Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/creditcardreform/
Timestamp: 2019-04-19 02:29:00+00:00

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Happy March! With any luck, it will start to feel like spring again for those of us who are getting a bit tired of winter. Since it’s the first Monday of the month, we thought we would start this week off with a low-impact post that brings us up to date on a few different compliance-related developments.
Last week, the CFPB released a report and bulletin regarding consumer complaints about credit reporting companies including accuracy in credit reports. As part of the Bureau’s response to this issue, CFPB Director Richard Cordray called on credit card companies to make “credit scores freely available on [consumers’] monthly statement or online.” While there are a few large credit card companies who are already offering this service to their customers, this is not a current regulatory requirement. However, it may be a sign of things to come from the CFPB.
Back in December, the CFPB announced it would oversee the largest nonbank student loan servicers. The Bureau wasted little time as Discover Financial Services disclosed in its annual securities filing that the CFPB is investigating the company’s student loan servicing practices. The CFPB also filed suit last week against a for-profit college for predatory lending in relation to its student loan programs. As credit unions increase their involvement with private student lending, they may want to monitor the increased CFPB action in this area.
At its February 20th meeting, the NCUA Board issued a proposed amendment to its voluntary liquidation regulation. The proposal includes a few changes that aim to reduce the burden on credit unions that are voluntarily liquidating. For example, the proposed changes would allow such credit unions to publish required creditor notices in electronic media and exempt credit unions with less than $1 million in assets from publication generally. Also, credit unions under $50 million in assets would be exempt from the requirement to make creditor publications in multiple sources.
Below are a couple of resources you may find useful for starting off a new month.
NCUA to Hold BSA Webinar. On Wednesday, March 19th, NCUA will host a free webinar titled “BSA-MSB Training: What You Need to Know.” The webinar will be a panel and cover topics such as the critical elements of a BSA program, Money Service Businesses, common BSA violations, and reporting requirements. Attendees who successfully complete a test at the end of the webinar will receive a certificate of training. Those interested in this program can register here.
Kaufman & Canoles. Attorneys at Kaufman & Canoles released their Credit Union Legal Update—Winter 2014. This update discusses recent court rulings that may impact credit unions.
CFPB’s Findings on the CARD Act; NCUA’s 2014 Board Meeting Schedule; Extra! Extra! Buy NAFCU’s 2013 Credit Union Compliance GPS and Get the 2014 Manual Free!
CFPB’s Findings on the CARD Act. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was signed into law in May 2009 with the intent of establishing fair and transparent practices in the credit card market. Last week, the CFPB released a report detailing how the CARD Act has, as intended, increased consumer protections and fairness, including reducing penalty fees and making the cost of credit cards clearer to consumers.
“Total cost of credit declined: The CFPB found that the total cost of credit declined by two percentage points between 2008 and 2012. The total cost of credit includes all fees, interest, and finance charges paid by the consumer to the card issuer. The decline in the total cost of credit has occurred even as annual fees and interest rates have increased, indicating a shift from back-end pricing toward more transparent front-end pricing that consumers can understand and evaluate more easily.
Although the overall findings included a two-percentage point decline in the total cost of credit between 2008 and 2012, there are still areas of concern in the credit card market. Some of the areas of concern include add-on products, fee harvester cards, deferred interest products, and disclosures – all of which are discussed in more detail in the report. The CFPB will continue to monitor these areas of concern and take action where appropriate.
To view the report in its entirety, click here. Also, you can view NAFCU’s comment letter on the subject matter here.
NCUA’s 2014 Board Meeting Schedule. Last Friday, the NCUA Board released its monthly meeting schedule for 2014. The schedule, subject to change, is available here.
NAFCU’s Credit Union Compliance GPS. Regulatory burden got you down? Well, help is here by way of NAFCU’s 2013 Credit Union Compliance GPS! Newly updated and written by NAFCU’s compliance team, this is an essential resource for all credit union compliance officers and staff. The electronic manual explains complex regulatory language in plain English and includes user-friendly bookmarks, hyperlinks and pagination for easy navigation. With updated resources and guidance to help your compliance research efforts, this is a must-have reference tool!
With one purchase, you can share the manual with your entire credit union staff for one affordable price - $399 for NAFCU member credit unions and $499 for nonmember credit unions. And, if you purchase the 2013 Credit Union Compliance GPS today, you will get the 2014 Credit Union Compliance GPS when it’s available in March – at no extra cost! Also, if you register for NAFCU’s Compliance School before the 2014 version is available, you’ll get the benefits of the 2013 version until the 2014 version is available!
Ability to Pay Rules for Credit Cards Continued – Reputation Risk if Credit Unions Only Consider Independent Income and Assets?
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.
“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.
Earlier this month, my colleague JiJi blogged about the CFPB’s final rule amending Regulation Z’s ability to pay rules for credit cards. For consumers age 21 and over, these changes allow credit unions and other card issuers to consider income and assets that a consumer has a reasonable expectation of access to as the consumer’s income or assets.
We’ve received questions from quite a few folks about this change – in particular, whether a credit union is now required to include the income and assets that a consumer has a reasonable expectation of access to when considering a consumer’s ability to pay. Answer: No.
“(a) General rule— (1)(i) Consideration of ability to pay. A card issuer must not open a credit card account for a consumer under an open-end (not home-secured) consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the consumer's ability to make the required minimum periodic payments under the terms of the account based on the consumer's income or assets and the consumer's current obligations.
(ii) Reasonable policies and procedures. Card issuers must establish and maintain reasonable written policies and procedures to consider the consumer's ability to make the required minimum payments under the terms of the account based on a consumer's income or assets and a consumer's current obligations. Reasonable policies and procedures include treating any income and assets to which the consumer has a reasonable expectation of access as the consumer's income or assets, or limiting consideration of the consumer's income or assets to the consumer's independent income and assets. Reasonable policies and procedures also include consideration of at least one of the following: The ratio of debt obligations to income; the ratio of debt obligations to assets; or the income the consumer will have after paying debt obligations. It would be unreasonable for a card issuer not to review any information about a consumer's income or assets and current obligations, or to issue a credit card to a consumer who does not have any income or assets.” 12 CFR 1026.51(a)(1) (emphasis added).
In other words, for consumers age 21 and over, a card issuer may consider income and assets to which an applicant has a reasonable expectation of access, but is not required to do so.
One issue to consider, however, is whether choosing to exclude this type of income will leave your credit union at a competitive disadvantage compared to other lenders. Food for thought.
Recently, the Consumer Financial Protection Bureau (CFPB) finalized amendments to the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), making it easier for spouses and partners who do not work outside of the home to qualify for credit cards. In the existing regulation, card issuers were limited to consideration of only a card applicant’s independent income or assets, thus resulting in numerous creditworthy applicants – such as stay-at-home spouses and partners – being declined credit card access even though they had the means to pay the debt.
The final rule can be found here. The final rule took effect on May 3, 2013 and requires mandatory compliance by no later than November 4, 2013, although card issuers may, at their option, come into compliance before that date.
The end of 2012 is fast approaching, and so are compliance deadlines (although if you are reading this we have successfully avoided the end of the world according to the “interpretation” of the Mayan calendar, so we have that going for us). Yesterday we blogged about required updates for adverse action notices and risk based pricing notices. Today we would like to focus on credit cards updates required by January 1, 2013.
