “reflect the current business climate” and address issues such as calculating market value in construction-related business loans and valuation-related issues. The report also raised the prospect of changes to the MBL rule’s personal guarantee requirement and its two-year direct experience requirement.

Addressing the final recommendation of the “Dirty Dozen,” the report recommends that the Board amend Section 722 to eliminate redundant NCUA requirements on credit unions to provide copies of appraisals upon request. 

Finally, the report acknowledges that the Dodd-Frank Act transferred the Fair Credit Reporting regulation to the CFPB and advises that Section 717 should be transferred to the CFPB. It also gives hope that NCUA may tackle other issues including modernizing advertising rules, and rules on notification of credit unions’ insurance status. 

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NAFCU's 2014 Technology and Security Conference.  NAFCU’s 2014 Technology and Security Conference, which will be held February 11-13 in Las Vegas, is a great place to discover the latest credit union security and technology trends. Conference topics include fraud trends, core processing issues, big data and credit union crisis management.  Check out more information about the conference and register here.

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BSA Blast – The January 2014 edition of NAFCU’s BSA Blast is now available (a NAFCU member login is needed).  This issue is all about enforcement – from FinCEN’s enhanced focus on holding financial institutions responsible for Bank Secrecy Act (BSA) violations and its enforcement action against JP Morgan Chase in connection with the Madoff scandal to recent OFAC enforcement actions against three banks. In addition the issue contains a new BSA quiz for use in staff training.

The Mortgage Choice Act (H.R. 3211); Congress Must Address the Points & Fees Issue

Written by Jillian Pevo, NAFCU’s Director of Legislative Affairs

For over two weeks it felt like Groundhog Day here in Washington –each day it seemed like additional federal employees were furloughed, Congress did a whole bunch of arguing, and not a lot got done. Congressional staffers deemed “non-essential” were instructed to stay home, and the agendas of various committee chairmen temporarily fell by the wayside as negotiating relative to the government shutdown and national debt ceiling took center stage. 

It’s worth noting that credit unions really showed their true colors during this difficult time – numerous lawmakers took note of the special incentives and programs many of your credit unions offered to your members affected by the shutdown. We aren’t surprised, but our staff here at NAFCU can’t thank you enough for all you do. 

When the logjam in Congress finally broke last week, with an agreement on government funding until January 15 and on the debt ceiling through February 7, elected officials scrambled to fill the Congressional agenda with previously postponed hearings and a host of other activity related to the issues they care about most.  

One issue that seems to be percolating in both the House Financial Services and Senate Banking Committee’s is the CFPB’s qualified mortgage (QM) definition in satisfying “ability to repay” requirements under the Dodd-Frank Act. As currently defined, QMs cannot have points and fees in excess of 3 percent of the loan amount (for loans $100,000 or greater). This will make meeting the QM test problematic for lenders and non-QM loans would be less likely to be made or would only be available at higher rates due to heightened liability risks.

Representative Bill Huizenga (R-MI) has been out front on this issue and recently, in the spirit of compromise, introduced a scaled down version of a more board piece of legislation to modify the definition of “points and fees.”  The Mortgage Choice Act (H.R. 3211) would exclude title charges from the “points and fees” definition, and clarify that escrow charges should also be excluded. Representative Huizenga’s bill is bipartisan, and there is also a bipartisan Senate bill (S.949) that would also address this issue. 

With the ability-to-repay provisions set to take effect in January of 2014, time is of the essence for stakeholders to make their case to Congress. NAFCU’s government affairs team is committed to pursuing this issue in hopes of seeing changes before the effective date. As Congress came back into session yesterday, NAFCU brought H.R. 3211 to the attention of House Speaker Boehner and Minority Leader Nancy Pelosi. We are also working with other industry groups to help educate members of Congress about how burdensome the points and fees definition will be for lenders, and ultimately consumers. We recognize the importance of this issue to credit unions.  However, it should be noted, as the recent government funding fight so keenly demonstrated, getting almost anything passed in the current environment is an uphill battle.  Nonetheless, NAFCU will be here fighting for you.

As always, if you have questions about what’s happening in Congress, or additional insight that may be helpful to NAFCU’s lobbying team, please reach out to us. 

Leadership; QRM; Interchange Update; September Compliance Monitor

Written by Steve Van Beek

Last week, I wrote an article for CUinsight.com that asked How Can Credit Unions Create a Culture of Compliance? Here is a snippet:

"So, how can we change our culture into a culture of compliance – an environment where we can stop compliance snafus before they begin, by building risk management into product development from the start?

In the past, a compliance officer would be brought into a discussion at the tail end of a project’s development, to give approval or disapproval. In today’s world, a compliance officer needs a seat at the table to help evaluate the various risks of a new product or service. The Consumer Financial Protection Bureau is not just rule- and requirement-focused – it is principle-focused. Their offices want to know not only if a credit union’s product or service is compliant with rules and guidance, but if that product or service provides a real benefit to members." (Emphasis added).

As compliance plays a larger and larger role at credit unions, compliance officers need to expand their skill sets. Rather than sitting back, they need to take charge and demonstrate how an effective compliance program at the credit union can reduce compliance, strategic and reputation risks. 

While compliance professionals usually attend NAFCU's two compliance conferences (School & Seminar), I'd recommend taking a look at NAFCU's Management & Leadership Institute - October 7-11 in Philadelphia, PA. To successfully create a culture of compliance, compliance officers need to expand their leadership skills and this conference provides those tools - including:

• Tools to effectively build relationships with board members;

• Successful communication techniques to help move projects forward;

• Tactics for leading a successful credit union— from operations to marketing; and

• Clarity on board vs. management roles.

More information on the "institute experience" can be found here and the overall conference details are here.

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Qualified Residential Mortgage Proposal. Last week, the FDIC, OCC, FHFA, SEC and the Federal Reserve released a joint proposed rule (replacing the prior proposal) that would define a "qualified residential mortgage." Importantly, this proposed rule would not directly impact credit unions; however, it will impact the secondary mortgage market. 

One important improvement is that the proposed definition of "qualified residential mortgage" would be aligned with the CFPB's definition of "qualified mortgage." However, the devil is always in the details and the proposed definition of "qualified residential mortgage" would only be aligned with the CFPB's "general definition of qualified mortgage." According to the proposal, the definition of "qualified residential mortgage" would not include a mortgage that attains “qualified  mortgage” status on the basis of being eligible for purchase by Fannie Mae or Freddie Mac, issued by a “small creditor” (as defined in the CFPB’s rule), or is a “qualified mortgage" balloon loan.

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Latest Interchange Video. Looking for the latest on interchange? Check out NAFCU's Interchange Fee issue page - including the latest video update from NAFCU's Carrie Hunt.

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September Compliance Monitor. The September 2013 NAFCU Compliance Monitor is now available for download by NAFCU members. This month's articles are on NCUA's Loan Participation Rule and the CFPB's Remittance Transfer Rule. And, of course, the latest Compliance Calendar is also available.

Understanding the CFPB’s Civil Investigative Demand Powers

Written by John A. Howes, Jr., Regulatory Affairs Intern

In the July issue of NAFCU’s Compliance Monitor, I wrote about the Consumer Financial Protection Bureau’s (CFPB) new tool for enforcing the country’s consumer financial protection laws, the Civil Investigative Demand (CID).  I wanted to take a moment to tell you a little bit more about this unique device that will test credit unions’ compliance and record-keeping.

A CID is an administrative subpoena for documents, testimony, electronically stored information, and answers to written questions related to an investigation that the CFPB has the authority to conduct.  CIDs impose significant requests for information and short, definite timetables for responses, so credit unions must be prepared and quickly decide a course of action if one crosses their desks.  

Last year, the CFPB clarified these new powers in its Final Rules Relating to Investigations, located in the CFPB’s regulation 12 C.F.R. Part 1080. The CFPB can issue a CID to any institution – even credit unions with less than $10 billion in assets who are not under its primary supervisory authority.  The CFPB is only required to disclose CIDs when recipients have petitioned to modify or set them aside.  So far, we only know of three that have been made publicly available.

A CID recipient must quickly contact his or her attorney and assemble a response team that can ensure compliance with legal obligations, determine the scope and timing of the CID, and assess the feasibility of document collection.  The team must decide whether to petition to modify or set aside the CID or fully comply with it and produce the requested information based on the tight deadlines set in the rule. 

