Thursday, December 7, 2023

March 2010 Legal Update

Raffles and Giveaways and Lotteries, Oh My! What Can/Can’t a Bank Do?

FACT Act Changes Mandatory July 1, 2010 (Reg V)

Yet More Changes Affecting Open-End Credit to Consumers (Reg Z) Effective February 22, 2010 and July 1, 2010
Reminder: Escrow Required for HPMLs for All Applications Received after April 1, 2010
Compliance Dates Roundup

Raffles and Giveaways and Lotteries, Oh My! What Can/Can’t a Bank Do?

Byron’s Quick Hit: Despite recent changes in Oklahoma expanding legal gambling, Oklahoma banks are still prohibited by Federal and Oklahoma law from operating, participating in, advertising, or hosting a promotion that meets the definition of a “lottery.” A promotional giveaway run by a bank will normally be considered a lottery if the entrants must give “consideration” for entering the contest. In order to avoid the consideration requirement, banks must give non-customers a fair opportunity to enter the contest and win.
                We get a fairly steady stream of questions concerning whether a particular bank promotion under consideration is considered a lottery. For whatever reason, there has been an uptick recently in these inquiries. In looking through these issues, it appears that this topic has not been covered in the Legal Update since 1995! I for one think 15 years is long enough to go between covering this important legal topic. So wait no longer!
                Everybody likes a giveaway. Banks frequently offer bonuses for becoming a new customer. It can be appealing to concentrate the money a bank may spend on new account bonuses, or would otherwise spend on marketing, to give away bigger, better prizes. In addition, most of us enjoy games of chance to some degree. Thus, many business, including banks, attempt to woo new customers or award existing customers (and thereby woo new customers) by giving away bigger prizes based upon some element of chance.
                There are two important areas of restriction for Oklahoma banks when considering what is or is not a prohibited in this area: (i) federal law that prohibits participation or promotion of a lottery by banks; and (ii) Oklahoma law that prohibits lotteries for all Oklahoma citizens, including banks. A carefully designed promotion may be able to pass legal muster under both these regimes.
Federal Prohibition on Participation in Lotteries by Banks
                All FDIC-insured financial institutions are prohibited from dealing in or participating in lotteries, as described below. For the purposes of this article, I will be discussing 12 U.S.C. § 25a, which affects national banks. However, basically identical prohibitions are enacted for state-chartered banks that participate in the Federal Reserve System (12 U.S.C. § 339), federal thrifts (12 U.S.C. § 1463), and state-chartered banks that do not participate in the Federal Reserve System, but that are insured by the FDIC (12 U.S.C. § 1829a).
                Pursuant to 12 U.S.C. § 25a, national banks are prohibited from (i) dealing in lottery tickets, (ii) dealing in bets used as a means or substitute for participation in a lottery; (iii) announcing, advertising, or publicizing the existence of any lottery, or the any participant or winner of such a lottery. While, this prohibition may not seem so broad on its face, the statute gives a very broad definition of lottery. As a result, banks are effectively prohibited from participating in any activity whereby a group of people give some sort of consideration (payment or otherwise) and a winner is chosen by some means of chance.
It is important to note that banks are not prohibited from banking lawful lottery administration activities, pursuant to Section 25a(d). This has been verified by OCC Interpretive Letter 1085 (March 8, 2007), which states:
12 U.S.C. § 25a does not prohibit national banks from accepting deposits from, or providing other normal banking services to, [a state] Lottery or a private entity that becomes the [m]anager of the Lottery. Such services are expressly authorized by 12 U.S.C. § 25a(d).
                Strangely enough, one activity that is probably NOT prohibited by federal law is a bank donating a gift or prize in support of what would otherwise be an unlawful raffle or lottery by another organization. Further, if the organizer of the raffle mentions that the bank has given such a prize, that is also not prohibited by Section 25a. That was the determination of the OCC in OCC Interpretive Letter 900 (June 19, 2000). This letter states:
[S]imply noting on an advertisement that the Bank has donated [an] item to be raffled would not constitute action by the Bank to publicize the lottery, provided the Bank has no involvement with the sponsoring or display of the advertisement. … To attribute such third party activities to the Bank would be to impose vicarious liability upon the Bank for the acts of others, which is not authorized by the language of the statute.