When the CFPB republished Regulation Z, Sections 12 CFR 1026.60 (applications and solicitations) and 12 CFR 1026.6 (account opening disclosures) were changed to reflect the CFPB's authority over Regulation Z and credit cards.
"(15) Web site reference. A reference to the Web site established by the Bureau and a statement that consumers may obtain on the Web site information about shopping for and using credit cards. Until January 1, 2013, issuers may substitute for this reference a reference to the Web site established by the Board of Governors of the Federal Reserve System."
Similar language is included in 12 CFR 1026.6(b)(2)(xiv) for account opening disclosures.
Note: This disclosure is only required for credit card accounts. Thus, the change would only need to be made on your credit card application and solicitation disclosures and your credit card account opening disclosures.
NAFCU’s Offices Closed for the Holidays – Just a reminder that NAFCU’s offices will be closed all next week and through the beginning of the new year. The blog will also be on hiatus during this period. NAFCU’s offices will re-open on Wednesday January 2, 2013, and we will be back to blogging as well to start off the new year. From all of us here at NAFCU, we wish you and yours a safe, happy, and hopefully restful holiday season!
Change in Terms Required for Change to CFPB Website on Credit Card Disclosures?
Over the past weeks and months many credit unions, their vendors, their attorneys, their trade associations and many others have been struggling with trying to determine whether a 45-day change-in-terms notices is required solely due to a technical change to Regulation Z. This blog post will try to provide an overview of this situation and where things stand. Unfortunately, there is not a perfect answer as the CFPB will not provide formal guidance on this situation.
Devil is in the Details. The Dodd-Frank Act transferred authority for Regulation Z from the Federal Reserve to the Consumer Financial Protection Bureau. This meant that the CFPB has authority for interpreting Regulation Z as well as providing information to consumers regarding credit cards. To implement its authority under Reg Z, the CFPB republished Reg Z under 12 CFR 1026. During this republishing, the CFPB indicated it was making solely technical changes and there would be no substantive changes. However, as we all know - the devil is in the details.
"(xiv) Web site reference. For issuers of credit cards that are not charge cards, a reference to the Web site established by the Bureau and a statement that consumers may obtain on the Web site information about shopping for and using credit cards. Until January 1, 2013, issuers may substitute for this reference a reference to the Web site established by the Board of Governors of the Federal Reserve System."
Ok, this seems simple. In fact, we blogged on this as early as January 10th of 2012. Credit unions have been making these updates throughout the year and most are ready to go on their disclosures for new credit card disclosures.
"(2) Rules affecting open-end (not home-secured) plans. (i) Changes where written advance notice is required. (A)General. For plans other than home-equity plans subject to the requirements of § 1026.40, except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and (c)(2)(v) of this section, when a significant change in account terms as described in paragraph (c)(2)(ii) of this section is made, a creditor must provide a written notice of the change at least 45 days prior to the effective date of the change to each consumer who may be affected." (Emphasis added).
"(ii) Significant changes in account terms. For purposes of this section, a “significant change in account terms” means a change to a term required to be disclosed under § 1026.6(b)(1) and (b)(2), an increase in the required minimum periodic payment, a change to a term required to be disclosed under § 1026.6(b)(4), or the acquisition of a security interest." (Emphasis added).
So - this is where things get weird. The disclosure of the CFPB's website is required by 1026.6(b)(2)(xiv) which would bring it under the definition of a "significant change in account terms." This is even though the credit union did not make the change and the disclosure of the CFPB website is not actually a "term" of the account that impacts members (rather, it is a mandated disclosure).
Is There an Applicable Exception? Thus, a strict reading of Regulation Z indicates that this switch to the CFPB's website would be a "significant change in account terms." But, does this trigger the change-in-terms notice? It doesn't seem like it would as the credit union didn't make this change. Congress did. Dodd-Frank transferred authority to the CFPB and this required the CFPB to change Regulation Z and include their website - rather than the Federal Reserve's - under 1026.6(b)(2)(xiv). Why should credit unions have to send notices to their existing cardholders of this change? Further, this disclosure of the CFPB's website is only required in the application/solicitation and account opening disclosures - why would it need to be disclosed to existing members when it is changed?
i. A change in the consumer's credit limit except as otherwise required by § 1026.9(c)(2)(vi).
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges.
v. Changes arising merely by operation of law; for example, if the creditor's security interest in a consumer's car automatically extends to the proceeds when the consumer sells the car." (Emphasis added).
This sounds great. The argument is that the change to the CFPB's website is a "change arising merely by operation of law." Dodd-Frank transferred authority to the CFPB and that is the only reason why this technical change occurred. Done deal, right?
Informal Agreement. I've talked with CFPB staff on this issue (as have many others) and CFPB staff agrees that this "operation of law" exception applies and credit unions do not need to send the change-in-terms notice in this situation. Unfortunately, the CFPB staff is unwilling to put their opinions in a formal writing. This means that credit unions are left with an informal agreement that a change-in-terms notice is not required.
Documentation is Key. Because the CFPB will not put their opinion in writing, it is important that credit unions document their decision-making as to why they did not send the change-in-terms notice in this situation. Remember, the CFPB staff is not examining and auditing your credit union - so be sure to have documentation of your decision not to send the notice in case this issue comes up.
Notice Already Sent. Of course, if your credit union has already decided to send the notice - you are in a great position as you can move on to many other compliance issues facing your credit union. Additionally, if you have the wheels in motion to get the notice out to your members in the near future - there is nothing wrong with sending the notice.
Risk-Averse. If your credit union decides it doesn't feel comfortable relying on an informal (2nd-hand) agreement from the CFPB staff - by all means send the notice. And, then document why you sent the notice and the burden caused by the CFPB's unwillingness to put their opinion in writing.
This website is intended to provide general compliance information in regard to the subject(s) covered. It is provided with the intent and understanding that the publisher is not engaged in the act of rendering legal, accounting or any other professional advice. The information provided in this website is not intended nor should be used as a substitute for legal advice or other expert opinions and services in specific situations. NAFCU is not responsible for the content of comments and reserves the right to delete or block comments that it finds inappropriate."
"The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) became law in 2009. The CARD Act requires that card issuers evaluate a consumer’s ability to make the necessary payments before opening a new credit card account. Under current CARD Act regulations issued by the Federal Reserve, a card issuer generally may only consider the individual card applicant’s income or assets.
Data made available to the Bureau suggest that some otherwise credit-worthy individuals have been declined for credit card accounts under the current regulation, even though they have the ability to make the required payments. Discussions with industry sources indicate that a significant number of these individuals may be stay-at-home spouses or partners with access to income from an employed spouse or partner.
The Bureau’s proposed revision would allow credit card applicants who are 21 or older to rely on third-party income to which they have a reasonable expectation of access. Although the proposal applies to all applicants regardless of marital status, the Bureau expects that it will ease access to credit particularly for stay-at-home spouses or partners who have access to a working spouse or partner’s income."
"SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is proposing to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation, which interprets the requirements of Regulation Z. Regulation Z generally prohibits a card issuer from opening a credit card account for a consumer, or increasing the credit limit applicable to a credit card account, unless the card issuer considers the consumer’s ability to make the required payments under the terms of such account. Regulation Z currently requires that issuers consider the consumer’s independent ability to pay, regardless of the consumer’s age; in contrast, TILA expressly requires consideration of an independent ability to pay only for applicants who are under the age of 21. The Bureau requests comment on proposed amendments that would remove the independent ability-to-pay requirement for consumers who are 21 and older, and permit issuers to consider income to which such consumers have a reasonable expectation of access." (Emphasis added).
The comment period will extend for 60 days after the proposal is published in the Federal Register. NAFCU's Regulatory Affairs team will be providing a Regulatory Alert for NAFCU members and soliciting comments on the proposal.
On Wednesday, the Financial Services Subcommittee held a hearing to examine the ability to pay provisions of the Credit CARD Act (specifically, section 1026.51 and the corresponding Official Commentary from Regulation Z). Gail Hillebrand, the Associate Director for Consumer Education and Engagement at the CFPB, represented the CFPB’s position at the hearing.
The hearing focused on the rule as it was issued by the Federal Reserve Board last April, and inherited by the CFPB on July 21, 2011.
Under the rule, as currently written, lenders are required to consider individual rather than household income when determining whether someone qualifies for a credit card. This has raised a significant concern, as it has the potential to disproportionately impact non-working spouses.
Even before responsibility for this regulation was formally transferred to the Consumer Bureau last July, we heard concerns about the impact this rule could have on the availability of credit to some individuals. In some families, all of the adults are employed outside the home. In others, someone stays at home or works part time. This is often, although not always, a woman.
spouse or partner who is not employed outside the home (or who is employed part time) and who wants to open an individual credit card account rather than opening a joint account.” (Emphasis added).
The CFPB is currently in the process of evaluating the regulation and reviewing responses and input it has received from individuals who have petitioned the Bureau to express their concerns about this issue. The goal is to ensure access to credit to those that do have the ability to pay, but without having potentially negative consequences. The CFPB will continue to move forward on addressing the issue during the course of this summer.
For more information on the CFPB’s review of the Credit Card Ability to Pay rules, check out this Press Release and a recent NAFCU Today story. Also note, NAFCU's Comment Letter can be accessed here.
Today, I wanted to highlight a common Reg Z violation (according to Federal Reserve examiners) which stems from the multitude of changes in Regulation Z over the past 3-4 years. And, unfortunately, we ain't seen nothing yet!
The failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit. As with the RESPA tolerance requirements, this violation reflects the compliance challenges that arise with a significant regulatory change. Financial institutions relying on third-party software to create disclosures should verify that the software reflects the changes in regulatory requirements. For internally created software, institutions should ensure that regulatory changes are communicated in a timely manner to the IT department and that the software is tested to verify that the changes have been implemented. For a more detailed discussion of vendor risk management, refer to the Outlook article “Vendor Risk Management” in the First Quarter 2011 issue.20" (emphasis added).
As the underlined text indicates - this is an issue partly because of the magnitude of regulatory changes and the inability for smaller institutions to simply keep up.
The article indicates that "the failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit."
If you click through the model form links above, you'd see that G-17(A); G-17(B) and G-17(C) are all designed as model forms for credit card accounts. Only G-17(D) provides any guidance on open-end account opening disclosures for non-credit cards. Thus, three of the four forms are designed for credit cards and not other types of open-end products.
I wonder if that is part of the reason this is a common compliance violation? And - this is the part of the feedback loop that the CFPB needs to improve on if it truly wants to lessen the regulatory burden on smaller institutions. If there are numerous compliance violations - the CFPB needs to look internally and see if their regulations, forms and guidance are making the requirements clear and straightforward.
Work with Us. Other regulators have not succeeded in the past and they also haven't shown much effort. Usually, the regulation gets promulgated and that is the end of it. But that isn't good enough. It isn't good enough for the regulator, it isn't good enough for credit unions and it isn't good enough for consumers. The real test is whether the CFPB improves in the future or whether it follows the same old story.
If your credit union is a NAFCU member you are probably familiar with NAFCU’s Compliance Monitor, our monthly compliance newsletter. One of the features of the Compliance Monitor is the Compliance Forum, which includes questions and answers written by our Compliance Team. You may have asked yourself, “Where do they come up with these questions?” The answer is from our NAFCU members!
Answering compliance questions is one of the major member services NAFCU’s Regulatory Compliance Division provides our members. We get a lot of questions. Sometimes we see a pattern of questions on a particular topic, particularly after there has been a recent regulatory amendment. Sometimes we get a unique question that we just feel compelled to share. When this happens, we start drafting Q&As.
Question: At our credit union we understand that the Credit CARD Act, and the resulting changes to Regulation Z, prohibits increasing an APR within the first year of account opening. However, we want to increase the annual fee for a credit card account which is six months old. Is this permissible?
(Emphasis added.) 12 C.F.R. §1026.55(b)(3)(iii).
The annual fee for a credit card account is one of the fees required to be disclosed under Section 1026.6(b)(2)(ii), therefore, increasing the annual fee during the first year after the account is opened is prohibited.
This Q&A is an example of a particular question that came in and we thought it would benefit all our members to get an answer, so we drafted a Q&A for the Compliance Monitor.
Just to add my own personal disclaimer, I grew up in the DC Metro area (in Falls Church, Virginia) and as such am an avid Redskins, Capitals, and UVA fan. In addition to Steve’s usual plugs about everything Michigan, I will do my best to keep you updated on the trials and tribulations of being a sports fan in DC. Here’s hoping RG3 lives up to the hype!
If you are located in either the Cleveland or New York City areas, you might be able to get a chance to listen to the CFPB in-person. The CFPB has two "Industry Discussions" listed for later this spring.
You can also hear from CFPB Director Cordray during NAFCU's Free Webcast on April 24th. The Webcast is open to all credit unions but registration is required.
Last Thursday, the CFPB issued a proposed rule to amend Section 1026.52(a) of Regulation Z. I know what a lot of you are thinking - another change to the Credit CARD Act regulations? Another clarification?
"§ 1026.52 Limitations on fees.
(a) Limitations prior to account opening and during first year after account opening.(1) General rule. Except as provided in paragraph (a)(2) of this section, the total amount of fees a consumer is required to pay with respect to a credit card account under an open-end (not home-secured) consumer credit plan prior to account opening and during the first year after account opening must not exceed 25 percent of the credit limit in effect when the account is opened. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.(emphasis added).
What is the CFPB proposing? The CFPB is proposing to remove the "prior to account opening" language from Section 1026.52(a) and, thus, the restriction on fees would only cover fees charged after the account is opened.
Why is the CFPB doing this? Isn't this weakening the rule? The Federal Reserve originally wrote this rule and was sued by an institution arguing the Fed went beyond the requirements of the Credit CARD Act. There are good stories on the CFPB's move here (New York Times) and here (Washington Post).
The Short Version. This proposal won't directly impact most credit unions as they are not offering credit cards with large amounts of fees in the first year or prior to account opening. However, other card issuers might be able to move back to their prior business model of charging processing fees prior to account opening.
