NAFCU Compliance Blog

"Consumer Compliance Outlook—Fintech, Alternate Data, and Fair Lending Risks"

Written by André B. Cotten, Regulatory  Compliance Counsel

Consumer Compliance Outlook. The Second 2017 Issue of the Philadelphia Federal Reserve's Consumer Compliance Outlook is now available. This issue continued to expound on the rise of financial innovation and provided an overview of key federal regulations for servicemember financial protection.

My colleagues and I have previously written about the growing role of fintech and the data sharing consumer protection principles. Today's blog post will explore potential fair lending risks with the use of big data and the rise of fintech.

The article discussed how fintech has already produced real benefits to consumers, including increased speed, convenience, and new product offerings that make it easier for consumers to manage their financial lives. Fintech also offers the possibility of bringing banking and financial products to underserved communities and the underbanked.

With that being said, many firms are exploring ways to leverage new data and analytic techniques to extend credit to more consumers. The CFPB has noted that approximately 26 million Americans are credit invisible, which means that they do not have a credit record and another 19.4 million do not have sufficient recent credit data to generate a credit score.

The Federal Reserve's Article is intended to offer some general guideposts for evaluating UDAAP and fair lending risks related to fintech, with a focus on alternative data. Note, fair lending and UDAAP are broad areas of the law where sound legal analysis depends on the specific facts and circumstances.

Background

The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) are the two key federal fair lending laws. These fair lending laws broadly prohibit two kinds of discrimination: disparate treatment and disparate impact. In some instances, both theories may apply. Disparate treatment occurs when a lender treats a consumer different because of a protected characteristic (i.e. race, color, religion, national origin, sex, marital status, age).

Disparate impact occurs when a lender's policy or practice has a disproportionately negative impact on a prohibited basis, even though the lender may have no intent to discriminate and the practice appears neutral. A policy or practice that has a disparate impact may violate the law, unless the policy or practice meets a legitimate business necessity that cannot reasonably be achieved by a means that has less impact on protected classes.  

Moreover, Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practice. The Dodd-Frank Act prohibits unfair, deceptive, or abusive acts or practices. Many states also have town on UDAAP laws. Deception in the financial services industry often involves misrepresenting the terms or costs of financial services products.

Questions to Consider When Thinking about Fintech and Alternative Data

The Consumer Compliance Outlook considers that many firms and financial institutions are exploring new data sources and analytical techniques. The Federal Reserve warns financial institutions to conduct a thorough analysis to ensure compliance with consumer protection laws prior to implementing new data and modeling methods. The article provides a series of questions to help financial institutions determine whether they are appropriately using alternative data. The questions are grouped into two broad categories: basis for considering the data; how the data is being used.

What is the Basis for Considering the Data?

Question #1: Is there a nexus to creditworthiness?

Generally, the more speculative the nexus with creditworthiness, the higher the fair lending risk. In addition to accuracy and reliability, it is important to consider whether the data is representative of all consumers or only a subset.

Question #2: Will the predictive relationship be ephemeral or stable over time?

Financial institutions may want to consider whether the predictive potential of the data is likely to be stable over time or ephemeral. For example, if a model uses online data from social media sites, such as Yelp or Facebook, what happens to the reliability of that data as consumers' online habits evolve?

How are You Using the Data?

Question #3: Are you using the data for the purpose which they have been validated?

The Federal Reserve advises that it is important to ask if the data has been validated and tested for the specific uses. For example, if a financial institution validates a data field for marketing, it does not mean this same data is appropriate to use for underwriting or pricing.

Question #4: Do consumers know how you are using the data?

Consumers generally understand how their financial behavior affects their traditional credit scores. However,  alternative credit scoring methods could raise questions of fairness and transparency.

The ECOA and the FCRA require financial institutions who deny credit to provide consumers with adverse action notices specifying the top factors used to make that decision. The FCRA also requires that consumers receive risk-based pricing notices, if they are provided credit on worse terms than others.

With that being said, it is important that fintech firms, and any banks with which they partner, ensure that the information conveyed in adverse action notices and risk-based pricing notices complies with the legal requirements for these notices.

Certain behavioral data may raise particular concerns about fairness and transparency. UDAAP issues could also arise if a firm misrepresents how consumer data will be used.

Question #5: Are you using data about consumers to determine what content they are shown?

Technology can make it easier to use data to target marketing and advertising to consumers most likely to be interested in specific products, but doing so may amplify redlining and steering risks.

The Federal Reserve stated that the core concern is that, rather than increasing access to credit, these sophisticated marketing efforts could exacerbate existing inequities in access to financial services. Thus, these efforts should be carefully reviewed.

Question #5: Which consumers are evaluated with the data?

Are algorithms using nontraditional data applied to all consumers or only those who lack conventional credit histories? Applying alternative algorithms only to those consumers who would otherwise be denied based on traditional criteria could help ensure that the algorithms expand access to credit.

In closing, the Consumer Compliance Outlook states that fintech can bring great benefits to consumers by enhancing speed, convenience and access to credit. However, fintech is not immune to the consumer protection risks that exist in brick-and-mortar financial institutions. The Federal Reserve encourages financial institutions to ensure that fintech trends and products promote a fair and transparent financial marketplace and that the potential fintech benefits are realized and shared by as many consumers as possible.

***

Programming Note. NAFCU's offices will be closed Friday, December 22^nd and Monday, December 25^th in observance of the Christmas holiday. We wish you all a safe and wonderful holiday. We'll be open on Tuesday, December 26th and back to blogging on Wednesday, December 27^th.  Happy Holidays!

We Listened So You Don't Have To: Interagency Fair Lending Hot Topics Webinar

Written by: André B. Cotten, Regulatory Compliance Counsel

On November 16^th, 2017, the CFPB, NCUA and several other representatives from federal agencies presented a webinar on lending topics ranging from the HMDA changes to Regulation B special purpose credit programs, compliance management for consumer loans and fair lending considerations. You can listen to the webinar here and download the presentation slides here. Here is a quick summary of the main topics discussed:

HMDA Changes and Fair Lending

A CFPB representative quickly went over the new HMDA rules that will be in effect for HMDA data collected in 2018 and reported in 2019. According to the speaker, the FFIEC released its HMDA Examiner Transaction Testing Guidelines that will be used by all federal regulators in assessing the accuracy of the HMDA data that financial institutions record and report. This guide has important information regarding testing procedures and tolerance calculations for errors in different sample sizes.

As far as examinations, the CFPB highlighted that it will be updating its HMDA Examination Procedures and Getting It Right Guide to make complying with the rules easier. And as we previously reported, the CFPB's approach in initial examinations will be consistent with the approach taken for other regulations, which means "good faith efforts" to comply will be taken into account.

Special Purpose Credit Programs

A NCUA representative reviewed Regulation B Special Purpose Credit Programs. A special purpose credit program is characterized as a credit incentive. For instance, a credit union offers a one-time rate reduction for designated loan products to one or more of its membership groups. In other words, this incentive program would not be offered to the credit union's entire field of membership.

NCUA discussed credit risks associated with offering these type of special purpose credit programs. According to the official interpretations to Regulation B, the credit union makes the determination if the program benefits an "economically disadvantaged class of persons". The requirements for special purpose credit programs are detailed in section 1002.8. Note, the credit union's program cannot be established to evade ECOA's nondiscrimination requirements. To comply with Regulation B, the credit union may request common characteristic information to determine eligibility. If financial need is one of the criteria for the special purpose credit program, the credit union may also request information need to determine financial need.

Compliance Management for Consumer Loans

A representative from the Federal Reserve Board presented on compliance management for consumer loans. Although most credit unions are not supervised by the Federal Reserve, a credit union would still find the presenters remarks helpful.

The discussion focused on fair lending risks and compliance management for the pricing of consumer loans. However, the same principles would apply to developing an effective fair lending risk management program for consumer loan underwriting, and for mortgage and indirect auto pricing and underwriting.

Many credit unions offer consumer loans that serve a critical need for members. The Federal Reserve identified common scenarios the fair lending risk for pricing arises, which include the following:

• The credit union grants the loan originators broad discretion to set the interest rate and fees
• The credit union does not use rate sheets or other pricing guidelines
• The credit union does not require the loan originators to clearly and consistently document pricing decisions, including exceptions
• The credit union does not monitor for potential pricing disparities on a prohibited basis.

The Federal Reserve Board's representative also identified the elements of an effective compliance management system: Board of Directors and Senior Management Oversight; Policies and Procedures; Risk Monitoring and Management Information Systems (MIS); Internal Controls.

The Federal Reserve expects the financial institution's board and senior management to ensure they understand the level of risk in the credit union's products, services, and business lines, including the fair lending risk in consumer loan pricing. Board and Senior Managers are also expected to administer compliance management program that is consistent with the size, complexity, and risk profile of the financial institution's products, services, and business lines.

In regards to policies and procedures, the Federal Reserve encourages financial institutions to develop policies and procedures (such as rate sheets, checklists, job aids, etc.) designed to ensure consistent outcomes and prevent discrimination on a prohibited basis. Financial institutions are also encouraged to provide training on the fair lending risk in consumer loan pricing, and the financial institution's policies should appropriately control that risk.

The Federal Reserve also provided some best practices. Financial institutions may want to use rate sheets or loan origination software that use clear pricing criteria, and, if applicable, clear pricing exception criteria. The financial institution may also want to require loan originators to clearly and consistently document pricing decisions, including exceptions.

Then, in regards to risk monitoring and management information systems, the financial institution may want to develop risk monitoring systems commensurate with the level of discretion permitted. The Federal Reserve also provided several fact scenarios and commentary to better explain various fair lending risk scenarios. The credit union may also want to provide the board of directors and senior management with the information needed to identify and evaluate fair lending risk for consumer loan pricing.

When developing and modifying internal controls, the Federal Reserve advises that financial institutions may want to develop periodic fair lending self-assessment processes. These processes can include compliance reviews and audits that are appropriate for the size, complexity, and risk profile of the credit union's products, services, and business lines.

Other Related Fair Lending Topics

There were numerous other presenters during the webinar. The FDIC representative provided additional guidance concerning Fair Lending Monitoring Programs. The FDIC's Compliance Manual defines "monitoring" as a proactive approach by an institution to identify procedural or training weaknesses in an effort to preclude regulatory violations. It also includes transactional testing. The FDIC discussed performing periodic analyses of data for fair lending risks. These reviews should be conducted on a portfolio-wide basis.

Moreover, a representative from HUD discussed recent common issues in consumer complaints at HUD. Some common complaints include the following: the treatment of disability income; the treatment of parental leave income; collateral policies; reasonable accommodations; and targeting tools for marketing through social media.

Lastly, an attorney from the Department of Justice discussed denial investigations and cases. The DOJ representative used a recent case to explain instances of mistreatment based on prohibited criteria. The complaint alleges that the bank required employees to deny loans from minority applicants more quickly than similarly-qualified white applicants. The bank also instructed its employees not to provide credit assistance to applicants whose applications were marginally qualified.

***

Live Webcast on Tuesday, December 5 - Must a Credit Union Website be ADA Compliant? Protecting Your Credit Union from Potentially Frivolous Claims 

Over the past few months, credit unions have been hit with scores of lawsuits (and perhaps hundreds of “attorney demand letters”) challenging the accessibility of credit union websites to visually-impaired individuals.  Under the Americans with Disabilities Act of 1990, “public accommodations” are charged with being accessible to those with impairments.  These cases and claims allege that credit union websites are places of “public accommodation;” that they are not fully-accessible to visually-impaired individuals; and that the visually-impaired claimant stands ready to resolve the matter “confidentially” for a cash settlement. 

This 90-minute webcast will feature speakers with current experience in the legal and procedural issues involved, and will cover background information, current cases specific to credit unions, and what your credit union can do now to minimize its risk. Register here.

CFPB Supervisory Highlights; More HMDA Guidance

Written by: André B. Cotten, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More HMDA Guidance

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

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

"An Ounce of Prevention is Worth a Pound of Cure": Fair Lending Issues

By André B. Cotten, Regulatory Compliance Counsel

Lately, we've been receiving some questions stemming from fair lending issues that came up during NCUA examinations. We will review some of these today, but overall credit unions can take a variety of actions to proactively address fair lending risk. These actions include carefully drafting fair lending policies and procedures, training employees, performing risk assessments and ongoing monitoring of compliance with fair lending laws.

Fair lending laws are designed to provide fair and equal access to credit, based on individual creditworthiness, without regard to a prohibited basis such as race, gender or national origin. Fair lending laws include the Equal Credit Opportunity Act (Regulation B), Home Mortgage Disclosure Act (Regulation C), and Fair Housing Act.

From a litigation perspective, discrimination cases are often based on one of two theories – “disparate treatment” or “disparate impact.” A standard disparate treatment case involves a conscious decision by the credit union to discriminate against an applicant on a prohibited basis. On the other hand, disparate impact cases are far more nuanced and fact intensive. These types of cases involve a facially neutral policy that has a disparate impact (or disproportionately burdens) members of a protected class. Disparate impact cases do not require applicants to demonstrate an intent to discriminate and may be proven using statistical evidence.

Credit unions, however, may defend against a “disparate treatment” case by arguing that challenged practices are necessary to achieve one or more substantial, legitimate, and nondiscriminatory interests. These cases tend to be fact intensive so it is difficult to speculate how a judge and jury would decide a particular matter without knowing all of the facts beforehand, and overall can require consulting with local counsel.

However, from a compliance prospective, some issues our members have asked about recently include questions regarding advertising, training and audits.

Marketing and Advertising

In regards to marketing, the fair lending rules apply from the outset of the transaction which includes marketing. The FFIEC Fair Lending Examination Manual contains a detailed discussion of the types of practices that examiners look for when determining whether a credit union has engaged in prohibited marketing, I have included an excerpt below:

“Indicators of potential disparate treatment in Marketing of residential products, such as:

M1. Advertising patterns or practices that a reasonable person would believe indicate prohibited basis customers are less desirable.

M2. Advertising only in media serving non-minority areas of the market.

M3. Marketing through brokers or other agents that the institution knows (or has reason to know) would serve only one racial or ethnic group in the market.

M4. Use of marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the institutions assessment or marketing area that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area.

M5. Using mailing or other distribution lists or other marketing techniques for pre-screened or other offerings of residential loan products that:

Explicitly exclude groups of prospective borrowers on a prohibited basis; or

Exclude geographies (e.g., census tracts, ZIP codes, etc.) within the institution's marketing area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.

M6. Proportion of prohibited basis applicants is significantly lower than that group's representation in the total population of the market area.

M7. Consumer complaints alleging discrimination in advertising or marketing loans.”

The full examination guide can be found here, the disparate impact in advertising section begins on p. 11:

http://www.ffiec.gov/pdf/fairlend.pdf

Training

Training is essential part of maintaining fair lending compliance. According to the NCUA guide, Fair Lending Compliance Best Practices for Federal Credit Unions, "[f]air lending training should be provided for all credit union employees and officials involved in the lending process. Include training for employees who take applications, originate loans, service loans, and collect delinquent loans. The supervisory committee and internal audit staff should also incorporate an assessment of compliance with the credit union’s fair lending policies as a component of their review procedures."