Within 10 calendar days of receipt, a CID recipient must decide whether to meet and confer with the CFPB’s enforcement attorneys to discuss appropriate limitations on the scope of the request, issues related to privileged and confidential information, and a reasonable timeframe for compliance.  This is crucial to any response plan because, if there is no meeting within 10 days, the CFPB will not allow a recipient to petition to modify or to quash the CID.  Moreover, if a recipient petitions to modify or set aside, he can only raise issues that were discussed during the meeting with CFPB attorneys.  Within 20 calendar days after service of the CID, a recipient must decide whether to fully comply with the CID or to petition the agency’s director to modify or set it aside.  

The petition must be as specific as possible regarding the burdens of complying with the CID.  It should offer specific alternatives and suggestions for responding to the requests instead of simply saying that it is “overly burdensome.”  Showing specific figures from a third party detailing the CID’s burdens and compliance costs would also be a good idea.  In addition, a recipient could try narrowing the dates or refining the searches for the requested information.

Be prepared if you receive a CID.  Promptly contact your attorney(s) and try to negotiate the CID’s potentially vast requests for information and short, definite timetables for responses.

CFPB's Efforts on Protecting Older Americans

Written by Steve Van Beek

Section 1013(g) of Dodd-Frank required the CFPB to create an Office of Older Americans:

"(g) OFFICE OF FINANCIAL PROTECTION FOR OLDER AMERICANS.—

(1) ESTABLISHMENT.—Before the end of the 180-day period beginning on the designated transfer date, the Director shall establish the Office of Financial Protection for Older Americans, the functions of which shall include activities designed to facilitate the financial literacy of individuals who have attained the age of 62 years or more (in this subsection, referred to as ‘‘seniors’’) on protection from unfair, deceptive, and abusive practices and on current and future financial choices, including through the dissemination of materials to seniors on such topics."

In mid-May, the CFPB testified before the House Committee on Energy and Commerce and discussed the issue of elder abuse.

"Problem: Older Americans, their caregivers, and others in the community don’t know how to spot and avoid frauds and scams.

• CFPB initiative: The Office is developing an awareness program called Money Smart for Older Adults, in collaboration with the FDIC. This community education program uses the FDIC’s well established Money Smart training approach. The Bureau and the FDIC worked together to prepare content on common issues facing seniors, including how to identify a potential scam or fraud, and that module will be released jointly by the FDIC and the CFPB later in 2013. These training materials focus on preventing, recognizing, and reporting elder financial exploitation, and will serve as training for older consumers and other key audiences. (Emphasis added).

***

Yesterday, the CFPB and the FDIC announced their Money Smart for Older Adults program. There are seven segments:

• Common Types of Elder Financial Exploitation
• Scams Targeting Veterans
• Identity Theft
• Medical Identity Theft
• Scams that Target Homeowners
• Planning for Unexpected Life Events
• How to Be Financially Prepared for Disasters

You can download the instructor led curriculum here. And, you can find the Participant/Resource guide here. As your credit union works to protect your members (and train your staff on identifying and addressing elder abuse), be sure to review these resources as well as the Office of Older American's main webpage and additional resources.

Ding! Ding! Ding! Round One in Effect

Written by JiJi Bahhur, Regulatory Compliance Counsel

In case it slipped your mind, I thought I’d throw it out there that a few requirements from the Consumer Financial Protection Bureau’s (CFPB) mortgage rules – what I like to call Round One – became effective as of June 1, 2013.  Of note are the final TILA Escrow Rule and its recent amendments/clarifications – located at 12 C.F.R. 1026.35(b) – and the final Prohibition on Mandatory Arbitration – located at 12 C.F.R. 1026.36(h).

Escrow Requirements for HPMLs. The final TILA Escrow Rule lengthens from one year to at least five years the required minimum period most creditors must maintain an escrow account for first-lien higher-priced mortgage loans (HPMLs) secured by a consumer’s principal dwelling.  A creditor or servicer must either maintain the escrow account until the underlying debt obligation is terminated, or after the five-year period the consumer requests that the escrow account be cancelled.  If the consumer requests cancellation, the creditor or servicer is only permitted to cancel the escrow account if the loan’s unpaid principal balance is less than 80 percent of the original value of the property securing the underlying debt obligation and the consumer is not currently delinquent or in default on the underlying obligation. The new escrow requirements for HPMLs took effect as of June 1, 2013, and apply to applications received on or after June 1, 2013. 

Arbitration Clauses. The prohibitions on mandatory arbitration for mortgage loans – also effective as of June 1, 2013 – prohibits credit unions from including contractual or agreement terms that require mandatory arbitration or any other non-judicial procedure to resolve disputes arising out of consumer credit transactions secured by a dwelling.  This prohibition also applies to home equity lines of credit (HELOCs) secured by a consumer’s principal dwelling.  Although such a practice was never too prominent in the credit union industry – since Fannie Mae and Freddie Mac already prohibited it – loan agreements should be reviewed to ensure that a mandatory arbitration clause does not exist. 

Financing Credit Insurance. And the last CFPB mortgage requirement I wanted to mention was the prohibition on financing single-premium credit insurance.  I won’t get into details, but just wanted to mention that the original June 1, 2013 effective date has been delayed until January, 2014.  The delay will give the CFPB the ability to clarify, before the provision takes effect, its applicability to transactions other than those in which a lump-sum premium is added to the loan amount at closing.  We’ll have more on that at a later date. 

In the meantime, credit unions should prepare themselves for Round Two, which includes heftier players such as Ability to Repay and Qualified Mortgages, Regulation Z’s High-Cost Mortgage and Homeownership Counseling Amendments, Regulation X’s Homeownership Counseling Amendments, the Mortgage Servicing rules, Appraisal rules, etc. To see the list of regulations and their effective dates, view NAFCU’s Compliance Calendar, open to all.   

NACHA Launches 1073 Solutions Center to Assist with Remittances Compliance; Baby Compliance Solutions 101

Written by JiJi Bahhur, Regulatory Compliance Counsel

Yesterday, NACHA – The Electronic Payments Association – announced the launch of its 1073 Solutions Center with the objective of providing greater clarity and understanding of the requirements from the international remittances regulation.  The 1073 Solutions Center makes this possible by providing information, tools and resources, and available solutions to help financial institutions meet compliance and business needs with the regulation. 

If you’re wondering what the “1073” refers to, it’s because section 1073 of the Dodd-Frank Act establishes the regulatory framework for governing international remittance transfers originated by U.S. Consumers.  The 1073 Solutions Center is NACHA’s resource center intended to assist with compliance of such section; and in doing so, NACHA has provided the four steps to 1073 compliance on the 1073 Solutions Center main page:

 “Step 1 - Read and understand the regulation.

Step 2 - Determine how many consumer international remittance transfers you have annually.

Step 3 - Evaluate your procedures to determine how they will adapt to be in compliance.

Step 4 - Identify solutions to meet your business needs.”

Under each step, there is a wealth of information, resources, and solutions available.  If you are a credit union that generates more than 100 consumer international remittance transfers per year, take some time to go to the 1073 Solutions Center and poke around.  This is a great way to get any questions you may have had on the remittances regulation answered.

As a reminder, the final remittances rule takes effect October 28, 2013.

***

Speaking of solutions, a couple nights ago, I was looking at two pictures I snapped of my kids. Unfortunately, and to my disappointment, neither picture was perfect: in the first picture, Kyse was looking up, but Ava was looking down; and in the second picture, vice versa.  Baby Compliance Solutions 101: associate yourself with talented friends who can take the good parts of each picture and turn it into one perfect picture!   Now, I'd say that is a solution!

CFPB Proposes to Push Back Compliance Date for Credit Insurance; FSOC Report

Written by Steve Van Beek

Last week, the CFPB proposed to push back the compliance date for the prohibition on single-premium credit insurance. The prohibition - located in the loan originator final rule - is slated to become effective June 1, 2013. The proposed rule would provide a temporary delay to the new rule. In short, there has been quite a bit of confusion since the final rule was issued - mostly due to CFPB's inclusion of examples in the preamble to the final rule.

In addition to the delay, the CFPB has indicated they will be issuing another proposed rule on this issue to gain additional feedback in hopes of clarifying the requirements:

"In light of the interpretive questions that have arisen since publication of the Final Rule, the Bureau intends to publish a new proposal to seek further notice and comment on the provision in June 2013. In that proposal, among other things, the Bureau plans to (1) seek public comment, including from industry stakeholders and consumers, regarding the applicability of the prohibition to transactions in which credit insurance premiums are charged periodically; and (2) propose a new effective date for § 1026.36(i), under which the provision would take effect some time after finalization of that proposal."

