Regulatory Alert 20-RA-07 CFPB Issues Amendments to Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule

August 2020

In July, the CFPB issued a final rule amending parts of the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule (Payday Rule). NCUA notes that although the CFPB Payday Rule became effective on January 16, 2018, the compliance dates are currently stayed pursuant to a court order issued because of pending litigation.

The CFPB’s July changes rescinded 3 provisions of the Payday Rule:

• The requirement for a lender to determine a borrower’s ability to repay before making a covered loan
• The underwriting requirements for making the ability-to-repay determination
• Certain recordkeeping and reporting requirements

The July amendments made no changes to provisions related to:

• Provisions relating to payment withdrawal restrictions
• Notice requirements and related recordkeeping requirements for covered short-term loans
• Covered longer-term balloon payment loans

The CFPB Payday Rule

The Payday Rule covers the following products:

• Short-term loans that require repayment within 45 days of consummation/advance, regardless of the cost of credit
• Longer-term loans with certain types of balloon-payment structures or require a payment substantially larger than all others, regardless of the cost of credit
• Longer-term loans with a cost of credit exceeding 36% APR and have a payment mechanism that gives the lender the right to initiate transfers from the consumer’s account without further action by the consumer

The rule excludes from coverage purchase money security interest loans, real estate secured credit, credit card accounts, student loans, non-recourse pawn loans, Reg E overdraft services and overdraft lines of credit, employer wage advance programs, and no-cost advances.

In addition to the exempted loan products listed above, the rule conditionally exempts the following otherwise covered loan products:

• Alternative loans that conform to the NCUA’s PALs I requirements (conforming non-PALs loans)
• PALs I loans made by FCUs
• Otherwise-covered loans made by a lender that, together with its affiliates, does not originate more than 2,500 covered loans in a calendar year and did not do so in the preceding calendar year (Accommodation Loans) so long as the lender and its affiliates did not derive more than 10% of their receipts from covered loans during the previous year

Key CFPB Payday Rule Provisions Affecting Credit Unions

NCUA notes several key provisions of the rule that affect credit unions:

• Finance charges must be calculated the same way the finance charge under Regulation Z is calculated
• Generally, the lender may not attempt more than 2 withdrawals from a consumer’s account. If a second withdrawal attempt fails due to insufficient funds, the lender must provide consumer a consumer rights notice and a specific new authorization to make additional withdrawal attempts
• Written compliance policies and procedures must be established
• Evidence of compliance must be maintained for 36 months after the date on which a covered loan is no longer an outstanding loan

 

CFPB Payday Rule Effect on NCUA PALs I, PALs II, and Non-PALs Loans

PALs I
The Payday Rule provides a safe harbor for PALs I FCU loans and therefore those loans are not subject to the rule.
12 CFR 701.21(c)(7)(iii)

PALs II
Depending on the loan’s terms, an FCU’s PALs II loan may be a conditionally exempt alternative loan or an accommodation loan under the Payday Rule.  12 CFR 1041.3(e)  Also, a loan that complies with all PALs II requirements and has a term longer than 45 days is also exempt.

 Non-PALs
To be exempt from the Payday Rule a non-PAL must comply with the applicable parts of 12 CFR 1041.3 as outlined below:

• Comply with the requirements of an alternative loan and accommodation loan (12 CFR 1041.3(f))
• Not have a balloon feature
• Be fully amortized and not require a payment substantially larger than all others, and otherwise comply with all the terms and conditions for such loans with a term of 45 days or less

For loans longer than 45 days, must not have a total cost exceeding 36% per annum or a leveraged payment mechanism, and must comply with the terms and conditions for such longer-term loans.

The CFPB has also issued FAQs and a compliance guide related to the Payday Rule.

 

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Legal Opinion Automated Loan Underwriting System – Segregation of Duties for Loan Officers

June 16, 2020

NCUA’s legal opinion reinterprets existing NCUA interpretations of the permissibility of loan disbursements resulting from the use of an automated loan underwriting system (ALUS). The Legal Opinion applies to FCUs. At issue are:

• Section 1761c(b) of the FCU Act
• The duties of a member service representative (MSR)
• NCUA Legal Opinion 02-0520 (July 10, 2002)
• NCUA Legal Op. 09-1044 (October 2010).

