December 2015 Legal Briefs

  • It’s Year-End: Have You Finished All the Annual Tasks?
  • Reg Z v. the UCCC – Part II
  • FDIC’s update on payday lending
  • Key SCRA date approaching

It’s Year-End: Have You Finished All the Annual Tasks?

By Andy Zavoina

As we approach the year-end, it’s time to relax by the fire, sip eggnog, reflect on accomplishments, and cuss those TRID rules that took up so much time and caused so much stress. Now you can close the compliance books on 2015. Uh, you did get all the little things done – right? You weren’t so preoccupied with all the other fires you were putting out that some small task was put aside? It could happen. Maybe before you start that fire and sip that eggnog we should go through a quick list of “to-do” items that have to be done each year, either by now, now, or soon coming due.

Reg E § 1005.8– If your consumer customer has an account to or from which an electronic fund transfer can be made, an error resolution disclosure is required. There is a short version that you may have included with each periodic statement, or the longer version that is sent annually. Electronic disclosures under E-SIGN are allowed here. This may also be a good time to review §1005.7(c) and determine if any electronic fund transfer services were added, and if they were disclosed as required.

Reg P § 1016.5 – When your customer’s account was initially opened, you had to accurately describe your privacy policies and practices in a clear and conspicuous manner. You have to do this annually as well. Like Reg E, ensure that your practices have not changed and that the form you are sending accurately describes your practices.

For Reg P and the Privacy rules, annually means at least once in any period of 12 consecutive months during which that relationship exists. You may define the 12-consecutive-month period, but you must apply it to the customer on a consistent basis, so this is not necessarily a December or January issue, but it could be. And each customer does not have their own “annual date.” If a consumer opens a new account with you in February, you provide the initial privacy notice then. That is year one. You can provide the annual privacy notice for year two at any time, up until December 31 of the second year.

How do you plan to deliver your Privacy Notice? There are four acceptable means: hand delivery, mailing a printed copy, posting it on your web site and requiring the consumer to acknowledge receipt of the notice as a necessary step to obtain a particular financial product or service, or posting it at an ATM screen again, requiring an acknowledgement before a transaction may advance.

It is important to note that unlike most other regulatory requirements, Reg P doesn’t require E-SIGN compliance for your web-based disclosures. You can use e-disclosures on your bank web site when the customer uses the web site to access financial products and services electronically and agrees to receive notices at the web site, and you post your current privacy notice continuously in a clear and conspicuous manner on the web site. So the demonstrable consent requirements and others in E-SIGN’s 101(c) section do not apply, but there must still be acceptance to receive them on the web. Alternatively, if the customer has requested that you refrain from sending any information regarding the customer relationship and your current privacy notice remains available to the customer upon request this method is acceptable.

BSA Annual Certifications – Your bank is permitted to rely on another financial institution to perform some or all of the elements of your CIP under certain conditions.  The other financial institution must enter into a contract requiring it to certify annually to your bank that it has implemented its AML program.

OFAC – Banks must report all blockings to OFAC within ten days of the event and annually by September 30, concerning those assets blocked (see form TD F 90-22.50).

IRAs, IRS Notice 2002-27 – If a minimum distribution is required from an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA on the prior year-end must provide a statement to the IRA owner by January 31 of the calendar year regarding the required minimum distribution.
Reg Z Thresholds and Updates – These changes are effective January 1, 2016:

–    The CARD Act penalty fees safe harbor amount in section 1026.52(b)(1)(ii)(A) will remain at $27;
–    The CARD Act penalty fees safe harbor amount in section 1026.52(b)(1)(ii)(B) will drop $1, to $37;
–    The HOEPA total loan amount threshold that determines whether a transaction is a high cost mortgage is changed to $20,350;
–    The HOEPA total points and fees dollar trigger amount is changed to $1,017;
–    As of the effective date, a covered transaction is not a qualified mortgage unless the transaction’s total points and fees do not exceed 3 percent of the total loan amount for a loan amount greater than or equal to $101,749; $3,052 for a loan amount greater than or equal to $61,050 but less than $101,749; 5 percent of the total loan amount for loans greater than or equal to $20,350 but less than $61,050; $1,017 for a loan amount greater than or equal to $12,719 but less than $20,350, and 8 percent of the total loan amount for loans less than $12,719.
Annual Escrow Statements § 1024.17 – For each escrow account you have, you must provide an annual escrow account statement. This statement must be done within 30 days of the completion of the escrow account computation year. This need not be based on a calendar year. You must also provide the borrower(s) with the previous year’s projection or the initial escrow account statement so they can review any differences. If your analysis indicates there is a surplus, then within 30 days from the date of the analysis you must refund it to the borrower if the amount is greater than or equal to $50. If the surplus is less than that amount, the refund can be paid to the borrower, or credited against the next year’s escrow payments.

Fair Credit Reporting Act – Affiliate Marketing Opt-Out § 1022.27(c) – Affiliate marketing rules in Reg V place disclosure restrictions on you and opt out requirements. Each opt-out renewal must be effective for a period of at least five years. If this procedure is one your bank is using, are there any expiration dates for the opt-outs and have these consumers been given an opportunity to renew their opt-out?

Fair Credit Reporting Act – FACTA Red Flags Report – Section VI (b) (§ 334.90) of the Guidelines (contained in Appendix J) require a report at least annually on your Red Flags Program. This report can be made to either the Board, an appropriate committee of the Board, or a designated employee at the senior management level.
Regulation O, Annual Resolution §§ 215.4, 215.8 – In order to comply with the lending restrictions and requirements of 215.4, you must be able to identify the “insiders.” Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person. An affiliate is any company of which a member bank is a subsidiary or any other subsidiary of that company. Your insiders are defined in Reg O by title unless the Board has passed a resolution excluding certain persons. You are encouraged to check your list of who is an insider, verify that against your existing loans, and ensure there is a notification method to keep this list updated throughout the year.

Reg BB (CRA), Content and availability of Public File § 228.43 – Your Public File is required to be updated and current as of April 1 of each year.

HMDA and CRA Notices and Recordkeeping – HMDA and CRA data is gathered separately by applicable banks but both Regs C and BB respectively have reporting requirements for the Loan Application Registers (LAR). Each must be submitted by March 1, for the prior calendar year. National banks are currently required to update LAR data quarterly. The new HMDA rules will require all HMDA reporters to do so. Regardless, if you are a reporter of either LAR you should start verifying the data integrity now to avoid stressing the process at the end of February.

Training – An actual requirement for training to be conducted annually is rare, but annual training has become the industry standard and may even be stated in your policies. There are six areas that mandate training.
–    BSA (12 CFR §21.21(c)(4) and §208.63(c)(4) Provide training for appropriate personnel.)
–    Bank Protection Act (12 CFR §21.3(a)(3) and §208.61(c)(1)(iii) Provide initial & periodic training)
–    Reg CC (12 CFR §229.19(f) provide each employee who performs duties subject to the requirements of this subpart with a statement of the procedures applicable to that employee)
–    Customer Information Security found at III(C)(2) (Pursuant to the Interagency Guidelines for Safeguarding Customer Information, training is required.  Many banks allow for turnover and train as needed, imposing their own requirements on frequency.)
–    FCRA Red Flag (12 CFR 222.90(e)(3) Train staff, as necessary, to effectively implement the Program;)
–    Overdraft protection programs your bank offers. Employees must be able to explain the programs’ features, costs, and terms, and to explain other available overdraft products offered by your institution and how to qualify for them. This is one of the “best practices” listed in the Joint Guidance on Overdraft Protection Programs issued by the OCC, Fed, FDIC and NCUA in February 2005 (70 FR 9127, 2/24/2005), and reinforced by the FDIC in its FIL 81-2010 in November, 2010.