Until that future proposed rule, the CFPB is issuing this proposal to temporarily delay the June 1, 2013 deadline. Are we having fun yet?  

***

FSOC Annual Report. The Financial Stability Oversight Council (FSOC) recently issued their 2013 Annual Report detailing the activities of the Council, significant market and regulatory developments, and potential emerging threats to the financial stability of the United States. The report includes seven themes; however, notably absent is any discussion of regulatory burden on financial institutions. This is incredibly unfortunate as the FSOC has a statutory mandate from Dodd-Frank to facilitate coordination between federal regulators.   

What Does Your Board Need to Know About the CFPB?

Written by Steve Van Beek

The headline above was my goal when I created a presentation for NAFCU's Board of Directors & Supervisory Committee Conference next month in Asheville, North Carolina. The first point is that the CFPB's regulations apply to all credit unions.

After that, you can see my overview and key takeaway slides below.

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It's Not Too Late. Your Board can still sign up for the conference - May 15-17 in Asheville, NC - and we'll be having similar discussions at NAFCU's Annual Conference - July 9-13 in Boston, Massachusetts.  

Here is another question: How are you informing and updating your Board on the CFPB's actions (and potential actions)? 

CFPB Issues Escrow Guide; Proposes Changes to Ability-to-Repay & Servicing Requirements

Written by Steve Van Beek

Escrow Guide. On Friday, the CFPB issued a Small Entity Compliance Guide for the Amendments to the Escrow Requirement for Higher-Priced Mortgage Loans. As you work through the escrow changes - effective June 1, 2013 - be sure to review the Small Entity Guide as it is the CFPB's effort to explain the changes in plain English.

***

Proposed Clarifications. Also on Friday, the CFPB announced they were proposing clarifications to the ability to repay/qualified mortgage requirements as well as the mortgage servicing requirements. This proposal is in addition to the escrow proposal issued the week prior.

The announcement includes this language from the CFPB:

"These proposals are part of our commitment to facilitate implementation of the rules issued in January under the Dodd-Frank Act. We at the Bureau believe that we have a responsibility not just to write a rule, but to see that it is implemented effectively."

These proposals have a very short comment period - so be sure to weigh in on the issues causing your CU headaches. The escrow proposal has a 15 day comment period (comments due May 3, 2013) and the latest proposal indicates there will be a 30 day comment period.

We'll have more on the ability-to-repay/QM and servicing proposal, but for now - here are the main areas that will be clarified:

• Debt-to-income ratio

• Contract variances and the temporary QM provision

• Purchase, guarantee or insurability status and the temporary QM

• No field preemption under Regulation X

• Small servicer exemption

For additional information, see the announcement and the language of the proposed text. 

2013 HMDA Getting it Right Guide; New NAFCU Calendar; Reg Alert on Escrow Proposal

Written by Steve Van Beek

2013 HMDA Guide. Yesterday, the Federal Financial Institution Examination Council (FFIEC) issued the 2013 HMDA Getting it Right! guide. According to the main page:

"The 2013 edition reflects the transfer of authority over Regulation C from the Federal Reserve Board to the Consumer Financial Protection Bureau. Appendix D, comment 1003.2 (Financial Institution)-2 is updated with the asset-size threshold exemption applicable to collection of 2013 data. There are also minor changes to the general text of the Guide, including updates to Sources of Geographic Information and Submitting the LAR."

You can find the full PDF of the 2013 Guide here.  

***

Long Time Coming. Now, you may be wondering when the last version of the Guide was issued?  2010.  The 2011 version would have been the lame duck one when the Federal Reserve still had authority for Regulation C (HMDA). However, there was no guide issued. On July 21, 2011, the CFPB took over Regulation C and they failed to release a guide in 2012.  Fortunately, in year two, the CFPB found the time to update the Guide and provide guidance to HMDA-reporting institutions.

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Garbage In, Garbage Out? The CFPB is a self-described "data-driven" agency. If you doubt it, take a read through this Bloomberg.com story: U.S. Amasses Data on 10 Million Consumers as Banks Object. To me, if you want to be data-driven - the best first step is to make sure your regulatory requirements are clear and understandable so that the data you collect (whether it be consumer complaints, HMDA data, or anything else) is as reliable as possible. But, that's just me.  

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NAFCU Calendar.  NAFCU has a new calendar on our website that features:

• Compliance Deadlines;

• Important Regulatory Dates;

• Education & Conferences;

• CU Research Survey Deadlines; and

• Other Important Dates.

The calendar allows you to navigate month-by-month, click to find more information and add dates to your own calendar. For example, the "more information" link on the June 1st Escrow Changes Deadline includes this information:

CFPB Compliance Deadline: Escrow Requirement

Description:

Amended escrow requirements for higher-priced mortgage loans. Added a new small creditor exemption for credit unions that meet a four-part test.

Regulatory Text: 12 CFR 1026.35

NAFCU Compliance Blog: Mortgage Reform - Escrows

NAFCU Resources: www.nafcu.org/mortgagerules/#escrow

Download the latest full Compliance Calendar, including proposed regulations, past deadlines and more.

Date:Jun 01, 2013    

Add to Calendar                                             Back to Calendar

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NAFCU Members. The Mortgage Rules webpage includes NAFCU's Regulatory Alert on the CFPB's recent proposed rule. The proposal was published in the Federal Register yesterday and only provided 15-days for comments (comments to NAFCU on the Regulatory Alert are due on Wednesday, April 24).  

CFPB to Begin Issuing Information to Help Credit Unions Comply with Mortgage Rules

Written by Steve Van Beek

Last week I was at a conference with other credit union attorneys and I noted the only parts of the CFPB's Implementation Plan for the new mortgage rules was the press release (sent on February 13th) and one blog post on the preliminary rural and underserved counties list.

Well, the CFPB must have been listening because on Friday afternoon they announced their plans to provide their first substantive guides to the mortgage rules in the upcoming weeks.  Below is from their email:

"In the coming months, we’ll release plain language compliance guides, updates of the official interpretations, examination procedures, and other materials. We’re planning to release the first set of materials next week. 
 
If you’re in the mortgage industry or just want to know what we’re doing to help them get ready, sign up for our regulations-specific email list. The signup form is in the upper-right section of the page. 
 
consumerfinance.gov/Regulations 
 
A good implementation plan reduces confusion and costs for industry. That means less time figuring out what the rules mean and more time designing business practices that serve consumers and follow the rules. That’s a market that works better for everyone."

I'd encourage you to sign-up for the announcements and set aside time to review the materials the CFPB provides. 

***

Back in early 2013 (just before the rules were finalized) the CFPB reached out to NAFCU for input on their Implementation Plan for the Mortgage Rules. While I was hopeful at the time, as the days passed by I became more convinced the CFPB missed a huge opportunity by waiting so long to begin communicating with compliance officers on the new rules.

Below are the suggestions I sent to the CFPB back in January:  

• "Applicability.  It is very important to credit unions that the CFPB be specific regarding which new requirements apply to which types of mortgage products.  Credit unions usually think in terms of the mortgage products they offer and not which regulation might apply.  The more the CFPB can do to make distinctions in their communications (and in the actual regulation and commentary), the less burden credit unions will face.  Some of the distinctions that would allow credit unions to know if the regulations apply to their product are included below. 
  • Open-End Credit versus Closed-End Credit
  • First lien versus Subordinate lien
  • Principal dwelling versus Any dwelling
  • Real-estate secured versus secured by personal property (which might be a dwelling – e.g., manufactured homes, mobile homes)

• Fact Sheet for Compliance Officers.  In the CFPB’s prior releases, there have been Fact Sheets for consumers and Fact Sheets for the press.  It would be very helpful if the CFPB released a Fact Sheet for compliance officers. 

• Ask CFPB & Prior Q&As.  Compliance officers should have an avenue to ask questions about the applicability and requirements of the new regulations.  The CFPB would then be able to post these questions and answers on their website to provide guidance to other compliance officers.  Very similar to the process the CFPB already uses to provide information to consumers. 

• One-Page Document with Compliance Dates.  It would be very helpful if the CFPB created and released a one (or two) page document that contains the compliance dates for all the new requirements.

• Webinars and Small Entity Guides.  These are very helpful to credit unions.  However, in order to have the greatest impact – they need to be released in a timely manner and clearly explain the applicability of the new rules.