In regards to ECOA (Reg B), The Fair Lending Guide issued by NCUA's Office of Consumer Financial Protection and Access gives similar guidance for credit unions: "Provide training to all employees involved in any aspect of taking, evaluating, acting on a credit application, or furnishing/maintaining credit information. In addition, persons involved in marketing and credit operations should receive appropriate instruction relative to their responsibilities."

However, while the formal guidance does not specify frequency of training, the AIRES Examination Questionnaire goes a step further to specify that training should occur at least annually.

Audits

Also according to NCUA's publication, The Fair Lending Guide, credit unions have the discretion whether to conduct an internal or external fair lending audit. However, an audit should be conducted at least annually to assess overall compliance. The FFIEC Examination Manual also provides guidance on identifying compliance program discrimination factors (p. 6), also advises examiners to review many aspects of fair lending compliance including audit programs. Generally, the guidance indicates that the annual audit should consider the credit union's compliance with the substantive nondiscrimination requirements as well as its adherence to the technical provisions of ECOA and Regulation B.

***

These are only a few of the many complex issues that can come in the context of fair lending. To help credit unions comply with fair lending, below is a list of several key resources for assessing a lending program:

• NCUA Fair Lending Guide: NCUA's Office of Consumer Protection issued a Fair Lending Guide in December 2016. The guide gives a great overview of fair lending.
• NCUA Fair Lending FAQs
• NCUA Fair Lending Best Practices
• AIRES Exam Questionnaires
• FFIEC Fair Lending Examination Procedures: FFIEC issued interagency guidelines which provide additional insight into the objectives of a fair lending examination.
• NCUA Fair Lending Website: NCUA compiled several resources to help credit unions comply with the various laws and regulations that apply to fair lending.

CFPB Proposes Reg B Amendments Given Interplay with HMDA; Regulatory Compliance School Kick Off

Written by Brandy Bruyere, Vice President of Regulatory Compliance

It seems unkind to start Monday morning off with something relating to the Home Mortgage Disclosure Act (HMDA), but we had to fit this one in sometime and today's the day.

On March 24, 2017 the CFPB published proposed amendments to Regulation B that would "facilitate compliance with [HMDA], to add certain model forms and remove others… and to make various other amendments to Regulation B and its commentary to facilitate the collection and retention of information about the ethnicity, sex, and race of certain mortgage applicants." This is in addition to a notice issued in September 2016 that approved use of the 2016 Uniform Residential Loan Application (URLA) for collecting information relating to ethnicity and race under HMDA. In fact, one of the proposed amendments would incorporate the 2016 URLA into the appendix of model application forms, replacing the 2004 version of the URLA.

First, let's start with why this kind of rule alignment is necessary. Section 1002.5 of Regulation B addresses limitations for requesting information regarding an applicant's race, color, religion, national origin, or sex:

"(a) General rules—

(1) Requests for information. Except as provided in paragraphs (b) through (d) of this section, a creditor may request any information in connection with a credit transaction. This paragraph does not limit or abrogate any Federal or state law regarding privacy, privileged information, credit reporting limitations, or similar restrictions on obtainable information.

(2) Required collection of information. Notwithstanding paragraphs (b) through (d) of this section, a creditor shall request information for monitoring purposes as required by §1002.13 for credit secured by the applicant's dwelling. In addition, a creditor may obtain information required by a regulation, order, or agreement issued by, or entered into with, a court or an enforcement agency (including the Attorney General of the United States or a similar state official) to monitor or enforce compliance with the Act, this part, or other Federal or state statutes or regulations.

[…]

(b) Limitation on information about race, color, religion, national origin, or sex. A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) and (b)(2) of this section…." (Emphasis added.)

The rule goes on to discuss situations where requesting this kind of information may be permitted for conducting certain self-testing functions under section 1002.15.  Of course, Regulation C (HMDA) requires collection of some of this data, which is discussed in the staff commentary to section 1002.5(a):

"Paragraph 5(a)(2).

[…]

2. Information required by Regulation C.Regulation C generally requires creditors covered by the Home Mortgage Disclosure Act (HMDA) to collect and report information about the race, ethnicity, and sex of applicants for home-improvement loans and home-purchase loans, including some types of loans not covered by §1002.13 [which allows collection for purchases and refinancings of dwelling secured loans that will be the applicant's principal residence]."

While Regulation B allows collecting information that is otherwise prohibited in order to comply with HMDA the rule uses terminology that does not align with the amended version of HMDA and the proposal addresses these kinds of issues. The proposal would also add section 1002.5(a)(4) which would set forth "other permissible collection of information" to allow credit unions to collect this kind of data even if not subject to HMDA reporting. For example, a credit union that submitted HMDA data in any of the past 5 years, but is not currently a "financial institution" under HMDA would be permitted collect information for HMDA covered loans. The proposal would also amend section 1002.13(b) to give credit unions the option to allow applicants to self-identify using the specific race and ethnicity categories required by HMDA.

The actual text is pretty technical so for those working on HMDA compliance at a credit union, it may be worth taking a look at the specific language in the proposal. The CFPB is accepting comments on the proposal, so if it seems something is missing, please let us know.

Compliance School Kicks Off Today. NAFCU's compliance team will be at our spring Regulatory Compliance School this week working with a great group of credit union professionals who are seeking or renewing their NCCO designation. Our email and phone responses may take a bit longer than usual, but we will still be responding to members throughout the week. Thanks for your understanding!

Should Credit Unions Photocopy Identification Cards?

Written by Shereefat Balogun, Regulatory Compliance Counsel

So last week, I attempted to take some cash out of my credit union’s ATM but the customer in front of me had a bunch of checks she had to deposit and took forever.  I decided to walk into the branch and ask for the cash withdrawal.  The teller asked me for my driver’s license or any similar ID. I told her that I did not have any ID on me (don’t judge me!), but I had my ATM/debit card.  The teller said she would be able to process my request only if the credit union had a copy of my ID on file.  While I understood the benefits of having the copy on file, I could not help but to think about the different compliance issues this raises.  Yes, the copy of the ID is great for verifying your members’ identity or helping to detect fraud.  However, it got me thinking about compliance issues relating to IDs, such as military IDs and fair lending concerns.  Contrary to what we’ve been taught, what’s good for the goose is NOT always good for the gander. 

Bank Secrecy Act and CIP Recordkeeping

The Bank Secrecy Act requires a credit union to know its member (KYC or KYM whichever lingo you prefer) and have a customer identification program (CIP). This includes checking a government identification number, which can be done with documentary evidence like an ID.  So collecting the ID to verify the information is one thing.  But should a credit union keep a copy of the ID in its records?  For recordkeeping purposes, the CIP rule leaves it up to the credit union to determine how it wants to document verification that has been performed.  Generally, the rule requires a credit union to retain a description of the document that was relied on, noting the type of document, any identification number contained in the document, the place and date of issuance, and expiration date.  So, a description is generally sufficient.  Though the credit union may retain a copy of the ID, it certainly is not required.  See, 31 C.F.R. §1020.220(a)(3)(i)(B).  This is also confirmed in FinCEN’s Guidance on Customer Identification Regulations FAQs:

2. Can a bank keep copies of documents provided to verify a customer’s identity, in addition to the description required under 31 C.F.R. § 103.121(b)(3)(i)(B), even if it is not required to do so?

Yes, a bank may keep copies of identifying documents that it uses to verify a customer’s identity. A bank’s verification procedures should be    risk-based and, in certain situations, keeping copies of identifying documents may be warranted. In addition, a bank may have procedures to keep    copies of documents for other purposes, for example, to facilitate investigating potential fraud…

(Emphasis added.)

Keep in mind though, that although there are no federal regulations prohibiting a credit union from photocopying ID, some states prohibit photocopying IDs.  Be sure to check with your individual state law to see if there are any limitations here.

But wait…what about military IDs?  Good question!  While a credit union may use a military ID to collect identifying information for CIP purposes and other purposes, it cannot copy the ID for CIP purposes.  Federal law generally prohibits the copying or scanning of military ID:

Whoever manufactures, sells, or possesses any badge, identification card, or other insignia, of the design prescribed by the head of any department or agency of the United States for use by any officer or employee thereof, or any colorable imitation thereof, or photographs, prints, or in any other manner makes or executes any engraving, photograph, print, or impression in the likeness of any such badge, identification card, or other insignia, or any colorable imitation thereof, except as authorized under regulations made pursuant to law, shall be fined under this title or imprisoned not more than six months, or both.

(Emphasis added.)

As stated above, photocopying military ID can subject a person to fines and imprisonment up to 6 months.  If your BSA/CIP program permits the photocopying of military ID identification, you may want to reassess your CIP requirements. 

To emphasize, the statute prohibits the photocopying the military identification card.  For CIP purposes, it’s our understanding that some credit unions document information found on the military ID since they are unable to make a copy.  This practice is consistent with the CIP recordkeeping requirement discussed above. 

Fair Lending Concerns

So we’ve established that it is customary to collect and retain a copy of a driver’s license for CIP purposes.  However, for purposes of Regulation B and other fair lending laws, credit unions may want to keep that copy out of the member’s loan application file.  For example, Regulation B prohibits financial institutions from considering certain information when evaluating an application and making a credit decision.  Indeed, the FinCEN FAQ highlighted above also warned:

Nonetheless, a bank should be mindful that it must not improperly use any document containing a picture of an individual, such as a driver’s license, in connection with any aspect of a credit transaction.

(Emphasis added.)

Regulation B and Regulation C require a credit union to collect certain information for monitoring purposes.  For instance, Regulation B requires a credit union that receives a credit application to collect certain information, such as ethnicity, sex, and age.  See, 12 C.F.R. §1002.13(a).  Similarly, Regulation C requires a credit union to collect certain data in relation to applications for home purchase loans, home improvement loans, and refinancings.  This information includes information about the ethnicity, race, and sex of the applicant or borrower.  See, 12 C.F.R. §1003.4(a)(10).  When collecting this information, a credit union may list questions regarding the ethnicity, race, and sex of the applicant on the loan application form, or on a separate form that refers to the application.  See, Appendix B to 12 C.F.R. Part 1003.

Although neither rule explicitly instructs credit unions to refrain from maintaining a copy of a driver’s license from a loan file, doing so may increase your fair lending risks, and may lead to examiner scrutiny.

As always, if you have any questions about this blog or any other compliance issue, please feel free to reach out to NAFCU’s Regulatory Compliance Team.  We’re here for you!

Updated URLA/Form 1003; Early HMDA Compliance Period for Ethnicity and Race Data Collection

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

Freddie Mac and Fannie Mae have issued an updated Uniform Residential Loan Application (URLA, also known as the Form 65 or Form 1003). The URLA can be used by creditors to ensure compliance with Regulation B (see 12 C.F.R. Part 1002, Appendix B) and is required under Freddie’s Seller/Servicer Guide and Fannie’s Selling Guide.

The CFPB used its approval of the revised and redesigned forms, published in the Federal Register on September 29^th, to also address the collection of applicant ethnicity and race information in advance of the new HMDA rules.

Early Compliance on Ethnicity and Race Data Collection Permitted

Generally, Regulation B prohibits credit unions from inquiring into an applicant’s race or ethnicity. However, Regulation B permits inquiries for monitoring purposes in connection with HMDA reporting. See, 12 C.F.R. § 1002.5(a)(2). Thus, until HMDA’s new provisions are in effect, credit unions can only inquire into race and ethnicity to the extent required by the current HMDA provisions, unless otherwise permitted.

The Bureau’s approval of the updated form cited that the revisions to HMDA do not require the collection of disaggregated race and ethnicity categories until January 1, 2018. However, in an effort ease the transition to new HMDA and provide space for the implementation of new policies and forms, the Bureau is permitting early compliance with the collection of disaggregated race and ethnicity categories. In the approval, the Bureau stated:

“At any time from January 1, 2017, through December 31, 2017, a creditor may, at its option, permit applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule. During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule, shall not be deemed to violate Regulation B § 1002.5(b). During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule, shall also be deemed to be in compliance with Regulation B § 1002.13(a)(i) even though applicants are asked to self-identify using categories other than those explicitly provided in that section. The issuance of this Bureau official approval has been duly authorized by the Director of the Bureau and provides the protection afforded under section 706(e) of ECOA.” 81 Fed. Reg. 66930, 66931. (Emphasis added.)

For more information on the new disaggregated ethnicity and race categories, as well as new HMDA’s special transition rule for collecting ethnicity, race and sex information, NAFCU members can view this July 2016 Monitor Article.

Credit unions complying early should continue to submit aggregated data throughout 2017, even though they are collecting data in a disaggregated form. The approval notice contains instructions on how to re-aggregate the information for submission. We have created a chart of the re-aggregation below for credit unions’ convenience:

NAFCU Webcast – Save $100 by Registering by Thursday

Credit Union Vendor Management: Basic Concepts and Risk Mitigation Techniques

Live Webcast Thursday, October 13, 2016  |  2:00-3:30 p.m. ET

NAFCU's Director of Education Devon Lyon and Regulatory Compliance Counsel Benjamin Litchfield will discuss operational and compliance challenges posed by managing vendor relationships. Attend this webcast to pinpoint frequent vendor management trouble areas for credit unions, and learn agency supervisory expectations. Early-bird registration expires tomorrow!

 

Justice Department Reaches Settlement to Resolve Lending Discrimination Case; CFPB Issues Monthly Complaint Snapshot

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Happy Friday to all of you out there in regulatory compliance land. On Wednesday, September 28, 2016, the U.S. Department of Justice announced that it reached a settlement with Charter Bank of Corpus Christi, Texas, over allegations that the bank engaged in a pattern or practice of discrimination on the basis of national origin. The Justice Department alleged that between 2009 and 2014, Charter permitted employees to adjust interest rates on vehicle title loans upward or downward by approximately three percentage points without any consideration for the borrower’s credit risk. This policy purportedly resulted in Hispanic borrowers being charged higher interest rates than similarly situated non-Hispanic borrowers. As part of the settlement, Charter agreed to maintain uniform pricing policies and pay more than $165,000 to victims of the alleged discrimination.

The Equal Credit Opportunity Act and its implementing regulation, Regulation B, prohibit discrimination on a prohibited basis in any aspect of a credit transaction. See, 12 C.F.R. § 1002.4(a). The term “prohibited basis” is defined broadly in Regulation B to include “race, color, religion, national origin, sex, marital status, or age” as well as the fact that the consumer’s income derives from a public assistance program or the fact that the consumer has exercised any right under the Consumer Credit Protection Act or any state consumer protection laws. 12 C.F.R. § 1002.2(z). Furthermore, the Act and Regulation B not only prohibit overt discrimination but facially neutral policies that have a disparate impact without an adequate business justification. See, 12 C.F.R. pt. 1002, Supp. I, comment 6(a)-2. For more information, compliance officers may want to consult the FFIEC Fair Lending Examination Manual, which provides a detailed discussion of fair lending issues and possible red flags.