Security, Annual Report to the Board of Directors § 208.61 – The Bank Protection Act requires that your bank’s Security Officer  report at least annually to the board of directors on the effectiveness of the security program. The substance of the report must be reflected in the minutes of the meeting. The regulations don’t specify if the report must be in writing, who must deliver it, or what information should be in the report. It is recommended that your report span three years and include last year’s historical data, this year’s current data and projections for the next year.

Information Security Program part of GLBA – Your bank must report to the board or an appropriate committee of the board at least annually on the overall status of the information security program and the bank’s compliance with the Interagency Guidelines for Safeguarding Customer Information. The reports should discuss material matters related to the program, such as: risk assessment; risk management and control decisions; service provider arrangements; results of testing; security breaches or violations and management’s responses; and recommendations for changes in the information security program.

Annual MLO Registration § 1007.102 – Mortgage Loan Originators must renew their SAFE Act registration on the Registry. It is done during the period including November 1 through December 31. If this hasn’t been completed, there is still time. This is also a good time to plan with management and Human Resources MLO bonus plans for those impacted by the Reg Z loan originator provisions. § 1026.36(d)(1)(iv)(B)(1) has limitations on some types of compensation.

Other – Some miscellaneous items you may address internally in policies and procedures include preparation for IRS year-end reporting, vendor due diligence requirements (including insurance issues and renewals), documenting ORE appraisals and sales attempts, risk management reviews, records retention requirements and destruction of expired records, and a designation by the Board of the next year’s holidays.
Whew. If this list was completed or in the works and you kept up with all of the regulatory changes in policies, procedures, software, training, implementation and auditing, you deserve that fire and eggnog. Take off half of this Saturday and all day Sunday and enjoy yourself. Then get ready for 2016.

Reg Z v. the UCCC – Part II

By Pauli D. Loeffler
This article continues exploration of the differences between Reg Z and Oklahoma’s Uniform Consumer Credit Code (“U3C”) begun in the November 2015 Legal Briefs. In order to avoid compliance violations, knowledge of both the federal regulation and the state act is necessary. Citations to sections of the Oklahoma U3C can be found in Title 14A of the Oklahoma Statutes.

Difference in emphasis.  The Federal Truth in Lending Act (“TILA”) and Regulation Z impose only disclosure requirements, not limitations on permissible interest rates, miscellaneous charges, and other lending practices.  Reg Z does prohibit certain loan provisions such as balloon payments, negative amortization, penalties, and the percentage of late fees for a High Cost Motgages (previously called a HOEPA mortgage), as well as limitations on fees for credit cards and compensation of loan originators, but these kinds of limitations are more an exception to the general emphasis on disclosure of loan terms. Reg Z does not dictate a maximum finance charge, but rather “shines the light” on the total costs of credit in order to allow consumers to make informed choices.

While the U3C has nearly the same disclosure requirements as Reg Z, it establishes a maximum finance charge that varies by the amount or the consumer loan, limits the dollar amount of various fees and charges, and restricts or prohibits other credit- related practices.

U3C: Credit sales and loans. The U3C has two completely separate sets of provisions for “consumer credit sales” (Article 2) and “consumer loans” (Article 3).  In some cases, Article 2 and Article 3 contain very similar, and in many instances, identical provisions, but not always. The “consumer loan” sections don’t apply to “consumer credit sales” nor vice versa.  This makes a difference when the bank is selling repossessed vehicles or consumer goods or when dealer paper is involved.

Section 2-107 of the U3C states, “Except as otherwise provided, ‘seller’ includes an assignee of the seller’s right to payment . . . .”  In other words, when a bank purchases dealer paper it becomes the substituted “seller” related to that dealer paper, and not a “lender” with respect to a loan.

Many banks purchase dealer paper, so what begins as a consumer credit sale will remain a consumer credit sale (not a consumer loan) until it is paid.  In the uncommon situation where a bank needs to rework some debt that was acquired as dealer paper, any amendment, extension, or renewal of that dealer paper will still be dealer paper and must comply with the provisions relating to consumer credit sales, rather than those for consumer loans.  The bank cannot assume it can rewrite dealer paper by using a promissory note form for consumer loans.

