Credit Union Legal Update – Spring 2011
By Credit Union
Loan Modifications, Loan Workouts and Foreclosures
Many credit union loan officers seem to be spending more time addressing loan modifications, loan workouts or even foreclosures than making real estate related loans. There is no reason to believe that in the months to come the situation will change. Prior NCUA positions regarding loan modifications were previously reported in the Spring 2010 Kaufman & Canoles Credit Union Legal Update that can be found by clicking here. Kaufman & Canoles Credit Union Legal Specialist, Andy Keeney, recently conducted a workshop in conjunction with the Credit Union Mortgage Association entitled Mortgage Delinquency & Collections Conference focused entirely on this subject. Copies of the PowerPoint slides for that program can be found at http://tinyurl.com/Keeney1.
Loan modifications, workouts and foreclosures continue to be hot topics for NCUA. In a recent letter to all federally-insured credit unions, NCUA reminded all of the Federal Financial Institutions Exam Council (FFIEC) policy statement regarding prudent commercial real estate loan workouts. The policy statement provides significant guidance for examiners and also provides significant guidance for credit unions that are working with members who are experiencing diminishing cash flows, depreciated real estate values or prolonged delays in selling of their homes.
Due diligence is often the key. Credit unions contemplating loan modifications or workouts should consider at least the following:
- appropriate risk management practices for renewing and restructuring member loans consistent with safe and sound lending practices and regulatory requirements;
- prudent loan workout arrangements to improve the prospects for repayment of principal and interest supported by an analysis of the members willingness and ability to repay the loan;
- an evaluation of support provided by guarantors;
- a current assessment, be it either through an appraisal or otherwise, of the value of the underlying collateral;
- and appropriate reporting on NCUA 5300 call reports and loan loss estimates that comply with generally-accepted accounting principles.
In what is perhaps the most complete guidance document written for credit unions on foreclosures, NCUA issued in a letter in January 2011 to all federally-insured credit unions regarding residential mortgage foreclosure concerns. NCUA announced that they were expanding their examination procedures to include an in-depth review of foreclosure practices at credit unions. They urged every credit union to review its own mortgage documentation and foreclosure management processes. As noted above, they continued to encourage credit unions to work with delinquent borrowers by modifying the terms of their loans, especially if loan modifications would be less costly than foreclosures.
As part of their due diligence, credit unions should check their policies and procedures; their staff qualifications; their general controls; legally compliant documentation; and their reporting to Boards on foreclosure actions and the financial impact on credit unions. NCUA concluded its alert by reminding credit unions that they should suspend foreclosure actions during modification negotiations and during the temporary modification period, at least whenever legally possible. Issues pertaining to loan modifications, workouts and foreclosures often raise significant legal concerns. NCUA once again encouraged credit unions to consult with legal counsel.
The Second Annual Mortgage Delinquency & Collections Conference sponsored by the Credit Union Mortgage Association and Andy Keeney is currently being planned. For further information regarding upcoming seminars, please go to our Seminars page.
A copy of the NCUA alert on loan modifications and workouts and the recent NCUA letter on foreclosures can be downloaded in .pdf format by clicking on the following links: NCUA Letter – Commercial Real Estate Loan Workouts; Policy Statement on Prudent Commercial Real Estate Loan Workouts; and NCUA Letter – Residential Mortgage Foreclosure Concerns.
Protection of ‘Aging’ Members
As credit union members age, there is an increasing awareness and concern for potential elder abuse. At times, a credit union may believe that an elderly person is being forced into an action or threatened, but the member appears to be healthy. This creates a dicey situation. Do you respond to the member and risk litigation, or do you challenge the member and risk litigation? Several credit unions have been sued by family members.
FinCEN (Financial Crimes Enforcement Network of the United States Department of the Treasury) recently issued an advisory designed to help credit unions and other financial institutions. They listed a number of red flags of elder abuse. Here are some examples:
- Uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds;
- Debit transactions that are inconsistent for the elder;
- Uncharacteristic attempts to wire large sums of money;
- Closing of CDs or accounts without regard to penalties;
- A caregiver or other individual shows excessive interest in the elders finances or assets, does not allow the elder to speak for himself, or is reluctant to leave the elders side during conversations;
- The elder shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to caretaker;
- The financial institution is unable to speak directly with the elder, despite repeated attempts to contact him or her;
- A new caretaker, relative or friend suddenly begins conducting financial transactions on behalf of the elder without proper documentation;
- The elderly individuals financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual;
- The elderly customer lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters.
