cuna regulatory compliance school e-school introduction...
TRANSCRIPT
CUNA Regulatory Compliance
School
E-school Introduction
Consumer Lending Regulations
Jon Bundy and Lauren Capitini
Regulatory Compliance Managers
CUNA Mutual Group
Agenda
• Today
– The Regulatory Process
– Regulation B: Equal Credit Opportunity
– Regulation Z: Closed-end Lending
• Next Round
– Regulation Z: Open-End Lending, Right of
Rescission, and Misc. provisions
– Servicemembers Civil Relief Act (SCRA)
– Uniform Commercial Code (UCC)
Outline of the Regulatory
Process
Why Do We Have
Consumer Regulations?
Outline of the Regulatory Process -
Why Regulations?
• Level the Playing Field
• Correct Wrongs
• Political Issues
• Inertia
• Special Interests
• Emerging Technologies
• New Financial Products
• Activities of Compliance Experts/Operations
• Others
Regulatory Process
and Scheme
1. Both Houses of Congress Pass Identical
Bill
2. President Signs
3. Law Assigned to Regulator to Create
Rules
4. Proposed Regulations-Federal Register
5. Final Regulations-Federal Register
Regulatory Process
and Scheme
1. Statute
2. Regulation
3. Commentary
4. Case Law
Regulatory Process and Scheme
Example-Over the limit fees
• Statute
• FRB Regulation
• Commentary
• Pfennig Case
– Courts-District Court rules for card issuer,
Ct. of Appeals reverses, Supreme Court
reverses again.
– Result-FRB rules stay as is
Points to Remember
• Statute, Regulation, Commentary, Case Law all must be followed
• Chance to influence rules through comment process
• There are very few black and white rules or bright lines
• Words and actions have meaning and impact
• Definitions critical
Equal Credit Opportunity Act
Regulation B-§1002
Equal Credit
Opportunity Act
“The purpose of this regulation is to promote
the availability of credit to all creditworthy
applicants without regard to race, color, religion,
national origin, sex, marital status, or age
(provided the applicant has the capacity to
contract); to the fact that all or part of the
applicant's income derives from a public
assistance program; or to the fact that the
applicant has in good faith exercised any right
under the Consumer Credit Protection Act.” Section 1002.1(b)
Equal Credit
Opportunity Act
General Rule-1002.4
• No discrimination against an applicant based on
a prohibited basis regarding any aspect of a
credit transaction. 1002.4(a)
• No discouragement to apply for credit. 1002.4(b)
• Required disclosures must be clear and
conspicuous in a form applicant can
retain.1002.4(c)
Equal Credit
Opportunity Act
Analyzing Discrimination-
1. Overt Discrimination
2. Disparate Treatment
3. Disparate Impact
Equal Credit Opportunity Act
• The “Effects Test” for disparate impact1. Member must prove: Criteria or practice has a
disproportionate adverse impact on a protected
class
2. Credit Union then must prove: Criteria or practice
used has legitimate business necessity and valid
predictor of loan performance
3. Member may then prove: alternative criteria or
practice available with less adverse impact.
• Increasing Importance with CFPB
Equal Credit
Opportunity ActRequests for Information-1002.5
1. General Rule-A creditor may request any information. 1002.5(a)(1)
2. For credit secured by the borrower’s dwelling, certain
information must be asked. 1002.5(a)(2)
3. May not inquire about-
• Race
• Color
• Religion
• National Origin
• Sex 1002.5(b)
Equal Credit Opportunity Act
Requests for Information-1002.5-Continued• Self-testing- May inquire about the race, color, religion,
national origin, or sex of an applicant or any other person for purpose of conducting a self-test that meets the requirements of § 1002.15.
• If so, disclose orally or in writing:(i) The applicant will not be required to provide the
information;(ii) Requesting information to monitor its compliance with
ECOA;(iii) Federal law prohibits the creditor from discriminating
on the basis of this information, or on the basis of an applicant’s decision not to furnish the information; and
(iv) If applicable, certain information will be collected based on visual observation or surname if not provided by the applicant or other person.