                Although the prohibitions contained in federal law are quite restrictive, some of the more restrictive provisions are contained under Oklahoma law affecting all Oklahoma citizens, as discussed below.
Oklahoma Law Prohibits Lotteries
                In today’s terms, it seems a little bit silly to say that Oklahoma prohibits lotteries. Not only do we have the state lottery, but legalized gambling has been vastly expanded in recent years. However, despite recent changes in the law, it is clear that other than state-sanctioned lotteries, anything that satisfies the statutory definition of a “lottery” is still prohibited under Oklahoma’s criminal statutes.
                It is a criminal violation of Oklahoma law to participate in a lottery. Chapter 41 of Title 21 (21 Okla. Stat. §§ 1051 – 1068), provides that a lottery is a “nuisance” that Oklahoma courts are authorized to stop. In addition, it is illegal to sell lottery tickets, to advertise a lottery, to use a facility to host a lottery, or to insure against a lottery, among other things. Basically, if it is a lottery, you need to stay away from it. Thus, the big question that must first be addressed when considering a possible promotion involving giving something away is “Is it a lottery?”
                21 Okla. Stat. § 1051(A) defines a lottery as:
Any scheme for the disposal or distribution of property by chance among persons who have paid, or promised, or agreed to pay any valuable consideration for the chance of obtaining such property, upon any agreement, understanding or expectation that it is to be distributed or disposed of by a lot or chance, whether called a lottery, raffle, or a gift enterprise, or by whatever name the same may be known. “Valuable consideration” shall be construed to mean money or goods of actual pecuniary value.
It should be noted that there are several exceptions given to the definition of the term “lottery,” including for the Oklahoma Lottery Commission. However, none of these exceptions will protect a bank that wants to give away a large prize to one of its customers.
                The statutory definition has changed over time. However, the basic requirements of the statutory definition of a lottery were restated by the Supreme Court of Oklahoma in Draper v. Lynch, 1943 OK 215, as follows: (1) the offering of a prize; (2) by chance; and (3) the giving of consideration for an opportunity to win the prize. Reviewing these three components of a lottery, it is easy to see that the last component, CONSIDERATION, will always be the central issue. That a prize is offered and is given away by some mechanism of chance is part and parcel of the very idea of a promotion to give away a prize.
                Oklahoma caselaw makes clear that the meaning of “consideration” is very wide, and may not necessarily mean that the participant paid money that he would not have otherwise had to pay. For example, in Knox Industries Corp. v. Scanland, 258 P.2d 910 (Okla. 1953), a service station started a promotion to give away a 1952 Ford. All that a person had to do to be eligible to win the prize was to go by one of the owner’s service stations and ask for a ticket. Participants did not have to buy or purchase anything. The winner was to be picked from among the ticket numbers distributed in this manner. The winner was required to present the winning ticket within certain specified hours at the business’s main office. In determining that the entrants did provide consideration, the Oklahoma Supreme Court quoted the following language:
But while the patrons may not pay, and the respondent may not receive any direct consideration, there is an indirect consideration paid and received. The fact that prizes of more or less value are to be distributed will attract persons … who would not otherwise attend. In this manner those obtaining prizes pay consideration for them, and the [business] reap a direct financial benefit.
                Although the Knox decision came in 1953 and has not been revisited by Oklahoma courts since, it appears that the legislature has softened the result here somewhat by defining “valuable consideration” to mean “money or goods of actual pecuniary value.” However, I do not think that the basic holding of Knox can be completely discounted, as many of the proposed current promotions involve indirect consideration from customers. For example, a bank may wish to give its customers automatic entries in a promotional giveaway, simply by virtue of being a customer, or by virtue of using the customers ATM/debit card. In both of these instances, the bank receives indirect consideration from its customers for participation in the promotion.
One often-used technique to wash the tinge of “consideration” from a promotion is to allow free entry by anyone, including non-customers. This technique can be successful, so long as the restraints placed upon a non-customer do not place the non-customer at a significant disadvantage to the bank’s customers. This is why disclaimers such as “no purchase necessary to win” while referring entrants how to enter for free are seen on almost all promotions of this type.