Please note that the FinCEN advisory encouraged the use of SARs (Suspicious Activity Reports) and the notation elder financial exploitation in the narrative. We hope the use of SARs will help reduce elder abuse. Stay tuned.
What’s Up with the NCUA Merger or Purchase and Assumption Process?
For some time, many have viewed the NCUA workings regarding mergers or purchases and assumptions as similar to trying to decipher the black box on an airplane. In an effort to create greater transparency in the merger process, NCUA recently issued a letter to all federally-insured credit unions. The letter addressed and explained the purchase and assumption process, as well as detailed the various types of mergers. It summarized the criteria utilized by NCUA to evaluate mergers and purchases and assumptions.
With regard to voluntary mergers, NCUA noted that they generally do not participate in the identification and selection process concerning voluntary mergers. However, the appropriate Regional Director is involved and can deny a selected merger partnership based on safety and soundness issues or field of membership compatibility.
Now, with respect to unassisted supervisory mergers, NCUA noted that they may or may not participate in the identification process concerning unassisted supervisory mergers. Several factors were involved in an NCUA decision, including whether a credit union is critically undercapitalized.
As to assisted mergers and purchases and assumptions, NCUAs role is much greater, including the identification and selection of the continuing credit union partner. In an assisted merger or a purchase and assumption, there is often financial assistance from NCUA. Hence, NCUA evaluates the entire fact situation, including such items as: a potential loss to the share insurance fund; the size and complexity of the acquired credit union; the financial stability of the acquired credit union; or the degree of urgency to complete the assisted merger or purchase and assumption.
So as to remove some of the mystery from the black box, and to provide more transparency as to the selection process, NCUA has established an automated national registry. The goal of the national registry is to improve the efficiency of identifying potential credit union partners and provide greater opportunity for more interested credit union to be involved. The registration process is relatively simple. To access the registry:
- Set your web browser to www.ncua.gov;
- Scroll under Credit Union Data and click Credit Union Online;
- Log in to Credit Union Online; and
- Click Merger Partner Registry on the left margin.
A copy of the NCUA letter can be downloaded in .pdf format by clicking here.
There seems to be an increasing number of members who forget that their credit union is member-owned, and they threaten litigation against the credit union for mistakes, oversights or legal technicalities.
The key to protecting the interests of the credit union is documentation. If a member is complaining, maintaining contemporaneous notes of the conversations is extremely helpful. Correspondence in the form of emails and letters is also of great benefit. This documentation is usually critical to any proper defense of a lawsuit. Unfortunately, sometimes documents are not retained or it becomes too burdensome to maintain the documents. The lack of critical documentation is discovered only after a lawsuit is filed against a credit union. The rules of court generally require the credit union to provide copies of almost all documents (other than those that are subject to an attorney-client privilege) or files to the other side. Most certainly, there should not be any altering or destruction of documents or records. In the event of litigation or potential litigation, it is important for the President/CEO or other appropriate senior management to globally notify the appropriate employees of the credit union of pending or actual litigation and to hold onto all documents. This is generally known as a litigation hold policy.
A copy of a suggested litigation hold policy/memo can be downloaded by clicking here. It is our hope that you will not need to use it, but in the event of litigation or threatened litigation, you should have a policy in place.