1002.5(b)(1)
Equal Credit Opportunity ActRequests for Information-1002.5-Continued
• Requests information about spouse or former spouse
only if -
1. Spouse will be permitted to use account
2. Spouse contractually liable on account (joint
borrowers)
3. Relying on spouse’s income for repayment
4. Reside in community property state
(AZ,CA,ID,LA,NV,NM,TX,WA,WI)
5. Relying on alimony, child support, from spouse or
former spouse
1002.5(c)
Equal Credit
Opportunity Act
Requests for Information-1002.5-ContinuedOther limitations on information requests—(1) Marital status. If an applicant applies for individual unsecured credit, a creditor shall not inquire about the applicant’s marital status unless the applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested. If an application is for other than individual unsecured credit, a creditor may inquire about the applicant’s marital status, but shall use only the terms married, unmarried, and separated. A creditor may explain that the category unmarried includes single, divorced, and widowed persons. 202.5(d)(1)
Equal Credit
Opportunity ActRequests for Information-1002.5-Continued
Other limitations on information requests—Disclosure about income from alimony, child support, or separate maintenance. A creditor shall not inquire whether income stated in an application is derived from alimony, child support, or separate maintenance payments unless the creditor discloses to the applicant that such income need not be revealed if the applicant does not want the creditor to consider it in determining the applicant’s creditworthiness. 1002.5(d)(2)
Equal Credit Opportunity ActRequests for Information-1002.5-Continued
Other limitations on information requests-
• Childbearing, childrearing. A creditor shall not inquire
about birth control practices, intentions concerning the
bearing or rearing of children, or capability to bear
children. A creditor may inquire about the number and
ages of an applicant’s dependents or about
dependent-related financial obligations or
expenditures, provided such information is requested
without regard to sex, marital status, or any other
prohibited basis. 1002.5(d)(3)
• Permanent residence and immigration status-may
inquire about this. 1002.5(e)
Equal Credit Opportunity ActEvaluating Applications-1002.6-
General Rule-All information may be used as long as it is
not used to discriminate on a prohibited basis. 1002.6(a)
Specific rules-
• Age
• Childbearing, childrearing
• Telephone listing
• Credit History
• Immigration status
• Marital status
• Race, color, religion, national origin, sex 1002.6(b)
Protected Income
1002.6(b)(5) states:
(5) Income. A creditor shall not discount or exclude from consideration the income of an applicant or the spouse of an applicant because of a prohibited basis or because the income is derived from part-time employment or is an annuity, pension, or other retirement benefit; a creditor may consider the amount and probable continuance of any income in evaluating an applicant's creditworthiness. When an applicant relies on alimony, child support, or separate maintenance payments in applying for credit, the creditor shall consider such payments as income to the extent that they are likely to be consistently made.
Equal Credit Opportunity ActExtensions of Credit-1002.7-• May not refuse to grant an individual account to
creditworthy individual on basis of sex, marital status, or other prohibited basis. 1002.7(a)
• May not require certain names 1002.7(b)
• Open-end accounts-may not require reapplication, change terms, terminate account based on reaching certain age, retiring, or change in name 1002.7(c)
• Spouse’s signatures-may not require unless joint account, community property state, get valid security agreement in collateral.
• Applications must make clear that joint borrowers are applying for joint credit.
• Deny credit based on reaching an age where credit insurance not available
Equal Credit Opportunity Act
Notification of Action Taken-1002.9-Notify an applicant of action taken within:
(i) 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application;
(ii) 30 days after taking adverse action on an incomplete application, unless notice is provided in accordance with paragraph (c) of this section;
(iii) 30 days after taking adverse action on an existing account; or
(iv) 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.