Answering Some Common Questions:
1.     Is it appropriate for a bank to give automatic entries into a promotion by: (a) opening an account or keeping it open, (b) renting a safe deposit box; (c) applying for a loan; or (d) using his ATM/debit card (I’m sure there are many more examples)? 
I don’t believe that the act of giving an automatic entry to a customer is always impermissible. The key is that in order to clean these transactions of the “consideration” piece, there must be an opportunity for those who are not customers to enter for free. 
I also believe common sense requires that the non-customer essentially be given a fair chance to win. For example, if your bank would like to give your customers an automatic entry each time the customer uses his ATM/debit card, that will potentially give tens (at least a hundred in my case) of automatic entries per month. If on the other hand, the contest is open to non-customers who come in and fill out a free entry form (but they only get one entry), in my mind you have over-tilted this back to where the non-customer is effectively (almost always) not going to win. Your bank is making money from each ATM/debit card transaction. I think this type of promotion is probably prohibited by both state and federal law.
2.     May the bank host or advertise a “casino night” in favor of a local charity where all of the proceeds go to charity? Can the bank allow tickets for a raffle to be sold on its premises for a good charity?
This one is easy: No. Despite your good intentions, these activities are clearly prohibited by both Oklahoma and federal law.
Practical Tips
1.             Any time you are giving something away and there is an element of chance, you must ensure that participants have the opportunity to enter without payment of consideration. This means that you must afford the opportunity for non-customers to enter into the promotion at no cost.
2.             The requirements for a non-customer to enter into a promotion should not require a substantial degree of effort. Although it is probably permissible to require that a non-customer fill out an entry form at a bank branch, other means, such as allowing mail-in entries and online entries are preferable.
3.             To this author, promotions that provide numerous automatic entries to customers, while practically limiting non-customers to many fewer entries are suspect. Thus, for example, promotions whereby a customer obtains a free entry every time he uses his ATM/debit card run a high risk of being considered an illegal lottery. Banks should not “stack the deck” so that they are essentially assured that one of their customers will win.
FACT Act Changes Mandatory July 1, 2010 (Reg V)
Byron’s Quick Hit: Changes under the FACT Act will require that banks adopt written policies and procedures concerning their consumer credit reporting activities. In addition, banks will be required to respond to credit disputes raised by consumers that are presented directly to the bank.
                The Fair Credit Report Act (“FCRA”) was enacted in 1970. The Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”) amended the FCRA for various purposes, including improving the accuracy of consumer reports. Section 312 of the FACT Act amended the FCRA by requiring the federal banking regulatory agencies to issue guidelines for credit information furnishers to establish reasonable policies and procedures for implementing the FCRA’s accuracy and integrity regulations and guidelines. Further, the FACT Act required the federal banking regulatory agencies to issue regulations identifying the circumstances under which a credit information furnisher must reinvestigate disputes concerning the accuracy of information contained in a consumer credit report based on a direct request from a consumer. 
Pursuant to the FACT Act requirements, the federal regulatory agencies issued final rules on July 1, 2009 at 74 F.R. 31484. The final rules were issued simultaneously by the Office of the Comptroller of the Currency (12 C.F.R. Parts 41 and 571), the Federal Reserve (12 C.F.R. Part 222 – Reg V), the FDIC (12 C.F.R. Part 334), the National Credit Union Administration (12 C.F.R. Part 717), and the Federal Trade Commission (16 C.F.R. Part 660). In this article, I will simply refer to the changes incorporated in Reg V. However, all banks are affected by these final rules.
The deadline for compliance with the final rules is July 1, 2010. Banks that have not begun already should act quickly to ensure compliance by the deadline.
                As always, as important as any other part of any new regulatory provision, are the definitions. Section 222.41 contains the following definitions that apply to the new final rules:
                “ACCURACY” means that information that a furnisher provides to a consumer reporting agency about an account or other relationship with the consumer correctly: (1) reflects the terms of and liability for the account or other relationship; (2) reflects the consumer’s performance and other conduct with respect to the account or other relationship; and (3) identifies the appropriate consumer.