Health Benefits (Long-Term Care) for Boards of Directors
Many commentators have addressed the issue of term limits for Board members, education of Board members, liability of Board members and the general topic of the challenge to find new Board members. The result is often that experienced Board members continue year after year to serve their credit union, without compensation. Some credit unions have considered offering long-term care insurance to federal credit union officials. They sought NCUAs input. NCUA, in a recent letter from the Office of General Counsel, conceptually approved the program. NCUA has ruled that a federal credit union may provide long-term care insurance to a volunteer official, even if such insurance would provide protection for other areas of risk to which an official is exposed outside his or her credit union activities. This opportunity is not provided to non-volunteer members of volunteer committees or other honorary or advisory positions. In granting broad authority, NCUA noted that it would be difficult, from a practical standpoint, for a credit union to provide long-term care insurance to federal credit union officials but to limit coverage only to the risks associated with an officials credit union activities. So, long-term care insurance on a broad base is now permitted, but the coverage must be reasonable. Clearly, according to NCUA, if a current official would be eligible to receive the coverage while still serving as a federal credit union official, the benefit is permissible. However, long-term care coverage must cease immediately when an official no longer serves on the Board. As a credit unions Board ages, there is no longer a reason to ask a qualified and experienced Board member to move on and resign from the Board. Long-term health issues can be properly addressed under this NCUA finding.
A copy of this opinion of the General Counsel can be downloaded by clicking here.
Could An ATM Be the Reason for a Lawsuit?
On September 15, 2010, the U.S. Department of Justice (DOJ) published the final regulations revising the Americans With Disabilities Act, including its ADA Standards for Accessible Design. These final rules took effect March 15, 2011. However, under a safe harbor clause, compliance with the new 2010 Standards for Accessible Design is not required for new construction and alterations until March 15, 2012, if implementing the upgrades would result in an undue financial burden. The following chart helps to explain the timing of compliance for newly installed or altered ATMs:
|Compliance Dates for New Construction and Alterations||Applicable Standards|
|On or after January 26, 1993 and before September 15, 2010||1991 Standards|
|On or after September 15, 2010, and before March 15, 2012||1991 Standards or 2010 Standards|
|On or after March 15, 2012||2010 Standards|
The term undue burden means significant difficulty or expense. In determining whether an action would result in an undue burden, factors to be considered include:
- The nature and cost of the action needed under this part; and
- The overall financial resources of the credit union; the number of persons employed by the credit union; the effect on expenses and resources; legitimate safety requirements that are necessary for safe operation, including crime prevention measures; or the impact of the action upon the operation of the ATM site.
A credit union should first consult with its ATM vendor to determine if its existing ATMs comply with the new communication-related specifications of the 2010 ADA Standards. If the existing ATMs do not comply, a credit union may be able to make the argument that upgrading an ATM would constitute an undue burden. An undue burden is subjective and will be determined on a case-by-case basis. If it would prove to be extremely difficult and expensive for a credit union to upgrade its existing ATMs, then a credit union arguing undue burden will need to establish a budget, a strategic plan and a schedule for achieving the upgrades in the future. The credit unions strategic plan should be documented in the event of a lawsuit regarding the ADA. A credit unions strategic plan may be subject to change depending on the credit unions financial situation. In summary, if a credit union determines that it would be an undue burden to comply with the new 2010 Standards, the ADA states that a strategic plan for future compliance should be in place.
Some of the required standards for ATMs to be accessible to and independently usable by persons with visual impairments include the following technical specifications:
- Voice guidance All ATMs must be speech enabled to service visually impaired consumers.
- Height and reach To ensure consumers can easily access input controls, an ATMs reach must not be greater than 48 inches.
- Input device Input device controls must be tactually discernible, which means key surfaces must be raised above surrounding surfaces to serve visually impaired consumers.
- Numeric keypads The ATMs keypad must be arranged in a twelve-key ascending layout, such as telephone keys, or descending, such as a computer number pad layout.
- Function keys Function keys must be designed to contrast visually from their background.
- Display screen For visibility from a point located 40 inches above the center of the floor in front of the ATM, characters on the screen must be in sans serif font, a minimum of 3/16 high, and contrast with their background.
- Braille instructions Braille instructions to initiate the voice guidance feature must also be provided.
The ADA Standards for Accessible Design include, for the first time, detailed requirements for features to make ATMs truly accessible to blind customers, such as the standards found in Section 707 (New Talking ATM Technical Section) and Section 220 (New Scoping Section for Talking ATMs).
In addition to the ADA requirements and compliance, updates to Regulation E will impact credit unions.
