Posts filed under ‘Compliance’

Two Really Boring but Important Compliance Tidbits

Sometimes  people there is no way  to make this stuff interesting but you should pay attention nevertheless,

Reg. Relief on Privacy Notices

Our good friends at the Bureau That Never Sleeps (The CFPB) finalized regulations  giving financial institutions greater flexibility when providing members those meaningless privacy notices required under federal law.  

Your credit union is required to send out  annual privacy notices informing members of their privacy rights in relation  to the sharing of information with third parties. These  notices can be confusing to members and worthless since they have to be sent out even when there have been no changes to a credit union’s third party relationships or privacy obligations. The CFPB has finalized regulations permitting you to post the required notices online in lieu of mailing them provided certain conditions are met.

It’s a win-win. Members get less confusing junk mail and credit unions get to save time money and a whole bunch of trees. Here is a link to the final regulation… On the downside, with the nights now getting cold I personally find that snail mail is a great way to spark a fire.

 There are  requirements to satisfy before you can begin online posting so read the regulation before you put away the stamps.

http://www.federalreserve.gov/bankinforeg/srletters/sr1317a1.pdf

When is a restructuring a Troubled Debt Restructuring for accounting purposes? That is the question or at least the question that has vexed NCUA and other regulators since 2012. On the one hand they want to encourage institutions to provide a lifeline to members who can stay above water with a little help; on the other hand they don’t want to encourage credit unions to rearrange the deck chairs on the titanic.  

As explained in a 2012 Supervisory Guidance” The credit union must provide the examiner an analysis to support its determination the extension, renewal, deferral or rewrite is, or is not, a TDR. The credit union must provide a well-documented analysis that illustrates (1) whether the borrower is experiencing financial difficulty and (2) whether the credit union granted a concession it would not otherwise consider except for the borrower’s financial difficulty. The credit union’s conclusion and rationale must be clearly stated in supporting documents.”

If this sounds like a highly subjective standard it is. The key take away is that your TDR determinations should be made in a systematic way. (By the way I love the fact that accountants are perceived as buttoned down, straight-laced Black-And-White guys and gals while  attorneys get pegged as the rule benders. Accounting lends itself to more creative interpretation than a Picasso painting).

A September 30th Accounting Bulletin released by the NCUA provides further TDR clarification. The good news is that just because a loan workout has been classified as a TDR doesn’t mean it must  remain so   Specifically if a TDR is restructured and, “If at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted by the institution to the borrower” the loan no longer has to be treated as a TDR.

Here is a link to the bulletin and a useful Supervisor Guidance

http://www.ncua.gov/Legal/GuidesEtc/AccountingBulletins/ACCTBUL14-01.pdfHere is the link to the bulletin

http://www.ncua.gov/Resources/Documents/LCU2013-3_SupervisoryLetter.pdf

October 21, 2014 at 9:12 am Leave a comment

Chip and PIN: The Next Big Compliance Deadline?

When a President has to react to a serious problem but doesn’t know what more he can do to solve it   he appoints a “Czar” as in a “Drug Czar” or “Ebola Czar.“ When a President has ideas about how to solve a problem but can’t get anyone to agree to his solution, he holds a summit.

The President is a smart guy who knows that cybersecurity is a major issue about which Congress has failed to act. Last year, 100 million consumers were victims of data breaches. So this past Friday, the President announced that he would be hosting a cybersecurity summit.

While the bully pulpit only goes so far, the actions announced by the President and major retailers on Friday underscore that, for card issuing credit unions, October 2015 looms as one of the biggest compliance deadlines. As you probably already know, October 2015 is when that liability shifts for card issuers and merchants accepting Visa and MasterCard that don’t have chip-and-pin technology.

Starting in October of 2015 a merchant with a payment terminal that doesn’t use chip-and-pin technology will be liable for the costs of any unauthorized Point of Sale transactions involving a member with a chip-and-pin card. Conversely, if a card issuer can’t process EMV transactions, it is on the hook for the liability. The shift was first unveiled in 2012 to give everyone more than adequate time to adopt the new technology but, until recently, I was skeptical of just how important the deadline would be. Making the shift costs money. Issuing chip embedded plastic isn’t cheap compared to the erstwhile magnetic strip and retrofitting payment terminals isn’t cheap for merchants.