Another issue with dealer paper and consumer credit sales is that § 5-103(2) may bar a deficiency amount. If dealer paper from consumer-purpose sales secured by goods has an original cash price less than a certain dollar amount, and the goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding.  The dollar amount is subject to annual adjustment. The amount as of July 1, 2015 is $4,900.

Maximum interest rate. “What is the maximum allowable APR for in Oklahoma?” is a question I am often asked and one of my least favorite. Why? I know the banker wants a single, definitive numeric percentage, but it is not possible to give one.  The answer depends on the amount of the loan and whether the loan is payable in installments, interest only with a balloon, or a single pay note. It also matters whether it is a loan as opposed to a credit sale.

§ 3-508A Consumer Loans: There are two different methods in this section to help you determine interest rate on consumer loans.  The simpler of the two methods (which appears second in the statute) allows a straight 25% on the unpaid principal balance of the loan. The credit sale counterpart is found in § 2-201 discussed below.

The other Section 3-508A method allows a series of “tiered” interest rates, yielding an average interest rate greater than 25%.  Under this approach a lender may charge a 27% interest rate on the unpaid principal balance of first $2,900; 23% interest rate on that portion of the unpaid principal balance which exceeds $2,900 up to a $6,200; and 20% interest rate on any portion of the principal balance exceeding $6,200.

Section 3-508A literally allows a lender to calculate the interest separately each month on different amounts of the outstanding balance.  This approach always yields an increasing “average” rate of interest on the loan as payments reduce the balance.

§ 2-201 Credit Sales: The loan amounts under this section are subject to annual adjustment, unlike those under § 3-508A which are not. I am using those in effect as of July 1, 2015.

Like § 3-508A,  there are two different methods in this section to help you determine interest rate on consumer loans.  The simpler of the two methods (which appears second in the statute) allows a straight 21% on the unpaid principal balance of the loan.

The other § 2-201 method allows a series of “tiered” interest rates, yielding an average interest rate greater than 21%.  Under this approach a lender may charge a 30% interest rate on the unpaid principal balance of first $1,470; 21% interest rate on that portion of the unpaid principal balance which exceeds $1,470.01 up to $4,900; and 15 % interest rate on any portion of the principal balance exceeding $4,900.

This allows a lender to calculate the interest separately each month on different amounts of the outstanding balance.  Like § 3-508A, this approach always yields an increasing “average” rate of interest on the loan as payments reduce the balance.

§ 3-508B Consumer Loans: Section 3-508B provides an alternative method of imposing a finance charge.  This alternate method yields greater than the 27% annual interest rate otherwise permitted by Section 3-508A(2)(a) for loans of this size.  And, unlike § 3-508A, the loan amount, one time acquisition charge and monthly handling charges under this section are subject to annual adjustment. I am using those in effect as of July 1, 2015. The maximum loan amount for which this can be used is $1,470. The section also has minimum and maximum limits for repayment based on the loan amount.  This section has no credit sale counterpart.

The minimum term of any loan made under the terms of subsections under 3-508B shall be no less than sixty (60) days for any loan exceeding $149.95. Any loan made under the terms of this section shall be scheduled to be payable in substantially equal installments at not less than thirty-day intervals, with the first installment to be scheduled to be due not less than one (1) calendar month after the date such loan is made.

The maximum term of any loan made under the terms of this section shall be one (1) month for each Ten Dollars ($10.00) of principal up to a maximum term of eighteen (18) months., however, loans for amounts between $490.01 to $1,470.00 shall be one (1) month for each Twenty Dollars ($20.00) of principal up to a maximum term of eighteen (18) months.

