Consumer Compliance Outlook
News from Washington
On July 14, 2008, the Board of Governors of the Federal Reserve System (Board) issued its final rules under Regulation Z for consumer mortgages and advertising using its rulemaking authority under the Home Ownership Equity Protection Act of 1994 (HOEPA) and the Truth in Lending Act. The mortgage rules fall into two categories: three rules that apply to all closed-end mortgages secured by a consumer's principal dwelling, and four rules that apply only to a new category of loans known as "higher-priced mortgage loans" (HPML) based on the annual percentage rate of the loan and designed to capture all subprime mortgages. The rules take effect on October 1, 2009, except that the effective date for the new escrow requirement for HPMLs is April 1, 2010, for site-built homes and October 1, 2010, for manufactured homes. The new advertising rules under Regulation Z require additional information about certain loan features and ban seven misleading advertising practices. Finally, the Board also proposed amendments to Regulation C (the Home Mortgage Disclosure Act) to change the definition of "higher-priced loans" so that it conforms to the definition of HPMLs under the new HOEPA rules. The rules will be discussed in detail in a future issue of Consumer Compliance Outlook.
On June 26, 2008, the Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) made public the 2008 host state loan-to-deposit ratios that the agencies use for verifying compliance with §109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 during a bank's Community Reinvestment Act examination. Section 109 prohibits a bank from establishing or acquiring a branch outside its home state when the primary purpose is to acquire deposits. A bank complies with §109 if the loan-to-deposit ratio in its home state is at least one-half the loan-to-deposit ratio of the host state where it plans to establish or acquire a branch. If the home state ratio is less than one-half the host state ratio, a second test is conducted to determine whether the bank is reasonably meeting the credit needs of the communities of the interstate branches. If the bank fails the second test, it violates §109 and can be sanctioned by its regulator.
On May 30, 2008, the Board, the FDIC, the OCC, the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) issued the final illustrations for certain hybrid adjustable-rate mortgage (ARM) products. The illustrations are designed to help consumers understand how ARM products compare to a fixedrate mortgage by displaying a comparison chart of the monthly payments for a 30-year ARM product (using three hypothetical changes in the annual percentage rate during the life of the loan) and a 30-year fixed-rate product. Banks are not required to use the illustrations.
On May 30, 2008, the Board, the FDIC, the OCC, and the OTS issued the 2008 list of distressed or underserved nonmetropolitan middle-income geographies. Bank activities to revitalize or stabilize any of the designated areas will receive CRA consideration as "community development." The information can be downloaded in Adobe PDF or Excel spreadsheet formats.
On May 8, 2008, the Board and the Federal Trade Commission (FTC) issued for public comment proposed rules regarding risk-based pricing notices (notice). The rulemaking was required by §311 of the Fair and Accurate Credit Transactions Act of 2003. The proposed rules require a creditor to send a notice to a consumer when the creditor uses a credit report in evaluating a consumer credit application and offers terms materially less favorable than the most favorable terms available to a substantial proportion of consumers, based in whole or part on information in the report. The notice would have to include all of the disclosures required by §615(h)(5) of the Fair Credit Reporting Act (FCRA) as well as a statement that the terms offered to the consumer may be less favorable than the terms offered to consumers with better credit histories. Consumers receiving a notice must also be told that they can obtain a copy of their credit report without charge. If the creditor will be sending the consumer an adverse action notice under §615(b) of the FCRA, a risk-based pricing notice is not required. The purpose of this disclosure is to encourage consumers to review their credit reports for inaccuracies. The proposal generally requires that the notice be provided to the consumer after the terms of credit have been set but before the consumer becomes contractually obligated on the credit transaction. The closing date for comments was August 18, 2008.
On May 2, 2008, the Board, the OTS, and the NCUA jointly issued proposed regulations to ban unfair credit card practices and deposit account overdraft services using their authority under §5 of the FTC Act to prohibit unfair or deceptive acts or practices. For credit cards, the proposal would 1) prohibit financial institutions from increasing the APR of an outstanding card balance (with limited exceptions, including not receiving a payment within 30 days of the due date); 2) regulate payment allocation when consumers send payments in excess of the minimum payment and have multiple balances with different APRs so that financial institutions could not always allocate the entire payment to the balance with the lowest APR; 3) allow consumers to take full advantage of promotional rates on card offers (such as 0 percent APR balance transfer offers for a limited period of time) by requiring that payments in excess of the minimum be applied to nonpromotional rate balances first; 4) prohibit financial institutions from imposing late fees unless they provide a reasonable amount of time to pay a balance (with a safe harbor of at least 21 days provided between the mailing of the periodic statement and the due date for the payment); 5) prohibit financial institutions from using the double-cycle (or two-cycle) balance computation method, where the balance is computed by averaging the balance from the current and last billing cycle rather than just the current one; 6) prohibit financial institutions from imposing an over-the-credit-limit fee if it results solely from a credit card hold; 7) prohibit financial institutions from financing credit availability fees if such fees exceed 50 percent of the credit line; and 8) require that, for firm offers of credit under the FCRA, the creditor disclose the factors that determine if a consumer will qualify for the most favorable APR and credit limit. For overdraft services, the proposal would 1) prohibit financial institutions from imposing overdraft fees if they result solely from a debit card hold; and 2) require that institutions offer consumers the opportunity to opt out of overdraft programs. The closing date for comments was August 4, 2008.
