Consumer Compliance Outlook
News from Washington: Regulatory Updates
The proposed rule, announced on April 19, 2011, would require creditors to determine a consumer's ability to repay a mortgage before making the loan and would establish minimum mortgage underwriting standards. The rule, which is being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would apply to all consumer mortgages, except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans.
The proposal provides four compliance options for the ability-to-repay requirement. First, a creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors. Second, a creditor can make a “qualified mortgage,” which provides the creditor with special protection from liability provided the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years. Third, a creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio. Finally, a creditor can refinance a “nonstandard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment. The proposal also contains limits on prepayment penalties. Comments on the proposed rule are due by July 22, 2011. General rulemaking authority for TILA transfers to the Consumer Financial Protection Bureau on July 21, 2011. Accordingly, this rulemaking will not be finalized by the Board. The announcement and the Federal Register notice are available at: http://1.usa.gov/frb_repay. Outlook Live conducted a webinar on the proposed rules: http://bit.ly/webinar-repay.
The final rule, announced on March 18, 2011, is intended to enhance protections for consumers who use credit cards and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. The Credit CARD Act requires card issuers to consider a consumer's ability to make the required payments on the account before opening a new credit card account or increasing the credit limit on an existing account. The Board's rule addresses practices that can result in extensions of credit to consumers who lack the ability to pay. Specifically, the rule states that credit card applications generally cannot request a consumer's “household income” because that term is too vague to allow issuers to properly evaluate the consumer's ability to pay. Instead, issuers must consider the consumer's individual income or salary. In addition, the Board's rule clarifies that promotional programs that waive interest charges for a specified period of time are subject to the same Credit CARD Act protections as promotional programs that apply a reduced rate for a specified period. The rule is effective October 1, 2011. The Board's announcement and the Federal Register notice are available at: http://1.usa. gov/frb_clarify.
The proposed amendments, announced on March 3, 2011, encourage banks to clear and return checks electronically, add provisions that govern electronic items cleared through the check-collection system, and shorten the “exception” hold periods on deposited funds. The proposal provides that a depositary bank would be entitled to the expeditious return of a check only if it agrees to receive returned checks electronically. In addition, the proposal would permit the bank responsible for paying a check to require that checks presented to it for same-day settlement be presented electronically. The proposal would apply Regulation CC's collection and return provisions, including warranties, to electronic check images that meet certain requirements. Because of the faster collection and return time frames that result from electronic collection and return, the proposal would shorten the safe-harbor period for an exception hold to four business days, which should enable the depositary bank to learn of the return of virtually all unpaid checks before being required to make these deposits available for withdrawal. The proposal also eliminates references in Regulation CC to “nonlocal” checks because the Reserve Banks have ceased operations in all but one of their check processing offices so all checks are now local. Appendix C to the regulation sets forth model funds availability forms that banks may use as the basis for their disclosures to customers. The Board's announcement and the Federal Register notice are available at: http://1.usa.gov/frb_cc.
The jointly proposed regulations, announced on March 1, 2011, implement the credit score disclosure requirements of the Dodd-Frank Act. The statute requires creditors to disclose credit scores and related information to consumers in risk-based pricing and adverse action notices under the Fair Credit Reporting Act (FCRA) if a credit score was used in setting the credit terms or taking adverse action. The Board also proposed to amend certain model notices in Regulation B (Equal Credit Opportunity Act), which combine the adverse action notice requirements for both Regulation B and the FCRA. The amendments would revise those model notices to incorporate the new credit score disclosure requirements. The Board's announcement and the Federal Register notice are available at: http://1.usa.gov/frb_rbp.
The final rule, announced on February 23, 2011, revises the escrow account requirements for certain home mortgage loans. The rule increases the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien "jumbo" mortgage loans. Under the final rule, the escrow requirement will apply to first-lien jumbo loans only if the loan's APR is 2.5 percentage points or more above the average prime offer rate. The APR threshold for nonjumbo loans remains unchanged. The final rule is effective for covered loans for which the creditor receives an application on or after April 1, 2011. The announcement and the Federal Register notice are available at: http://1.usa.gov/frb_jumbo.
The proposed rule, announced on February 23, 2011, implements the Dodd-Frank Act requirements for first-lien escrow accounts for HPMLs. The length of the escrow would be expanded from one year to five years. The escrow would be longer in certain circumstances, such as when the loan is delinquent or in default. The proposed rule would also provide an exemption from the escrow requirement for certain creditors operating in "rural or underserved" counties, as authorized by the legislation. The proposal would implement new disclosure requirements that would be required at least three business days before consummation of a mortgage loan to explain how the escrow account works, or the effects of not having an escrow account if one is not being established, and require consumers to receive disclosures three days before an escrow account is closed. The comment period closed on May 2, 2011. The announcement and the Federal Register notice are available at: http://1.usa.gov/frb_escrow.
On February 23, 2011, the agencies issued an interim final rule to implement statutory restrictions on the garnishment of federal benefit payments. The rule, which became effective May 1, 2011, establishes procedures that financial institutions must follow when they receive a garnishment order against an account holder who receives certain types of federal benefit payments by direct deposit. The rule requires financial institutions to determine the sum of such federal benefit payments deposited to the account during a two-month period and ensure that the account holder has access to an amount equal to that sum or to the current balance of the account, whichever is lower. The Federal Register notice is available at: http://1.usa.gov/garnish-rules.