For a loan up to $146.95, a lender may impose a one-time flat-rate charge of $4.90 for each $24.50 of principal balance (regardless of the term of the loan, but the term cannot exceed one month for each $10 of principal balance).

For any loan $146.96 and up to and including $700.00, the lender may impose a one-time acquisition charge up to 1/10 of the principal balance.  Additionally, the lender may impose a monthly handling fee as follows:

1.    For a loan $146.96 up to $177.50, a monthly fee up to $14.70;
2.    For a loan $177.51 up to $343.00, a monthly fee up to $17.15;
3.    For a loan $343.01 up to $490.00, a monthly fee up to $19.60;
4.    For a loan $490.01 up to $735.00, a monthly fee up to $22.05;
5.    For a loan $735.01 up to $1,470.00, a monthly fee up to $24.50.

In each of subparagraphs (1) through (5) above, the acquisition charge is earned when received, and only the future installment handling fees can be avoided by prepayment—except that, if one of these loans is prepaid during the first sixty days, a prorated portion of the acquisition charge must be refunded, in an amount to be determined by multiplying 1/60 of the acquisition charge times the number of days remaining from the date of prepayment to the sixtieth day of the loan.

The section prohibits additional fees: no insurance charges, application fee, documentation fee, processing fee, returned check fee, credit bureau fee, or any other kind of fee that might otherwise be permitted on other types of consumer loans.  Also, no credit insurance can be sold in connection with in § 3-508B loans.  If a lender wants or needs to sell credit insurance or to impose other normal loan charges (such as late fees) in connection with a loan, it will have to use the § 3-508A procedures.

Loans made under § 3-508B cannot be refinanced as nor consolidated with § 3-508A loans nor vice versa.

§ 3-510 Consumer loans: The loan amount under this section is subject to annual adjustment. I am using the amounts in effect as of July 1, 2015.

This section provides for a maximum interest rate of 21% for loans secured by land if the principal is $4,900 or less. If the APR exceeds 21%, the security interest is void. There is an exception for an open-end credit plan of at least $4,900. (Note:  As previously discussed in Reg Z v. UCCC – Part I, real estate secured loans to buy, build or refinance a residence no matter how high the interest rate is, are excluded from all but disclosure and remedy provisions of the U3C as are real estate secured loans with an initial rate of 13% or less.)

§ 3-511 Consumer Loans: The loan amounts under this section are subject to annual adjustment. I am using those in effect as of July 1, 2015.

The effect of this section is that if the unpaid balance of the loan is $4900.00 or less, and the APR exceeds 18%, then loan must be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor. This is the section that causes problems for interest-only with balloon and single pay loans.

The statute also restricts the loan term to not more than 49 months if the principal loan amount is more than $1,470, and to 37 months if $1,470 or less.

Differences in disclosures of certain fees.  § 1026.4(c)(1) of  Reg Z and the Official Interpretation to that section permit an application fee or processing fee to be excluded from the finance charge only if a) it is a charge to recover the costs associated with processing an application for credit, and b) the fee is charged to all applicants — not just to applicants who are approved or who actually receive credit. Under § 1026.4(c)(7) of Reg Z :  “(ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyances or settlement documents”  (if “bona fide and reasonable in amount”) are excluded from the finance charge. This exclusion from finance charge only applies to real estate loans. On the other hand, § 3-202(1) provides for certain charges that are “in addition to” (not part of) the finance charge. Under § 3-202(1)(d)  “[A] charge for processing the debtor’s application for credit including but not limited to costs of services such as credit reports, credit investigations, appraisals and fees for preparation of loan-related documents” would not be included as a finance charge.

Please be aware that the language is not the same for consumer credit sales (dealer paper, sale of repo goods financed by the bank). § 2-202) provides:

(1) In addition to the credit service charge permitted by this part, a seller may contract for and receive the following additional charges in connection with a consumer credit sale:

(d)  charges to recover the costs associated with processing applications, including but not limited to cost of services such as credit reports and credit investigations.