But the days of mutually assured indifference are over. Speaking before employees at the CFPB on Friday, the President unveiled an Executive Order mandating that credit cards and credit-card readers issued by the United States government come equipped with chip-and-pin technology starting next year.  The President also announced that he was ordering federal law enforcement to share more information with the private sector when they discover identity theft rings.

Finally, the President announced that “a group of retailers that include some of our largest — Home Depot, Target, Walgreens, Walmart — and representing more than 15,000 stores across the country, all of them are pledging to adopt chip-and-pin technology by the beginning of next year.”

Now, I have said it before and I will say it again. Industry-wide adoption of chip-and -pin is no panacea. The technology is already old and does nothing to prevent online fraud. But the events of Friday underscore that it is time to get moving on adopting this technology if you haven’t done so already.

Here are some links for additional information:

http://www.whitehouse.gov/the-press-office/2014/10/17/remarks-president-protecting-american-consumers

http://phys.org/news/2014-10-obama-unveils-stem-identity-theft.html

http://usa.visa.com/download/merchants/bulletin-us-participation-liability-shift-080911.pdf

http://usa.visa.com/download/merchants/bulletin-us-participation-liability-shift-080911.pdf

October 20, 2014 at 8:46 am Leave a comment

In defense of the CFPB

 

In today’s blog I come not to criticize the CFPB, but to praise it.

Earlier this week, it proposed further amendments to its Integrated Disclosure requirements that take effect August 2015. These Dodd-Frank mandated amendments replace the erstwhile Good Faith Estimate with a Loan Estimate.  The amendments proposed this week are not big deals. They are tweaks that won’t keep you from cursing Dodd- Frank; but the very fact that the amendments are being proposed speaks volumes about the good side of the CFPB.

Does the CFPB have too much power? You bet It does. Does the Bureau That Never Sleeps pay too little attention to the burdens it is imposing on industry? Absolutely. But a good regulator is like a good umpire: You might disagree with the dimensions of his strike zone but a good umpire like a good regulator approaches regulations and their enforcement in a consistent manner so that everyone knows when they have missed the strike zone. By this standard, the CFPB is doing a great job.

Under the integrated disclosure requirements that take effect in August 2015-remember, they combine the separate disclosures currently mandated under TILA and RESPA-lenders are permitted to redisclose Loan Estimates when a mortgage interest rate is locked. For the redisclosure to be valid, the regulation currently provides that it has to be made “on the day the interest rate is locked.”

When the integrated mortgage proposal was put forward the rate-lock provision did not get all that much attention; the Bureau assumed that requiring same day redisclosure was not a big deal for lenders because they knew the rate they were going to charge. The CFPB could have obstinately refused to reconsider the regulation after it issued them in final form. Instead, it continued to listen to affected industry participants, was convinced that the requirement would be more difficult for lenders to comply with than it originally assumed and is now proposing to amend the final regulation to authorize a revised Loan Estimate to be issued no later than the next business day after the rate is locked.

A second proposed revision announced this week is targeted towards new construction loans. It permits creditors who reasonably expect settlements to occur more than 60 calendar days after initial disclosures have been issued to state on Loan Estimates that they may issue new disclosures.

The political environment is so weighed down with justified cynicism that  the CFPB often catches the institutions it regulates off guard by remaining true to its mission. Before it changes a regulation its primary question is: will the change  benefit, or at least not diminish, consumer protections? For example, in the preamble to these proposed amendments the CFPB argues that giving lenders until the next business day to redisclose loan estimates will benefit consumers by giving them more time to accept loan offers.

Then there is the intangible benefit of dealing with a regulator that writes and explains regulations more clearly than any other. You may not agree with its mortgage regulations but it has provided material designed to help even the smallest lender comply with them.