In this opinion, NCUA partially reverses its position that an MSR can not both input data into an ALUS and oversee the disbursement of funds in certain fact specific circumstances where internal controls are sufficient to mitigate the risk of fraud.

Background

Section 1761c(b) of the FCU prohibits an individual from having the authority to disburse funds of an FCU for any loan or line of credit for which that individual approved the loan application as a loan officer. When the credit review process is automated with an ALUS, someone must enter the application data into the system.

 In 2002, NCUA determined that an FCU employee entering data into an ALUS is responsible for the accuracy of the information and is acting akin to a loan officer and therefore could not also oversee the disbursement of funds pursuant to § 1761c(b).

In 2010, NCUA issued another legal opinion related to the use of ALUS concluding that it is permissible for an FCU to use a fully automated loan underwriting system but reiterated that the same employee may not both input the applicant’s data into the ALUS and disburse the loan funds.

NCUA’s Evolving View

While the 2002 and 2010 legal opinions consistently viewed an employee entering data into an ALUS as the equivariant of a loan officer, NCUA now believes that with advances in technology and changes in credit union operations, that many no longer always be the case.

 Specifically, NCUA notes that loan officers are responsible for more than formulaic underwriting: they evaluate the character of the borrower and the likelihood of repayment as well as ensuring loan terms and procedures comply with credit union policies and applicable compliance requirements. In contrast, an FCU employee working with an ALUS today may be limited to strictly performing data entry with no other responsibilities or knowledge of the loan approval process.

In such cases, NCUA now opines that with certain safeguards in place, it might be possible for the same employee to serve the function of data entry into the ALUS as well as oversee the disbursement of the loan. NCUA suggests the following safeguards may make this type of arrangement permissible:

• strictly limit the employee’s duties in the ALUS context to data processing and other necessary administrative functions that are separate and distinguishable from loan officer duties
• develop internal procedures to maintain a segregation of duties between the data entry employee and the loan officer outside of the ALUS function so there is no confusion about what duties each performs
• establish internal checks and balances to:
• effectively monitor that data entry employees are correctly inputting data into the ALUS and correctly disbursing funds based on ALUS credit decisions
• detect any instances of fraud or embezzlement
• exclude data entry employees from any involvement with the ALUS other than accurate data input and proper disbursements

 

Legal Opinion Reasonable Proximity Analysis

June 10, 2020

 NCUA’s Legal Opinion addresses FCU field of membership and the term “reasonable proximity,” as used in the Federal Credit Union Act (“FCUA”) and whether it establishes a statutory constraint related to proximity. NCUA answered “No” there was not a statutory constraint on the term “reasonable proximity” that would impose a limit such as a maximum distance between the location of the group and the location of the FCU.

NCUA views “reasonable proximity” as including a geographic component but will continue to assess it on a case-by-case basis.

The FCUA permits a group to be added to a multiple common bond FCU’s field of membership when it is neither practicable nor reasonably safe and sound for the group to charter its own credit union. The FCUA further instructs that the group to be added must be “within reasonable proximity” to the FCU. NCUA notes that the context of the FCUA and the traditional definition of proximity requires a geographic determination.

The NCUA’s Chartering Manual requires added groups to be within reasonable geographic proximity of the credit union and within the service area of at least one of FCU’s service facilities.” However, the Chartering Manual does not include a specific distance or mileage limitation into its definition of reasonable proximity. NCUA notes that given geographic and population density diversity throughout the country, explicit mileage limits can cause unfair results and are therefore not appropriate. As a result, NCUA uses a case-by-case approach in chartering decisions when interpreting reasonable proximity.