Disclosures made pursuant to Reg Z will always satisfy disclosure requirements under the U3C but the reverse is not always true, so when the loan doc/loan processing fee is included in the finance charge using Reg Z disclosures, the result is that the APR calculated under Reg Z may exceed Oklahoma usury rate or trigger the warning regarding “single pay” and interest only with balloon loan under Sec. 3-511.

It’s a good principle in any consumer credit transaction to be completely consistent either following U3C disclosure guidelines on all points, or following Reg Z’s disclosure guidelines on all points. Arguing with an examiner that you are “mostly” following what Reg Z requires concerning disclosures except for one matter is a losing battle. And no, I would not provide the customer both Reg Z and U3C disclosures. However, if a usury violation pops up, you may want to test whether the loan does in fact violate the U3C by calculating the APR in accordance with U3C. If it does not exceed usury or trip the “must be payable in substantially equal installments” warning, you can document this to the file and make the loan despite the APR calculation on the Reg Z disclosure since, in actuality, the loan does not violate APR provisions of the U3C.

FDIC’s update on payday lending

by John S. Burnett
The FDIC did another version of its “What we really should have said …” routine this month when it issued FIL-52-2015 to “clarify” earlier guidance on banking relationships with payday lenders. The agency reached back over ten years, to March 1, 2005, when it originally issued FIL-14-2005 (“Payday Lending Programs: Revised Examination Guidance”). Unless you happen to have an old copy of the 2005 guidance, you won’t be able to see it in its original form. Instead of issuing updated guidance superseding the 2005 document, the FDIC revised the old FIL (and the guidance attached to it).

What does this all mean to you?
First, there is the FDIC’s ongoing attempt to separate itself from earlier guidance or statements that may have implied that banks should “de-risk” their customer relationships to disconnect from certain customer types (such a payday lenders). As it has done multiple times over the last several months, the FDIC stressed in FIL-52-2015 that financial institutions that can properly manage customer relationships and effectively mitigate risks “are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws.” Text was added to the 2005 guidance to emphasize that it did not apply to banks who offer products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders.

Second, if your bank itself (or through third parties) does offer payday loans (sometimes called “deferred deposit advances”), you should ensure your policies and practices are informed by the 2005 guidance document. If you make “small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment (such as a social security check),” go back to those guidelines and ensure that you have addressed each of the areas of concern listed by the FDIC:
•    Your responsibilities if there is any third-party involvement in such lending
•    Loan concentrations
•    Capital adequacy
•    Adequacy of your Allowance for Loan and Lease Losses (ALLL) for these loans
•    Classification of loans
•    Renewals and rewrites
•    Collectibility of accrued fees and interest
•    Proper accounting for recoveries of charged-off balances
•    Consumer compliance issues, particularly those involving CRA, Truth in Lending, ECOA, FCRA, Fair Debt Collection Practices and any UDAP/UDAAP issues

Key SCRA date approaching

By John S. Burnett
Many of you have asked about the “sunset” date included in the temporary amendments to Section 303 of the Servicemembers Civil Relief Act (SCRA). That section deals with pre-active-duty debts secured by a mortgage, trust deed or other security in the nature of a mortgage. The two provisions of that section provide for a stay of proceedings brought to enforce such an obligation (section 303(b)) and require a court order prior to a sale, foreclosure or seizure of property for a breach of such an obligation (section 303(c)).

Both sections apply during the term of, and for 90 days following, a servicemember’s active military service. The “90 days” text in both provisions has been temporarily replaced by “one year” but that temporary replacement is currently due to end at the end of 2015.

A Bill (HR 189) has been introduced in the House of Representatives to extend that sunset date for one more year, to midnight on December 31, 2016. At this writing, it’s been reported out favorably by the House Committee on Veterans’ Affairs. Given its uncontroversial nature, it’s likely to pass both houses, and perhaps even be signed by the president, before the end of the year. Keep an eye on BankersOnline’s Top Stories and Daily Compliance Briefing for an update.