To see the specifics of the proposed change, click here to see the Federal Register (the bracketed text indicates that text - "prior to account opening" would be removed if the rule was finalized).
Note: If you are looking for which fees count toward the 25% cap during the first year - scroll down in the staff commentary to 12 CFR 1026.52(a)(2).
Well, the CFPB wasn't lying when it stated its initial focus would be on mortgages, credit cards and student loans. We now have "Know Before You Owe" projects for each one.
Yesterday, the CFPB announced their first steps toward clarifying and condensing credit card agreements.
The announcement also came with a pair of blog posts from the CFPB.
Similar to the other Know Before You Owe projects, the CFPB is actively soliciting feedback on their prototype. Importantly, this is not a proposed rule. However, it is the CFPB's first steps toward collecting information and attempting to clarify credit cards for consumers. (I'm sure many compliance officers are wanting some clarification as well - and not the kind of "clarifications" the Fed dropped on everyone earlier in 2011).
If your credit union offers credit cards, be sure to review the prototype. It might be a good idea to have preliminary discussions with your forms provider as well. Would they be able to make these changes? How long would that take? At what cost?
This also might be a good time to put together a summary of the headaches during the last round of "tweaks" to credit card disclosures. Detailed, specific information on the timeframe, steps and costs to comply with the most recent changes to credit cards would be very useful during the prototype stage and especially during any future proposed rulemakings.
In the past week or so, we've tried to highlight a few areas where regulations can be quite difficult to follow. Here's another example, coming out of the Fed's recent 300+ page CARD Act "clarification" rulemaking. The rule becomes effective October 1, 2011. If your credit union converted your credit card program from a variable to a fixed rate recently, please put down your coffee and move anything that you can throw that is currently within your arm's reach into a desk drawer. And then lock that drawer.
Issuers are generally required to reevaluate rate increases at least every six months. Regulation Z clarifies that a change from a variable rate to a fixed rate, or vice-versa is not a rate increase that triggers the obligation to reevaluate, if the rate in effect prior to the change is the same as, or higher than, the new rate. However, the Board added new comment 59(a)(1)-3.iii in its "clarification." The new comment creates an obligation to reevaluate if a creditor switches an account from a variable rate to a fixed rate and the variable rate decreases at some later time, leaving the cardholder paying a higher rate than he would have absent the creditors’ decision to change from a variable to a fixed rate. The comment below explains the situation.
“[A]ssume a new credit card account…is opened on January 1 of year 1 and that a variable annual percentage rate that is currently 15% and is determined by adding a margin of 10 percentage points to a publicly-available index not under the card issuer’s control applies to all transactions on the account. On January 1 of year 2, upon 45 days’ advance notice pursuant to § 226.9(c)(2), the rate on all existing balances and new transactions is changed to a nonvariable rate that is currently 15%. The change from the 15% variable rate to the 15% non-variable rate on January 1 of year 2 is not a rate increase for purposes of § 226.59(a). On April 1 of year 2, the value of the variable rate that would have applied to the account decreases to 12.5%. Accordingly, on April 1 of year 2, the non-variable rate of 15% exceeds the 12.5% variable rate that would have applied but for the change in type of rate. At this time, the change to the non-variable rate of 15% constitutes a rate increase for purposes of § 226.59, and the card issuer must begin periodically conducting reviews of the account pursuant to § 226.59.
Consequently, issuers that convert accounts from variable to nonvariable rates must track the old variable rate, which no longer applies to the account, as a decrease in that index may give rise to the obligation to reevaluate accounts that now have a fixed rate. The example shows a hypothetical where the review is triggered on April 1, of "year 2." But this requirement to compare your fixed rate against the old, dead, variable rate could trigger a review in "year 40." Add this to the mix: If your credit union has take part in a number of mergers and you've incorporated their card programs into your program, the complexity of the review process could be fierce. You'll need to know the history of their rate change decisions to get a good picture of your rate review responsibilities.
Earlier this week, I had the pleasure of attending a luncheon where Congressman Spencer Bachus (R-Ala.) addressed a gaggle of regulatory peeps. Rep. Bachus is a big deal in Washington, as he is the Chair of the House Committee on Financial Services. He spoke about a number of issues, including his views of the CFPB.
He viewed the new agency as potentially problematic, laying out three basic reasons for his view.
While Elizabeth Warren is not technically the Director, she is hiring everyone who will "count" at the CFPB. Those new hires will be molded by Ms. Warren. Mr. Bachus doesn't see eye-to-eye with Ms. Warren on the role of regulation, so he sees an agency of Warren-ites as troubling. Mr. Bachus' views are very interesting in light of this article from the L.A. Times.
In any case, Warren is already aware that fresh blood is needed in the regulatory arena. She said she wants to avoid hiring nothing but older, seen-it-all-before bureaucrats who may be set in their ways.
"We're going to hire new, young staff and train them to follow the law," Warren said.
Hey, wait a minute. Isn't that the script for "The Untouchables"?
"That's what I'll be renting this weekend," she said, laughing.
He noted that the CFPB will increase regulatory burdens. But he added something that is missed by many. When a new set of regulatory hurdles is put in place, those hurdles have a greater impact on smaller businesses. So, credit unions and community banks, entities that don't have a ton of resources to throw at compliance and legal risks, will be affected the most. This remains to be seen, but it is a concern that I share with Mr. Bachus. I understand that Ms. Warren wants to level the playing field so that good actors are not competing against bad actors with one arm tied behind their backs. But if the smaller good actors are using both hands to deal with new regulatory requirements, we won't have any free hands to compete with anyone.
Mr. Bachus also noted that financial regulators must balance consumer protection with safety and soundness. If the only products that a financial firm is allowed to offer do not make money, that firm is in a world of trouble.
Mr. Bachus' comments are a reminder of the complex dance that is done in Washington, D.C. Ms. Warren has her marching orders. She is building the CFPB. But checks and balances are in place, and Mr. Bachus has indicated that he'll use his position and power to keep an eye on things at the CFPB.
The CFPB will host a "credit card conference" next Tuesday to measure the impact of the Credit CARD Act.
We will bring together academics, industry leaders, consumer advocates, and voices from within government to look at the data from multiple directions, and to analyze how the industry has reacted and how consumers are responding. The idea is to establish a fact base upon which the CFPB can improve our understanding of the impact of the CARD Act and to help us understand how we can make credit markets work better.
The FFIEC announced its new and improved IT Examination Infobase. The announcement doesn't signal a change to the FFIEC's IT handbook, but the FFIEC believes the change should improve access to guidance and the ability of the FFIEC to update guidance in the future. The IT Examination Handbook is a huge source of valuable guidance.
NAFCU has entered into an agreement with Sheshunoff and Thompson that benefits the entire credit union industry. NAFCU was able to negotiate a credit union discount for the entire Sheshunoff and Thompson libraries of content. If you find a manual or product that tickles your fancy, use promo code NAFCU11 at checkout when you purchase or renew the product to save 10%. Learn more about this new development here.
I arrived a bit early for the luncheon with Rep. Bachus, so I had about 5 minutes to kill. Those five minutes became a personal pep-talk. I've lived in the D.C. area since 1996. The traffic may be bad and the work may be hectic, but part of me will always be a tourist that is overwhelmed by Washington, D.C. and the institutions and places it hosts.