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In other news, the CFPB released its monthly complaint snapshot on September 27, 2016. The report notes that the volume of student loan complains has increased by 78 percent from last year. Bank account and prepaid card complains have also increased by 26 percent and 20 percent respectively. On the other hand, complains regarding payday loans and mortgages have dropped by 18 percent and 11 percent over the same period. The largest number of complaints received by the Bureau this month appears to center around debt collection, which has seen a 50 percent increase in complaint volume from last month. The report also draws particular attention to money transfer services with some of the more common complaints relating to seller fraud and funds availability.

Depending on the structure of the program, Regulation E may impose some requirements on credit unions handling consumer complaints involving money transfer services. For example, Regulation E treats payments made through online bill pay as an “electronic funds transfer” unless the contract for the bill-payment service clearly states that all payments will be solely by check. See, 12 C.F.R. pt. 1005, Supp. I, comment 3(b)(1)-vi. This means that the member may have the right to stop payment under section 1005.10(c) as well as limitations of liability and error resolution rights for these kinds of transactions. See, 12 C.F.R. §§ 1005.6; 1005.11. One thing to note, however, is that unlike Regulation Z, Regulation E does not appear to allow the member to assert claims regarding property or services purchased through electronic funds transfer against the credit union. Compare, 12 C.F.R. § 1005.2(m) (definition of unauthorized electronic funds transfer) with 12 C.F.R. § 1026.12(c)(1).

If the money transfer service is provided to the member solely by check, such as through the sale of money orders, then state law may govern the substantive rights of the parties. Since the structure of any money transfer service program can involve some degree of risk both from a compliance and litigation standpoint, credit unions may want to consult with counsel on the appropriate policies and procedures for mitigating these kinds of risks as well as how to structure a compliant program.

Have a great weekend!

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

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

The full report is available here.

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Know the Changes: HMDA Reporting Procedures

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

Part of the HMDA Webcast Series

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

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

We Listened So You Don’t Have To: The 2015 Interagency Fair Lending Hot Topics Webinar

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

A lot happened on Thursday, October 15^th. FinCEN issued the second edition of SAR Stats. The CFPB issued the new HMDA rule, which Brandy discussed in a blog post last week. NCUA finalized its risk-based capital rule, which, thankfully, Alicia is spoon-feeding to us in bite-size chunks via her RBC blog series which will continue on Friday.

In much less dramatic but still useful news, on October 15^th the Interagency Fair Lending Hot Topics Webinar was held. The webinar was attended by the CFPB, the Federal Reserve Board, NCUA, the FDIC, the OCC, the DOJ and HUD.  At the webinar, the CFPB very briefly discussed the red flags it looks for with regard to redlining. It then very thoroughly discussed its recent Consent Order against Hudson City Savings Bank due to redlining.

The OCC briefly discussed fair lending concerns surrounding OREO disposal. HUD discussed the high number of complaints it continues to receive in connection to the underwriting treatment received by women while on maternity leave. The DOJ presented a veritable parade of enforcement actions regarding auto lending.

The most useful presentation came from Jamie Goodson, Director of the Division of Consumer Compliance Policy and Outreach in the Office of Consumer Protection at NCUA. Her presentation contained some cogent reminders for credit unions about NCUA’s expectations regarding fair lending policies. She provided some concrete, occasionally-missed information that should be included in CU’s fair lending policies and some suggestions to ensure policies are sufficiently drafted and maintained.

Occasionally-Missed Information

Most fair lending policies clearly prohibit discrimination on the bases of race, religion, national origin, sex, marital status and age. However, NCUA’s presentation indicated that not all policies also explicitly prohibit discrimination on the basis of receipt of public assistance income or the exercise of any right under the Consumer Credit Protection Act (CCPA), both of which are prohibited bases mentioned in the ECOA. The presentation indicated that beyond simply including these two prohibited bases in the list, it may be necessary to provide further information to help employees comply with the policy.

The receipt of public assistance income is a prohibited basis, regardless of whether all or only part of the applicant’s income comes from public assistance. The receipt of public assistance can only be considered as a pertinent element of creditworthiness under a judgmental system of evaluation, as defined by 12 C.F.R. § 1002.2(t). During the presentation, NCUA recommended that a policy might list several common types of income that is public assistance, to aid employees in complying. For example, a policy might list benefits or income from the following programs: Supplemental Nutrition Assistance Program, Rent Supplement, Rental Housing Assistance, Supplemental Security Income, Unemployment Benefits, Temporary Assistance to Needy Families, and any other program income or benefits which may be commonly encountered.

A fair lending policy should also prohibit discrimination on the basis of an applicant’s good faith exercise of their rights under the CCPA, or any state law upon which the CFPB has granted an exemption. This is a stated prohibited basis in the ECOA and NCUA indicated it should be included in a fair lending policy. An exercise of rights under the CCPA could include action under TILA, the Fair Credit Billing Act, the Consumer Leading Act, FCRA, FDCPA, EFT Act, or the ECOA itself.

Suggestions for Drafting and Maintaining Policies

Beyond the above substance, NCUA also recommended that policies be drafted carefully and fully. Specifically, the presentation used an example of a policy that stated “employment income” would be considered, when the credit union indicated what was meant and understood by employees was that “income” would be considered. Also, the presentation recommended that a fair lending policy address considerations beyond loan underwriting, including marketing, product development, forms and any other area where fair lending concerns may appear.

If you are interested in hearing all 90 minutes of the presentation, the webinar is archived and still available on the Consumer Compliance Outlook website here. Slides to the webinar, which are pretty thorough, can be viewed here.

Evans Bancorp Recap, and Another Bank is Accused of Redlining

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Yes, I said another redlining case.  Regular readers of the NAFCU blog will remember that Brandy Bruyere first wrote about redlining almost one year ago today.  As Brandy’s blog explained, New York’s Attorney General filed an action against Evans Bancorp “for unlawful discrimination on the basis of race in violation of the Fair Housing Act.”  Specifically, New York’s Attorney General alleged Evans Bank limited its branching and lending activities of credit products to a particular geographic area in the highly-segregated Buffalo, New York metropolitan area.  Recently, it was announced that Evans Bancorp agreed to pay nearly $1 million to end the lawsuit.

 On Thursday, the CFPB and the Department of Justice (DOJ) announced a proposed consent order with Hudson City Savings Bank to settle similar allegations of violating the Fair Housing Act and Equal Credit Opportunity Act.  In a joint complaint filed in New Jersey District Court, the CFBP and DOJ alleged that Hudson City Savings Bank intentionally engaged “in a pattern or practice of unlawful redlining by structuring its business so as to avoid the credit needs of majority-Black-and-Hispanic neighborhoods in its residential mortgage lending, and thereby engaging in acts or practices directed at prospective applicants that discouraged applicants in these neighborhoods from applying for credit.”  Phew, that was a long sentence.  Essentially, the complaint states that Hudson City Savings Bank discouraged minorities from applying for loans by (1) placing its branches outside of densely populated Black-and-Hispanic areas, and (2) not accepting first-lien mortgage loans at branches proximate to a majority of the Black-and-Hispanic areas. 

 Specifically, the complaint alleges that from 2004 to 2010, Hudson City Savings Bank sought to expand its presence through branch expansion and acquisition.  Bank management provided direction to explore markets in Staten Island, Long Island, Connecticut, and parts of New York.  As alleged in the complaint, “these areas exclude and form a semi-circle around the four counties in New York State with the highest proportions of majority-Black-and-Hispanic neighborhoods: Queens, Kings [A.K.A. Brooklyn], Bronx, and New York Counties.”  Moreover, during the relevant time period, Hudson City Savings Bank only accepted first-lien mortgage loans at select branches, which were only located in census tracts with relatively low Black and Hispanic populations.  Thus, the complaint alleges, Hudson City Savings Bank concentrated its lending network to avoid lending in Black-and-Hispanic areas.  To boot, the complaint alleges Hudson City Savings Bank failed to exercise adequate oversight or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance.

 So what is Hudson City Savings Bank’s penance?  If the proposed consent order is approved by the court, Hudson City Savings Bank will pay more than $30 million in fines and restitution, which include opening or acquiring at least two new full-service first-lien mortgage accepting branches proximate to a majority of the Black-and-Hispanic areas.  In addition, Hudson City Savings Bank will need to hire a consultant to assess the credit needs of the Black-and-Hispanic communities within the affected metropolitan statistical areas, and administer Fair Lending Training to ensure that their activities are conducted in a nondiscriminatory manner.  Moreover, the order stipulates that this training will be conducted annually.

 Both complaints indicate that regulators are looking for financial institutions that may be discriminating against certain classes of borrowers.  While credit unions are generally not the type of financial institution that engages in discriminatory practices, under the disparate impact theory, a credit union may have a policy or practice that disproportionately has a negative effect on a prohibited basis—even though the credit union has no intent to discriminate.  Thus, credit unions may want to periodically review its policies and practices to ensure its lending program does not have an unintentional discriminatory impact on its members.  To help credit unions comply with fair lending, below is a summary of several key resources to review before assessing a lending program:

• NCUA Fair Lending Guide:  NCUA’s Office of Consumer Protection issued a Fair Lending Guide in March of 2013.  The guide gives a great overview of fair lending.
• NCUA Fair Lending FAQs
• NCUA Fair Lending Compliance Best Practices
• ARIES Exam Questions:  NCUA Examiners use the ARIES Questionnaire to examine credit unions.  The AIRES Questionnaire has a section on Fair Lending, which may be helpful to credit unions.
• NCUA Examination Guide:  Appendix 19B contains an overview of Equal Credit Opportunity Act objectives.
• NCUA Fair Lending Website:  The NCUA complied several resources to help credit unions comply with the various laws and regulations that apply to fair lending.
• DOJ Fair Lending Website:  The DOJ’s Fair Lending Website contains several resources related to fair lending, including its annual report to congress that contains detailed information on recent fair lending litigation.
• FFIEC Fair Lending Examination Procedures:  FFIEC issued interagency Fair Lending Examination Procedures, which will give you additional insight into the objectives of a fair lending examination. 
• Federal Reserve Consumer Outlook:  The Philadelphia Federal Reserve complied an impressive amount of fair lending resources for depository institutions of all types.  This resource is an excellent resource page.
• Fair Lending Webinar:  Another good fair lending resource is the Federal Reserve Bank of San Francisco interagency Outlook Live webinar on Fair Lending, which is scheduled to take place on place on Thursday, October 15, 2015 (register here).  The webinar will be 90 minutes long and cover CFPB mortgage updates, use of data in evaluating fair lending risk, compliance management, pricing, maternity leave discrimination, post-origination risks, auto lending settlements and others. Participating agencies include the DOJ, CFPB, FDIC, OCC, FRB, HUD and NCUA. 

Post-Caucus Regulatory Round-Up: NCUA Board Takes Action on Regulatory Flexibility Act and Aggregate Lending Limits; CFPB Releases Updated TRID Examination Procedures; FRB Announces 2015 Fair Lending Webinar

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Caucus is over and what a week it was! Meeting our members face-to-face and helping you make direct connections with your representatives here in Washington, D.C. has been fantastically rewarding. Thanks to all who attended! While credit unions were on the Hill, the regulators have been busy. Here are some highlights from the regulators this week.

NCUA Board Takes Action on Regulatory Flexibility Act and Aggregate Lending Limits

Today at NCUA’s Board meeting, the board voted on final rules regarding the Regulatory Flexibility Act and the aggregate lending limit for corporate credit unions. The Board increased the asset threshold for ‘small entity’ designation from $50 million to $100 million, and committed to reevaluating the threshold every three years. That will give some credit unions special consideration for regulatory relief. The Board also voted to exclude Central Liquidity Facility-related bridge loans from the aggregate unsecured lending cap on loans to one borrower by corporate credit unions. 

Also, at the board meeting, NCUA Chairman Debbie Matz recommended a policy change that would authorize the Office of Consumer Protection to approve community charter expansion requests that are currently reserved for board consideration. Earlier this year, NCUA began an internal review of its Field of Membership regulations in order to streamline procedural and regulatory hurdles that unnecessarily burden credit union growth.

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CFPB Releases Updated TRID Examination Procedures

On Tuesday, the CFPB updated its Supervision and Examination Manual sections on Mortgage Origination Exam Procedures and TRID Examination Procedures for examinations after the October 2015 effective date. The updated examination procedures can be accessed here. While most credit unions will not be examined for consumer compliance by the CFPB, any guidance is helpful in trying to find one’s way out of the dreaded TRID labyrinth.

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FRB Announces 2015 Fair Lending Webinar

Also, on Tuesday, the Federal Reserve Bank of San Francisco has announced an interagency Outlook Live webinar on Fair Lending Hot Topics. The webinar will be 90 minutes long and cover CFPB mortgage updates, use of data in evaluating fair lending risk, compliance management, pricing, maternity leave discrimination, post-origination risks, auto lending settlements and others. Participating agencies include the DOJ, CFPB, FDIC, OCC, FRB, HUD and NCUA. The webinar takes place on Thursday, October 15, 2015 and requires registration which can be done here. 

CFPB Allegations Against Santander; Indirect Lending Reminders; Fed Survey: Seeking Member Input

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Last Wednesday, Victoria wrote a round-up of recent CFPB enforcement actions. Later that day, the Wall Street Journal reported on yet one more: large auto lender Santander Consumer USA Holdings Inc. (Santander) said the CFPB has alleged that it violated U.S. fair lending laws. Specifically, the CFPB has alleged that Santander has violated the Equal Credit Opportunity Act (ECOA) by overcharging “protected groups” of consumers on auto loans made through car dealerships.

This is only the latest CFPB action focusing on indirect auto lending. Earlier this month, the CFPB called for Fifth Third Bank to cut its dealer markup to avoid possible discrimination in its auto-lending business. In July, the CFPB and the Department of Justice announced a $25 million settlement  to resolve discriminatory auto lending practices by American Honda Finance Corporation. In September, 2014 the CFPB announced its intention to extend its supervisory authority  to nonbank auto lenders. The same month an article appeared in The NCUA Report from the Office of Examination and Insurance Report cautioning credit unions about the dangers of indirect auto lending.

As we enter the 2016 model year, and in light of the CFPB’s allegations against Santander, now might be a good opportunity to review NCUA’s expectations for indirect lending relationships. In August, 2010, NCUA issued Letter to Credit Unions no. 10-CU-15 regarding the unintended exposures to risk which can result from indirect lending relationships. This letter was primarily focused on safety and soundness, and did not specifically address the ECOA, but it did cite dealer incentives and compensation programs as possible areas of risk and discussed the importance of clear vendor policies and consistent reviews.