                “DIRECT DISPUTE” means a dispute submitted directly to a furnisher (including a furnisher that is a debt collector) by a consumer concerning the accuracy of any information contained in a consumer report and pertaining to an account or other relationship that the furnisher has or had with the consumer.
                “FURNISHER” means an entity that furnishes information relating to consumers to one or more consumer reporting agencies for inclusion in a consumer report. 
                “IDENTITY THEFT” means a fraud committed or attempted using the identifying information of another person without authority.
                “INTEGRITY” means that information that a furnisher provides to a consumer reporting agency about an account or other relationship with the consumer: (1) is substantiated by the furnisher’s records at the time it is furnished; (2) is furnished in a form and manner that is designed to minimize the likelihood that the information may be incorrectly reflected in a consumer report; and (3) includes the information in the furnisher’s possession about the account or other relationship that the Federal Reserve Board has determined that the absence of which would likely be materially misleading in evaluating a consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living, and credit limit (if applicable).
Establishment of Policies and Procedures Concerning the Accuracy and Integrity of Furnished Information (12 C.F.R. § 222.42)
                The Final Rules require that every furnisher establish and implement reasonable written policies and procedures in order to ensure the accuracy and integrity of the information relating to consumers that it furnishes to consumer reporting agencies. According to the new provisions, “The policies and procedures must be appropriate to the nature, size, complexity, and scope of each furnisher’s activities.” In addition, Section 222.42(b) specifies that each furnisher MUST consider the guidelines provided in Appendix E to Reg V in developing its policies and procedures and must incorporate those guidelines that are appropriate.
                The guidelines provided in Appendix E are broken down into three sections: (i) a discussion of the nature, scope and objectives of the required policies and procedures, (ii) the establishment and implantation of the policies and procedures, and (iii) specific components of the policies and procedures. The first section dealing with the nature, scope and objectives is purely common sense considering the requirements of the final rules itself. The objective of the final rules is to provide accurate credit reporting information about consumers. Businesses should consider the nature of their business and the objective of the final rules relate to its activities. The remaining two sections are somewhat more substantive.
                As it relates to establishing and implementing policies and procedures, Appendix E clarifies that businesses should: (1) identify practices or activities that can compromise the accuracy or integrity of information furnished by consumer reporting agencies; (2) evaluate the effectiveness of existing policies regarding the accuracy and integrity of information furnished to consumer reporting agencies and should consider whether new, additional or different policies and procedures are necessary; and (3) evaluate the effectiveness of specific methods (including technological means) the business uses to provide information to consumer reporting agencies, including how those methods may affect the accuracy and integrity of the information it provides and wither new, additional or different methods should be used in order to enhance the accuracy and integrity of the information provided.
                In addition, Appendix E provides that each furnisher should address each of the following components of its policies and procedures as appropriate:
1.             Establishing and implementing a system for furnishing information about consumers to consumer reporting agencies that is appropriate to the nature, size, complexity, and scope of the furnisher’s business operations;
2.             Using standard data reporting formats and standard procedures for compiling and furnishing data, where feasible, such as the electronic transmission of information about consumers to consumer reporting agencies;
3.             Maintaining records for a reasonable period of time, not less than any applicable recordkeeping requirement, in order to substantiate the accuracy of any information about consumers it furnishes that is subject to a direct dispute;
4.             Establishing and implementing appropriate internal controls regarding the accuracy and integrity of information about consumers furnished to consumer reporting agencies, such as by implementing standard procedures and verifying random samples of information provided to consumer reporting agencies;
5.             Training staff that participates in activities related to the furnishing of information about consumers to consumer reporting agencies to implement the policies and procedures;
6.             Providing for appropriate and effective oversight of relevant service providers whose activities may affect the accuracy or integrity of information about consumers furnished to consumer reporting agencies to ensure compliance with the policies and procedures;
7.             Furnishing information about consumers to consumer reporting agencies following mergers, portfolio acquisitions or sales, or other acquisitions or transfers of accounts or other obligations in a manner that prevents re-aging of information, duplicative reporting, or other problems that may similarly affect the accuracy or integrity of the information furnished;
8.             Deleting, updating, and correcting information in the furnisher’s records, as appropriate, to avoid furnishing inaccurate information;
9.             Conducting reasonable investigations of disputes;
10.           Designing technological and other means of communication with consumer reporting agencies to prevent duplicative reporting of accounts, erroneous association of information with the wrong consumer(s), and other occurrences that may compromise the accuracy or integrity of information provided to consumer reporting agencies;
11.           Providing consumer reporting agencies with sufficient identifying information in the furnisher’s possession about each consumer about whom information is furnished to enable the consumer reporting agency properly to identify the consumer;
12.           Conducting a periodic evaluation of its own practices, consumer reporting agency practices of which the furnisher is aware, investigations of disputed information, corrections of inaccurate information, means of communication, and other factors that may affect the accuracy or integrity of information furnished to consumer reporting agencies; and
13.           Complying with applicable requirements under the Fair Credit Reporting Act and its implementing regulations.