• Citations.  Whenever possible, the CFPB should use citations when discussing new requirements so that credit unions can conduct further research and analyze the underlying regulatory text, any staff commentary and the preamble to the new regulatory requirement. 

• Annotated Model Forms.  The CFPB’s proposed model forms for the TILA-RESPA Integrated Disclosures included annotated model forms which allowed users to click on various sections of the model form and see the underlying citation and a link to the proposed rule.  Including this feature with the final rules would be extremely beneficial to credit unions – especially as they work with third-party forms providers.  The annotated model forms will allow credit unions to show their vendors the underlying regulatory requirement and why the particular language or formatting is required. 

• Break Up Topics/Changes Into Manageable Sections.  One of the aspects that NAFCU has found most effective in explaining large changes to regulations (such as from the Credit CARD Act or prior RESPA reform) has been to break up the new requirements in manageable pieces.  For example, the mortgage servicing sections could be clearly broken up in the following sections: (1) adjustable-rate notices; (2) periodic statements; (3) error resolution procedures; (4) information requests); etc.  This allows credit unions, who have very limited compliance staffs, to focus on certain changes initially and move on after implementing those changes rather than trying to comprehend the entire regulation at once."   

We'll have to wait and see how they do overall, but they certainly didn't make educating compliance officers a focus of their new rules. Instead, they worked the media angle and touted the past abuses by certain mortgage lenders and servicers while simply dumping the new rules and forcing everyone to wade through the 3507 pages.

***

And, I must include your Moment of Zen (or at least mine) for today. Go Blue!

Mortgage Periodic Statements & The E-SIGN Act; Key Takeaways from NAFCU's Webcast

Written by Steve Van Beek

One of the issues discussed last week at School and again on yesterday's webcast was the ability of credit unions to send mortgage periodic statements electronically without going through the full E-SIGN Act consent process.

Here is the language from new 12 CFR 1026.41(c):

"(c) Form of the periodic statement. The servicer must make the disclosures required by this section clearly and conspicuously in writing, or electronically if the consumer agrees, and in a form that the consumer may keep. Sample forms for periodic statements are provided in appendix H-30. Proper use of these forms complies with the requirements of this paragraph (c) and the layout requirements in paragraph (d) of this section." (Emphasis added).

The official staff commentary to 12 CFR 1026.41(c) has additional information:

"41(c) Form of the periodic statement.

1. Clear and conspicuous standard. The “clear and conspicuous” standard generally requires that disclosures be in a reasonably understandable form. Except where otherwise provided, the standard does not prohibit adding to the required disclosures, as long as the additional information does not overwhelm or obscure the required disclosures. For example, while certain information about the escrow account (such as the account balance) is not required on the periodic statement, this information may be included.

2. Additional information; disclosures required by other laws. Nothing in § 1026.41 prohibits a servicer from including additional information or combining disclosures required by other laws with the disclosures required by this subpart, unless such prohibition is expressly set forth in this subpart, or other applicable law.

3. Electronic distribution. The periodic statement may be provided electronically if the consumer agrees. The consumer must give affirmative consent to receive statements electronically. If statements are provided electronically, the creditor, assignee, or servicer may send a notification that a consumer's statement is available, with a link to where the statement can be accessed, in place of the statement itself.

4. Presumed consent. Any consumer who is currently receiving disclosures for any account (for example, a mortgage or checking account) electronically from their servicer shall be deemed to have consented to receiving e-statements in place of paper statements."  (Emphasis added).

As you can see, the commentary is extremely important. It clarifies that simple consent to electronic statements is sufficient (as opposed to the electronic consent required by the E-SIGN Act). It also clarifies that members who have consented to receive other disclosures electronically "shall be deemed to have consented" to receiving their mortgage periodic statement electronically.

Of course, the new periodic statement requirement only applies to credit unions that service 5000 or more mortgage loans (NAFCU log-in required). However, credit unions below the threshold - and, thus, not required to the new periodic statement - can still use the commentary as a guide to the delivery of any mortgage servicing information they currently send to members.

***

Two Important Notes.  

1. Limited Scope. This does not open the flood gates with regard to the E-SIGN Act. This flexibility applies solely to closed-end loans secured by a dwelling. It does not extend to HELOC statements which must follow 12 CFR 1026.7. The flexibility also does not extend to other products (checking accounts, credit cards, etc.). 
2. Training Staff. The E-SIGN Act has already caused numerous headaches for compliance officers. This flexibility for mortgage periodic statements (simple consent versus full E-SIGN Act consent) has the potential to amplify this confusion.

***

Yesterday's webcast included a detailed discussion of this issue as well as many of the other "under the radar" issues in the new mortgage regulations. Below you can find the Key Takeaways from the webcast (click on the photo of the slides):

Of course, the webcast is available for on-demand purchase. If you are following the Key Takeaways from School and putting together a mortgage implementation team at your credit union, this would be a good webcast to watch together to ensure everyone is on the same page.

Research Tips for the New Mortgage Rules; NAFCU Webcast on New Rules

Written by Steve Van Beek

Over the past two months, we've written numerous blog posts on the new mortgage regulations. Included a few posts which contain research tips on how to track and find the new requirements. Below is a consolidated listing of those blog posts so that you have them in one central location:

• February 5th - CFPB Rules in the Federal Register; NAFCU Rule Summaries

• February 11th - Finding the New Requirements in the Electronic Code of Federal Regulations

• February 13th - NAFCU's Scope & Applicability Charts for the New Mortgage Rules

• February 22nd - Finding the New Reg Z & Reg X Requirements in the Electronic Code of Federal Regulations

• March 4th - Research Tip: Tracking Rulemakings in the Federal Register

Hopefully you find the above useful. We're always looking for blog ideas - so just let us know if there is something you'd like to see us cover in a future blog post.  

***

NAFCU Webcast on Mortgage Rules. NAFCU's compliance team will be conducting a webcast tomorrow on a few of the "under the radar" issues from the CFPB's new mortgage rules. We'll discuss:

• Details on homeownership counseling requirements;

• Mortgage loan originator qualifications, certifications and training requirements;

• New appraisal disclosure and delivery requirements;

• The small creditor exemption for the escrow requirement for higher-priced mortgage loans; and

• Other frequently-asked-questions regarding the new rules.

We'll also provide a "look ahead" at what other issues the CFPB is targeting in 2013.  

Registration is still open - Sign Up Today!  Remember, NAFCU's webcasts are available to anyone and everyone.  

Want to Give the Regulators a Piece of Your Mind? There's an APA for That

Written by Angela Meyster, Regulatory Affairs Counsel

Regulations can be costly, complicated, and troubling.  It can feel like government agencies are out of touch with the effects of their rulemaking and care little about the burdens they impose on you.  Don't you wish you could tell them how you feel, or even change their minds, before they take action?

Well, good news! The nice people in Congress gave you an outlet for your concern…worries…or… outright rage: the Administrative Procedures Act and its Notice and Comment rulemaking process.

As NAFCU regulatory affairs counsel, I rely on this process to voice member concerns and advocate on behalf of the credit union industry on a weekly basis.  But you don’t have to work for a trade association - or even be an attorney - to participate.  Anyone can write a comment letter.

***

How the notice and comment process works:

Statutory Authorization. There needs to be a statute that tells an agency to solve a particular set of problems and gives it the power to make the rules to do so. Have you heard of the Dodd-Frank Act?  Too soon?

Notice. Once the agency has identified an approach to meeting its stated goal, and has drawn up proposed rules to do so, it will provide a Notice of Proposed Rulemaking (NPRM).

Note: An agency may publish the NPRM on its website for a significant period of time before actually entering it into the Federal Register.  Think of it as an elaborate Easter egg hunt, where at the end of game you don’t get chocolate but a ton of regulations with which your credit union has to now figure out a way to comply.  Luckily here at NAFCU we have some tips on how to track regulations in the Federal Register.

This is where you come in:  This is your opportunity to digest everything the agency has put out there and formulate an opinion on it.  Usually the agency identifies specific areas on which it would like feedback, but its blanket request for comment “on any other aspect of the proposal” means that you can and should write to them about anything that concerns you about the proposed rule.

Here at NAFCU we quickly translate the convoluted legal jargon the agency has put out into something comprehensible and send it off to our members in the form of “Regulatory Alerts” for their input.  Based on this input, we write a comment letter representing the interests of NAFCU members and send it off to the agency. But we also work with our members if they want to send their own comment letters.  Every time you see a Regulatory Alert is an opportunity to get your voice heard twice.