1002.9(a)(1)
Equal Credit Opportunity Act
• What constitutes an “Application”?
– Defined by what the Credit Union does with
member information, not what the member
asks for
– In what channels do you accept applications?
– Is the Credit Union staff trained to respond
appropriately when they receive member
information
Equal Credit Opportunity ActNotification of Action Taken-1002.9-
The content of adverse action notice must be in writing and contain:
• a statement of the action taken
• the name and address of the creditor;
• a statement of the provisions of § 701(a) of the Act;
• the name and address of the federal agency that administers compliance with respect to the creditor;
• and either:(i) A statement of specific reasons for the action
taken; or (ii) A disclosure of the applicant’s right to a
statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor’s notification.
Equal Credit
Opportunity Act
Notification of Action Taken-1002.9-
• Model Form
• Incomplete Applications
• May add FCRA information
Equal Credit
Opportunity Act
Furnishing Credit Information-1002.10-
• If furnish information to bureaus-
1. For new accounts reflect the participation of
both spouses. 1002.10(a)(1)
2. For existing accounts, do the same within 90
days of receiving a written request from one or
both spouses. 1002.10(a)(2)
3. Furnish information in a manner so bureau can
provide information in both spouse’s names. 1002.10(b)
Equal Credit Opportunity Act
Information for Monitoring Purposes-1002.13-
• When application received for purchase or refinance of
principal dwelling (1 to 4 units), must ask-
1. Ethnicity (using terms Hispanic or Latino or not
Hispanic or Latino) and
2. Race (using American Indian or Native Alaskan, Asian,
Black or African American, Native Hawaiian or Other
Pacific Islander, and White)
3. Sex
4. Marital status using categories married, unmarried,
and separated
1002.13(a)(1)
Equal Credit Opportunity ActInformation for Monitoring Purposes-1002.13-
Obtaining the Information-
• May be on an application or separate document. 1002.13(b)
• Applicants must be asked, but not required to supply
information. (If not provide must note on form) 1002.13(b)
• Creditor must then note ethnicity, race, sex based on
visual observation or surname. 1002.13(b)
• Must disclose information being requested for federal
monitoring purposes of statues that prohibit
discrimination and that will note information if applicant
doesn’t provide the information. 1002.13(c)
Truth in Lending Act
Regulation Z
12 CFR-PART 1026
TILA History
• Enacted by Title I of the Consumer Credit
Protection Act of 1968.
• Only one stated goal. Uniform disclosure
of the cost of credit.
TILA History
Later amended (added on to) by acts of Congress:– Fair Credit Billing Act of 1974
– Consumer Leasing Act of 1976
– Truth in Lending Simplification and Reform Act of 1980
– Competitive Equality Banking Act of 1987
– Fair Credit and Charge Card Disclosure Act of 1988
– Home Equity Loan Consumer Protection Act of 1988
– Home Ownership and Equity Protection Act of 1994
– Economic Growth and Regulatory Paperwork Reduction Act of 1996
– Mortgage Disclosure Improvement Act of 2008
– Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009
– Higher Education Opportunity Act of 2009
– Helping Families Save Their Homes Act of 2009
– Wall Street Reform and Consumer Protection Act (Dodd-Frank)
Truth in Lending
• Result is increased complexity:
Rule Making Authority
• The Dodd-Frank Act granted rulemaking
authority under TILA to the Consumer
Financial Protection Bureau (CFPB) and,
with respect to the entities under the
CFPB’s jurisdiction, granted the CFPB
authority to supervise for and enforce
compliance.
• Previously, rulemaking authority was with
the Federal Reserve Board.
Truth in Lending
“The purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The regulation also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes.
1026.1(b)
Truth in Lending The regulation does not govern charges for consumer credit. The regulation requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer's dwelling. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 1026.60 and mortgages that are subject to the requirements of Sec. 1026.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling.”