Here are some items of interest.
You may have caught on to the fact that I enjoy reading the works of Felix Salmon. In this post, Mr. Salmon dissects a disclosure he received from his bank. As you'll read, the disclosure is nearly impossible to understand. The post is a nice reminder of this fact: we write or disclose words to communicate. What are you trying to say? Once you know that, say it as clearly as possible. There are times when we must use precise words or "legal terms of art." Outside of those times, though, writing or disclosures should be clear and easy to understand. Don't use 50-cent words when a nickel buys you exactly what you need. Don't force readers to choose between confusion and reaching for a dictionary. And you should hire a monkey to slap you whenever you use any of the following terms in a document meant for general consumption: heretofore, whereas, or any Latin phrase.
The Fed has updated its Consumer Compliance Handbook. Here's how I use these handbooks. Someone may ask you for an overview of Regulation E. You know all about Regulation E, but you are swamped. Why not refer them to the Reg E portion of the handbook? Or use the handbook when building a training program to make sure you don't forget something important. In an age of increasing work demands, always lean on trusted resources whenever possible.
"The rebate offer is clear, transparent, and we believe fully within the spirit of the Card Act," says Citigroup spokesman Samuel Wang.
So, while the Credit CARD Act and resulting Reg Z changes make it difficult to increase rates on purchases and existing balances, there is an argument that it does not cover such "rebate" features. Food for thought.
The WSJ article also serves as a good reminder.
Major newspapers have financial journalists. They give advice and/or write articles that point at perceived abuses by financial institutions. This article notes how consumers with credit cards can improve their lot by calling in to "fight back" and "raise hell." That's why it is wise to read local newspapers. Your members will read them, and they'll react accordingly.
Journalists love a good story. This article talks about a gentlemen with a Discover card who had his interest rate increased in a way that he thought violated the Credit CARD Act. At the end of the day, the bank didn't violate the Act. But he's still in the article, and the WSJ contacted the bank directly. They ended up reversing the fees and interest rate increase. Consumers who feel wronged will sometimes reach out. There's not much you can do to prevent that, but you should always remember that it is a possibility.
On a semi-related note, here is a wonderful blog post written by Professor Don Boudreaux of the George Mason University. Professor Boudreaux writes numerous "letters to the editor" that challenge statements and statistics that fly in the face of reason or sound economic theory. This one was a beauty, and it was written to the Wall Street Journal.
August 22 Reg Z Penalty Fee Issue: Hidden Inactivity Fees?
(3) The closure or termination of an account.
Account inactivity sounds simple enough, right? Not so fast my friends. The Fed views the category a bit more broadly than you might first suspect. For example, if you waive an annual credit card fee if the member pays X dollars in interest or uses the card X amount of times, you have an impermissible inactivity fee.
The Fed explained the prohibition in the Staff Commentary via a new comment to Regulation Z.
Inactivity fees. Section 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a fee based on account inactivity (including the consumer’s failure to use the account for a particular number or dollar amount of transactions or a particular type of transaction). For example, § 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 fee when a consumer fails to use the account for $2,000 in purchases over the course of a year. Similarly, § 226.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 annual fee on all accounts but waiving the fee if the consumer uses the account for $2,000 in purchases over the course of a year.
If you want to know the Fed's rationale, here is how it defended its position in the final rule.
Consumer groups and individual consumers requested that the Board clarify that a card issuer cannot circumvent this (inactivity fee) prohibition by, for example, imposing a $50 annual fee on all accounts but waiving the fee if the consumer uses the account for $2,000 in purchases over the course of a year. In contrast, industry commenters argued that such arrangements should be permitted because they are no different than “cash back” rewards. Industry commenters also argued that inactivity and closed account fees should not be treated as penalty fees because the consumer has not violated the terms of the cardholder agreement by failing to use the account for a certain amount of transactions or by closing the account. However, as discussed above with respect to comment 52(b)-1, the Board believes that these fees are properly subject to § 226.52(b) because they are fees imposed for violating other requirements of the account. And other incentives provided to encourage consumers to use their accounts. Unlike other types of incentives, however, this arrangement is inconsistent with the intent of § 226.52(b)(2)(i)(B)(2) because only consumers who do not engage in the requisite level of account activity are ultimately responsible for the fee. Thus, in these circumstances, there is no meaningful distinction between the annual fee and an inactivity fee. Accordingly, comment 52(b)(2)(i)-5 clarifies that this type of arrangement is prohibited. The Board notes that this guidance should not be construed as prohibiting “cash back” rewards or similar incentives commonly offered by card issuers to encourage account usage.
The August 22 rules only apply to credit cards.
You may want to review your credit card fee arrangements to see if you charge fees in this manner. If you do, you'll need to make some adjustment by August 22.
As you can see, this rule is rather tricky. Don't forget about our July 14th webcast on the subject.
I've had a few minutes to glance through the Federal Reserve's recent final rule that implements the last two provisions of the Credit CARD Act. Here's some help in breaking it down.
The final rule is 252 pages long Yech! But here's the thing, you shouldn't worry about reading all of it at first. Just read the 21 pages that form the actual changes to the regulation itself. Here are those 21 pages. Read that first. If something is confusing, then go the staff commentary. If it is still confusing, then go the preamble and discussion portion of the rule. If the issue is still unclear, you may be off the grid.
Special mandatory compliance date for amendments to penalty fee disclosures.
The mandatory compliance date for the amendments to the penalty fee disclosures in §§ 226.5a, 226.6, 226.7, and 226.56 and in Model Forms G-10(B), G- 10(C), G-10(E), G-17(B), G-17(C), G-18(B), G-18(D), G-18(F), G-18(G), G-21, G- 25(A), and G-25(B) is December 1, 2010. Although card issuers may not charge late payment fees, returned payment fees, or over-the-limit fees that are inconsistent with § 226.52(b) after August 22, 2010, the Board understands that it may not be possible for some card issuers to revise the disclosures for such fees prior to August 22. Accordingly, the Board has established a mandatory compliance date of December 1, 2010 for the amendments to the penalty fee disclosure requirements.
Regarding penalty fees, the Fed had proposed that credit unions might be able to take advantage of a number of credit card penalty fee arrangements. There was the cost method, the prohibitive effect method, a percentage method, and the safe harbor. In the final rule, the Fed limits credit unions to either a "cost" method or the "safe harbor" fee of $25. (There is another method based on 3% of the the delinquent balance, but that is limited to charge cards.) The cost method will require an institution to show that its penalty fee represents a reasonable proportion of the costs incurred by the card issuer for that type of violation. Any card issuer using the "cost" method will have to reevaluate its determination of what those costs are, and the reasonable fee, every 12 months. That sounds like a lot of work, so I envision a super-majority of credit unions will simply use the safe harbor fee.
The safe harbor is $25, but for violations of the same type that occur within the next six billing cycles, credit unions will be able to charge up to $35 for such violations.
(2) If the issuer reduces the annual percentage rate to a rate that is lower than the rate described in paragraph (f)(1) of this section.
Well, I guess that's enough for today. Ugh.
Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs its incurs as a result of violations.
In addition, the Fed created this consumer brochure to help explain the changes to consumers. This may be a great training tool for front line staff.
First, keep in mind that this rule only applies to credit cards. The limitations on fees won't affect any other products. The requirement to revisit APR increases only affects credit cards as well.
Contact your third party vendors that help you with your credit card portfolio. Make sure they are aware of the final rule, and ask them how they will help you comply with the changes. For example, the "safe harbor" fee is $25. But you can charge $35 if the member has been late on one of his or her last six payments. In addition, late fees generally cannot be more than the underlying transaction. So, if a member is late on a $15 minimum payment credit card payment, you won't be able to charge more than $15. Will your data processing system be able to handle the variables? And what about your disclosures?
Keep in mind that if you change your late fees for credit cards, that is something that takes board approval for FCUs per your bylaws. Check out your bylaws to determine if that language is in there.
Start looking at your credit card portfolio to determine which cards have had an APR increase since January 1, 2009. That is the universe you'll be working within for the APR review portion of the final rule.
Consider signing up for the NAFCU webcast, where we'll detail this final rule. It is scheduled for July 14. (Bastille Day, no?) It will be delivered by Steve, Sarah, et moi.
We'll dig through the final rule to highlight issues as the weeks march forward.
This Thursday's NCUA Board meeting agenda has been changed. One item has been deleted from the open session ( Proposed Rule, Interest Rate Risk Policy) and one item has been added to the closed session (Consideration of Supervisory Activities). The revised agenda for this week’s meeting is available online here.
The NFIP lapses have been confusing for lenders, to say the least. NAFCU sent this letter to the Hill on Monday evening. And we joined in sending this letter yesterday. Both letters urge Congress to reauthorize the NFIP as soon as possible.
I think this proposal is a fairly big deal, so I urge you to review the Alert and comment. Not a member? I wrote generally about the proposal on the blog a few weeks ago. I fear the rule will put pressure on your credit card fee income and very well may reduce interest income for your credit card portfolio. Come hoo-hoo or high water, the Fed is under the gun to have a final rule that will take effect on August 22, 2010.
Case in point: look at this section of the proposal's preamble. It should give you a good glimpse of how this rule may cause severe heartburn for compliance officers.
Proposed comment 52(b)(2)(i)–1 would clarify that the dollar amount associated with a late payment is the amount of the required minimum periodic payment that was not received on or before the payment due date. Thus, § 226.52(b)(2)(i)(A) prohibits a card issuer from imposing a late payment fee that exceeds the amount of the required minimum periodic payment on which that fee is based. For example, a card issuer would be prohibited from charging a late payment fee of $39 based on a consumer’s failure to make a $20 required minimum periodic payment by the payment due date.
Did that get your attention? If so, please read the proposal or the NAFCU Regulatory Alert.
Last week, NCUA issued Regulatory Alert 10-RA-05, which shares Guidance Document FIN-2010-G001 with federally-insured credit unions. The guidance clarifies regulator expectations regarding how financial institutions should gather “beneficial ownership information.” In short, regulators are worried that individuals may use front companies or other account structures to hide the true ownership or control of an account. The beneficial owner, may dominate the account for illegal purposes in a way that shields their true identity. The guidance indicates that regulators expect financial institutions to implement internal controls to discover “beneficial owners,” especially for accounts that are higher risk for money laundering and other financial crimes. Route this to your BSA Officer. If you are the BSA Officer, note that many email programs will allow you to send an email to yourself. I do this sometimes, along with a note that says something akin to "Demo, I need this analyzed by COB today." This at least gives me the feeling that I delegated the work to someone.
We've discussed the Fed's proposal that will require you to review rate increases on your credit cards if the increase was done after January 1, 2009. But wait...what if the increase was due to the operation of a variable rate? Do you still have to review it and possibly lower the rate? Nyet. Here's what the Fed indicated on pages 57-58 of the proposal.
Penalty fees by credit card issuers must be reasonable and proportional to the violation of the account terms.
Credit card issuers must reevaluate at least every six months any APR increase done on or since January 1, 2009.
There are only two provisions, so this can't be that bad, right? Like the title of this post says, don't be fooled by the size of a proposal, or the number of provisions. I scanned the 157 pages last night after Das Twins went to bed, and I can tell you this - this proposal is both tricky and paternalistic. And that's a deadly combination.
Reasonable and proportional penalty fees.
Under the proposal, if you want to charge a penalty fee, you'll have to do it in one of the allowable methods.
Fees based on costs, if you can show that the fee represents a reasonable proportion of the total costs caused by the violation.
Fees based on deterrence, if you can show that the dollar amount of the fee is reasonably necessary to deter that type of violation using an empirically derived, demonstrably and statistically sound model that reasonably estimates the effect of the amount of the fee on the frequency of violations.
If you use either of these methods, you must reevaluate your methodologies at least every 12 months. The Fed will provide a safe harbor, but it seeks comments as to what that amount should be.
You can't charge a penalty fee for more than the underlying transaction. For example, if a member goes over the limit by $5, you can only charge a $5 over the limit fee.
If there is no dollar amount associated with the violation, you can't charge a fee. So, you can't charge a fee if a transaction is declined, when the member closes an account, or if there is inactivity on the account.
You may not charge more than one fee for violating the agreement based on a single event or transaction.
5% of the underlying transaction, not to exceed an amount to be determined by the Fed.
You'll have to review the decision that led to the rate increase. You don't have to use the same factors that led to the rate increase, but you may. Based on your review, you'll need to reduce their rate as appropriate.
If you do decide that a rate reduction is required, there's no explicit requirement to reverse all of the APR increase. BUT...the Fed is contemplating a requirement that you'll have to review such accounts every 6 months until you do reduce the rate all the way back to what it was before the increase.
There's a thumbnail sketch of the proposed requirements. I didn't touch on everything. For example, because the amount of penalty fees may vary given on the situation, your fee disclosures may need to be updated. Most likely, you'll disclose penalty fees as "up to $20." Model forms have been amended accordingly.
We'll dig into the details in the coming weeks, so stay tuned. But for now, here's my take-away points.
We need your help. You need to review this and comment. Comments are due 30 days after this puppy is published in the Federal Register. We're working on a Regulatory Alert, and we welcome NAFCU member comments. But please consider commenting yourself.
You need to alert your budget people that income very well may drop because of this regulation. Remember, you may see a drop in your fees, the number of your fees, as well as the fact that may have to reduce interest rates that you raised after January 1, 2009.
With that, have a great weekend, everyone.
Timely Settlement of Estates; Nice Job, GPO Access!
Now that we're living in the land of Credit CARD Act protections, I thought I'd give a small reminder concerning the new "timely settlement of estates" requirement. This new requirement is found at 12 C.F.R. Part 226.11(c). The name can be a bit misleading. Sure, it does involve setting up procedures to ensure that you give an administrator timely information about the credit card account of the deceased. But there's more.
(3) Limitations after receipt of request from administrator. (i) Limitation on fees and increases in annual percentage rates. After receiving a request from the administrator of an estate for the amount of the balance on a deceased consumer’s account, a card issuer must not impose any fees on the account (such as a late fee, annual fee, or overthe-limit fee) or increase any annual percentage rate, except as provided by § 226.55(b)(2).