The Regulation E disclosures for ATMs requires credit unions to provide notice that a fee will be imposed for providing electronic fund transfer or a balance inquire and to disclose the amount of the fee. To meet the notice requirement, credit unions must post in a prominent and conspicuous location on or at the ATM and also provide the notice on the actual ATM screen or provide it to the consumer on paper before he/she is committed to paying a fee.
Credit unions should be aware that there are a growing number of lawsuits being filed accusing credit unions of violating this particular provision of Regulation E. Not complying with ATM posting requirements is a significant risk concern for credit unions. Credit unions are not only being sued for failure to provide notice, but also for allegedly posting notices that give incorrect information about the access fees being charged. Some plaintiffs have been accused of removing the notice and then suing the credit union for a breach of Regulation E. Documentation is the key. Photograph the notice on the ATM and, each time it is serviced confirm that the notice is in place. The law affords consumers up to $1,000 in damages for each violation. Keep in mind that some of these claims in the aggregate include tens of thousands of individuals. Violations of Regulation E can also expose credit unions to a fine of up to $500,000 plus plaintiffs costs and attorney fees.
Green Loans May Become Red Losses
It sounded like a good idea. Financial institutions could promote environmentally-oriented loans to encourage homeowners to undertake changes in their home to save energy. Commonly known as Property Assessed Clean Energy (PACE) loans, these loans are available in many states. The concept is that, through a PACE loan program, homeowners are encouraged to make building improvements that will increase energy efficiency. Recently, these PACE or green loans have raised a significant concern to NCUA. The concern is that existing first liens of credit union real estate loans might be undermined by a PACE loan that may take a superior position. Concern was so significant that NCUA recently issued a regulatory alert to all federally-insured credit unions. In the alert, NCUA Chairman Debbie Matz provided, I encourage all credit union lenders to understand the implications of the PACE loan programs available in their service areas and to review the Federal Housing Finance Agencys statement. If the PACE loans available in their service areas present potential safety and soundness concerns, management should make appropriate adjustments to the credit unions underwriting criteria and collateral monitoring practices.
PACE loans are administered by the local government through tax assessments. They essentially represent a lien comparable to a city or county tax. Tax liens usually claim a senior position in a chain of title. If a credit union needs to foreclose against the property, the first thing they would need to pay off would be the PACE loan. In todays environment with many properties under water, paying off the first loan could cause losses to the credit union since, presumably, they would not be able to recover sufficient money to pay off their existing loan.
What can credit unions do? The following are a few suggestions:
- Adjust the loan-to-value ratios to reflect the maximum permissible PACE amount available to borrowers;
- Increase borrower debt-to-income ratios to account for additional obligations associated with possible future PACE loans;
- Ensure that loan covenants require approval/consent for any PACE loans;
- Consider establishing an escrow payment arrangement so that PACE loans could be paid through escrow;
- Title insurance may be the key.
It is recommended that credit unions undertake their due diligence with respect to PACE loans and do their absolute best to make sure these green loans do not become red losses.
A copy of this regulatory alert from NCUA can be downloaded in .pdf format by clicking here.
Loan Applications You Must Review and Can a Computer Do the Review?
For years, credit unions have sought to comply with the Equal Credit Opportunity Act and its accompanying Regulation B. The Regulation requires creditors, in evaluating the creditworthiness of an applicant, to consider any information an applicant may present. What about information that is outside the credit bureau report? NCUA was recently confronted with this question. The answer? Federal credit unions must consider information provided by a member that is not included in a traditional credit report. NCUA noted that according to staff commentary to Regulation B, at an applicants request, creditors must consider credit information not reported through a credit bureau when the information relates to the same types of credit references and history which the creditor would ordinarily evaluate. Consequently, NCUA had no problem citing this precedent and answering the question in the affirmative. However, in a separate legal ruling and one that sets new precedent, NCUA recently concluded that a credit union can create an online, fully-automated loan process that disburses funds without the involvement of a loan officer. The NCUA Office of General Counsel concluded that such a process is permissible under the Federal Credit Union Act. However, credit unions should be careful and cautious and confirm that such an automated system addresses all regulatory compliance issues.
As proposed, the credit union could utilize an automated loan processing and underwriting system to issue small personal loans primarily for new members. No credit union personnel would be involved in inputting information for the loan applications; pulling the credit report; comparing a credit score with underwriting requirements; or funding the loans. There would be an audit to review loans for fraud or other compliance-related purposes within a day or so after funding the loan.