While NCUA still has supervisory authority over credit unions with $10 billion or less in assets regarding compliance with the ECOA, Bulletin 2013-02 issued by the CFPB gives useful guidance on avoiding ECOA issues in indirect lending relationships. NCUA has indicated in its Fair Lending Examination and Compliance Program Questions and Answers that credit unions should review their indirect lending programs in conjunction with this CFPB bulletin to ensure their programs comply with ECOA and Regulation B. (See Question 21).

Both the NCUA’s Letter to Credit Unions and the CFPB’s Bulletin cite dealer mark-up and compensation policies as a major area of potential risk. The CFPB Bulletin recommends eliminating dealer discretion to markup buy rates and finding other mechanisms to compensate dealers that cannot result in discriminatory treatment. In the alternative, it recommends imposing controls on dealer markup and compensation policies, and monitoring these policies to ensure compliance and to address unexplained pricing disparities.

A credit union may not have sufficient leverage to negotiate a competitive program for its members while disallowing dealer mark ups. In that situation, the CFPB recommends sending communications to all participating dealers explaining the ECOA, the credit union’s expectations with respect to ECOA compliance, and the dealer’s obligation to markup interest rates in a non-discriminatory manner. Then the CFPB recommends follow up in the form of regular analysis of dealer-specific and portfolio-wide loan pricing data to locate potential disparities, and where disparities are prohibited by the ECOA, taking corrective action against dealers and properly remunerating any affected members.

Finally, NCUA’s Letter to Credit Unions and the CFPB bulletin both emphasize the important of robust compliance management programs. The AIRES Questionnaire regarding indirect lending requires review of dealer compensation programs to ensure it is competitive, yet fair. It also requires a credit union have policies in place regarding dealership compensation. The difficulty of establishing an indirect lending program where dealer compensation is competitive, yet fair and nondiscriminatory toward members is challenging. It’s clear it is an issue that will not be going away anytime soon. 

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NAFCU Seeks Member-CU's Input for Report to Fed

In other news, NAFCU is asking members to complete a survey on a range of issues, including the impact of CFPB's qualified mortgage rule, the Durbin Amendment and NCUA's proposed risk based capital rule, in preparation for this year's meeting between its board and Federal Reserve Board Gov. Jerome Powell. The deadline for survey submission is Sept. 11. 

CFPB Finalizes TRID Delay; CFPB and Justice Department Action Against Honda for Alleged Discriminatory Auto Lending Practices; Farewell; Programming Note

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

CFPB Finalizes TRID Delay. Yesterday, the CFPB finalized the delay of the TRID rule until October 3, 2015 and clarified that the delay will also apply to the post-consummation escrow cancellation and mortgage servicing transfer notices. NAFCU noted this ambiguity in the proposal and stressed in our comment letter that this needed to be clarified. Here is the excerpt relating to the post-consummation notices (escrow cancellation, changes to mortgage servicing transfer notice):

“The technical amendments also take effect on October 3, 2015, the same effective date as the TILA-RESPA Final Rule and Amendments. Some commenters specifically asked whether the change in effective date to October 3, 2015, applies to the postconsummation notice requirements including §§ 1026.20(e) and 1026.39(d)(5). As discussed in the TILA-RESPA Final Rule, implementation of the Dodd-Frank Act disclosures in §§ 1026.20(e) and 1026.39(d)(5) becomes mandatory on the effective date, now October 3, 2015. As discussed further in part VII below, the portions of this final rule related to the delay in the effective date to October 3, 2015, are effective immediately upon publication in order to move the effective date for the TILA-RESPA Final Rule and Amendments and the amendatory instruction discussed in note 4 from August 1, 2015 to October 3, 2015. As a result of this final rule, the provisions of the TILA-RESPA Final Rule and Amendments, as well as the technical amendments and corrections made in this final rule, are not effective immediately upon publication, but on October 3, 2015.” (Emphasis added)

The Bureau also rejected requests for a “formal grace period or dual compliance period” meaning early compliance with the rule is still not permitted.

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CFPB and Justice Department Action Against Honda for Alleged Discriminatory Auto Lending Practices. Last week, the CFPB and Department of Justice (DOJ) announced a settlement to resolve alleged discriminatory auto lending practices by American Honda Finance Corporation (Honda) against African-American, Hispanic and Asian/Pacific borrowers. The CFPB’s press release and the consent order between the CFPB and Honda are available here and here, respectively. Honda’s settlement with the DOJ is subject to court approval, and the DOJ has filed a complaint and proposed order in the U.S. District Court for the Central District of California.

The action focuses on indirect auto lending practices, specifically dealer markups. According to the consent order, Honda permitted dealers to mark-up consumers’ interest rates by as much as 2.25 percent for contracts with terms of 60 monthly payments or less, and 2 percent for contracts with greater than 60 monthly payments. However, the allegations are that as a result of its dealer discretion pricing policies, Honda charged borrowers higher interest rates because of their race or natural origin, and not because of the borrowers’ creditworthiness or other objective credit risk criteria.

From the DOJ’s press release:

“The United States’ complaint alleges that the average African-American victim was obligated to pay over $250 more during the term of the loan because of discrimination, the average Hispanic victim was obligated to pay over $200 more during the term of the loan because of discrimination and the average Asian/Pacific Islander victim was obligated to pay over $150 more during the term of the loan because of discrimination. The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending.”

Under the CFPB order, Honda must substantially reduce or eliminate entirely dealer discretion; pay $24 million in damages for consumer harm; and administer and distribute funds to victims. I thought this excerpt from the CFPB’s press release, regarding dealer discretion, was of interest:

“Honda will reduce dealer discretion to mark-up the interest rate to only 1.25 percent above the buy rate for auto loans with terms of 5 years or less, and 1 percent for auto loans with longer terms. Honda also has the option under the order to move to non-discretionary dealer compensation. The Bureau did not assess penalties against Honda because of Honda’s responsible conduct, namely the proactive steps the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether.”

The CFPB has been looking at fair lending issues in the indirect auto market for some time now. As we have previously blogged, the CFPB released Bulletin 2013-02 in March 2013 to indirect auto lenders about compliance with the Equal Credit Opportunity Act (ECOA), and released a supervisory highlights report in September 2014 detailing supervisory activities in the indirect auto lending market.

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Farewell.  Today is my last day at NAFCU, so I just want to take a moment to thank everyone. I’ve had the opportunity to work with great colleagues here at NAFCU and I am thankful for all of the opportunities over the past few years. A big thank you to NAFCU members and blog readers – I’ve enjoyed working with many of you on compliance questions, meeting folks at conferences, chatting over the phone, and emailing.  I’m also staying within the credit union industry, and will be moving in-house at a credit union. So, I’m not going far and I look forward to staying in touch. Thanks again for everything!

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Programming Note. NAFCU’s office will close at noon today for an all-staff team-building event.

CFPB Bulletin on Non-Discriminatory Access to Credit for Mortgage Applicants Who Receive Public Housing Assistance; Updated Mortgage Origination Examination Procedures; Public Inquiry into Student Loan Servicing Practices

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

CFPB Bulletin on Non-Discriminatory Access to Credit for Mortgage Applicants Who Receive Public Housing Assistance. The CFPB recently released Bulletin 2015-02, Section 8 Housing Choice Voucher Homeownership Program. The bulletin is intended to remind creditors “of their obligations under the Equal Credit Opportunity Act (ECOA)¹ and its implementing regulation, Regulation B,² to provide non-discriminatory access to credit for mortgage applicants using income from the Section 8 Housing Choice Voucher (HCV) Homeownership Program.³” (Footnotes omitted). The Section 8 Housing Choice Voucher Homeownership Program (Program), created to assist low-income, first-time homebuyers in purchasing homes, is funded by the Department of Housing and Urban Development and administered by participating local public housing authorities.

The Bulletin was issued in response to certain lending practices that have come to the attention of the CFPB – namely that some financial institutions have been excluding or refusing to consider income from the Program during the loan application and underwriting process, or only permitting Program vouchers to be used for certain mortgage loan products or delivery channels. The Bulletin reminds institutions of their fair lending obligations under ECOA and Regulation B regarding the treatment of income derived from any public assistance program. From the Bulletin:

“ECOA and Regulation B prohibit creditors from discriminating in any aspect of a credit transaction against an applicant “because all or part of the applicant’s income derives from any public assistance program.”⁶ “Any Federal, state, or local governmental assistance program that provides a continuing, periodic income supplement, whether premised on entitlement or need, is ‘public assistance’ for purposes of the regulation. The term includes (but is not limited to) . . . mortgage supplement or assistance programs . . . .”⁷ As such, mortgage assistance provided under the Section 8 HCV Homeownership Program is income derived from a public assistance program under ECOA and Regulation B.

Regulation B further provides that “[i]n a judgmental system of evaluating creditworthiness, a creditor may consider . . . whether an applicant’s income derives from any public assistance program only for the purpose of determining a pertinent element of creditworthiness.”⁸ However, “[i]n considering the separate components of an applicant's income, the creditor may not automatically discount or exclude from consideration any protected income. Any discounting or exclusion must be based on the applicant's actual circumstances.”⁹” (Footnotes omitted).

The Bulletin goes on to provide guidance on managing fair lending risk in this area, such as making sure underwriting policies are clearly articulated; training underwriters, mortgage loan originators and others involved in mortgage loan origination; and monitoring for compliance with underwriting policies. For complete details, the CFPB’s press release is available here and the Bulletin is available here.

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Updated Mortgage Origination Examination Procedures. Earlier this month, the CFPB also released updated mortgage origination examination procedures, which include guidance on how the agency will conduct examinations for compliance with the TILA-RESPA Integrated Disclosure Rule (TILA-RESPA). This document can be a handy tool for those working to implement TILA-RESPA requirements in advance of the August 1, 2015, effective date. For a complete run-down of NAFCU resources to assist those working to implement the rule, check out this blog by my colleague JiJi.

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Public Inquiry into Student Loan Servicing Practices. The CFPB has issued a request for information seeking comments from the public about industry student loan servicing practices; practices related to loan repayment, including practices related to student loan repayment for borrowers in distress; the applicability of consumer protections from other consumer financial product markets (such as consumer mortgages and credit cards) to student loan servicing; and input about the availability of data on student loan performance and on borrower characteristics during repayment. Comments are due to the CFPB on or before July 13, 2015.

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NAFCU Webcast: UCC Provisions Affecting Your Credit Union. The Uniform Commercial Code (UCC) impacts many of your credit union’s lending and payment processing activities—but the connection usually isn’t obvious until there’s a problem. Avoid this issue by being well-informed. Attend this detailed webcast to learn how various sections of the UCC affects the different operations of your credit union, from lending to dishonored checks. The webcast will be held on Thursday, May 21, from 2:00 p.m. – 3:30 p.m. ET. Register here.

CFPB Provides Guidance on Using Social Security Disability Income in Mortgage Lending

Written by Angela Meyster, Senior Regulatory Affairs Counsel

Two weeks ago, the CFPB released a bulletin providing guidance for lenders using consumers’ Social Security disability insurance and Supplemental Security Income (collectively, Social Security disability income) to determine whether to provide mortgage loans.  The guidance stems from the recurring issue that many consumers relying on Social Security disability income cannot provide proof of how long they will continue to receive their benefits and lenders are worried that, without this proof, they cannot adequately determine a consumer’s ability to repay. Generally the Social Security Administration (SSA) will provide proof that a consumer is currently receiving benefits, but will not forecast for how long the consumer will continue to receive the benefits.

The Bureau in its bulletin cites critically to instances where, in an effort to address this issue, applicants have been asked by mortgage lenders for information about their disability or a statement from their physician about the duration of their disability.

According to the Bureau, to verify income under the CFPB’s Qualified Mortgage debt-to-income ratios, a lender must look at whether the SSA benefit verification letter or equivalent document includes a defined expiration date for payments.  If there is no explicit mention that benefits will expire within three years of loan origination, the lender can treat the benefits, for purposes of being compliant with the Qualified Mortgage rule, as likely to continue. 

The CFPB’s bulletin also highlights that if a lender places “unnecessary documentation requirements” (such as those mentioned above) on a consumer who is receiving Social Security disability income, the CFPB may subject the lender to a fair lending violation. Specifically, fair lending concerns may arise under the Equal Credit Opportunity Act (ECOA) and Regulation B. Under the ECOA and Regulation B, creditors cannot discriminate against an applicant on the basis that the applicant’s income derives from a public assistance program.  A creditor may only take into account the length of time an applicant will remain eligible to receive income from such a program. Creditors should also avoid creating a disparate impact by imposing a different set of requirements for applicants deriving income from public assistance programs. The CFPB encourages creditors to spell out clearly their verification requirements for Social Security disability income, train their personnel in fair lending practices, and ensure strict compliance with underwriting policies.

Finally, the Bulletin outlines a similar approach the Department of Housing and Urban Development, Department of Veterans Affairs, Fannie Mae, and Freddie Mac have taken with respect to Social Security Disability Income.

For more information about compliance with the fair lending requirements of ECOA and Regulation B, see CFPB Bulletin 2012-04: Lending Discrimination.

FFIEC “Shellshock” Vulnerability Alert; Cyber Security Awareness; Consumer Compliance Outlook; Outlook Live Webinar on Fair Lending

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Federal Financial Institutions Examination Council (FFIEC) members recently issued a statement advising financial institutions of a material security vulnerability in the Bourne-again shell (Bash) system software, referred to as “Shellshock.” The statement outlines the agencies’ risk management expectations. From the statement:

“While vendors are working to patch and update their systems, the FFIEC member agencies expect financial institutions to conduct a risk assessment and address the Shellshock vulnerability as part of ongoing information security and incident response plans. Financial institutions should take the following steps, as appropriate:

• Identify all servers, systems, and appliances that use vulnerable versions of Bash and follow appropriate patch management practices, including conducting a vulnerability scan to detect if the patch is installed and testing to ensure a secure and compatable configuration.³
• Apply mechanisms to filter malicious traffic to vulnerable services such as appropriate Web application firewall signatures.
• Monitor systems for malicious or anomalous activity and update signatures for intrusion detection and prevention systems.
• Ensure that all third-party service providers are taking appropriate action to identify and mitigate risk and monitor the status of vendors’ efforts to address the vulnerability.
• Review systems to determine if this vulnerability has been exploited and, if necessary, conduct a forensic examination to determine the potential effects of any breach.” (Footnote omitted)

The statement also includes references for monitoring threats and vulnerabilities and is available in its entirety here.

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Cyber Security Awareness. October is also cyber security awareness month.  NCUA recently took this opportunity to remind credit unions about its Cyber Security Resources page  and that cyber security remains a priority.