(ii) Limitation on trailing or residual interest. A card issuer must waive or rebate any additional finance charge due to a periodic interest rate if payment in full of the balance disclosed pursuant to paragraph (c)(2) of this section is received within 30 days after disclosure.
So, with that in mind, once the administrator calls in, you have protect these accounts as noted above. So, when assessing fees or doing APR increases on your credit card portfolio, you'll need to find a way to shield such accounts. Also, you need to waive interest (or rebate it) if the administrator pays in full after you provide him or her with the balance as required by 12 C.F.R. 226.11(c)(2).
GPO is wonderful. Our Government Printing Office maintains an electronic form of the Code of Federal Regulations. And they have already updated their Regulation Z regulations to reflect the 2/22/2010 amendments.
The ability to repay requirements apply to accounts opened on or after February 22, 2010, regardless of when the credit union received the application. The rule also applies to credit limit increase requests (even on existing accounts) on or after February 22. See pages 19-20 of the transition rules.
The prohibition on charging fees equaling more than 25% of the member's credit limit within the first year, 226.52, applies to credit card accounts opened on or after February 22, 2010. It does not apply to accounts opened prior to 02/22/2010 even if they are still in their first year. Be sure to track these new accounts, especially ones with low credit limits, as the rule requires you to refund any fees charged above the 25% level by the end of the next billing cycle.
The restrictions on using the term "fixed" to describe your credit card accounts starts on February 22, 2010. If you describe an account as fixed, be sure to clearly disclose the period it is fixed and the rate that will apply afterward. If no time period is given, you will not be able to increase the APR on those accounts in the future. So, be sure to scrub your disclosures, advertisements, statements, rate sheets and other information for any inadvertent uses of the word "fixed."
The prohibition on increasing APRs and fees in the first year (see page 2-3) of a credit card account via the advance notice exception in 226.55(b)(3) applies to cards opened on or after February 22, 2010. See page 29.
Keep in mind this prohibition does not apply to increases due to other exceptions because the exceptions in 226.55 are not mutually exclusive. For example, the APR could increase due to the ending of a properly disclosed promotional period or due to the increase in the index on a variable-rate account which is outside of the credit union's control.
But, this limitation would prohibit the credit union from increasing the margin on a variable-rate account within the first year the account is opened because to increase the margin you would utilizing the advance notice exception under 226.55(b)(3).
This would also prohibit the credit union from increase a standard rate from 10% to 12%, for example on credit card accounts within the first year.
Credit unions will need to track and monitor which credit card accounts have been opened in the past year. The proposed increases in APR or fees can not apply to these accounts. In other words, any changes proposed under the advance notice exception can only apply to accounts that have been opened at least a year. This could cause operational headaches as your proposed changes will no longer be able to apply to all credit cards uniformly as some will be protected by the limitation on increase APRs or fees in the first year.
Remember, this blog posting has links to the regulatory text, staff commentary, and preamble to help pinpoint information (and don't be afraid to use "CTRL-F" to search for what you are looking for in each PDF document).
The federal government's offices in Washington, D.C. are closed today. NAFCU follows their lead, so our offices are closed as well. It really is a mess out there, folks.
NAFCU members: If you have a compliance issue, email us at compliance@nafcu.org. We'll do our best to respond remotely.
The new Regulation Z rules, both from the Credit CARD Act and the prior final rule, have created quite a bit of confusion about the disclosure of APRs. In order to properly disclose your APR on account opening disclosures - you will need to be clear on what type of account you are offering.
Fixed APR. The January 2009 final rule and the Credit CARD Act placed limitations on using the term "fixed" to describe an account. In short, credit unions can only use the term "fixed" to describe an APR if they also state a time period for which the APR will be fixed - and the APR that will apply after the "fixed" time period. If no time period is given, the credit union is not allowed to increase the APR on that account as it is truly fixed (like a 30-year fixed mortgage).
Also, as this chart indicates - the limitations apply to all open-end lending (see 226.16(f)). These limitations become effective February 22, 2010 and apply to both advertisements and account opening disclosures (see pages 16-17 and page 1 for the reference to 226.5(a)(2)(iii) referring to "fixed." This PDF contains the regulatory text of 226.5(a)(2)(iii). Only the "fixed" section is effective February 22, 2010 - the other parts of 226.5(a)(2)(iii) will become effective July 1, 2010.
Non-variable APR. This is the term the Federal Reserve has been using to describe accounts that are not tied to an index and margin and are not fixed. For these accounts, credit unions have a specific APR (i.e. 8.99%) that applies to the account - but they are not prohibited by increasing the APR in the future (through a 45-day change-in-term) as they would be if they referred to that account as "fixed" and did not give a specified time period. Keep in mind that according to 226.55(b)(3), the credit union is only able to increase the APR on future transactions by using the "advance notice exception."
So, do credit unions need to disclose the account as a "8.99% Non-variable APR" account? No, rather the account would simply be an account with a "8.99% APR." This is the default situation. When the account has special characteristics (such as "fixed" or is a variable-rate account) the credit union has to disclose additional information. However, if the account simply has a 8.99% APR - this is what the credit unions need to disclose. The fact that the account is "non-variable" and the credit union can increase the APR on future transactions using a 45-day change-in-terms does not need to be disclosed in an advertisement or the account opening disclosures.
In the past, some credit unions had referred to these accounts as "fixed." The Fed's January 2009 final rule explains why these limitations on the use of the term "fixed" are being adopted.
"Advertising ‘‘fixed’’ rates. Creditors sometimes advertise the APR for open end accounts as a ‘‘fixed’’ rate even though the creditor reserves the right to change the rate at any time for any reason. Consumer testing indicated that many consumers believe that a ‘‘fixed rate’’ will not change, and do not understand that creditors may use the term ‘‘fixed’’ as a shorthand reference for rates that do not vary based on changes in an index or formula."
Credit unions will need to make sure they do not inadvertently refer to their accounts as fixed, when they are, in fact, non-variable rate accounts.
"(A) Variable-rate information . If a rate disclosed under paragraph (b)(2)(i) of this section is a variable rate, the creditor shall also disclose the fact that the rate may vary and how the rate is determined. In describing how the applicable rate will be determined, the creditor must identify the type of index or formula that is used in setting the rate. The value of the index and the amount of the margin that are used to calculate the variable rate shall not be disclosed in the table. A disclosure of any applicable limitations on rate increases or decreases shall not be included in the table." (emphasis added). 12 C.F.R. 226.6(b)(2)(i)(A).
The Fed's consumer testing indicated the disclosure of the actual index and margin was confusing to members and should not be included in the table. Rather, inside the table the credit union will need to disclose that "This APR will vary with the market according to the [Prime Rate]." See page 26 of this PDF for a model form (notice also the purchase APR must be in 16 point font starting July 1, 2010).
(A) The fact that the annual percentage rate may increase.
(B) How the rate is determined, including the margin.
(C) The circumstances under which the rate may increase.
(D) The frequency with which the rate may increase.
(E) Any limitation on the amount the rate may change.
(F) The effect(s) of an increase.