NCUA concluded that there are no regulations that would prohibit a credit union from implementing such a process. They noted that it may raise safety and soundness concerns and perhaps legal counsel should be consulted. Compliance should be carefully monitored and audits regularly conducted.
A copy of this opinion of the General Counsel can be downloaded by clicking here.
Suggested Reading for Greater Understanding
- Due Diligence: A Necessity in a New Environment by E. Andrew Keeney
- Troubled Debt Restructuring Webinar dated January 6, 2011 by NCUA
- Stability Through Crisis, Annual Report 2008 2009 by NCUA
- NCUA OIG Semiannual Report to Congress, April 1, 2010 September 30, 2010 by NCUA
- E. Andrew Keeney Letter to Editor printed in CUES CU Management Magazine Legal Eagle Addendum
- Proposed Federal Regulation on Exempt Funds and Garnishment Procedures by ABA
- Safe Act as analyzed by Anthony Demangone of NAFCU on September 13, 2010
- Dodd Frank Rulemaking Tracker
Be sure to also check out our blogs featuring the latest news in Health Care, Intellectual Property & Franchising, International Business, Labor & Employment, and Real Estate Law.
In addition, all current and past issues of the Credit Union Legal Update are available on our website.
Mortgage Officers Exemption
Tuesday, November 16, 2010. This interview post originally appeared in CUES Credit Union Management.
Earlier this year, the U.S. Department of Labor recently ruled that mortgage loan officers are entitled to overtime pay in the Administrators Interpretation No. 2010-1.
CUES Credit Union Management spoke with attorney Scott W. Kezman, partner in Kaufman & Canoles Labor & Employment Practice Group, Norfolk, VA, about the new rules.
Q: What are the highlights of this ruling?
A: Prior to the Administrative Interpretation, the U.S. Department of Labors Wage and Hour Division issued opinion letters based on specific fact scenarios presented by employers seeking guidance on whether they were properly paying their employees under the Fair Labor Standards Act (FLSA) and its implementing regulations.
In fact, as recently as 2006, the Wage and Hour Division issued an opinion letter indicating that the mortgage loan officer position in question in that request met the criteria for the administrative exemption from the overtime requirements of the FLSA. Based on this opinion letter (and an earlier letter from 2001), most people considered it fairly settled law that the vast majority of mortgage loan officers met the criteria for the administrative exemption.
The new Administrative Interpretation marks a significant change in policy by the Wage and Hour Division because it basically reversed itself and states that the Wage and Hour Division now believes that the vast majority of mortgage loan officers do not meet the criteria for the administrative exemption from the overtime requirements of the FLSA.
Stated another way, unless specific mortgage loan officers qualify for some exemption from the FLSAs overtime requirements other than the administrative exemption, they must be paid time and one-half their regular rate of employment (inclusive of commissions) for all hours worked over 40 in a workweek.
Q: What does it mean for credit unions? What do they need to do?
A: Credit unions need to work with their labor and employment counsel to examine their alternatives. There may be other exemptions from the FLSAs overtime requirements in play (see next question). If no exemption is a good fit, they may decide to go ahead and pay overtime and seek assistance from counsel with the various methods of calculation of overtime available when dealing with commission-earning employees.
It may also be a good time to review the compensation program available to mortgage loan officers; for example, if no exemption applies, there is no longer any salary basis requirement. There are ways to deal with this situation but, unfortunately, none are quick and painless. (Read more about the salary basis requirement here.)
Q: Will CUs have to pay over-time for past unpaid time? Any way to avoid this?
A: Not necessarily. The administrative exemption from the FLSAs overtime requirement is one of several exemptions from the FLSAs overtime requirements. Other exemptions potentially applicable to mortgage loan officers are the executive exemption (where the mortgage loan officer in question performs supervisory duties that meet the criteria for that exemption) and the outside sales exemption (where the mortgage loan officers are customarily and regularly engaged away from the CUs place of business).
In the case of highly compensated mortgage loan officers (those who make more than $100,000 per year), the criteria for exemption can be more easily met than with less highly compensated employees. Credit unions with questions should consult labor and employment counsel to discuss their own specific facts related to mortgage loan officer employees. Scott W. Kezman.