There is certainly a benefit to voicing your concern through a trade association’s comment letter. It represents the overall sentiment of a large representative population of the industry on an issue, giving it additional clout. It also allows you to voice your opinion indirectly on a potentially delicate issue. If you don't want to make your credit union's view public - all comment letters are public information - providing your input to NAFCU can help get your message across discretely. 

Review. After the comment deadline, the agency must review the comments carefully. Often, if a comment letter contains new data, policy arguments, or hypothetical scenarios the agency did not think of in formulating its proposed regulation, the agency will either revise its proposed rule or elaborate on something that was unclear.  Bottom line: you can make a difference here. 

The Notice and Comment process is a powerful tool for stakeholders and regulators alike, although not every agency has chosen to adhere to the APA…but that’s a blog post for someone else. When it comes down to it, a lot of agencies want to hear what you have to say and it’s important for you to say it.  Many agencies lack the operational knowledge to fully understand the practical results and consequences of their regulations and that’s where the notice and comment process proves its worth.  After the agency finalizes its regulation it is an uphill climb for changes (even Congress struggles with this), so proactive measures in the proposed stages are crucial.

Here are some tips for writing effective comment letters:

• Outline of the letter: include the docket number, an introduction (tell them about yourself and why your opinion matters), and which specific aspects of the proposal on which you are commenting;

• Don’t feel compelled to comment on every aspect of a proposal - if only one part affects you, just comment on that one;

• The most persuasive feedback often includes real-world data and specificity;

• Your comments do not need to be just critical - you should express your support for any portion of the proposal you agree with; and

• Suggest alternatives that both meet the agency’s goals and reduce your compliance costs.

And, of course - provide NAFCU with your feedback on our Regulatory Alerts to help us as we attempt to educate the regulators.  

CFPB Publishes Preliminary List of Rural and Underserved Counties for Escrow Requirement

Written by Steve Van Beek

Programming Note: NAFCU's compliance team will be in and out of the office next week for NAFCU's Regulatory Compliance School. Fear not, my colleagues from our Government Affairs team will have you covered with guest blog posts - which will give you a glimpse at the world from their point of view (which I think you'll like as it revolves around preventing and reducing regulatory burden).

***

Rural and Underserved Counties List. On Wednesday, the CFPB issued a Letter to Regulated Entities wrote a blog post announcing a preliminary list of rural and underserved counties. This list is important as amended escrow requirement for higher-priced mortgage loans includes an exemption for small creditors that meet a four-part test. The first part of the test is whether the credit union has made - in the preceding year - more than 50% of their first lien mortgages in rural or underserved counties. While the list issued Wednesday is preliminary, it should give your credit union an idea of where you relative to the 50% threshold.

It also looks like there will be some technical corrections to the escrow rule and the final rural and underserved counties list will be available at the time those corrections are finalized. Here is from the CFPB's blog post:

"As provided in the rule, the Bureau will publish a list of such counties. The Bureau will be publishing in the near future some proposed minor technical changes to the rule. You can download a preliminary list based on the proposed revisions in CSV, XLS, or PDF format. We expect to finalize that rule before June 1, 2013, and will publish the official list of “rural” and “underserved” counties for 2013 at that time." 

Unfortunately, it doesn't appear the CFPB is looking at pushing back the June 1, 2013 deadline. Given the uncertainty they've created, that would be a great idea. But, we can't even get them to update regulations when Congress explicitly tells them to reduce the burden on credit unions.

***

Additional Resources.  NAFCU members can find additional information on the "small creditor exemption" by checking out our detailed article on the Escrow Rule from our February Compliance Monitor as well as our Scope & Applicability Chart. Both of these resources are located on our special Escrow subsection of our Mortgage Rules webpage. They are also available at the bullets below (NAFCU log-in required).

• Escrow subsection of Mortgage Rules webpage

• February Compliance Monitor:  Escrow Requirements for Higher-priced Mortgage Loans (including a discussion of the small creditor exemption)

• NAFCU's Scope & Applicability Chart for the Escrow Requirements (including the full 4-part test for the small creditor exemption)

• Amended regulatory text of 12 CFR 1026.35 (effective June 1, 2013)

Upcoming NAFCU Webcasts. NAFCU's Mortgage Reform Webcast Series includes the following three webcasts (the March 27th webcast will feature a discussion of the small creditor exemption under the escrow requirement):

• March 27 - Digging Deeper: CFPB's Mortgage Rules with NAFCU's Compliance Team

• April 10 - Which New Requirements Apply to HELOCs? with Steve Van Beek (yeah - it is Friday - I'm going 3rd person!!)

• April 17 - Preparing for New Mortgage Servicing Notices with Suzanne Garwood of Venable, LLP

***

Have a great weekend!  And, if you'll be at School next week in National Harbor, Maryland - be sure to come by and say Hi!

Regulatory Burden: Update the Regulations, Please!

Written by Steve Van Beek

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

• Regulatory Burden: Piles of Old Guidance

• Regulatory Burden: Short-Term

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

***

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

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

...

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

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

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

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

***

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

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

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

***

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

....

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

***

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

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

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

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

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

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

(vii) The lesser of—

(A) $100, or

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

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

***

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

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

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

***

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

***

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

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

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

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

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

The Importance of Informed, Decisive and Strategic Board Members

Written by Steve Van Beek

Yesterday, we blogged on the latest The Federal Credit Union magazine - including an article on The Vital Life of the CU Director.

Well, that article isn't the only one focusing on the role of the credit union's board of directors.  The NCUA Report has included detailed articles in both the January and February issues.

The January issue had an article from Region V titled Strong Board Leadership is Essential for Successful Credit Unions.  The article includes this summary:

"We found the most successful directors display three overarching and essential characteristics.

• They have a clear understanding of their role.
• They are engaged in critical decisions.
• They have a strategic mindset."

You can find the full article here.

The February issue includes an article from NCUA Chairman Debbie Matz titled Volunteer Directors Play Critical Role in Safety & Soundness (continued on page 6).

The article focuses on the board's duties to oversee the direction of the credit union as well as their risk management duties - including:

• Interest Rate Risk
• Third-Party Risk - including

1. Credit Risk; and
2. Reputation Risk

• Aging Membership

The article ties risk management back into overall safety and soundness.  

Read together - these articles provide a compelling case for informed, decisive and strategic credit unions boards.

***

With the above in mind, I wanted to share two NAFCU resources to help ensure your credit union's board is informed, decisive and strategic.  

NAFCU's Board of Directors & Supervisory Committee Conference.  NAFCU's 32nd Board of Directors Conference will be held May 15 - 17 in beautiful Asheville, North Carolina.  You can view the conference agenda here, which includes the following:

• Bank Secrecy Act and Risk Management with NAFCU's Anthony Demangone

• Fiduciary Duties and Ethics: The Top 10 Things Credit Union Directors Need to Know with NAFCU's Carrie Hunt

• Strategic Succession Planning

• How the CFPB Impacts Your Credit Union with Yours Truly

• Regulatory Update with NAFCU's Carrie Hunt

And, much more - including the opportunity to earn Bank Secrecy Act and Financial Literacy training certificates.  You can find additional information here (including the full conference brochure).

Sign up by March 22nd to get the early-bird rate!

***

NAFCU's Online Training Program.  NAFCU also offers an affordable online training program for credit unions.  The program includes 14 modules for board members - including two on the Bank Secrecy Act and one on Financial Literacy (training certificates are available for board members who view those modules).  You can find FAQs here and pricing information here.  If you have any questions - just shoot me an email and I'll help in any way I can.     

***

Be sure to pass the articles and the training opportunities along to your management and board.  And, remember that all of NAFCU's educational events - including our Board of Directors conference and Online Training Program - are open to all credit unions regardless of NAFCU membership.

***

Have a great weekend!  

The Federal Credit Union Magazine; Upcoming NAFCU Webcasts

Written by Steve Van Beek

The March-April edition of NAFCU's The Federal Credit Union magazine is now available.  I thought you'd enjoy the following articles:

• Rules, Rules and More Rules: How the CFPB is Impacting CUs

• The Vital Life of the CU Director

• NAFCU Expands Regulatory Team

• NAFCU's Legislative Priorities

• Management, Gen Y Style - including these five great tips:

1. Hire those who know more than you.
2. Work thoroughly and slowly.
3. Mentor and be mentored.
4. The art of woo.
5. Think of others first.

