NAFCU Compliance Blog

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

Written by Jennifer Aguilar, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

Interagency HELOC Guidance Released; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Interagency HELOC Guidance Released.  On July 1, NCUA (jointly with OCC, the Federal Reserve, FDIC, and the Conference of State Bank Supervisors) released guidance regarding home equity lines of credit (HELOCs) nearing their “end-of-draw” periods.  The guidance is intended to help financial institutions fully understand the potential risks associated with HELOCs that are approaching the transition from their draw periods to full repayment.  The guidance states:

“As HELOCs transition from their draw periods to full repayment, many borrowers will have the financial capacity to pay as agreed.  Some borrowers, however, may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values.

"When borrowers experience financial difficulties, financial institutions and borrowers generally find it beneficial to work together to avoid unnecessary defaults.  As HELOC draw periods approach expiration, lenders should communicate clearly and effectively with borrowers and prudently manage exposures in a disciplined manner.”

The guidance states that “[a]s part of the supervisory process, examiners will review financial institutions’ end-of-draw risk management programs for provisions that address five risk management principles.”  These principles are:

• Prudent underwriting for renewals, extensions, and rewrites;
• Compliance with pertinent existing guidance;
• Use of well-structured and sustainable modification terms;
• Appropriate accounting, reporting, and disclosure of troubled debt restructurings; and
• Appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses (ALLL) estimation processes.

The guidance goes on to provide guidelines for best practices with regards to “policies and procedures for managing HELOCs nearing their end-of-draw periods that are commensurate with the size and complexity of the portfolio.”  These risk management best practices include:

• Developing a clear picture of scheduled end-of-draw period exposures;
• Ensuring a full understanding of end-of-draw contract provisions;
• Evaluating near-term risks;
• Contacting borrowers through outreach programs;
• Ensuring that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations;
• Establishing clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives (renewals, extensions, and modifications);
• Providing practical information to higher-risk borrowers;
• Establishing end-of-draw reporting that tracks actions taken and subsequent performance;
• Documenting the link between ALLL methodologies and end-of-draw performance; and
• Ensuring that control systems provide adequate scope and coverage of the full end-of-draw period exposure.

As is stated in several places in the document, the guidance should be applied in a manner commensurate with the size and risk characteristics of a financial institution’s HELOC portfolio.  Therefore, NCUA, through their examination process, may look for how credit unions have applied some or all portions of the guidance.

***

Free Kick.  And then there were four.  After a riveting 60 matches, we are down to the final week of the World Cup.  Left standing are Brasil, Germany, Argentina, and the Netherlands.  All four have had their moments of brilliance, but they have also had moments of true concern in this tournament.  There are no doubt several plot twists left over the final four games of this tournament, but what I do know right now is that the eventual champion will have earned it.  This has been a tournament full of parity, surprises, and great play.  But it also has been a tournament that has seen controversy and injury strike.  In the end, though, this tournament has been a celebration of the beautiful game, and it will be sad to say goodbye to Brasil 2014 this Sunday afternoon.

As a very proud Colombian-American, this tournament has also filled me with much joy and pride.  Both the U.S. and Colombian teams acquitted themselves superbly throughout the course of this tournament.  It was sad to see them both bid farewell to this celebration of football this past week, but I will be comforted with amazing memories, especially the stalwart goalkeeping displayed by Tim Howard and the simply sublime playmaking abilities of James Rodriguez.  Both teams have bright futures ahead, and I look forward to seeing them, hopefully, take the next step over the next four years and in Russia in 2018!

Now, to my Starting XI (in a 4-4-2 formation) of the tournament:

Keeper – Tim Howard (USA);

Backs – Daley Blind (NED), Thiago Silva (BRA), David Luiz (BRA), and Serge Aurier (CIV);

Midfielders – Philipp Lahm (GER), James Rodriguez (COL), Lionel Messi (ARG), and Xherdan Shaqiri (SUI); and

Forwards – Arjen Robben (NED) and Thomas Muller (GER).