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Consumer Compliance Outlook. The Third Quarter 2014 issue of the Federal Reserve’s Consumer Compliance Outlook is now available. One of the articles features responses to questions received during an April 10, 2014, webinar held by the Federal Reserve System. Although the article, Consumer Compliance Management Program – Common Concerns and Best Practices Webinar Questions and Answers, is directed at Board supervised institutions, it is a useful read and touches on several topics of interest – the development of compliance management programs, compliance risk assessments, vendor management and regulatory change management. Here’s an excerpt from just one of the Q&A’s:

“Are there examples of a change management process that you can share with us?

Given the changing regulatory landscape with additional responsibilities of banks under new or revised regulations and pressures to follow competitors as new products are introduced in the marketplace, establishing a change management process can be an effective tool not only to manage changes but also to track any steps the institution has taken to mitigate potential harm and risks to consumers and the institution. The methods of developing and implementing a change management process may vary based on the institution’s size, complexity, and resources available.

Change management should be a structured and disciplined process that can be repeated since change can always be expected. The RFS Program describes that an effective change management process:

• requires management and staff from all affected functions — potentially including compliance, accounting, risk, internal audit, and line management — to review and recommend a response or change proposal for senior management or board approval that clearly articulates expected results. The entire life cycle of a product or service affected by the change must be considered, whether it involves the introduction of a new product or service or a change affecting existing bank operations.
• incorporates appropriate approval processes associated with implementation.
• requires that operating policies and procedures are updated to provide clear guidance to staff on how to comply with all legal or regulatory requirements.
• requires that staff be properly trained regarding the change.
• incorporates monitoring of the deployment of the new or revised process, product, or service.
• requires a review after implementing a change to determine whether the actions taken achieved the expected results.^14”  (Footnote omitted)

This Q&A, and the remainder of the article, may be found in its entirety here.

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Outlook Live Webinar on Fair Lending.  The Federal Reserve System is also hosting a free webinar entitled “2014 Federal Interagency Fair Lending Hot Topics” on Wednesday, October 22, 2014, from 2:00 p.m.–3:30 p.m. Eastern. The webinar will feature representatives from various federal agencies, including NCUA, and will discuss emerging fair lending issues and hot topics. Additional details and registration is available here.

 

Recent Fair Housing Act Enforcement

Written by Brandy Bruyere, Regulatory Compliance Counsel

While it is easy to get caught up tracking new regulations like next year’s TILA/RESPA integrated disclosures deadline, sometimes we are reminded that the “oldies but goodies” still need to be on our radar. Earlier this month, New York’s Attorney General filed an action against Evans Bankcorp “for unlawful discrimination on the basis of race in violation of the Fair Housing Act.” The suit claims that since 2009, Evans Bank limited its branching, lending activities, and marketing of credit products to a particular geographic “trade area” in the highly-segregated Buffalo, New York metropolitan area. This was documented by a map that Evans Bank made public as part of its compliance with the Community Reinvestment Act. Here is the map the Attorney General submitted in its suit, which includes Census Data regarding demographics:

This trade area allegedly eliminated approximately 75% of Buffalo’s African-American population from Evans Bank’s lending offerings leading to a disparate impact on African-Americans. The suit also claims that even the bank’s marketing practices excluded the trade area through its advertising campaigns. For example, the suit also alleges that Evans Bank advertised in “ethnic” media sources, but that these were in publications aimed at largely white ethnic communities such as the local Polish community. Meanwhile, the bank performed no advertising in media aimed at the African-American community.

The disparate impact claim relies in large part on data reported by the bank under the Home Mortgage Disclosure Act (HMDA), which showed that out of 1,144 mortgage applications received by Evans Bank between 2009 and 2012, only four applications, or 0.36%, were from African-Americans, and only eight applications were made on properties outside of the bank’s trade area. Compared to other area banks’ HMDA data, Evans Bank’s generated significantly less business from African-American borrowers and borrowers outside the trade area generally.

In response to the lawsuit, Evans Bank issued a statement by email from its CEO to media outlets refuting the attorney general’s claims in the law suit. Rather, the bank stated that it “continue[s] to believe these allegations are without any merit and we intend to vigorously challenge them… We remain confident that our residential lending practices meet all applicable laws and regulations.”

Also in September, the Department of Housing and Urban Development (HUD) settled a complaint against U.S. Bank National Association which alleged that the bank discriminated against a Native American couple in denying a loan refinance. The couple claimed that despite holding full title to their property, the bank denied a loan due because the home was in a Native American reservation. The bank denied any intentional discrimination, but agreed to settle the case. Under the terms of the agreement, the bank will fund the couple’s loan as applied for in May 2013 with no closing costs. The bank and its subsidiary will also as review their policies and procedures for compliance with the Fair Housing Act (FHA) and train employees regarding the Act’s requirements.

Finally, we could see new developments on the FHA and disparate impact cases. The Supreme Court is considering hearing a case out of Texas challenging the FHA disparate impact standard. Should the Court take this appeal, it could lead to big changes in this area of the law. The Court is set to decide today at this term’s opening conference whether to place the case on its docket.

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NAFCU Credit Union Compliance GPS. NAFCU's 2014 Credit Union Compliance GPS is still available. This comprehensive, electronic resource translates complex regulatory language into plain English. The latest edition includes improved user-friendly search functions, including more hyperlinks and bookmarks and much more. You can purchase a copy for your credit union here!

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Caught Napping! Apparently, I toss and turn a lot in my sleep these days which has left my poor husband exhausted. It’s no wonder I caught him napping the other day—and of course, Lemmy was only too happy to get comfortable and join him! 

September 2014 NCUA Report; Indirect Auto Lending; CFPB Releases Supervisory Highlights Report

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Last week, NCUA released its September 2014 Report. Featured articles include:

Office of Examination and Insurance Report: Beware of the Dangers of Indirect Auto Lending

Chairman’s Corner: Credit Unions Help Students Go Back to School

Region V Report: Want to Reduce Risk at Your Credit Union? Start with Internal Controls

Office of Consumer Protection Report: School Partnerships Can Benefit Students and Credit Unions

Office of Continuity and Security Management Report: Be Prepared: Develop a Strong Business Continuity Plan

Office of Examination and Insurance Report: Loans Grow in All Categories, Highest Year-over-Year Growth Since 2006

McWatters Takes Oath, Joins NCUA Board

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Indirect Auto Lending. One of the articles in this month’s NCUA Report discusses indirect auto lending at federally insured credit unions, and includes some of the red flags examiners should look for when reviewing credit unions’ indirect lending programs. The article also lists these red flags from recent exams as "items that can increase a credit union’s unintended risk exposure:

• Allowing a dealer to use a rebate on a new vehicle purchase to finance the negative equity on the trade-in vehicle.
• Having no loan-to-value ratio limit or dollar limit when financing negative equity on trade-in vehicles.
• Financing high-mileage automobiles, those with 100,000 miles or more, for 60 to 72 months, which exceeds the collateral’s useful operating life.
• Loosening underwriting standards by increasing advance rates, lengthening terms, and originating loans to borrowers with lower credit scores.
• Having no portfolio limits for borrowers with lower credit scores.
• Paying commissions for grade D and E credit-quality loans.
• Pricing riskier loans inadequately with an interest rate not commensurate with the credit risk associated with these loans.
• Failing to adjust allowance for loan- and lease-losses methodologies or maintain adequate reserve levels to cover the increased risk exposure from C, D and E quality loans.
• Changing the management of a credit union’s indirect lending program.
• Allowing loan officers or lending managers to approve exceptions to policy.
• Granting indirect automobile loans to non-credit union members."

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CFPB Releases Supervisory Highlights Report. The CFPB was also busy last week in the indirect auto lending space.  In addition to announcing a proposed rule to oversee larger nonbank auto finance companies, the CFPB released a “Supervisory Highlights” report detailing its supervisory activities related to fair lending and the indirect auto lending market.  The report follows a March 2013 CFPB Bulletin (2013-02) to indirect auto lenders about compliance with the Equal Credit Opportunity Act (ECOA), and is offered as further guidance to indirect auto lenders.

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NAFCU Credit Union Compliance GPS. NAFCU's 2014 Credit Union Compliance GPS is still available. This comprehensive, electronic resource translates complex regulatory language into plain English. The latest edition includes improved user-friendly search functions, including more hyperlinks and bookmarks and much more. You can purchase a copy for your credit union here!

CFPB Issues Consent Order against Bank for Deceptive Marketing of Credit Card Add-On Products and Discriminatory Credit Card Practices

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Last week, the CFPB ordered Synchrony Bank, formerly known as GE Capital Retail Bank (“Bank”), to pay an estimated $225 million to consumers harmed by deceptive marketing of credit card add-on products and borrowers excluded from credit card debt relief offers because of their national origin. Of that amount, $56 million goes to approximately 638,000 consumers who were subjected to deceptive marketing practices, and the remaining $169 million goes to approximately 108,000 borrowers who were excluded from debt relief offers as part of a joint enforcement action by the CFPB and Department of Justice. The CFPB also assessed a civil money penalty of $3.5 million for the deceptive marketing practices. The CFPB’s press release is available here.

Deceptive Marketing. Similar to a CFPB order that we blogged about a couple of months ago against Bank of America, N.A. and FIA Card Services, N.A., the marketing practices cited in this order focus on credit card add-on products, specifically debt-cancellation products.  From the press release:

“The Bureau found that GE Capital’s telemarketers misrepresented these products to consumers in four main ways:

• Marketed the product as free of charge: Telemarketers led consumers to believe they would not have to pay for these products as long as they paid off the balance on their billing statement. In fact, consumers could only avoid the fee in very specific circumstances, such as if the account was not in use or if the customer had paid off the balance prior to GE Capital issuing its monthly billing statement.

 

• Failed to disclose consumers’ ineligibility: In calls with telemarketers, many consumers mentioned that they were retired or disabled, which would mean that they were not eligible for key benefits of the products. Even after hearing this, the telemarketers neglected to tell the consumers that they would not be eligible for key debt cancellation benefits, and the consumers bought the products without this important information.

 

• Failed to disclose that consumers were making a purchase: In many cases, the telemarketers did not make it clear that consumers were purchasing a product. Rather, they made it seem like the consumers were receiving a benefit, updating their accounts, or that the telemarketers were handling other administrative tasks. In these conversations, it was not obvious to consumers that they were buying something and would be charged a fee.

 

• Marketed products as a limited time offer: Many customer service representatives falsely told consumers that these debt cancellation products were a “limited time offer.” In reality, nothing about the availability      of these products was limited. However, leading consumers to believe they had a short timeframe to sign up may have created a false sense of pressure and pushed them to enroll in the products.”

Under the order, the Bank is required to submit a compliance plan to prevent future violations to its CFPB Regional Director before marketing, soliciting, or selling credit card add-on products by phone.  The order also requires the Bank to strengthen oversight over any third-party vendors used in connection with marketing or selling add-on products.  These requirements are similar to those contained in the order issued against Bank of America, N.A. and FIA Card Services, N.A. for deceptive marketing practices.

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Discriminatory Credit Card Practices. The CFPB also found that the Bank engaged in discriminatory practices related to credit card debt relief offers.  According to the order, the Bank offered two promotions to credit card customers with delinquent accounts that allowed the customers to settle their balance by paying off a portion of their debt. However, this offer was not extended to customers who indicated a preference to communicate in Spanish or who had a mailing address in Puerto Rico, even if the customers otherwise met the criteria for the offer. 

Pursuant to the order, the Bank must provide remediation of at least $169 million to affected consumers in the form of monetary payments, credits, and waivers on accounts, representing the value of the excluded offer, lost interest, and indirect damages.  Additionally, the Bank is required to work with credit reporting agencies to remove any negative information in consumers’ credit histories as a result of these violations. 

Although the CFPB assessed a civil money penalty for the deceptive marketing practices, it did not assess a civil money penalty for the discriminatory debt relief offer exclusions – the CFPB indicated that this was based on a totality of the circumstances, including the Bank’s self-policing, prompt reporting to the CFPB, self-initiated consumer remediation, and cooperation with the CFPB’s investigation.

For complete details, the CFPB’s order is available in its entirety here.

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Free Compliance Training. Another great perk of being a NAFCU member! Now you can access six full compliance webcasts and self-paced modules free, and experience the convenient benefits of NAFCU’s Compliance Webcast & Online Training Subscription firsthand. Log in now and select NAFCU Member Online Sampler (you may have to click the blue plus sign in the lower right corner first). If you don't have a login, you can sign up for a username and password. Let the new Compliance Webcast & Online Training Subscription make your compliance training easy now.

NCUA 2013 Annual Report; NCUA Board Meetings—May Agenda & April Video Now Available; Webcast on Social Media Advertising; Nanny Dog

Written by Brandy Bruyere, Regulatory Compliance Counsel

NCUA’s 2013 Annual Report

On May 12, 2014, NCUA released its 2013 Annual Report which highlights last year’s NCUA initiatives and accomplishments and the agency’s perceptions of its work on “easing regulatory burdens.” NCUA grouped its report into six broad categories, quoted from the agency’s press release:

• Implement an effective supervision program to ensure the continued safety and soundness of federally insured credit unions.
• Adopt safe, targeted and flexible regulations to protect the credit union system and maintain a strong and independent National Credit Union Share Insurance Fund.
• Modernize the agency’s operations.
• Minimize assessments for the Temporary Corporate Credit Union Stabilization Fund.
• Engage and provide assistance to key stakeholders.
• Serve as a responsible steward of the public’s trust.

The report also highlights an area of particular interest for those who work in compliance—fair lending exams. In 2013, NCUA’s Division of Consumer Compliance Policy and Outreach examined 26 credit unions for compliance with fair lending laws. This exceeded NCUA’s annual goal to conduct 18 on-site fair lending examinations by 44% and the exams took NCUA 5,334 hours to complete. For those keeping score at home, that’s over 205 hours per examined credit union. NCUA more than doubled the number of such exams compared to 2012, when the agency conducted only 10 fair lending exams. Additionally, NCUA reported 41 off-site supervisory contacts with credit unions relating to fair lending compliance. The increased focus on fair lending supervision serves as a reminder that while following new regulations is important, so are long standing provisions under rules like Regulation B (ECOA) and Regulation C (HMDA). For those who are interested, NCUA has a collection of fair lending compliance resources including its Fair Lending Guide.

NCUA Board Meetings—Agenda for May and Video Available for April

On May 15^th, NCUA released its agenda for this month’s Board meeting. May’s agenda is not particularly exciting, which is probably a good thing since “exciting” when used to describe a Board meeting is too often a euphemism for “more regulations.” Here are the three items on the agenda:

• Notice and Request for Comment, Economic Growth and Regulatory Paperwork Reduction Act Review (EGRPRA);
• AERO Federal Credit Union (Glendale, AZ) Request to Ad Two Underserved Areas;
• Corporate Stabilization Fund Quarterly Overview.

The first item is worth noting because under the EGRPRA, NCUA is required every ten years to invite comment on rules that are outdated, unnecessary, or unduly burdensome. This is a good opportunity to stress the need for regulatory relief in important areas so credit unions may want to consider participating in this public comment process.