I apologize but I am still thinking about the Kansas City Royals crashing into over and under walls to make catches and I can’t get baseball metaphors out of my head. The bottom line is that the CFPB has a consistent strike zone. Its overriding mission is to protect consumers. When commenting on one of its proposals, it is incumbent on industry participants to quantify regulatory burdens with concrete operational examples and to suggest alternatives that will not diminish consumer protections. I will continue to disagree with the parameters of the Bureau’s strike zone but also give it much-deserved credit for the consistency and diligence with which it is carrying out its mission.   Here is a link to the proposal which also includes other technical changes..

http://www.consumerfinance.gov/blog/know-before-you-owe-proposed-updates-tila-respa-final-rule/

October 16, 2014 at 10:08 am Leave a comment

4 Cases This Term That Will Impact Your Credit Union Operations

Well, it’s opening day for legal junkies.  The first Monday in October the Supreme Court starts hearing cases it will decide over the 2014-2015 term that ends in June.  With the caveat that there may be cases added in the coming weeks and months, here is a look at the cases on the Court’s docket that will have an impact on your operations.

Perez v. Mortgage Bankers Association, No. 13-1041, 134 S. Ct. 2820 (2014).

This case is important to credit unions for two reasons.  First, if you employ mortgage originators, then you have been caught in a whirlwind of conflicting administrative rulings in recent years regarding whether your mortgage originators are entitled to overtime pay under the Fair Labor Standards Act.  Under the FLSA, so-called non-exempt employees are entitled to overtime when they work more than 40 hours a week.  However, there are several exceptions to this requirement.  In 2006, the Department of Labor issued an opinion letter stating that mortgage loan originators were exempt from the overtime requirement.  In 2010, the DOL issued an “administrative interpretation” reversing that 2006 opinion letter and mandating that employers pay overtime to loan originators.

In this case, the Court will decide at what point an agency’s administrative interpretation has effective become a Rule that can only be changed through the regulatory process by issuing a new rule replete with a comment period.  As a result, the Court’s decision in this case will provide further guidance to those of you who employ mortgage originators.

For those of you who don’t employ mortgage originators, the case will provide important guidance about how legally binding those NCUA guidance letters are on your credit unions.

EEOC v. Abercrombie and Fitch Stores, 731 F. 3d 1106 (10th Circuit 2013).

Under Title 7, if you have 15 or more employees, you must agree to reasonable accommodations for employees’ religious beliefs, providing that doing so does not pose an undue hardship on your business.  This means, for example, that a teller at your credit union with a sincerely held religious belief is entitled to wear a head scarf even if doing so mandates an exception to your dress code.  However, does Title 7 apply where an applicant or employee never informs an employer that she needs a religious accommodation?  This is the question that the Court will grapple with in this case.  It deals with a Muslim applicant for a sales position who was denied employment because the head scarf she wished to wear for religious reasons conflicted with “the look” that the company wishes to project for its sales people.  What makes the case interesting is that the applicant never told the employer that she had to wear the scarf for religious reasons.  Your HR people are going to want to pay particular attention to this case since best practice currently dictates that employers not ask about the religious beliefs of applicants during an interview.

Jesinoski v. Countrywide Home Loans, 13-604.

We all know that the Truth in Lending Act grants homeowners a three-day right of rescission on mortgage transactions.  Where such a notice is not provided, a borrower has three years “after the date of consummation of the transaction” to bring a lawsuit cancelling the mortgage.  This case deals with a narrow but important question:  does a borrower exercise his right to rescind the transaction by notifying the creditor in writing within three years of the consummation of the transaction or must he file a lawsuit within three years of the transaction?  This may not seem like a big deal, but the Circuit courts have been all over the map on this one.

Young v. United Parcel Service, 12-1226.

Federal law prohibits discrimination against employees because they are pregnant.  But, are you discriminating against a pregnant employee by refusing to provide her an accommodation?  In this case, the Court will determine if UPS acted properly when it refused to accommodate a pregnant driver’s request that she not be made to lift heavier packages.  This case isn’t as clear cut as it sounds.  Whereas federal law requires companies to provide reasonable accommodations to disabled persons, the company argues that since pregnant women are not considered disabled, it is not allowed to provide accommodations for pregnancy that would result in pregnant women being treated differently than their non-pregnant peers.