A copy of this article can be downloaded in .pdf format by clicking here.
Unfair and Deceptive Trade Practices – Watch Out for This Trap
Wherever possible, plaintiffs counsel in litigation will often assert that a credit unions actions violate a state law or rule commonly known as unfair and deceptive trade practices. If the plaintiff/member wins, not only would there be an award of a judgment, but often an unfair and deceptive trade practices claim would call for treble damages plus attorneys fees to be paid by the credit union. This important law or rule tries to prevent abuses.
The Federal Trade Commission has adopted an Unfair and Deceptive Trade Practices Act and such provisions have also been implemented by NCUA.
Although the NCUA Office of General Counsel in a recent letter did not find and cite a federal credit union for violation of UDAP, they strongly encouraged federal credit unions offering identity theft protection services to structure or modify their policies and practices, especially their advertising practices, to avoid or eliminate any potential violations.
The situation at hand was one where a federal credit union automatically enrolled their members, without the members request or express consent, to receive identity theft protection on accounts advertised as free checking. The credit union automatically deducted periodic fees (presumably for the identity theft protection) unless the members opted out from receiving the services. The account agreements and disclosures for this free checking program included a truth in savings fee disclosure listing a monthly fee for the services.
Were these procedures in violation of UDAP? Were they a representation or omission of material information that is likely to mislead a consumer?
Credit unions should be careful when they proceed with these innovative programs, and marketing departments should be encouraged to consult with legal counsel whenever there is a question of compliance. Penalties for violating UDAP are formidable, and it is always better to be careful and cautious.
A copy of this NCUA Opinion of the Office of General Counsel can be downloaded by clicking here.
Can You ‘Kick Out’ the Troublemakers?
These are stressful times for credit union members, as well as credit union employees. Sometimes tempers become heated, voices become loud and actions become regrettable. The credit union may want to just kick out from membership such members, including those that may have caused a loss to the credit union. Unfortunately, this is not always possible. A credit union cannot easily expel a member. However, services can be extremely limited. There are a number of opinion letters by NCUA that discuss the limitations of services issues. If you want to take advantage of this opportunity to extremely limit services to a particular member, the credit union needs to consider the following:
- There should be a logical relationship between the objectionable conduct and a limitation of services.
- The credit union policy needs to be in writing. It must have been distributed to the credit union membership so that members are aware of the policy.
- Care should be given so the implementation of the policy does not violate any anti-discrimination laws or regulations.
- Legal counsel should be consulted.
Please note that the above guidance applies to federal credit unions only. If a credit union is state-chartered, they should look to their state law. Assuming there is a policy in place and the above guidance has been followed, credit unions may benefit from a sample letter which can be downloaded by clicking here.
Compliance Quandary – What if You Don’t Comply?
It seems as though almost daily a new regulation is published or an existing regulation is modified. What are credit unions to do? What about the concept of ignorance of the law? What about not complying? The following are several existing regulations that apply to credit unions and the liability or potential penalty for a breach of the regulations:
Bank Secrecy Act
An incomplete or inaccurate currency transaction report (CTR) could bring fines of $500 each. Failure to file a CTR within 15 days can bring fines of $10,000, with further fines of $10,000 for each day the required report is not filed. A pattern of negligent violations is subject to a fine up to $50,000. There are also criminal penalties.
Regulation E (Electronic Fund Transfers Act)
For violations of Reg E, there is civil liability, which could include treble damages for certain error resolution violations. For individual actions, there could also be a penalty of not less than $100 and not more than $1,000. Class action damages equate to the lesser of $500,000 or 1% of the credit unions net worth. Attorneys fees and court costs may be recovered. Criminal liability is also a possibility.
Regulation Z (Truth in Lending Act)
For violations of Reg Z, there is civil liability, that could include treble damages for certain error resolution violations. For individual actions, there could also be a penalty of not less than $100 and not more than $1,000. Class action damages equate to the lesser of $500,000 or 1% of the credit unions net worth. Attorneys fees and court costs may be recovered.