Finally, for those who are interested, on May 15^th NCUA also uploaded the video for April’s Board meeting to its website. Just as a reminder, the April meeting included a proposed rule on associational common bond requirements and a final rule on capital planning and stress testing.

Webcast: Advertising Series--Truth in Savings and Its Impact on Social Media

Social media is a powerful advertising tool…and a dangerous one. Understand social media advertising risks regarding Truth in Savings with this helpful compliance webcast. You’ll examine advertising requirements such as trigger terms, APY disclosures and electronic promotions. Plus, you’ll dive FFIEC’s final guidance on social media, and get best practices for managing advertising and social media compliance at your credit union. Register by June 11 to save $100.

Nanny Dog

My husband and I recently babysat for some friends, and like many babies, our friends’ son was a little upset at bedtime. Lemmy just couldn’t stand to hear the baby cry, so he “helped” get the little guy to go to sleep.

Three Short Ones: NCUA Grants to Tornado Victims, AML Webinar, and Fair Lending Webcast.

Written by Eliott C. Ponte, Law Clerk

Grants to Help Credit Unions Affected by the Tornados

Low-income credit unions affected by the tornados in the South and Midwest can apply for emergency assistance grants to repair damages or replace equipment to restore services to members.  Low-income credit union can obtain more information about Urgent Needs Grants by clicking here, or can email the Office of Small Credit Union Initiatives at [email protected].

 

NCUA Hosts Free Webinar on AML

On Wednesday, May 21, 2014, at 2 p.m. EST, NCUA will be hosting the first of two free webinars titled: “How to Be in Compliance with OFAC and FinCEN.”  The webinars will provide an overview of OFAC’s and FinCEN’s programs, their enforcement authorities, and their relationships with other regulators. In addition, participants may receive a certificate of attendance if they individually participate in the survey offered during the webcast and take a short quiz at the end of the webcast.

Online registration is now open, and the link to the registration page can be found here.  Participants may also submit questions in advance to [email protected].

 

NAFCU Fair Lending Webcast: Best Practices and Indirect Auto Lending Issues

Receive important tips regarding how to optimize your fair lending compliance program, plus get updated on the headline-making indirect auto fair lending investigations and enforcement actions.  To find out more information regarding this webcast, click here.

CFPB Releases Fair Lending Report; NAFCU’s May Compliance Monitor Available; Fun in the Sun

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, the Consumer Financial Protection Bureau (CFPB) released a fair lending report to Congress that highlights its enforcement actions under the Home Mortgage Disclosure Act (HMDA) and Equal Credit Opportunity Act (ECOA) during an 18-month period (July 21, 2013 – December 31, 2013).  Fulfilling part of its fair lending mandate under the Dodd-Frank Act, the CFPB’s report gives Congress an update on the bureau’s fair lending-related efforts and outlines key priorities for its supervision and enforcement work.

If you don’t have time to go through the entire report, take a look at the Executive Summary; it provides a quick run-down of the CFPB’s “key developments” in fair lending.  Below, you’ll find just one of a number of “key developments” the CFPB lists in the Executive Summary:

“Guidance on supervisory reviews.  The Bureau publicly released information about the methods our examination teams use to conduct three types of fair lending supervisory reviews: ECOA Baseline Reviews, ECOA Targeted Reviews, and HMDA reviews.  Through these supervisory activities we detected some violations of ECOA and HMDA; we also found that many lenders have instituted and maintained strong fair lending compliance management systems (CMS) and had no violations of ECOA and HMDA.  Using the guidance issued by the Bureau describing these reviews, lenders may self-assess their own compliance with ECOA and HMDA.  We also provided guidance to industry via Supervisory Highlights and Bulletins discussing fair lending topics.” (My emphasis added).

Although the CFPB only has examination authority over credit unions with assets of $10 billion or more, its supervisory focus affects credit unions of all sizes; and as the “key development” above states, the CFPB’s guidance and reports such as its fair lending report, serve as means for credit unions of all sizes to stay compliant with federal consumer financial laws such as the HMDA and ECOA. 

You can access the CFPB’s latest fair lending report here. 

Also, for more information on the bureau's work on fair lending, take a look at this CFPB blog.  Here's a snip-it:

"We’ve also carried out some recent enforcement actions for violations of ECOA and/or HMDA against:

• Two mortgage lenders for significant errors in their mortgage loan application data
• A credit card company for several violations of consumer protection laws, including unlawfully discriminating against card applicants on the basis of age.
• A mortgage lender for charging higher prices on mortgage loans to African-American and Hispanic borrowers than similarly creditworthy non-Hispanic white borrowers
• An indirect auto lender for harming minority borrowers who were charged higher interest rates than similarly creditworthy non-Hispanic white borrowers.

Additionally, we’ve released important information about fair lending, which we hope will benefit consumers, advocates, and industry. We introduced our HMDA Database, which allows the public to study trends in the mortgage market across the nation and in their own communities. We also released two fair lending bulletins to help consumers and industry stakeholders recognize fair lending and access to credit risks in the home mortgage and auto lending markets. And, we’ll continue to work with industry and trade representatives, fair lending, civil rights, consumer and community advocates to make sure that consumers know their rights and that lenders know how to comply with the rules."

***

Also released last week, NAFCU’s May Compliance Monitor is available here (NAFCU login required).  This month’s featured articles include:

• NCUA Exam Spotlight: Private Student Lending
• Cybersecurity: Protecting Credit Unions from the Modern Day Butch Cassidy and His Gang

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Last, but definitely not least (at least in my book), I’d like to kick off the week by sharing some photos of my kiddies from this weekend.  It was beautiful this past weekend in the D.C. area and I know my family took full advantage of getting some much needed Vitamin D.

 

Consumer Compliance Outlook – Government Monitoring Information Requirements under the HMDA and the ECOA; CFPB to Start Looking at Potential Changes to HMDA Information Reporting; NAFCU Regulatory Compliance School

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Consumer Compliance Outlook. The Fourth Quarter 2013 issue of the Federal Reserve’s Consumer Compliance Outlook is now available. Articles in this issue include:

• Government Monitoring Information Requirements under the HMDA and the ECOA

• Overview of E-Banking Compliance Considerations

• Dodd-Frank Act Mortgage Regulations

One of the topics we receive a lot of compliance questions on is the collection of government monitoring information (GMI) under HMDA/Regulation C and ECOA/Regulation B.  This area is particularly tricky because the types of mortgage loans subject to each rule, and the information that must be collected under each rule, differ.  Regulation B, section 1002.5, generally prohibits inquiring about the “race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction,” except as specifically permitted by Regulation B, or except as specifically required – e.g., Regulation B, section 1002.13(a), Regulation C, section 1003.4(a)(10), etc.

All this complexity leads to a couple of common compliance violations in this area –not collecting information when you should, or collecting information when you shouldn’t.  The article in this issue of the Consumer Compliance Outlook on Government Monitoring Information Requirements under the HMDA and the ECOA provides an excellent summary of the requirements under HMDA and ECOA, and includes a handy comparison chart of the two.  It’s a great refresher for anyone who wants to brush up on these requirements and a great tool to pass on to your mortgage folks.

***

CFPB to Look at HMDA Information Reporting Requirements. Speaking of HMDA, the CFPB announced that it is beginning to look at potential changes to HMDA reporting requirements and is convening a panel as required under the Small Business Regulatory Enforcement Fairness Act (SBREFA). Some of the additional reporting requirements under consideration are mandated by Dodd-Frank; however, the CFPB is considering additional changes as well – such as requiring institutions to include an explanation of rejected loan applications. From the press release:

“Potential changes under consideration by the Bureau include:

• Improvements required by Dodd-Frank: In the Dodd-Frank Act, Congress directed the Bureau to update HMDA regulations by having lenders report specific new information that could alert regulators to potential problems in the marketplace. This includes: the length of the loan; total points and fees; the length of any teaser or introductory interest rates; and the applicant or borrower’s age and credit score.

 

• New developments in the market: The Bureau is considering additional information that would give regulators a better view of developments in all segments of the housing market. The Bureau is considering asking financial institutions to include more underwriting and pricing information, such as the interest rate, the total origination charges, and the total discount points of the loan. This will help regulators investigate the true trouble spots in the mortgage market.

 

• Monitoring access to credit: The Bureau is considering new requirements that would more accurately capture access to credit in the mortgage market. The Bureau is considering requiring institutions to include an explanation of rejected loan applications. The Bureau is also considering including whether the lender considered the loan to be a “Qualified Mortgage.” Qualified Mortgages are loans that meet certain criteria under the CFPB’s Ability-to-Repay rule and offer extra protections for consumers. Including QM status in HMDA data will help regulators and the public determine how the CFPB’s rules are impacting the mortgage market. Additional information, such as the borrower's debt-to-income ratio, will help regulators see whether financial institutions are making loans that are expensive or unsuitable for borrowers.”

This CFPB factsheet lays out the changes being considered.  The CFPB has made available this outline of proposals and list of questions on which it will seek input from the SBREFA panel.

Finally, the CFPB also announced a new HMDA tool available to the public for tracking public mortgage data.

***

Shameless Plug! Our 2014 Regulatory Compliance School is just one month away, but there’s still time to register! It’s like a comprehensive “boot camp” for compliance staff, with the chance to earn the respected title of NAFCU Certified Compliance Officer (NCCO). The program also includes a “Regulatory Update Day” – a roundup of current compliance topics and issues. If you’ve already registered, make sure to take advantage of the NAFCU discounted hotel room rate by February 14.

NCUA December Board Meeting Results; HPML Appraisal Supplementary Rule Finalized; NAFCU Webcast – Managing Third Party Fair Lending Risk.

Written by JiJi Bahhur, Director of Regulatory Compliance

NCUA December Board Meeting Results.  This past Thursday, the NCUA Board held its December Board meeting.  The agenda for the open meeting included the following action items:

1. Board Briefing, Supplemental Interagency Rule, Appraisals for Higher-Priced Mortgage Loans;
2. 2014 Temporary Corporate Credit Union Stabilization Fund Oversight Budget;
3. Final Rule, Part 700, 701, and 704, Technical Amendments, Corporate Credit Union Rating System;
4. Proposed Rule, Part 701, Requirements for Federal Credit Union Examination Sites; and
5. Final Rule, Parts 703 and 721, Charitable Donation Accounts.

All actions were approved.  I won’t go into detail on each of these actions in this blog post, but you can find the details here in NCUA’s Board Action Bulletin.   

***

HPML Appraisal Supplementary Rule Finalized.  During NCUA’s December Board Meeting, the last of the lingering mortgage rule amendments finalized.  More specifically, the Interagency Proposed Supplemental Rule on the HPML Appraisal Requirements finalized.  This supplements the HPML Final Rule that was issued in January, 2013, and goes into effect at the same time as the original final rule on January 18, 2014.

As background, under the January 2013 final rule, credit unions extending higher-priced mortgage loans must obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals and give applicants a copy of the written appraisals used for certain mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage. 

The supplemental final rule provides exemptions from the requirements to:  (1) transactions secured by existing manufactured homes and not land; (2) certain streamlined refinancings; and (3) transactions of $25,000 or less. 

Also, the rule requires credit unions to provide notice to the borrower within three business days after receiving application that states, generally, that the credit union may order an appraisal for which the borrower may be charged.  The proposal defined “business day” to only exclude Sundays and legal holidays, but NCUA heeded the advice of NAFCU and finalized the supplemental rule to also exclude Saturdays from the “business day” definition for the purpose of providing the notice required after receiving an application.  NAFCU is appreciative of this outcome as it will provide added flexibility to those credit unions whose back office operations are not open on Saturdays.

You can view the final HPML Appraisal Interagency Supplemental Rule here.

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NAFCU Webcast – Managing Third Party Fair Lending Risk.  You may be following the fair lending regulations “to the letter,” but what about your vendors?  If you utilize vendors for indirect lending, mortgage services, marketing or other services, you won’t want to miss NAFCU’s webcast – Managing Third Party Fair Lending Risk: Don’t Let Your Vendors Let You Down.  The webcast will take place on January 13, 2013 at 2:00pm Eastern time.  Register by January 6, 2014 and receive $100 off.  For details on this webcast, click here.

Consumer Compliance Outlook – HELOC Plans: Compliance and Fair Lending Risks When Property Values Change

Written by Bernadette Clair, Regulatory Compliance Counsel

Consumer Compliance Outlook. The Third Quarter 2013 issue of the Philadelphia Federal Reserve’s Consumer Compliance Outlook is now available.  Articles in this issue include:

• HELOC Plans: Compliance and Fair Lending Risks When Property Values Change

• The Importance of the Consumer Compliance Internal Audit Function

• New Compliance Requirements Under the Garnishment Rule for Accounts Receiving Certain Federal Benefits

Today, I want to highlight the article HELOC Plans: Compliance and Fair Lending Risks When Property Values Change. This article provides an excellent overview of the compliance requirements and issues that can arise when taking action on a HELOC because of a change in property value. In addition to providing an overview of Regulation Z requirements and potential adverse action notice requirements, the article highlights potential fair lending considerations.  From the article:

“The ECOA, as implemented by Regulation B, and the Fair Housing Act (FHA), as implemented by 24 C.F.R. Part 100, apply during all stages of credit transactions within their scope — not simply at origination. Thus, a lender’s decision to review consumer HELOC accounts because of declining property values or to restore a HELOC account when real estate prices rise has fair lending implications. In particular, the manner in which HELOC accounts are selected for review could increase the risk of disparate treatment or disparate impact on a prohibited basis. Disparate impact occurs when a creditor implements a facially neutral policy that disproportionately harms borrowers on a prohibited basis.¹⁸  Disparate treatment occurs when a creditor treats borrowers differently on a prohibited basis, such as on the basis of race or gender.¹⁹ For example, assume a lender originated HELOCs in two counties that both had significant declines in property values. County A is majority-Hispanic while County B is majority-non-Hispanic white. If the creditor only undertook HELOC reviews in County A, it would have increased the risk of disparate treatment.

Discrimination risk may also be present when different methods are used to value properties to determine whether a significant decline occurred. Using the example described above, if a lender used AVMs in County A while conducting full appraisals in County B, the fair lending risk would be elevated. Finally, a creditor’s discretion in any aspect of the credit transaction, including collection activity, increases fair lending risks. For example, if a lender has the ability to override a decision to suspend a HELOC, the manner in which that discretion is exercised could raise fair lending concerns.

To manage fair lending risks, lenders should ensure that policies are uniformly applied to all affected borrowers. In addition, lender discretion to override a decision to take action on a HELOC plan should be documented and closely monitored to ensure that similarly situated borrowers are treated consistently. To manage disparate impact risk, lenders can analyze whether a proposed policy or action will negatively and disproportionally impact borrowers on a prohibited basis and, if so, whether the lender has a business justification. The Interagency Fair Lending Examination Procedures are available to creditors to assist in analyzing fair lending risks.²⁰

Strong control systems can also help manage risks. Examples of risk controls include policies and procedures approved by the institution’s board that comply with applicable regulations and staff training on the regulatory requirements. Regularly monitoring compliance can confirm that board-approved procedures are implemented, followed, and work as intended. Exceptions to policies and procedures should be appropriately approved, documented, and monitored to help ensure consistency among borrowers. Finally, monitoring customer complaints and providing metrics on consumer HELOC actions can help senior management oversee the process more effectively.”
(Footnotes omitted)

Check out the full article here.