Further, Section 222.42(c) requires that credit information furnishers must review their policies and procedures periodically and update them as necessary to ensure their continued effectiveness.
Investigation and Resolution of Direct Disputes (12 C.F.R. § 222.43)
                If a consumer does not believe that information submitted by a furnisher is accurate, the final rules establish a mechanism for the consumer to contact the furnisher of the disputed information directly and requires the furnisher to conduct an investigation and, if necessary, correct erroneous information. The requirement of an investigation is triggered only if a consumer submits a dispute notice directly to the furnisher at an address set forth on a consumer report relating to the consumer, an address specified by the furnisher for submitting a direct dispute, or if such an address has not been specified, any business address of the furnisher.
                The consumer’s notice must (i) sufficiently identify the account or other relationship that the dispute relates to, (ii) the specific information the consumer is disputing, and (iii) all supporting documentation or other information reasonably required by the furnisher to substantiate the basis of the dispute. 
                Upon receiving a direct dispute notice from a consumer, a furnisher is required to (i) conduct a reasonable investigation with respect to the disputed information, (ii) review all relevant information provided by the consumer with the dispute notice, and (iii) complete its investigation and report the results of its investigation to the consumer within 30 days (this period may be extended for an additional 15 days if the consumer submits additional information within the 30 day period). In addition, if the furnisher determines that incorrect information was submitted as a result of the investigation, it must promptly notify each consumer reporting agency any correction to that information that is necessary to make the information provided by the furnisher accurate.
                A furnisher IS NOT required to conduct an investigation as a result of receiving a direct dispute notice if the furnisher reasonably determines that the dispute is “frivolous or irrelevant.” For purposes of the regulation, a dispute is “frivolous or irrelevant” if (i) there is an EXCEPTION provided to the investigation requirements of Section 222.43 (See Exceptions discussion below), (ii) the consumer did not provide sufficient information to investigate the disputed information, or (iii) the direct dispute is substantially the same as a dispute previously submitted by or on behalf of the consumer, for which the furnisher has already investigated or responded. Importantly, a consumer may re-open consideration of a previously closed dispute if the previous dispute was considered “frivolous or irrelevant” because the consumer did not submit sufficient information, by submitting a new notice of dispute and providing sufficient information.
                If a furnisher determines that a dispute is frivolous or irrelevant, it must notify the consumer of this determination within 5 business days of making the determination. The notice must be sent by mail, unless other forms of notice are authorized by the consumer. The notice must include the reasons why the claim was determined to be frivolous or irrelevant and must identify any information required to investigate the disputed information.
                Exceptions to Investigation Requirements – There are several categories to the requirement for an investigation. No investigation is required if the direct dispute: (i) relates solely to a consumer’s identifying information, such as name, date of birth, Social Security number, telephone number(s) or address(es); (ii) the identity of past or present employers; (iii) inquiries or requests for a consumer report; (iv) information derived from public records (e.g., judgments, liens, bankruptcies), unless provided by a furnisher regarding an account or relationship with the consumer; (v) information related to fraud alerts or active duty alerts; or (vi) information provided to a consumer reporting agency by another furnisher. In addition, no investigation is required if a furnisher has a reasonable belief that the direct dispute is submitted by, is prepared by, or is submitted on a form supplied to a consumer by, a credit repair organization.