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FinCEN Guidance FIN-2020-G002

Frequently Asked Questions Regarding Customer Due Diligence (CDD) Requirements for Covered Financial Institutions

August 3, 2020

FinCEN has issued updated responses to 3 FAQs regarding CDD requirements for covered financial institutions.  The FAQs clarify the regulatory requirements related to:

• obtaining customer information
• establishing a customer risk profile
• performing ongoing monitoring of the customer relationship to assist with CDD compliance obligations

These FAQs are in addition to those that were published on July 19, 2016 and April 3, 2018.  More information is available on FinCEN’s CDD webpage.

I. Customer Information – Risk-Based Procedures

The first question asks about the extent of the information to be collected on members at account opening: whether information about expected activity must be collected on all customers at account opening, or on an ongoing or periodic basis; whether media searches must be done on all customers at account opening or on an ongoing basis; and whether a financial institution needs to know its customer’s customer when providing services to another financial institution.

FinCEN provides the following responses in the revised FAQs:

• The CDD Rule does not categorically require the collection of any particular customer due diligence information (other than that required to develop a customer risk profile, conduct monitoring, and collect beneficial ownership information).
• The performance of media searches or the collection of customer information from a financial institution’s bank customers is a risk-based decision at the discretion of the financial institution.
• A covered financial institution may make a risk-based determination that a customer’s risk profile is low and additional information is not necessary.
• Covered financial institutions must establish policies, procedures, and processes for determining whether and when, on the basis of risk, to update customer information to ensure that customer information is current and accurate.

II. Customer Risk Profile

The second question asked whether financial institutions must use a specific method to risk rate customers or automatically characterize as high-risk customers and products that are identified as such in government publications.

FinCEN answered that there is no requirement that covered institutions use a specific method or categorization to establish a customer risk profile. Furthermore, there is no requirement to automatically categorize as “high risk” products or customer types listed in government publications.

III. Ongoing Monitoring of the Customer Relationship

Question three asked whether CDD requires financial institutions update customer information on a specific schedule.

FinCEN answered that there is no categorical requirement that financial institutions update customer information on a continuous or periodic schedule. The requirement to update customer information is risk based and should be undertaken based on normal monitoring. If monitoring reveals a change in customer information relevant to assessing the risk posed by the customer, then the customer information should be updated accordingly. Some financial institutions may decide as part of their policies to review customer information on a regular or periodic basis.

 

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Summary: Proposed Rule re: Higher Priced Mortgage Loan Escrow Exemption (Regulation Z)

12 CFR Part 1026

The Consumer Financial Protection Bureau

 Prepared by the Legislative and Regulatory Affairs Department

 July 2020

The Bureau is proposing to amend Regulation Z, which implements the Truth in Lending Act, as mandated by Section 108 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRPCA). The amendments would exempt certain insured depository institutions and insured credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans.

Comments must be received by September 21, 2020.  The proposed rule can be found here.

Summary:

Regulation Z, which implements the Truth in Lending Act, requires creditors establish an escrow account for certain higher-priced mortgage loans (HPMLs) with some exemptions.  Section 108 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRPCA) required the Bureau to issue regulations that provide a new exemption from TILA’s escrow requirement for loans made by certain insured depository institutions and insured credit unions.

New Section 1026.35(b)(2)(vi) would exempt from the Regulation Z HPML escrow requirement any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if (i) the institution has assets of $10 billion  or less; (ii) the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year; and (iii) certain of the existing Regulation Z HPML escrow exemption criteria, or those of any successor regulation are met.

In addition, the proposal would implement the EGRRPA section 108 statutory directive and would remove obsolete text from the official interpretation of Regulation Z.

The Bureau proposed that the amendments included in this proposal take effect for mortgage applications received by an exempt institution on the date of the final rule’s publication in the Federal Register.

Comments:

• The Bureau seeks comments on its proposed amendments to Section 1026.35 and on the need for the proposed changes and the impact on consumers of extending the exemption of the escrow requirements in Section 1026.35(b)(1).
• The Bureau seeks comment on whether the proposed effective date is appropriate, or whether the Bureau should adopt an alternative effective date.
• The Bureau request information regarding any additional data or studies that could help quantify the benefits and costs to consumers and covered persons of the proposed rule.
• The Bureau requests comment on the analysis provided in the rule and request information regarding any relevant data that should be included.