Director Cordray Lays Out the “Four D’s” that Plague Consumers

Written by Bernadette Clair, Regulatory Compliance Counsel

CFPB Director Cordray recently spoke at the American Banker Regulatory Symposium. In his remarks, Director Cordray described what the CFPB is now calling the "Four D's" that plague consumers. That sounds ominous. So what are these "Four D's?"  In a nutshell, they are:

• Deceptive marketing

• Debt traps

• Dead ends

• Discrimination

The “Four D’s” may be a nifty new catchphrase, but there aren't really any surprises here. Unfair, deceptive, or abusive acts or practices (UDAAPs), debt collection practices, fair lending, and payday loans, are just some of the issues that have been on the CFPB’s radar for some time and which we have blogged about numerous times, for example here, here, and here.

Here’s a snippet from Director Cordray’s remarks on deception and discrimination, two of the “Four D’s.” On deception:

“The first problem is deception. Consumers cannot make sound financial choices if they are given false or  misleading information. Yet this happens surprisingly often in the financial marketplace. In the lead-up to the financial crisis, for example, some lenders marketed mortgages with misleading teaser rates that misrepresented the full cost of the loan. One result was that too many homebuyers ended up with complicated mortgage products they did not understand and could not afford, which were doomed to failure – products they may well have avoided if they had known better.

Sometimes the problem that consumers face is not necessarily deception, but confusion about crucial product information. This also happens in a variety of markets. Information may be buried in pages of fine print or written in language that requires an advanced degree to decipher. Various providers may describe the same fee very differently, making comparisons numbingly difficult. Consumers need to have key terms highlighted so the most important risks will stand out and can be easily comprehended.”

 And here are his remarks on discrimination:

“The fourth “D” that is a clear focus for us is combating discrimination. We have seen too many instances of consumers getting unequal treatment based on characteristics such as race or gender. When consumers sit down at the table to discuss their prospects for a loan, they are often unaware of the options available to them. In many instances, hidden incentives for brokers or loan officers to negotiate higher rates have resulted in African-American and Hispanic borrowers paying more than they should have for mortgages and auto loans. Nobody believes that is right.

We made it clear last year that – like the other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as disparate treatment. From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate. We also have made it clear that lenders are responsible for the operation of their lending programs, even if they are structured to work with some sort of middleman who stands between them and the borrower. The bottom line is that every consumer should have equal access to credit, as required by law. We also will be revising the process by which the financial institutions provide information about the mortgage market under HMDA, the Home Mortgage Disclosure Act – both to improve the categories of information that are gathered and to ease the operational and technological burdens on industry to comply with this law.”

For more details, you can read Director Cordray's full remarks here.

 

CFPB Supervisory Highlights – Mortgage Servicing

Written by Bernadette Clair, Regulatory Compliance Counsel

Earlier this week, we blogged about the CFPB’s Summer 2013 Supervisory Highlights Report, and the sections of the report dealing with compliance management systems and fair lending issues related to providing adverse action notices.  Another hot button topic covered in the report is mortgage servicing, particularly issues related to servicing transfers, payment processing, and loss mitigation.  Here are some of the highlights:

Servicing Transfers. Back in February 2013, the CFPB announced its intention to closely monitor transfer activity by mortgage servicers and issued Bulletin 2013-1 providing information on particular areas of focus. The latest Supervisory Highlights Report reflects the CFPB’s focus in this area and provides examples of some of the servicing transfer issues that the CFPB has found during reviews. From the report:

“During its reviews of mortgage servicing, the CFPB detected risks to consumers in transfers of the servicing of  loans among institutions. For example, examiners found noncompliance with the requirements of the Real Estate Settlement Procedures Act (RESPA)⁵ to provide disclosures to consumers about transfers of the servicing of their loans. In other reviews, examiners noted lack of controls relating to the review and handling of key documents –  such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan. For example, examiners noted that one servicer conducted some due diligence on transferred servicing data but did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.” (Footnote omitted.)

Payment Processing. The CFPB also found issues related to payment processing during its reviews. A couple of the examples in the report include a servicer that failed to provide adequate notice to borrowers of a change in the address for sending payments, and a servicer that paid property taxes late. Here’s a taste of how the CFPB handled the servicer that paid property taxes late:

“In another review, the CFPB determined that a servicer paid certain property taxes late, in violation of RESPA. The CFPB directed the servicer to pay any fees associated with the late payment, and to investigate whether consumers experienced any additional harm as a result of the late payments. Further, at the CFPB’s direction, the servicer will notify consumers of the late payment and fee payment, and solicit information from borrowers about any additional harm caused by the late payment. If any such harm is identified, the servicer will remediate it.”

Loss Mitigation. In the area of loss mitigation, CFPB examiners found several issues, including:

• Inconsistent loss mitigation underwriting;

• Inconsistent waivers of certain fees or interest charges;

• Long application review periods;

• Missing denial notices;

• Incomplete and disorganized servicing files;

• Incomplete written policies and procedures; and

• Lack of quality assurance on underwriting decisions.

The CFPB also provides its expectations when these types of issues are identified by examiners. From the report:

“When examiners identify these issues, CFPB expects corrective action, and in the case of violations, directs the servicer to improve its policies and procedures governing the handling of loans in loss mitigation and the documentation of servicer actions, as well as training appropriate personnel on the new policies and procedures. Additionally, CFPB has directed servicers to engage in specific corrective actions appropriate to the circumstances, such as: reviewing loss mitigation decisions and related fees or charges to borrowers to determine whether any reimbursement is appropriate, conducting periodic testing to monitor areas of concern, and providing reports to CFPB on progress completing these corrective actions.

In addition to general compliance risks, weak compliance management surrounding loss mitigation processes creates fair lending risk. CFPB expects that entities servicing mortgage loans will implement fair lending policies, procedures, and controls to ensure that they are complying with the Equal Credit Opportunity Act. ⁸ While the appropriate program will vary from financial institution to financial institution, CFPB expects that at a minimum, entities servicing mortgage loans will conduct fair lending training for loss mitigation staff, and will engage in effective and timely fair lending risk assessments, compliance monitoring, and testing of fair lending risks.” (Footnote omitted.)

Once again, fair lending issues are emphasized, and as Mike noted in Monday’s blog post, this will continue to be a hot topic for the CFPB and NCUA.

For more details on the CFPB’s supervisory findings and program developments, check out the complete Supervisory Highlights Report.

CFPB Supervisory Highlights; Metsger sworn in to NCUA Board

Written by Michael Coleman, Regulatory Compliance Counsel

Last week we blogged about the CFPB’s release of their second Supervisory Highlights Report, which concerns exams completed between November 2012 and June 2013. As the CFPB’s press release noted, the Supervisory Highlights focuses on issues with mortgage servicing and non-bank compliance management systems, here is an excerpt from the press release quoting CFPB Director Richard Cordray:

“Our examinations of banks and nonbanks allow us to correct problems before more consumers are affected,” said CFPB Director Richard Cordray. “Today’s report highlights both the mortgage servicing problems throughout the industry and the challenges of making sure that nonbanks are following federal law. Fixing both is a priority for us.”

Today we’d like to take a closer look at some of the content of the report, specifically the section of the report which deals with the CFPB’s supervisory observations regarding:

• Compliance Management Systems;
• Mortgage Servicing;
• Fair Lending – Provision of Adverse Action Notices; and
• Significant Violations Detected.

We’ll take a closer look at the mortgage servicing section in a future blog post, but I wanted to pull out a couple of things the Supervisory Highlights report has to say about compliance management systems and fair lending issues involving the provision of adverse action notices (AANs). The report section on compliance management systems summarizes the CFPB’s findings, noting that non-banks are more likely to lack a robust compliance management system (CMS) as their compliance activities have not been subject to examination at the federal level (until now). However, the CFPB also noted that supervised banks also lacked one or more of what the CFPB considers the components of an effective CMS. The report notes on page 8 that although the CFPB does not require any specific CMS structure, they believe that effective CMS has four independent control components, which are:

1. Board of directors and management oversight;

2. A compliance program;

3. A consumer complaint management program; and

4. An independent compliance audit.

The CMS section goes on to describe these control components and what the CFPB expects they should be comprised of, it is an interesting read (and it contains some familiar information I am sure for all you compliance professionals).

The CFPB also had this to say with regard to adverse action notices in the section devoted to fair lending:

“The CFPB has noted that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B. ECOA requires creditors to provide notification of any adverse action taken on an application, unless the applicant is currently delinquent or in default. Furthermore, ECOA requires that the creditor provide or make available a specific statement of reasons for such action. Finally, a creditor must send an adverse action notice to an applicant within 30 days of receipt of a completed application. The CFPB has found instances where supervised entities violated ECOA and Regulation B by failing to comply with either the provision, content, or timing requirements for adverse action notices.

In such instances, the CFPB has directed the entities to develop and implement plans to ensure that the appropriate monitoring and internal controls are in place to detect and prevent future violations. Supervised entities should maintain compliance management systems that ensure notifications are sent to consumers with the appropriate content and within the timeframes required under Regulation B.”

Fair lending is definitely a hot topic for the CFPB, and for the NCUA (see this blog for some NCUA fair lending resources), and I think it’s safe to say that we should expect this focus to continue.

***

New NCUA Board Member. On Friday, August 23, Rick Metsger was officially sworn in as a new National Credit Union Administration Board member. Metsger, a Democrat, was nominated to the NCUA Board May 16. His nomination was approved by the Senate Banking Committee June 27, and the full Senate confirmed him Aug. 1. He succeeds former NCUA Board Member Gigi Hyland, who left the board last Oct. 5. His term continues through Aug. 2, 2017.

Consumer Compliance Outlook – Fair Lending; NCUA Fair Lending Resources

Written by Michael Coleman, Regulatory Compliance Counsel

Consumer Compliance Outlook. One more time. Last week my colleagues Bernadette and JiJi blogged about the Second Quarter 2013 issue of the Philadelphia Federal Reserve’s Consumer Compliance Outlook. I’d like to highlight another article from the publication featuring Fair Lending Webinar Questions and Answers stemming from the Federal Reserve Board’s webinar “Fair Lending Hot Topics,” held October 17, 2012.

There are a number of interesting Q&A’s in the article, here is one on the review of loan pricing during an examination:

“PRICING

5. What factors does the Federal Reserve consider in a pricing review?

Consistent with the Procedures, the Federal Reserve considers several risk factors in a pricing review for mortgage and nonmortgage products, including:

• Pricing Criteria:
  • Pricing policies that treat applicants differently on a prohibited basis or are likely to have a disparate impact
  •  Presence of broad discretion in loan pricing (e.g., interest rates, fees, and points), including discretion in granting exceptions to pricing policies
  •  Use of risk-based pricing that is not based on objective criteria or applied consistently
• Loan Originator Compensation: Financial incentives for loan originators to charge higher prices
• Documentation: Lack of clear documentation of the reasons for pricing decisions, including exceptions
• Complaints: Complaints by consumers or community advocates alleging discrimination in loan pricing

Since 2009, the DOJ has settled four pricing cases based on referrals from the Federal Reserve: United States v. Nara Bank; United States v. PrimeLending; United States v. SunTrust Mortgage, Inc.; and United States v. Countrywide Financial Corp. These cases are available at: www.justice.gov/crt/about/hce/caselist.php#lending.”

In addition to the Consumer Compliance Outlook, you also might want to check out the Federal Reserve’s Outlook Live, which contains the Federal Reserve webinars on consumer compliance topics.

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NCUA Fair Lending Resources. The Q&A above references the Federal Financial Institutions Examination Council (FFIEC) 2009 Interagency Fair Lending Examination Procedures and the associated Appendix. NCUA conducts its fair lending compliance program in accordance with the Procedures (which it adopted in 1999), and provided the 2009 Procedures to credit unions in Regulatory Alert 09-RA-09.

NCUA released Letter to Federal Credit Unions 13-FCU-02, which outlines NCUA's Fair Lending Examination Program. The letter also included a new Fair Lending Guide for federal credit unions. NCUA also issued a best practices document and a frequently asked questions (FAQ) document on NCUA's fair lending compliance program.

NAFCU Members. NAFCU’s  June 2013 Compliance Monitor featured an article on NCUA’s Focus on Fair Lending (log-in required) which summarizes the recent guidance from NCUA.

Consumer Compliance Outlook; NCUA Economic Videos

Written by Bernadette Clair, Regulatory Compliance Counsel

Consumer Compliance Outlook. The Second Quarter 2013 issue of the Philadelphia Federal Reserve’s Consumer Compliance Outlook is now available.  Articles in this issue include:

• Perspectives on Consumer Protection: A Conversation with Governor Duke
• Fair Lending Webinar: Questions and Answers
• Adverse Action Notice Requirements Under the ECOA and the FCRA

You can also download the full PDF here.

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NCUA Economic Videos. NCUA recently released a couple of new videos, available on YouTube. The first video, NCUA Economic Update – June 2013 Part I, provides an update on the economy and includes a discussion on the housing market, labor market, consumer confidence statistics, and the recent rise in interest rates and potential challenges to credit unions.

The second video, NCUA Economic Update – June 2013 Part II, focuses on NCUA’s proposed derivatives rule.  This proposed rule would provide qualified credit unions limited authority to engage in derivatives activities for purposes of mitigating interest rate risk, but would also establish a “pay to play” requirement.  See our May 17th blog post for more details on the proposed rule.

Have a great 4th of July!  We'll be back blogging on Friday.

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

Written by Bernadette Clair, Regulatory Compliance Counsel

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

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

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

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

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

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

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

NCUA Report: Q&A with Director of NCUA's Office of Consumer Protection; Free NAFCU Webcast

Written by Steve Van Beek

Last Friday, I blogged about the 2013 HMDA Getting it Right! Guide. The importance of accurate HMDA data was also emphasized in the April 2013 NCUA Report. The newsletter includes a Q&A with Gail Laster, Director of NCUA's Office of Consumer Protection - including these two Q&As:

"Q: What are some of the major fair lending compliance issues you are seeing?

A: One major fair lending compliance issue that we're seeing involves the quality of Home Mortgage Disclosure Act (HMDA) reports. HMDA data serves an important purpose for [NCUA's] fair lending examiners and the public. It lets us confirm that all Americans are getting equal access to credit to help them fulfill one of our fundamental rights - the right to own property.

To address the data quality issue, we hosted a webinar in January that explained the process for submitting HMDA data and reviewed some of the most common errors credit unions make when completing the HMDA reports. [The webinar is available here]. 