Yet More Changes Affecting Open-End Credit to Consumers (Reg Z) Effective February 22, 2010 and July 1, 2010
Byron’s Quick Hit: Reg Z has been updated yet again. The most recent set of changes generally bring Reg Z into line with changes that were already implemented and required under the Credit Card Act of 2009
                The history of the regulations published under the Truth in Lending Act (“TILA”) in the last 15 months has been enough to make a banker’s head spin. Well, on January 10, 2010, they did it again! The good news is that most of these changes relate solely to open-end credit not secured by real property (i.e., credit cards and other open-end credit to consumers). Further, to a large extent, the changes mirror the provisions of the Credit Card Act (adopted in 2009) which went into effect on February 22, 2010. The Final Rule was published in the Federal Register on January 29, 2010 (although it was made available via the Internet on January 10. It came in at over 400 pages. I won’t pretend that I have read every word, but I think I can give our readers a helpful summary. Without further ado, let’s jump into this latest set of changes to Reg Z.
Changes Effective February 22, 2010
1.12 C.F.R. § 226.5(a)(2)(iii) – In instances where a tabular disclosure is required, this provision prohibits the use of the term “fixed” in referring to an APR in a tabular disclosure unless the creditor also specifies a time period that the rate will be fixed. Alternatively, if no such time period is provided, a creditor may not increase the APR so long as the credit plan is open.
2.12 C.F.R. § 226.5(b)(2) – This provision affects the timing requirements for periodic statements in connection with grace periods. If the creditor offers a grace period during which the creditor does not impose a finance charge if the balance is repaid by a certain date, the creditor must deliver the periodic statement at least 21 days prior to the date on which the grace period expires. This provision does not apply to home equity lines of credit, which are covered by Section 226.5b(b), discussed below.
3.12 C.F.R. § 226.7(b)(11) and (13) – In relation to credit card accounts, card issuers must include on each statement the payment due date, which must be the same day of the month for each billing cycle, and the amount of any late payment fee or increased APR that may result as a result of a late payment. If a range of fees may be assessed, the card issuer may state the range of fees or the highest fee, or both the lowest and highest fee, at the issuer’s option. These disclosures must appear on the front of the first page of the periodic statement in close proximity to each other.
4.12 C.F.R. § 226.7(b)(12) – This provision requires some complicated disclosures that essentially tell the cardholder how long it will take to pay off the outstanding balance if the cardholder makes only the minimum payment each month. Also required is a new minimum payment warning, which must appear with a bold heading, as follows:Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.” 
5.12 C.F.R. § 226.7(b)(13) – Requires that the due date, late payment fee, APR, ending balance, minimum payment due, and the repayment disclosures must be grouped together.
6.12 C.F.R. § 226.9(c)(2) – Provides that a creditor changing any term of an open-end (other than HELOCs) credit account, including overdraft protection lines of credit and unsecured lines of credit, must provide at least 45 days advance written notice prior to changing the terms.
7.12 C.F.R. § 226.9(e) – Provides for new disclosures upon RENEWAL of a credit card account. Prior to this change, card issuers were allowed to provide renewal disclosures on or with the periodic statement that includes an annual fee. This new provision requires that a card issuer provide the renewal disclosures at least 30 days or one billing cycle before the annual fee is posted to the account. Also, renewal disclosures are required even if there is no annual fee if the card issuer has changed any term of a cardholder’s account required to be disclosed under Section 226.6(b)(1) and (b)(2), if such disclosures haven’t been previously disclosed to the cardholder.
8.12 C.F.R. § 226.9(g) – Requires penalty rate notice to be given at least 45 days prior to the effective date of the increase. NOTE: Certain additional format requirements for the penalty rate notice (at Section 226.9(g)(3)(ii)) will apply on July 1, 2010.
9.12 C.F.R. § 226.9(h) – Provides that cardholders will have the right to reject significant changes in cardholder agreement terms.
10.               12 C.F.R. § 226.10 – Credit card issuers cannot set a cut-off hour earlier than 5 p.m. on the payment due date. Generally, card issuers that are banks will have to treat an in-person payment made at a branch as received on the date on the date of payment (made during the branch’s business hours). Thus, if a branch is open later than 5 p.m. and a payment is made in person, the card issuer must treat the payment as made on that date.