• Learning from Noncompliance

• What Bankers Worry About

As you can see, there is a little bit for everyone - be sure to pass along to others at your credit union that might be interested.  

***

Upcoming NAFCU Webcasts.  We have a full slate coming up.  Remember - NAFCU's conferences and webcasts are open to anyone and everyone (NAFCU members receive preferred pricing). 

• An Inside Guide to CU Board of Directors - March 13

• BSA Compliance Update: Citations, Investigations and Criminal Activity - March 19

• Digging Deeper: CFPB's Mortgage Rules with NAFCU's Compliance Team - March 27

• Which New Requirements Apply to HELOCs?  - April 10

• Preparing for New Mortgage Servicing Notices - April 17

• A Look Inside NCUA's National Supervision Policy Manual - May 1

I'm biased - but that is a great slate of upcoming webcasts.  If you're thinking - I want them all - we got you covered.  You can still purchase NAFCU's Unlimited Webcast Subscription - including access to the six webcasts we've already held in 2013.  

CFPB Focusing on Students (and Private Student Loans); Free UDAP Webinar

Written by Steve Van Beek

The CFPB recently reiterated their focus on financial products offered to students.  A brief discussion of two current efforts is below. 

***

CFPB Inquiry into Campus Products.  In late January, the CFPB launched an inquiry into the financial products marketed to students through colleges and universities.  If your credit union has a relationship with a local college or university (or if you CU is sponsored by one!), be sure to keep an eye on this issue.   

***

CFPB Focusing on Private Student Loans.  The CFPB has not been shy when indicating they will be focusing heavily on private student loans.  If your credit union makes private student loans, be sure to track the CFPB’s actions and ensure you are ready for future changes.  On February 21, the CFPB penned two blog posts on student loans.  The first looked at student debt and schools.  The second was titled “Help Stop the Student Debt Domino Effect.”  The CFPB also announced a new Notice and Request for Information on the student loan market.  NAFCU’s Regulatory Affairs team will be providing a Regulatory Alert on this request for information and will also be drafting a comment letter to the CFPB. 

***

Free UDAP Webinar.  On March 5, The Philadelphia Federal Reserve’s Consumer Compliance Outlook will feature a free webinar on UDAP - Analysis, Examinations, Case Studies, and Emerging Risks.  The webinar will look at:

• Consumer Financial Protection Bureau (CFPB) UDAAP and Federal Reserve Bank UDAP legal authorities

• UDAP legal analysis and examination procedures

• UDAP and bank holding company risk

• Case studies and emerging areas of risk

• Recommendations for implementing an effective UDAP compliance program

The webinar will start at 2:00 p.m. EST on March 5th.  With the CFPB’s future actions in this area unknown, be sure to tune in.

Finding the New Reg Z & Reg X Requirements in the Electronic Code of Federal Regulations

Written by Steve Van Beek

A couple weeks back, we looked at finding the new homeownership counseling disclosure requirements in the Electronic Code of Federal Regulations (e-CFR).  Now that all the final rules have been published, I thought it would be good to link to all the new and amended regulatory texts so that you have a central location for finding the future regulatory language. 

Note:  Below are links to the major changes - but there are tons of other little changes and tweaks to other sections of Regulation Z and Regulation X.  Additionally, some of the link names have the same citations but they go to a different regulatory text.  For example, there are numerous links to "Appendix I" but they all go to different staff commentary.   

Regulation Z (Truth in Lending Act) - 12 CFR 1026

• New Interest-Rate Adjustment Notices - 12 CFR 1026.20

• New Points & Fees Test - Closed-end Credit - 12 CFR 1026.32

• New High-Cost APR Thresholds & Expansion of High-Cost to Open-end Credit - 12 CFR 1026.32

• New Prohibitions & Requirements for High-Cost Mortgages - 12 CFR 1026.34

• Changes to Escrow Requirement for Higher-Priced Mortgage Loans - 12 CFR 1026.35

• New Appraisal Requirements for Higher-Priced Mortgage Loans - 12 CFR 1026.35

• New Negative Amortization Counseling Requirement - 12 CFR 1026.36(k)

• Changes to Prompt Payment Crediting & Payoff Statements - 12 CFR 1026.36(c)

• New Mortgage Loan Originator Compensation, Qualifications, Training, Disclosures & More - 12 CFR 1026.36

• Periodic Statements for Mortgage Loans - 12 CFR 1026.41

• Ability-to-Repay Requirements & Qualified Mortgage Standards - 12 CFR 1026.43

Appendices to Regulation Z

• New Model Forms for Adjustable-Rate Mortgages and Periodic Statements - Appendix H

• Higher-Priced Mortgage Loan Appraisal Safe Harbor Review - Appendix N

• Illustrative Written Source Documents for HPML Appraisal Rules - Appendix O

• Standards for Determining Monthly Debt and Income - Appendix Q

Official Staff Commentary to Regulation Z - Appendix I

• New Staff Commentary for Points & Fees Test; Ability-to-Repay Requirements & Qualified Mortgage Standards - Appendix I

• New Staff Commentary for High-Cost Mortgages; Negative Amortization Counseling Requirement - Appendix I

• New Staff Commentary for Appraisals on Higher-Priced Mortgage Loans - Appendix I

• New Staff Commentary for ARM notices; Payment Crediting & Payoff Statements; and Periodic Statements - Appendix I

• New Staff Commentary for Mortgage Loan Originator Requirements (all of them) - Appendix I

Regulation X (Real Estate Settlements Procedures Act) - 12 CFR 1024

• Changes to Escrow Accounts - 12 CFR 1024.17

• New Homeownership Counseling Disclosure - 12 CFR 1024.20

New Subpart C to 12 CFR 1024

The CFPB reorganized Regulation X - including a new Subpart C with Mortgage Servicing Requirements.  Sections 1024.30 through 1024.41 can all be found at this link.  Below are the new sections under Subpart C:

Subpart C—Mortgage Servicing

1024.30   Scope.

1024.31   Definitions.

1024.32   General disclosure requirements.

1024.33   Mortgage servicing transfers.

1024.34   Timely escrow payments and treatment of escrow account balances.

1024.35   Error resolution procedures.

1024.36   Requests for information.

1024.37   Force-placed insurance.

1024.38   General servicing policies, procedures, and requirements.

1024.39   Early intervention requirements for certain borrowers.

1024.40   Continuity of contact.

1024.41   Loss mitigation procedures.

The language of those new sections is available here.

Appendices to Regulation X

• New Model Language for Force-placed Insurance Notices - Appendix MS-3

• New Model Language for Early Intervention; Loss Mitigation; and Housing Counselor Notices - Appendix MS-4

• Official Bureau Interpretations to Reg X - Supplement I (link goes to Federal Register)

***

Wow - that is a lot of links and a long blog post.  I know I've been running down some rabbit holes in my research and I'm sure some blog readers have as well.  Hopefully this blog post helps organize the confusion.  A bit.  Have a great weekend!

NAFCU's Regulatory Compliance School Just Got Better - Regulatory Update Day

Written by Steve Van Beek

We've heard you!  For the past couple of years, we've received the following feedback about NAFCU's Regulatory Compliance School (paraphrased, of course):

"School is great and provided a solid foundation for understanding the regulatory requirements credit unions face on a daily basis.  BUT, the rules are changing so fast that it would be great to receive updates on what has just changed and what is changing next."

With this in mind, we've created Regulatory Update Day at NAFCU's 2013 Regulatory Compliance School (March 18-23 in National Harbor, Maryland).  

Regulatory Update Day (Thursday, March 21st) will provide:

• A clear understanding of what changes NCUA has in store for 2013 – including their Exam Focus

• An overview of the scope and applicability of the CFPB’s seven new mortgage regulations*

• A detailed look at the CFPB’s Qualified Mortgage/Ability-to-Repay requirements*

• Answers to Frequently Asked Questions on the mortgage rules from NAFCU’s compliance team*

• Insight from credit union attorneys and practitioners on how best to set up your implementation strategy

You can find more information on Regulatory Update Day here.  The three sessions with the "*" are sessions that are also part of NAFCU's Mortgage Reform Webcast Series.

The other 4 days of Compliance School will remain the same as will the opportunity to take the NAFCU Certified Compliance Officer (NCCO) exams.  Good luck!  

***

And, all attendees at NAFCU's 2013 Regulatory Compliance School will receive NAFCU's 2013 GPS (coming soon!) as well as NAFCU's Scope & Applicability Charts.