On May 2, 2008, the Board issued proposed amendments to Regulation DD regarding new disclosure requirements for deposit account overdraft services. The proposal complements the Board's rulemaking for overdraft services discussed above. The proposed rules would 1) require financial institutions to disclose the aggregate costs of overdraft services on periodic statements (the amount of fees incurred in the current statement and the cumulative amount of fees for the year to date); and 2) prohibit financial institutions from including the amount of overdraft protection when displaying an account balance for the deposit account. Banks would be permitted to provide a second balance that includes the amount of overdraft protection available on the account if it is prominently disclosed along with the actual balance information. The closing date for comments was July 18, 2008.
On May 2, 2008, the Board issued proposed amendments to Regulation Z. This proposal is intended to complement the Board's regulation on unfair rulemaking discussed above. Under the proposal, 1) creditors could not require that mailed payments be received earlier than 5:00 p.m. on the due date; 2) consumers could reject a subprime card with substantial fees after account opening (but before using the card) and avoid the fees; 3) creditors publishing advertisements for deferred interest plans stating "no interest" (or similar) would have to prominently disclose the circumstances when interest can be charged; and 4) creditors would be prohibited from substituting a new general-purpose credit card for an existing singlemerchant card without the consumer's consent if the existing card has been "inactive" for 24 months or longer. The closing date for comments was July 18, 2008.
On April 1, 2008, the Board announced that the Federal Reserve System was making available color-coded maps and data that illustrate subprime and alt-A mortgage loan conditions across the United States. The maps, which are maintained by the Federal Reserve Bank of New York, will display regional variations in the condition of securitized owner-occupied subprime and alt-A mortgage loans. The maps and data can be used to assist in identifying existing and potential foreclosure hotspots. The maps are available at the New York Fed's website.
The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council (FFIEC) approved interagency examination procedures to verify compliance with the Department of Defense's (DoD) implementing regulations for the John Warner National Defense Authorization Act for Fiscal Year 2007 (known as the Talent Amendment), regarding limitations on consumer credit extended to service members and dependents. The DoD rule, which is codified at 32 C.F.R. 232, covers payday loans, motor vehicle title loans, and tax refund anticipation loans and applies to all persons engaged in the business of extending such credit and their assignees. The DoD rule limits the amount a creditor can charge service members and their dependents for a covered transaction. Total charges must be expressed as a total dollar amount and as an annualized rate called the military annual percentage rate, or MAPR, which may not exceed 36 percent. The rule applies to consumer credit extended to a covered borrower and consummated on or after October 1, 2007. The examination procedures identify four objectives: 1) determine an institution's compliance with the regulations; 2) assess the quality of the institution's compliance risk management systems and policies and procedures for implementing the provisions; 3) determine the reliance that can be placed on the institution's internal controls and procedures for monitoring the institution's compliance with the provisions; and 4) determine corrective action when violations of the regulations are identified or when the institution's policies or internal controls are deficient. The examination procedures are available on the Board's website.
The Task Force on Consumer Compliance of the FFIEC approved updated interagency examination procedures for Regulation DD, the implementing regulation for the Truth in Savings Act. The updated procedures: 1) incorporate the Board's amendments to the regulation and official staff commentary regarding electronic disclosures; and 2) respond to recommendations made by the Government Accountability Office (GAO) in its March 2008 study "Bank Fees: Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts"(GAO-08- 281).1 The examination procedures contain language supplementing current procedures to emphasize the existing requirement to provide full account disclosure (e.g., fees, terms, and conditions) to a consumer upon request, regardless of whether the consumer is an existing or prospective customer. The revised procedures also remind examiners that institutions must maintain evidence of compliance with Regulation DD, including the requirement to provide consumer disclosures upon request. Finally, the revised procedures focus on the need for examiners to make sure that supervised institutions train appropriate employees in these disclosure requirements of Regulation DD. The revised procedures are available on the Board's website. An article discussing the GAO study appears in this issue.