(G) A rate is accurate if it is a rate as of a specified date within the last 30 days before the disclosures are provided." 12 C.F.R. 226.6(b)(4)(ii).
This detailed information can not be included in the account opening table but should be included in another part of the account opening disclosures or account agreement.
For those of you working on Reg Z issues for the 2/22/2010 deadline, you are aware of the requirement to post your credit card agreements on your website and to submit them to the Federal Reserve. (Note, there is a small issuer exception.) If you haven't looked into the requirements of submitting your credit card agreements to the Fed, you'll want to view this "technical specifications document" which outlines the...well...technical specifications involved in delivering your agreements to the Fed.
In order to submit your agreement, you'll need to include your DUNS number. A what number?
A DUNS number. That's a Dun and Bradstreet Universal Number System number. This is a number offered by Dun and Bradstreet, a company that apparently wants to be called D&B. Which makes me think of Dave and Busters. Are credit unions able to get a DUNS number? Yes. In fact, NCUA requires that credit unions applying for technical assistance grants to have one.
NAFCU Members: We've updated the Reg Z Overview document, adding a section on "subsequent disclosures."
As I write this, the Washington, D.C. area is staring at a monster snow storm that is due to hit early Friday morning. Here's the snow total estimates as of late Friday morning. 16-26 inches!
NAFCU's Offices are closing at 1:30 p.m. today, as we follow the Federal Government's lead on snow closings. Please be patient with our response times.
While Regulation Z haunts us in our sleep, NCUA continues to issue guidance relevant to compliance officers. Here's a few items that have been kicking around in my in-box.
NCUA has issued its annual "Please Do Not Forget About Your HMDA Submission Regulatory Alert."
You have asked if a federal credit union (FCU) can provide residential mortgage loan processing and servicing to credit unions as a correspondent service under the incidental powers rule where the credit union receiving the service would fund the loan and the loan would close in the funding credit union’s name. 12 C.F.R. §721.3(b). We conclude this would be permissible as a correspondent service and note, as required for all incidental powers activities, FCUs must comply with any applicable NCUA regulations, policies, and legal opinions, as well as state and federal law applicable to the activity. 12 C.F.R. §721.5.
NCUA has issued Letter to Credit Union 10-CU-01. The letter shares a Supervisory Letter issued to all NCUA field staff regarding the supervision of low income and community development credit unions. It is a great overview of these two types of credit unions. NCUA also notes that the guidance would be useful for any credit union looking to serve people of "modest means."
You likely rely on third party vendors for many aspects of your credit card program. If you fear that your vendor will be unable to meet some deadline, be proactive. Document your efforts to comply. Save emails and other vendor communications. Ask them to explain why they won't meet a deadline, and save their response. Feel free to push them - remember, you are paying them for their ability to provide solutions. Should an examiner inquire why you are not in compliance with some aspect of the rule, you'll at least be able to show your due diligence and efforts.
As we tinker with rates, don't forget an important Credit CARD Act provision that has yet to be implemented. Section 101 of the Credit CARD Act contains a provision that requires creditors that increase an APR on a credit card after January 1, 2009 to revisit the increase later to see if the rate should be reduced. The Fed has not issued regulations yet to address this, so we don't have details on what we'll have to do. But ask yourself this: If someone asked you to provide a list of credit card accounts that might be subject to this upcoming requirement, would you be able to do so? Would you be able to pull a list of credit card accounts that had their rate increased since January 1, 2009?
"(b) Exceptions. A card issuer may increase an annual percentage rate or a fee or charge required to be disclosed under § 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception set forth in this paragraph even if that increase would not be permitted under a different exception." (emphasis added).
1. Exceptions not mutually exclusive. A card issuer may increase an annual percentage rate or a fee or charge required to be disclosed under § 226.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception set forth in § 226.55(b) even if that increase would not be permitted under a different exception. For example, although a card issuer cannot increase an annual percentage rate pursuant to § 226.55(b)(1) unless that rate is provided for a specified period of at least six months, the card issuer may increase an annual percentage rate during a specified period due to an increase in an index consistent with § 226.55(b)(2). Similarly, although § 226.55(b)(3) does not permit a card issuer to increase an annual percentage rate during the first year after account opening, the card issuer may increase the rate during the first year after account opening pursuant to § 226.55(b)(4) if the required minimum periodic payment is not received within 60 days after the due date."
This is an important distinction to keep in mind. For example, the advance notice exception can not be used in the first year an account is opened. 12 C.F.R. 226.55(b)(3)(iii). This prohibits the credit union from raising the margin on a variable-rate account within the first year the account is opened. However, the credit union could still increase the APR on the account, according to variable rate exception in 226.55(b)(2), if the index on the account increases (assuming the index is outside of the credit union's control).
This section looks at the double-cycle billing prohibition and the restrictions on charging interest on transactions which were paid in full by the end of the grace period that Anthony mentioned on Monday.
You can find the document at NAFCU's compliance homepage.
The recent changes to Regulation Z's open end rules have changed the way card issuers must handle their grace period. We're all familiar with the new prohibition against double-cycle billing. But there's more.
Effective February 22, 2010, when a member pays some, but not all of a prior credit card balance before the expiration of the grace period, the Credit CARD Act, and Reg Z, will prohibit the card issuer from imposing finance charges on the portion of the balance that has been repaid. The requirement is found at 226.54, and it was part of the proposal. I've highlighted some text in red below.
§ 226.54 Limitations on the imposition of finance charges.
(ii) Any portion of a balance subject to a grace period that was repaid prior to the expiration of the grace period.
In other words, if the member had purchases of $500, and paid you $300 before the expiration of the grace period, you can only reach back and charge interest on the $200 that was not paid. It is our understanding that many card programs were not set up this way. The staff commentary, beginning on page 1054, gives a number of examples and shows how this will work using hypothetical transactions.
I would check to see how you handle grace periods to ensure that your practices will match with the upcoming changes.
NAFCU members, the February 2010 NAFCU Regulatory Compliance Monitor is now available.
NAFCU has released its Regulatory Final for the Regulation Z final rule. It is available for members here.
The following includes the section number and a brief summary of the most significant changes to the final rule that either differ from the proposed rule or that simply were not discussed in the proposed rule. For more information on any of these significant changes, please see the section-by-section analysis for the section referenced.
§ 226.55(b)(2) – Variable Rate Exception. The rule states that an issuer that includes an interest rate floor in a variable rate plan may not use the variable rate exception to increase the interest rate on an account.
§ 226.55(b)(3) – Advance Notice Exception. The rule effectively states that any issuer that did not send a change in notice terms by January 7, 2010 is prohibited from increasing the APR on an existing balance even if notices are sent out prior to the February 22, 2010 effective date of this rule.
§ 226.7(b)(11)– Due Date; Late Payment Costs. The final rule authorizes an issuer to set a due date of the last day of the month. The proposed rule would have required due dates to be the same numerical day each month, effectively prohibiting due dates on the 29th, 30th or 31st of any month.
§ 226.56 – Requirements for Over-the-Limit Transactions. The final rule requires issuers to provide consumers confirmation of the decision to opt-in to have over-the-limit transactions honored. The proposed rule sought comment on whether the Board should impose such a requirement.

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