Remember:  You do not need to be a NAFCU member credit union to attend NAFCU's conferences or webcasts.  In fact, you don't even need to work at a credit union.  Each School usually features a handful of consultants, vendors and other credit union "peeps" who support credit unions - in one way or another - on a daily basis.      

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NAFCU's Five-Point Plan for Credit Union Regulatory Relief

Written by Steve Van Beek

We mentioned last week, NAFCU's letter to Congressional leaders calling for regulatory relief for credit unions.

Below, I'll outline the five-point plan and why regulatory relief is needed (nevermind - no need to preach to the choir!).

I did want to share this paragraph which does a great job of explaining the issue to Congress:

"Our nation's credit unions are struggling under an ever-increasing regulatory burden that must be immediately addressed.  A survey of NAFCU members late last year found that 94% have seen their regulatory burden increase since the passage of the Dodd-Frank Act in July 2010.  The regulatory onslaught continues to compound as credit unions now have over 5,000 pages of rules from the Consumer Financial Protection Bureau (CFPB) that they must understand, interpret, and ultimately comply with - despite the fact that Congress has widely acknowledged that credit unions were not the cause of the financial crisis.  Credit unions, many of which have very small compliance departments, must comply with the same rules and regulations as our nation's largest financial institutions that employ armies of lawyers.  The impact of the ever-increasing regulatory burden is even more sobering, as the number of credit unions continues to decline.  There are nearly 700 fewer credit unions today than there were before the passage of the Dodd-Frank Act."

Read that last line again:  There are nearly 700 fewer credit unions today than there were before the passage of the Dodd-Frank Act.  

That is why NAFCU is pushing so hard for regulatory relief.

***

Five-Point Plan. NAFCU's five-point plan for credit union regulatory relief covers these five major issues (we'll discuss each in more detail in later blog posts):

• Administrative Improvements for the Powers of the NCUA

• Capital Reforms for Credit Unions

• Structural Improvements for Credit Unions

• Operational Improvements for Credit Unions

• 21st Century Data Security Standards

You can find the full letter and details here.  As indicated, we'll expand on each point in future blog posts.  

Appraisal Disclosure Model Language; Confused Members

Written by Steve Van Beek

During last week's webcast we received numerous great questions from credit unions - including one on the model language of appraisal disclosure requirement under Regulation B.  Below is the Q&A that we've drafted on the question.  Note: Attendees of the webcast should receive the Q&As in the next day or two.  

Question:  The model language for the appraisal disclosures tells the member “You can pay for an additional appraisal for your own use at your own cost.”  Isn’t this going to lead to member confusion because it implies a lender might consider the member’s own appraisal (which we cannot do)?

Answer:  You are exactly right – the model language has the potential to cause confusion.  This was brought to the Consumer Financial Protection Bureau’s attention during the rulemaking process but there were no changes in the final language of the disclosure.  However, the CFPB did include a comment to official staff commentary indicating that the disclosure does not alter any existing prohibitions on using a borrower-ordered appraisal:

“14(a)(2) Disclosure.

1. Appraisal independence requirements not affected.  Nothing in the text of the disclosure required by § 1002.14(a)(2) should be construed to affect, modify, limit, or supersede the operation of any legal, regulatory, or other requirements or standards relating to independence in the conduct of appraisers or the use of applicant-ordered appraisals by creditors.”

Of course, the comment in the staff commentary does nothing to prevent member confusion. 

Thus, we have the potential for applicants to infer - from the required notice - that they can obtain their own appraisal and provide it to their lender for consideration.

***

Confused Members.  So, here is one way this could play out.  

• Credit union provides the appraisal disclosure to the applicant.

• Applicant reads "You can for an additional appraisal for your own use at your own cost" and reasons that "for your own use" obviously means to help them get a loan from the institution who provided the notice.

• Applicant obtains an additional appraisal.

• Applicant brings the appraisal to the credit union for use in connection with their application.

• Credit union informs the applicant that it is not allowed to use borrower-provided appraisals.

• Applicant is furious and waives the credit union's disclosure in front of the loan originator.

• The credit union explains that the notice is required by the Consumer Financial Protection Bureau and the credit union cannot modify the language.

• Applicant is not satisfied.

• Applicant calls the Consumer Financial Protection Bureau to file a complaint.

Of course, this won't happen often - but it will happen.  Hopefully, the CFPB's implementation plans include educating consumers on the appraisal process.  And, credit unions and other commenters brought this up to the CFPB and they declined to address this in the model language.

***

If you are curious, the industry's concerns are located here in the Federal Register and the CFPB's decision is here.

Mortgage Headache Areas; Upcoming Mortgage Reform Webcasts

Written by Steve Van Beek

Yesterday was NAFCU's first webcast as part of our Mortgage Reform Webcast Series.  I provided an overview of the seven new mortgage regulations - focusing specifically on the scope & applicability of the new requirements.  

I also provided some insight on "Headache Areas" and included this list at the end of the presentation:

• Determining Exemption Applicability

• New Notices – Content-Rich and Strict Timelines

• Error Resolution & Information Request Procedures

• Loan Originator Compensation Determinations

• Implementing So Many Changes At One Time

And, there will be many additional headaches as credit unions work toward implementing the new requirements.  Even self-induced ones.  

There is some hope on the horizon as the CFPB issued their best press release of their history which highlights their Implementation Plan for New Mortgage Rules.  The CFPB's plan indicates they are listening to NAFCU and credit union concerns regarding the overwhelming burden of reading, understanding, interpreting and implementing numerous requirements simultaneously.  Of course, we'll have more information on the CFPB's plan in future blog posts.

***

Upcoming Mortgage Reform Webcasts.  As I mentioned, yesterday's webcast was the first of our series and registration for the next three is now open.

• CFPB's Ability to Repay and Qualified Mortgage Requirements - March 6, 2013 - 2:00 p.m. to 3:30 p.m.

On March 6, Andy Keeney from Kaufman & Canoles will be examining the details of the CFPB's Ability-to-Repay Requirements and Qualified Mortgage Standards.  Andy will walk through the new underwriting guidelines - including the debt-to-income requirements - and explain how these rules will impact credit union mortgage lending.  And, importantly, the steps your credit union needs to take to comply by January 10, 2014.  

• Digging Deeper: CFPB's Mortgage Rules - March 27, 2013 - 2:00 p.m. to 3:30 p.m.

I'll be joined by my colleagues JiJi Bahhur, Bernadette Clair and Mike Coleman as we explore details of the CFPB's new mortgage requirements.  We'll provide answers to Frequently-Asked-Questions that our team has fielded from NAFCU member credit unions.  And, we'll take a look ahead at what other areas the CFPB is likely to address in 2013.  

• Which New Requirements Apply to HELOCs? - April 10, 2013 - 2:00 p.m. to 3:30 p.m.

I'll provide a detailed look at which requirements apply to home equity lines of credit and - just as importantly - which do not apply so that your credit union can best position your implementation strategy.  If your credit union makes HELOCs, this is one you'll want to attend as the new requirements are sprinkled throughout the CFPB's 3507 pages!

***

Programming Note:  NAFCU's offices will be closing early tomorrow and will be closed on Monday for the Federal holiday.  We'll have a blog post tomorrow and then start back up again on Tuesday.   

NAFCU's Scope & Applicability Charts for the New Mortgage Rules; NAFCU Calls for CU Reg Relief

Written by Steve Van Beek

The CFPB's 3507 pages of new mortgage regulations has everyone wondering where to start and how to best handle the new requirements.  One of the best first steps is to determine which requirements apply to which types of mortgage loans.  To help with this, NAFCU has put together the following Scope & Applicability Charts:

• Regulation Z (TILA) Mortgage Servicing Requirements

• Regulation X (RESPA) Mortgage Servicing Requirements

• Loan Originator Compensation, Qualifications, Training and Disclosure Requirements

• Regulation B Appraisal Requirements

• Appraisal Disclosure Requirement for Higher-Priced Mortgage Loans

• Appraisal Requirements for Higher-Priced Mortgage Loans

• New Escrow Requirements for Higher-Priced Mortgage Loans

• New Requirements for High-Cost Mortgage Loans

• New Homeownership Counseling Disclosure Requirement

• Ability-to-Repay Requirements and Qualified Mortgage Standards 

Now, you might be wondering how you gain access to those charts.  There are Five Ways:

• NAFCU members have access directly via NAFCU's CFPB Mortgage Rules webpage.

• Registrants for today's webcast on The CFPB's Final Mortgage Regulations (registration is still open) will be able to download the charts during the webcast.