I will, of course, be keeping an eye on this and other cases in the coming months.  In the meantime, for those of you who want additional information about the upcoming Court term, a great source of information is the SCOTUS blog.

October 6, 2014 at 8:49 am Leave a comment

What Tom Brady, subprime loans and White House break-ins have in common

There are some things we just instinctively know don’t happen. Like we know that a lunatic can’t jump the white house fence with the ease of a drunk teenager diving into a neighbor’s pool and that the same lunatic couldn’t procede to run for more yards on White House than Tom Brady passes for in a Monday Night Football game. Similarly, we know instinctively that credit unions don’t make subprime loans. As a result I’ve seen otherwise studious compliance professionals daydream when the presenter starts talking about subprime lending disclosure requirements.

So you may have been a little surprised by yesterday’s CU Times article suggesting that Navy Federal Credit Union may be setting itself up for Fair Housing examination scrutiny by offering No- Money-Down mortgages with 5% interest rates . The article exemplifies a simmering problem in mortgage regulation: Everyone is against sub prime lending but there is no set definition of what makes a subprime loan a subprime loan. With interest rates continuing near record lows all credit unions and banks for that matter, should  double-check if they are making loans that regulators could single out for greater scrutiny.

So what exactly is a subprime loan? First let’s keep in mind that almost all statutes and regulations now tie subprime loans to the APOR. The APOR is generally an average index of comparable loans. As interest rates go down so do the subprime trip wires.

First grab some more coffee. Then here are some of the differing definitions of a subprime loan,

Regulation Z defines a higher-priced mortgage loan as follows:

Higher-priced covered transaction Higher-priced covered transaction means a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more percentage points for a subordinate-lien covered transaction

12 C.F.R. § 1026.43

High-Cost Mortgage which regulation Z defines as The annual percentage rate applicable to the transaction, will exceed the average prime offer rate, as defined in), for a comparable transaction by more than:

(A) 6.5 percentage points for a first-lien transaction,

(B) 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,00012 C.F.R. § 1026.32

But wait there’s More…The state of course has its own definitions for what constitutes a High Cost Loan in 6-L of the Banking Law and a Sub Prime loan in 6-M.

There are many more examples with which I could sedate you; Keep in mind that each one of these definitions comes with its own disclosure requirements and penalties for noncompliance, and it quickly becomes apparent that what started as a genuine attempt to rein in abusive lending practices has morphed into a regulatory minefield more analogous to a speed trap then a legitimate regulatory framework. While it is true that none of this would matter much but for the fact that interest rates are so low they are, and now a bank or credit union making a 5% mortgage can be scrutinized for making a subprime loan.

Clearly something should be done. Congress could come up with a definition that preempts competing state requirements. Conversely, states could streamline their own subprime definitions   so that they are defined in reference to federal law.

Of course, I’ve given up on commonsense changes at least on the federal level, so my suggestion to you is to take a quick look at your mortgage interest rates this morning. You may be making “subprime loans” without even knowing it…

Speaking of subprime loans the New York Times is continuing to sound the alarm against the tactics used by used car dealers to qualify individuals for auto loans, they can’t afford. This morning, it is reporting that: “some of the same dynamics-including the seemingly insatiable demand for loans as the market heats up and the dwindling pool of qualified borrowers that helped precipitate the 2008 mortgage crisis are  now playing out, albeit on a smaller scale in the auto loan market”

The paper is reporting this morning that prosecutors in New York, Alabama and Texas are zeroing in on used car dealerships and have discovered hundreds of fraudulent loans given to people with inadequate credit. If you do indirect lending now would be a good time to double check the credit union’s underwriting policies and to make sure that you can document adequate oversight over the dealerships with which you have a relationship..