11.               12 C.F.R. § 226.11(c) – Requires the timely settlement of estate debts in connection with credit cards.
12.               12 C.F.R. § 226.16(f) – Provides that if an advertisement cannot state than an APR is fixed, it must state the time period that the rate will be fixed. If no such period is provided, the rate cannot increase so long as the account is open.
13.               12 C.F.R. §§ 226.51 – 226.58 – New subpart G provides numerous restrictions that put into place many of the provisions of the Credit Card Act. These include (i) the requirement that a credit card issuer consider the consumer’s ability to repay; (ii) limitations on fees; (iii) provisions regarding allocation of payments; (iv) limitations on imposing a finance charge; (v) limitations on increasing APRs, fees, and charges; (vi) a requirement of the consumer’s opt-in in order to charge an over-the-limit fee; (vii) reporting and marketing rules for college student open-end credit; and (viii) a requirements that card agreements be available for posting on the Internet.
Changes Effective July 1, 2010
1.             12 C.F.R. § 226.6 – Requires enhanced cost disclosures at account opening intended to make information more conspicuous and easier to read. Certain terms must be disclosed in a summary table. The table is similar to the table required for credit card applications and solicitations.
2.             12 C.F.R. § 226.7 – Requires for all open-end credit (other than HELOCs), new periodic statement requirements, including grouping fees and interest separately.
3.             12 C.F.R. § 226.16(g) – Contains restrictions on advertising of promotional rates for all open-end credit (other than HELOCs). These require use of the term “introductory” if the rate is an introductory rate, and a clear explanation of how the APR will change after the introductory period.
Reminder: Escrow Required for HPMLs for All Applications Received after April 1, 2010
                It is upon us! As discussed in the September 2009 Legal Update, first-lien lenders who make a HPML will be required to escrow for insurance and real estate taxes that the lender requires to be paid under the loan documents. Despite concerted efforts by bank organizations, including the Oklahoma Bankers Association and the American Bankers Association, to overturn this requirement, and the OBA’s best efforts to locate vendors who would be willing to handle escrow for our members, at this point in time, Oklahoma bankers should plan on escrowing for HPML loans, or they should not make them.
                Many bankers have found out that their software they already have is capable of handling escrow. However, if this is new for your bank, there is obviously a great deal of training and perhaps extra man power needed to fulfill the escrow requirements. If you have not already done so, you should contact your software provider for assistance in setting this up at your bank.
                In the mean time, it is my fear that this escrow requirement may have a substantial impact on community banks to lend to their local customers. I sincerely hope that this is not the case. However, if this does result, please forward any examples of having to forego lending due to this requirement to the OBA. Perhaps if we can show that consumers are being badly hurt by this requirement, the folks in Washington, D.C. will act to correct this.
Compliance Dates Roundup
2/14/2010 – Deadline to Comply with Revisions to Reg Z for Higher Education Opportunity Act (See January 2010 Legal Update)
2/22/2010 – Deadline to Comply with Provisions of Credit Card Act (See January 2010 Legal Update)
3/1/2010 – HMDA and CRA Annual Filings Due
4/1/2010 – Escrow Required for HPML Applications Received after April 1 (except manufactured housing) (See September 2009 Legal Update)
6/1/2010 – Compliance Deadline for new Reg GG (Unlawful Internet Gambling Enforcement Act (“UIGEA”) mandatory (delayed from December 1, 2009) (See November 2009 and December 2009 Legal Updates)
7/1/2010 – Deadline to comply with new Reg E Opt-in Requirement for Overdraft Protection for ATM and One-Time Debit Card Transactions (See December 2009 Legal Update)
7/1/2010 – Deadline to comply with new Reg Z Changes to Open-End Credit (covered here)
7/1/2010 – Deadline to comply with new regulations under Fair and Accurate Credit Transactions Act (“FACT Act”) (covered here)
7/1/2010 – Deadline to Comply with Changes to Reg AA (under Unfair and Deceptive Acts or Practices (UDAP), dealing with marketing and account management of credit cards) (to be discussed soon)