NOTE: The NCUA Truth in Savings Act and the Credit Card Act fall under coverage of the Truth in Lending Act.
Regulation B (Equal Credit Opportunity Act)
For violations of Regulation B, there could be civil liability for actual, as well as punitive, damages and individual or even class actions. Liability for punitive damages is limited to $10,000 in individual actions and the lesser of $500,000 or 1% of the credit unions net worth in class actions. Attorneys fees and court costs may also be recovered.
AND THERE IS MORE TO COME. There are numerous compliance challenges for 2011 and beyond. For example, the Fair and Accurate Transaction Act (FACT Act) had a mandatory deadline of January 1, 2011. This regulation deals with risk-based pricing notices which is covered in the following article. The same or similar liability for violation of the FACT Act is that of Regulation B as noted above.
There are new regulations regarding Privacy. There is a safe harbor for old privacy notices, and that was effective January 1, 2011. In the future, credit unions may use a new model privacy form. Although there is additional cost to generate all new forms, there is a presumption of compliance and, in effect, a safe harbor.
Other regulatory issues on the horizon pertain to Truth in Lending/Regulation Z/mortgage transfer notice; mortgage payment disclosures; loan originator compensation; and of course, there is Dodd-Frank, the new regulator. The Bureau of Consumer Financial Protection will have rule making authority over all institutions for most of the consumer protection statutes, including credit unions. The new Bureau will commence operations on July 21, 2011. There is already a Dodd-Frank Rulemaking Tracker website. At the time this newsletter went to press, there were already 300 Dodd-Frank regulatory updates reported. To continue to track Dodd-Frank, go to http://tinyurl.com/Keeney2.
Risk Based Pricing
The Risk Based Pricing (RBP) rules became effective January 1, 2011. Credit unions that (1) utilize risk based pricing and (2) use consumer credit scores in determining which APR a borrower will receive must comply.
There are several options for complying with the rules, including a credit score proxy method or a tiered pricing method. Credit unions also have the option to provide the member with a credit score disclosure in lieu of providing RBP notices.
The credit score proxy method requires that the credit union determine a cut-off credit score. The cut-off represents the point at which approximately forty percent (40%) of its members have higher credit scores and sixty percent (60%) of is members have lower credit scores. Under this method, the credit union must provide RBP notices to those members with a credit score lower than the cut-off credit score.
The tiered pricing method allows for credit unions to deliver the RBP notices to those members that are not in the top tier. In other words, those members that do not receive the most favorable credit terms and therefore do not find themselves in the highest tier (with the corresponding lowest APRs) must receive an RBP notice. For credit unions with four or fewer tiers of APRs available to their members, the RBP notice would need to be provided to every member that does not fall in the top tier. For those credit unions with five or more tiers of APRs available to their members, the RBP notice would need to be provided to all members that do not fall in the top two tiers.
The rules also provide for an alternative method of complying. This alternative method allows a credit union to provide an enhanced credit score disclosure which must be provided to all members who apply for credit for which the credit union utilizes risk based pricing.
Finally, and of note to many credit unions engaged in indirect automobile lending programs, the rules recognize that in the indirect auto lending context, credit unions may not be able to physically provide the RBP notices or credit score disclosures to their members. As long as the credit union arranges to have the auto dealer provide the required RBP notices and maintains reasonable policies and procedures to verify that the auto dealer provides such notices to the credit unions members, the requirements have been met. The prudent approach is to require the auto dealers with which a credit union does business to certify that the requisite RBP notice has been provided to the member prior to funding the loan. One manner in which to accomplish this is to require a pre-funding checklist on which the auto dealer simply checks a box or initials a line to indicate that the RBP notice has been provided. This would be a practical and logical extension of the credit unions duty to verify that the auto dealer is performing its RBP notice obligations.
Finally, credit unions offering online loan products and which utilize risk based pricing in offering such online products must keep in mind that the rules apply to all types of risk based lending. Any credit union that offers such an online lending program must devise processes for complying with the rules by ensuring that the member utilizing such online services is provided the requisite risk based pricing notice or enhanced credit score disclosure prior to the credit union funding the loan.
A special thank you to Aaron Ambrose and Katie Davenport for their contributions to this Update.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2022.