 

October 2, 2014 at 9:37 am Leave a comment

Military Misfires on Consumer Protection

Today’s blog provides a good example of how well-intentioned people can end up doing more harm than good.  The Department of Defense recently proposed expanding the coverage of consumer protection laws that currently apply to pay-day loans, refund anticipation loans and vehicle title loans to most consumer loans covered by the Truth in Lending Act. It would not apply to loans to purchase a vehicle or a home.  If the DOD isn’t careful, it will dry up the swamp of creditors who prey on our service members, which of course is a good thing, but do so in a way that will make it more difficult for members of the armed forces to get access to consumer credit, especially from credit unions.  Here’s why.

Back in 2007, responding to wide spread reports of predatory lending activities targeting the military, Congress passed the Military Lending Act.  The Act empowered the Department of Defense to define and regulate consumer credit products provided to active duty members of the armed forces and their dependents.  It gave the military wide discretion in determining what products would be subject to the enhanced regulatory restrictions.  Under the regulations promulgated by the DOD, a 36% interest rate cap was placed on refund anticipation loans, pay-day loans, and vehicle title loans.  In addition, the cap is calculated based on the Military Annual Percentage Rate (MAPR), which is succinctly summarized by the CFPB to include interest, fees, credit service charges, credit renewal charges, credit insurance premiums and other fees related to credit products sold in connection with the loan.  Creditors selling these loans have to provide enhanced disclosures, as well as take affirmative steps to identify eligible consumers.

At the time the legislation was enacted, credit unions and other financial institutions were concerned that if regulations were written too broadly, they would require the wide-spread adoption of two types of consumer loan products:  one for the military and one for civilians.  However, the final regulations were narrow enough in scope so that they didn’t impact the vast majority of credit unions, most of which would have no desire to offer these types of products in the first place, even if located in states where they were permitted to do so.

The statute as it has been implemented by the DOD made sense, at least until last Friday.  The DOD is proposing regulations that would expand the definition of products covered under the statute to include credit cards and other consumer loans covered under the Truth in Lending Act.  As a result, credit cards offered to members of the military and their dependents would be subject to a 36% cap calculated by a refined MAPR.  To be fair, the military recognizes that a poorly drafted regulation runs the risk of denying mainstream credit to members of the armed forces, so it is refining the MAPR to, for example, exclude customary and reasonable fees.  But the calculation of an MAPR would still differ for members of the military and civilians.  Furthermore, by expanding the reach of the MLA to most consumer loans except home mortgages and car loans, the military will make it more difficult for credit unions to provide legitimate loans to service members.

In fact, the proposal is such a bad idea that NCUA took the highly unusual step of issuing a statement critical of the proposal the same day it was announced.  It pointed out that NCUA’s pay-day lending alternative was designed specifically to fit within the Department’s existing regulations.

Current NCUA regulations allow federal credit unions to offer payday alternative loans with an interest rate of up to 28 percent and an application fee of up to $20. Under the Military Lending Act regulations, consumer credit to covered borrowers is subject to a 36 percent cap on the military annual percentage rate, or military APR, which includes application fees. If these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap.

Conversely, our good friends at the bureau that never sleeps, the CFPB, thinks the Department’s proposal is a swell idea.  Proponents of the DOD’s approach point out that it is extremely easy to avoid compliance with the MLA.  For example, a loan with a 91-day repayment period isn’t classified as a pay-day loan under the regulations, but a 90-day loan could be.  They argue that by expanding the size of the jurisdictional net, it will be easier to catch those creditors who prey on members of our armed forces.  The problem with larger fishing nets, of course, is that they scoop up everything in their wake, including fish that no one wants to catch in the first place.

Perhaps DOD should consider expanding the definition of the existing products covered under the MLA rather than grabbing everything into its jurisdiction.  Another alternative, which it notes in the preamble that it is open to considering, is to exempt certain types of institutions from coverage of the expanded regulations.  Considering that federal credit unions are already subject to an interest rate cap on loans and that the vast majority of credit unions are places that members of the military looking for a fair deal should be encouraged to patronize, an exemption makes sense to me.

At ease.

October 1, 2014 at 8:30 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, Credit Union Association of New York

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