Q: Can these kinds of data errors raise red flags?

A: Although we find most data reporting errors are unintentional, there are cases where the errors are symptoms of other weaknesses in lending processes or internal controls. Poor HMDA reporting can raise concerns about compliance with disclosure requirements associated with mortgage loan applications. It also makes it difficult to evaluate whether a financial institution is complying with fair lending laws.

Poor HMDA data is also an indicator of a lack of due diligence or a need for more training on the collection of mortgage loan application data or reporting procedures."

You can view the full Q&A here.

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Free NAFCU Webcast.  On May 8th, NAFCU will be hosting a free webcast on NCUA's Office of Consumer Protection: Function, Role and Objectives. NCUA's Director of the Office of Consumer Protection, Gail Laster will be presenting alongside Tonya Sweat, Director of Consumer Compliance Policy & Outreach in NCUA's Office of Consumer Protection. By viewing the webcast, you'll:

• Learn about the OCP initiatives in consumer compliance and fair lending;
• Understand the office’s vision and objectives; and
• Get an analysis of the interagency activities designed to help credit unions implement the regulations issued by the CFPB.

And, best of all - the webcast is free to ALL CREDIT UNIONS.  You can sign up here.

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.

***

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.  

***

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

***

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).  

NCUA Fair Lending Webinar; Additional Research Tip - Internet Explorer

Written by Steve Van Beek

Note: NAFCU's compliance team will be out of the office the next two days at a training conference in DC. NAFCU members, if you have a compliance question - the best way to contact us via email: [email protected]. Keep in mind our responses will be delayed a little longer than usual.

***

NCUA Fair Lending Webinar. Today is NCUA's free Fair Lending Webinar. You can sign-up for the webinar here. The announcement is located here. The webinar is today at 1 p.m. - register here.

***

Yesterday, I blogged about saving certain blog posts to your desktop. I used Chrome as my browser but the same process works for Mozilla Firefox. For Internet Explorer, the instructions are below along with screenshots.

Saving Important Blog Posts to Your Desktop - Internet Explorer.

1. Click on the Title of the blog post to be taken directly to the blog post site.

2. After clicking the Title, you'll be taken to the blog's main webpage - showing the blog post you clicked on. Your screen should look similar to below.

3. On this page, right click and choose "Create Shortcut" and choose Yes to the question of whether you want to create a "shortcut to this website on your desktop."

4. Go to your Desktop and look for the new shortcut. You should see something similar to below.  Double-click on this shortcut and you'll be taken directly to the blog post on the internet.

Using Internet Explorer, there is a direct shortcut created rather than the separate files stored locally on your desktop. Both work and should help ensure you have quick access to important blog posts to increase your efficiency when researching the new mortgage regulations.

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.      

***

Remittances Webinar; Fair Lending Webinar; Archived Nonaccrual/TDR Webinar

Written by Steve Van Beek

Remittances.  The CFPB recently opened their Remittances Webinar to everyone - without the need to register (the webinar is free).  The webinar will be available on this page beginning at 2:30 p.m. Eastern.  The webinar will last 90 minutes.

That is TODAY at 2:30 p.m. Eastern.  Be sure to tune in.    

NOTE - The CFPB issued their small entity compliance guide yesterday.  

*** 

Fair Lending.  The Philadelphia Federal Reserve's Consumer Compliance Outlook will be hosting a Fair Lending Webinar tomorrow - October 17th from 2:00 - 3:30 p.m. Eastern.  You can register here.   

The presentation slides are already available here.  Topics to be discussed are:

• Recent Fair Lending Enforcement Actions
• Risk Assessments
• Fair Lending Compliance Management
• Data Reporting and Analysis
• FHA LGBT Rule, Disability Discrimination, Maternity Leave Discrimination
• Loss Mitigation and Loan Modification
• Redlining

Remember - TOMORROW at 2:00 p.m. Eastern.  Register here.   

***

Nonaccrual and TDR Webinar.  NCUA's webinar on Workouts, Nonaccrual and TDRs is now archived and available.  The webinar can be watched here.  A transcript is also available inside the webinar (or at this link).       

Upcoming Webinars and Webcasts; NAFCU's October Compliance Monitor

Written by Steve Van Beek

Webinars and Webcasts.  There are quite a few free webinars to keep on your radar:

• October 4 at 3:00 p.m. EDT - Town Hall with Chairman Matz - Registration is Still Open

• October 16 at 2:30 p.m. EDT - New Requirements for Remittance Transfer Providers - Sign-Up by sending an email to [email protected] by October 9.  If you have a question you'd like answered during the webinar - send it to [email protected] by October 5.  

• October 17 at 2:00 p.m. EDT - Fair Lending Hot Topics by the Philadelphia Federal Reserve's Consumer Compliance Outlook

• Archived:  Servicemember Financial Protection (Compliance with the SCRA) - Slides are here.

NAFCU also has a couple of upcoming webcasts that might be of interest:

• October 10 - BSA/OFAC for Directors and Supervisory Committee  - Keep in mind that you can watch the archived webcast for up to one year - making this perfect for a future Board meeting or training event.  Sign up by October 3 and Save $100.  

• October 24 - Social Media and Website Compliance - This webcast will also be viewed live by all Regulatory Compliance Seminar attendees.  Sign up by October 17 and Save $100.  

• November 7 - CFPB's Latest Mortgage Proposals - NAFCU's Compliance team will overview the mortgage loan originator proposal, interagency higher-risk appraisal proposal and the Regulation B appraisal proposal.  Sign up by October 31 and Save $100.    

***

NAFCU's October Compliance Monitor.  NAFCU Members: Our October Compliance Monitor is now available for download.  This issue includes lengthy articles on the "high-cost" mortgage proposal (including a discussion of the potential change to the definition of "finance charge") and the CFPB's mortgage servicing proposals.  We've also attached a six-page chart which helps organize the 20 new notices included in the mortgage servicing proposals.  Happy reading!

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

Written by Steve Van Beek

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

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

Prerule Stage:

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

Proposed Stage:

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

Final Rule Stage:

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

Long-Term Actions:

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

Completed Actions: 

• Disclosure Rules for Remittance Transactions (Regulation E)

***

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

***

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

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

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

Consumer Compliance Resources; NAFCU’s Comment Deadline for NCUA’s 2012 Review

Written By JiJi Bahhur, Regulatory Compliance Counsel

I don’t know about you all, but the break in the middle of the week for Independence Day just made me want the weekend to come even faster!  And so here we are…it’s finally Friday.  Let’s keep it simple but informative today. 

***

Consumer Compliance Resources.  As Steve mentioned in a blog post earlier this week, the Federal Reserve's 2nd Quarter Consumer Compliance Outlook is now available.  There are some really great articles in this issue, but I wanted to point you to the very handy section called Consumer Compliance Resources.  This particular page of the Consumer Compliance Outlook gives you the ability to link to very valuable consumer compliance resources – a Compliance Officer’s dream come true! 

Give it a try!  The page provides updated links to an array of resources, including but not limited to:

• CFPB’s Official Website (plus 7 other related links)
• Dodd-Frank Act (plus 3 other related links)
• Federal Reserve’s Consumer Compliance Handbook
• FFIEC Guidance on Electronic Banking
• Payment Cards Center
• Regulation B (plus 13 other Fair Lending-related links)
• Reg C/HMDA (plus 5 other related links)
• Reg E/EFTA (plus 2 other related links)
• SCRA (plus 6 other related links)

And it goes on and on.  It wouldn't be a bad idea to save that resource page in your favorites. 

***

NAFCU’s Comment Deadline for NCUA’s 2012 Review.  Today is the deadline for submitting comments to NAFCU on our Regulatory Alert regarding NCUA’s 2012 review of its regulations.  Comments can be submitted by answering the questions in the Regulatory Alert (accessible to members only) or you can send an email to Tessema Tefferi, Regulatory Affairs Counsel, at [email protected].

Fair Lending FAQs - Future HMDA Changes; NAFCU Member Call-In

Written by Michael Coleman, Regulatory Compliance Counsel

The Federal Reserve’s Consumer Compliance Outlook for the First Quarter 2012 contained a section on the most frequently asked questions from the Federal Reserve Board’s November 2, 2011, webinar entitled “Fair Lending Issues and Hot Topics.” Question #7 focused on how Dodd-Frank changed HMDA requirements and indicated that Section 1094 of Dodd-Frank amended HMDA to require financial institutions to collect and report new data for mortgage loans in the future.  The new data will include:

• Origination channel (retail, broker, or other)
• Applicant's age
• Applicant's credit score
• Property value
• Loan term
• Term (in months) of any introductory interest rate period
• Rate spread for all loans
• Total points and fees payable at origination
• Term (in months) of any prepayment penalty
• Negative amortization
• Loan originator unique identifier, universal loan identifier, and parcel loan number (as the CFPB may determine appropriate)

Dodd-Frank transferred authority over HMDA and Regulation C to the CFPB. The CFPB has not yet issued rules to implement the changes to HMDA and revise Regulation C, nor did it specifically mention the rule revising Regulation C in its "Semi-Annual Regulatory Agenda." However, the CFPB's Agency Rule List indicates that revisions to Regulation C are in the “prerule” stage.

Note: Dodd-Frank did not mandate a deadline for a final rule, but keep this issue on your radar, as we'll see amendments to HMDA at some point in the future.

***

Free Member Call-In.  On Thursday, June 14 at 3:30 p.m. EDT, NAFCU will hold its mid-year Member Call-In.  The call is open to all NAFCU members but registration is required.  The call will feature NAFCU President and CEO Fred Becker and the association's government affairs team discussing latest developments in Washington affecting credit unions, including MBL, overdrafts, interchange, housing finance reform, CFPB, NCUA and more.  As always, you will have the ability to ask questions directly to NAFCU staff during the call.  

Don't miss out - register now for the June 14th NAFCU Member Call-In.  If you can't make the live call, the archived version is usually made available within a short period of time.  

Qualified Mortgages; Flood; Compliance Monitor; Fair Lending Webinars

Written by Steve Van Beek

Below are just a few quick items for your Friday - have a great weekend!

Qualified Mortgages.  The Consumer Financial Protection Bureau has reopened the comment period for their Qualified Mortgage rule (also known as the Ability-to-Repay rule).  The new comment period ends on July 9, 2012.  It had been expected that the CFPB would finalize this rule in early 2012 but it kept getting pushed back - with good reason as this rule has the potential to significantly alter the mortgage market - and now looks like it will be late 2012 before a final rule.  Dodd-Frank requires the rule in place by January 2013.  The CFPB's notice regarding the extended comment period is here. 

***

Flood.  A 2-month extension was passed and then signed by President Obama.  This extends the National Flood Insurance Program (NFIP) through July.

***

NAFCU's Compliance Monitor.  Our June 2012 issue of NAFCU's Compliance Monitor is now available for download by NAFCU members.  This month the articles focus on Reporting Interest Payments to Nonresident Aliens as well as the increased Focus on Fair Lending.

***

Fair Lending Webinars.  The Federal Reserve's Consumer Outlook Live series is hosting a June 21st webinar on 2010 Census Data - What it Means for CRA, HMDA and Fair Lending Compliance.  The webinar is free and follows on the heels of their November 2, 2011 - Fair Lending Issues and Hot Topics webinar (archived version available).   

Member Complaints; NAFCU's 2012 Regulatory Compliance Seminar

Written by Steve Van Beek

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

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

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

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

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

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

***

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

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

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

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

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

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

CFPB Disparate Impact Bulletin; IRS Nonresident Alien Interest Requirement

Written By JiJi Bahhur, Regulatory Compliance Counsel

Fair Lending.  The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing the Equal Credit Opportunity Act (ECOA).  As part of this responsibility, the CFPB recently issued CFPB Bulletin 2012-04 (Fair Lending) to provide compliance guidance on the fair lending requirements of the ECOA and its implementing regulation, Regulation B.   

The Bulletin puts lenders on notice that the CFPB will be monitoring for potential fair lending violations, including practices with unlawful discriminatory effects.  The CFPB reaffirmed its commitment to enforcing the ECOA, by recognizing the “disparate impact doctrine” as one of three recognized methods of proving lending discrimination under the ECOA.  The Bulletin further puts lenders on notice that lending policies with disproportionate, negative effects on a protected class (“disparate impact”) are illegal and will be pursued by the CFPB. 

For a background on Fair Lending and Reg B issues, take a peek at NAFCU's on-demand webcast (live broadcast was April 11th).  

***

IRS Reporting.  The IRS finalized a rule requiring financial institutions to report interest paid on or after January 1, 2013, to non-U.S. citizens of certain countries.  Alternatively, credit unions may report interest paid to all nonresident aliens.  The interest (the aggregate of $10 or more) paid to a nonresident alien should be reported on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the calendar year in which the interest was paid. 

For a full reading of the rule, go here.  Revenue Proceeding 2012-24 is here - listing the countries covered by this new requirement.  

NAFCU Members:  Our Regulatory Affairs team has provided a Final Regulation on this issue (12-EF-04) that is available for download.    

NCUA Meeting; Vendor Risk Management; Current Issues in Credit Unions

Written by Steve Van Beek

Just a couple of quick items for your Tuesday.

NCUA Cancels Board Meeting.  Last week, NCUA announced it would cancel its April Board meeting.  This is the second canceled meeting in 2012 for NCUA.  Hopefully, it means NCUA is putting extra effort and attention on reducing the regulatory burden on credit unions.  

Consumer Compliance "Outlook Live."  Yesterday we mentioned the resource Consumer Compliance Outlook from the Philadelphia Federal Reserve.  This group also provides free webinars and recently announced a May 2nd webinar on Vendor Risk Management.    

There are also archived webinars available for viewing:

• Consumer Compliance Hot Topics (December 15, 2011)
• Fair Lending Issues and Hot Topics (November 2, 2011)
• Real Estate Owned (REO) Disposition Risks and CRA Opportunities (October 4, 2011)
• Proposed Ability to Repay Standards for Mortgage Loans (May 26, 2011)
• Loan Originator Compensation (March 17, 2011)
• Risk Based Pricing Notices (February 17, 2011)
• Tips for Reporting Accurate HMDA and CRA Data  (November 17, 2010)
• Consumer Compliance “Top Ten” Lists  (May 20, 2010)
  

***

Current Issues in Credit Unions.  The latest Current Issues in Credit Unions podcast (Episode #69) is now available for download and listening.  You can find the agenda as well as past episodes here.    

Rob Rutkowski of Weltman, Weinberg & Reis does a great job with organizing and conducting these podcasts (including the live taping at our 2011 Compliance Seminar - Episode 64).

Rob will also be presenting at two upcoming NAFCU webcasts in April:

• April 11, 2012 (Tomorrow!):  Complying with Regulation B under the CFPB: Protecting Your Credit Union from Unlawful Lending
• April 25, 2012:  Managing Risks for Online Deposit Accounts (Early Bird Pricing ends April 18th)