• Attendees at NAFCU's Regulatory Compliance School will hear a similar presentation to today's webcast and will receive access to the charts at School in March (of course, NAFCU members can access the charts here).

• Purchasers of NAFCU's Credit Union Compliance GPS will receive access in mid-March when the 2013 GPS is available.

• Non-NAFCU member registrants of NAFCU's Regulatory Compliance Seminar will receive access in the next week.  If you sign-up for Seminar after today, we'll get the charts to you within a week of your registration.   

A Note on Sharing of Charts.  We put a ton of time and effort into researching and creating these charts.  And, we've made the accessible - in one way or another - to any credit union or organization that is interested.  Please do not share these outside of your credit union.  Of course, if you have any questions - just shoot me an email.  

Hope to see you on today's Mortgage Rules Webcast.

***

NAFCU Calls for Regulatory Relief.  Yesterday morning, NAFCU sent a letter to Senate and House leaders calling for a five-point plan on providing regulatory relief for credit unions through administrative, capital, structural, operational and data security reforms.  You can find the letter here.  For additional details, check out the NAFCU Today.

"All-in APR" Decision Delayed; HELOCs Next?

Written by Steve Van Beek

One of the biggest issues from the CFPB's mortgage proposals was their completely voluntary proposal to amend the definition of "finance charge" under the Truth in Lending Act.  Keep in mind that their proposal was not mandated by the Dodd-Frank Act.  In fact, the plain language of the existing Truth in Lending Act provides a clear definition of "finance charge" (which was not changed by Dodd-Frank).  This definition includes a clear description of which fees and charges are specifically excluded.

With that background, it was very welcome news in the final regulations to see the CFPB delay any decision on the "All-in APR" until the TILA/RESPA Integrated Disclosures are finalized (most likely this fall).  Here is from the CFPB's High-Cost Final Rule:

"The Bureau's 2012 TILA-RESPA Proposal sought comment on whether to finalize the more inclusive finance charge proposal in conjunction with the Title XIV Rulemakings or with the rest of the TILA-RESPA Proposal concerning the integration of mortgage disclosure forms.  Upon additional consideration and review of comments received, the Bureau decided to defer a decision whether to adopt the more inclusive finance charge proposal and any related adjustments to regulatory thresholds until it later finalizes the TILA-RESPA Proposal."

Good news on the delay - but the CFPB didn't provide any hint of which way they were leaning (or where they obtain the authority to override the clear language Congress adopted over 20 years ago). 

***

Consumer Group Comments.  You can bet that credit union and other financial institutions were not the only ones submitting comments on this issue.  Consumer groups have been very active and the final rule indicates they are expanding their calls for an "All-in APR" to open-end home equity lines of credit (HELOCs).  The CFPB's original "All-in APR" proposal was limited to closed-end mortgage loans.  This meant that non-mortgage closed-end loans (i.e., auto loans) and open-end loans - including HELOCs - would not have been impacted.  But, the CFPB has been getting comments on expanding this to HELOCs:

"One consumer group commenter urged the Bureau to make the APR coverage test more consistent between closed- and open-end credit by adopting a more inclusive APR calculation for HELOCs.  The commenter argued that, under the Bureau's proposal, a creditor could impose astronomical closing costs on a HELOC without meeting the APR coverage test, because such charges are not included in the APR calculation for HELOCs.  The commenter expressed concern that the difference in the APR for HELOCs versus closed-end transactions will unduly encourage creditors to steer consumers toward HELOCs, and particularly to HELOCs with excessively high closing costs.

The Bureau acknowledges that Regulation Z requires a different calculation of APR for closed-end transactions (interest rate plus other charges) than for HELOCs (interest rate only) for disclosure purposes.  Using these existing APRs for HOEPA coverage necessarily means that non-interest charges will be reflected in the APR for closed-end, but not for open-end.  The Bureau declines at this time, however, to adopt a different APR for HELOCs........Thus, the Bureau believes that comments concerning the disparity between the APR for closed- and open-end credit transactions are better considered as part of a broader reevaluation of the HELOC provisions of Regulation Z, rather than in the context of this rulemaking to implement section 1431 of the Dodd-Frank Act."

As they say, stay tuned.

CFPB Mortgage Rules in Federal Register; NAFCU Rule Summaries; Upcoming NAFCU Mortgage Webcasts

Written by Steve Van Beek

CFPB's Mortgage Regulations.  The CFPB's mortgage regulations are starting to be published in the Federal Register.  Below are the links to the rules that have been published so far as well as links to rules that are at the Public Inspection Desk (waiting to be published).

Published in Federal Register

• Escrow Requirements for Higher-Priced Mortgage Loans - Regulation Z

• Disclosure and Delivery Requirements for Copies of Appraisals and Other Valuations - Regulation B

• HOEPA/High-Cost Mortgages and Homeownership Counseling Amendments - Regulation Z & Regulation X

• Ability-to-Repay and Qualified Mortgage Standards - Regulation Z

• Concurrent Proposal - Ability-to-Repay and Qualified Mortgage Standards - Regulation Z

• Mortgage Servicing Rules (02/14) - Regulation Z (TILA)

• Mortgage Servicing Rules (02/14)- Regulation X (RESPA)

• Loan Originator Compensation Requirements (02/15) - Regulation Z

• Interagency Final Rule on Appraisals for Higher-Priced Mortgages.

***

NAFCU Resources.  Yesterday, we mentioned our new mortgage rules webpage.  That page includes tons of resources to help credit unions comply and it will be growing each day.  Included are summaries of the new rules from NAFCU's Regulatory Affairs team, such as:

• Final Regulation:  Ability-to-Repay and Qualified Mortgages
• Regulatory Alert:  Concurrent Proposal for Ability-to-Repay and Qualified Mortgages
• Final Regulation:  Escrow Requirements for Higher-Priced Mortgages
• Compliance Monitor Article:  Escrow Requirements for Higher-Priced Mortgages
• Final Regulation:  HOEPA/High-Cost Mortgage Loans and Homeownership Counseling Amendments
• Final Regulation:  Mortgage Servicing Requirements (Both Reg Z and Reg X)

Note:  The resources linked above are for NAFCU members-only.  However, the new mortgage rules webpage has additional resources that are available to everyone - including webcasts, conference sessions and links to blog post categories.   

***

Upcoming NAFCU Mortgage Webcasts.  The first two webcasts of NAFCU's Mortgage Reform Webcast Series are quickly approaching:

• The CFPB's Final Mortgage Regulations - February 13, 2013 - Special Two-Hour Webcast - 2:00 p.m. to 4:00 p.m.

I'll be providing an overview of the new regulations - including specifically the scope and applicability of each regulation.  I'll also be zeroing-in on the finalized exemptions and how credit unions determine if they qualify for the exemptions.  For a taste of the resources I'll be providing, check out this Scope & Applicability Chart for the Escrow Final Rule. 

• CFPB's Ability to Repay and Qualified Mortgage Requirements - March 6, 2013 - 2:00 p.m. to 3:30 p.m.

On March 6, Andy Keeney from Kaufman & Canoles will be examining the details of the CFPB's Ability-to-Repay and Qualified Mortgage Requirements.  Andy will walk through the new underwriting guidelines - including the debt-to-income requirements - and explain how these rules will impact credit union mortgage lending.  And, importantly, the steps your credit union needs to take to comply by January 10, 2014.  

                     

Challenges (Surprise!); New NAFCU Resource - Mortgage Rules Webpage

Written by Steve Van Beek

My colleague Anthony Demangone (you may remember him as "the Compliance Guy") put together a great blog post a few weeks back based on input from his blog readers.  The blog post is here.  

The first question was: What are the biggest challenges facing credit unions in a negative way?  The answer:

The second question: What are the biggest challenges facing credit union leaders on a personal level?  The answer:

And, that was before the mortgage regulations were finalized.  And it was mostly managers/executives responding - imagine the response from compliance officers!  Here is to hoping the regulators (and, just as important, Congress) are listening.  

Note:  You can subscribe to the Musings from the CU Suite blog emails here.

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New Mortgage Rule Webpage.  We are very excited about our new webpage to help organize compliance resources related to the CFPB's new mortgage regulations.  Be sure to check it out!  And, this page will be evolving as we add new resources.  

For example, we'll be adding articles from future Compliance Monitors - for now, check out the February article on Escrow Requirements for Higher-Priced Mortgage Loans (NAFCU members-only).

Of course, if you have feedback - please let us know!