1026.1(b)
Truth in Lending
Lets Break that Down:
• “promote the informed use of consumer credit by
requiring disclosures…”
– Uniform Disclosures
• “gives consumers the right…”
– Consumer Protections
• “The regulation requires…imposes limitations…
prohibits certain acts or practices…”
– Drives Creditor Behavior
Truth in Lending
Regulatory Scheme-Reg Z-
• Subpart A--General
• Subpart B--Open-End Credit
• Subpart C--Closed-End Credit
• Subpart D--Miscellaneous
• Subpart E--Special Rules for Certain Home Mortgage Transactions
• Subpart F-Certain Rules for Private Education Loans
• Subpart G—Special Rules Applicable to Credit Card Accounts and Open-End Credit Offered to College Students
Truth in Lending
Regulatory Scheme-Reg Z-
• Subpart A--General
1. 1026.1- Authority, purpose, coverage,
organization, enforcement and liability.
2. 1026.2- Definitions
3. 1026.3-Exempt transactions
4. 1026.4-Finance charge
Truth in Lending Definitions-1. (4) Billing cycle or cycle means the interval between the
days or dates of regular periodic statements. These intervals shall be equal and no longer than a quarter of a year.
2. (6) Business day means a day on which the creditor's offices are open to the public for carrying on substantially all of its business functions. (BUT-look further!!)
3. (10) Closed-end credit means consumer credit other than open-end credit as defined in this section.
4. (13) Consummation means the time that a consumer becomes contractually obligated on a credit transaction.
5. (19) Dwelling means a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.
Truth in Lending Exempt Transactions-1026.3-The regulation do not apply to:• An extension of credit primarily for a business,
commercial or agricultural purpose.
• An extension of credit to other than a natural person,
• Credit over $50,000 ($54,600 for 2015) not secured by real property or a dwelling. (relatively recent change)
• An extension of credit not secured by real property, or by personal property used or expected to be used as the principal dwelling of the consumer, in which the amount financed exceeds $50,000 or in which there is an express written commitment to extend credit in excess of $50,000. 1026.3(a)
• Government insured or guaranteed student loans (Note-private student loans ARE covered by Reg Z) 1026.3(f)
Truth in Lending
Finance Charge-1026.4-
Definition-“The finance charge is the cost of consumer credit as a dollar amount.”
Truth in Lending Finance Charge-1026.4-
It includes-
• any charge payable directly or indirectly by the consumer, and
• imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.
• includes fees and amounts charged by someone other than the creditor, if the creditor:
(i) requires the use of a third party as a condition of or an incident to the extension of credit, even if the consumer can choose the third party; or
(ii) retains a portion of the third-party charge, to the extent of the portion retained.
Truth in Lending
Example of finance charge.(1) Interest
(2) Service, transaction, activity, and carrying charges
(3) Points, loan fees, assumption fees, finder's fees
(4) Appraisal, investigation, and credit report fees
(5) Premiums or other charges for any guarantee or insurance protecting the creditor against the consumer's default or other credit loss.
(6) Premiums or other charges for credit life or disability written in connection with a credit transaction.
(7) Premiums for property insurance
(8) Debt cancellation fees. 1026.4(b)
Truth in Lending
Charges excluded from the finance charge-
(1) Application fees charged to all applicants for credit, whether or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.
(3) Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.
(4) Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.
1026.4(c)
Truth in LendingFees Excluded from the Finance Charge-Real-estate related fees. If the fees are bona fide and
reasonable in amount: (i) Fees for title examination, abstract of title, title
insurance, property survey, and similar purposes. (ii) Fees for preparing loan-related documents, such
as deeds, mortgages, and reconveyance or settlement documents.
(iii) Notary and credit report fees. (iv) Property appraisal fees or fees for inspections to
assess the value or condition of the property if the service is performed prior to closing, including fees related to pest infestation or flood hazard determinations.
(v) Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.
1026.4(c)(7)
Truth in Lending
Excluding Insurance from Finance Charge-
1) Credit Life, Disability, Debt Cancellation-
– Not required to get loan and that fact disclosed
– Premium (unit cost for open-end, total cost for closed-end)
– Sign or initial that want coverage 1026.4(d)
2) Property Insurance-
– Can be required, but member can get insurance from
whomever acceptable to credit union to exclude from FC
– If member buys from the credit union, the premium is included
in FC. 1026.4(e)
Truth in Lending
Tolerances for Calculation Accuracy:
1. APR : 1/8th of 1%
2. Finance Charge:
• $5 ($1000 or less)
• $10 (more than $1000)
3. Rescission:
• ½ of 1% of face amt. of note or $100 or if over-
disclosed
• For refinances with different creditor, 1% of face
amt.
• Foreclosures-Within $35 or overdisclosed.
Liability for Violations
1. From $1,000 to $5,000 as penalty
2. Actual Damages (hard to prove)
3. Costs and Attorneys’ Fees
Corrective Process-
You can relieve your credit union of liability if within 60 days of discovering the error, if you send a corrective action notice and make appropriate adjustments to borrowers account.
Third Party liability - if you have a third party from which you buy loans (indirect program) you may take on liability if the violation of TILA is obvious on its face.
Truth in Lending
Subpart C--Closed-End Credit
1. 1026.17 - General disclosure requirements
2. 1026.18- Content of disclosures
3. 1026.19 - Certain residential mortgage and variable-rate transactions
4. 1026.20- Subsequent disclosure requirements
5. 1026.21- Treatment of credit balances
6. 1026.22- Determination of annual percentage rate
7. 1026.23- Right of rescission
8. 1026.24- Advertising
Truth in Lending-1026.17
1. Form of disclosures-clear and conspicuous in a form
the member can keep 1026.17(a)
2. “FINANCE CHARGE” and “ANNUAL PERCENTAGE
RATE” must be more conspicuous when used with a
number 1026.17(a)(2)
3. Timing of disclosures-before consummation
1026.17(b)
4. At least 10 point type for dwelling secured
transactions
5. Basis of disclosures-actual terms. If not known, may
use estimates and mark with “e” 1026.17(c)
Truth in Lending
• “The disclosures shall be grouped
together, shall be segregated from
everything else, and shall not contain
any information not directly related to
the disclosures required under
§1026.18.” 226.17(a)
• This grouping is known as…..
“The Fed Box”
Closed End Disclosures –
1026.18 • Identify the Creditor
• Amount Financed
• Itemization of Amount Financed
• Finance Charge
• Annual Percentage Rate (APR)
• Variable Rates
• Payment Schedule
• Total Payments
Closed End Disclosures –
1026.18 (con’t)• Total Payments
• Any Demand Feature
• Total Sales Price
• Prepayment
• Late Payment Penalties
• Insurance or Debt Cancellation
• Certain Security Interest Charges
• Assumption Policy
• Any Required Deposits (Escrows)
• Interest Rate and Payment Summary for Mortgages
Truth in LendingSubsequent disclosure requirements-
1026.20Refinancings. A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. The following shall not be treated as a refinancing:
• A renewal of a single payment obligation with no change in the original terms.
• A reduction in the annual percentage rate with a corresponding change in the payment schedule.
1026.20 (continued)• An agreement involving a court proceeding.
• A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in 1026.4(d).
• The renewal of optional insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart.
Truth in LendingAdvertising-1026.24-
• Actually available terms, no misleading terms “free money”
• “Triggering terms”-1. Amount or percentage of down payment.
2. Number of payments
3. Amount of any payment
4. Amount of any FC
• If any of the above given, must state:1. Amount or percentage of any down payment.
2. Terms of repayment
3. “APR, and if the rate may increase after consummation.
• NOTE: “APR” is triggering term for open-end, but not for closed-end advertising.
