CFPB Executive Summary of the Small Business Lending Rule

Summary re: CFPB Executive Summary of the Small Business Lending Rule

Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile data regarding certain business credit applications and report that data to the CFPB.  Section 1071 specifies several data points that financial institutions are required to report and provides authority for the CFPB to require financial institutions to report additional data points that the CFPB determines would aid in fulfilling Section 1071’s purposes.  The amendments are designed to facilitate the enforcement of fair lending laws and enabling the identification of business and community development needs/opportunities for women-owned, minority-owned, and small businesses.  There are a number of requirements regarding information to be compiled, such as a requirement that financial institutions restrict certain persons’ access to certain information, requirements regarding maintaining certain information, and requirements regarding the reporting/publication of data.

Covered Financial Institution

  • Any partnership, company, corporation, association (incorporated/unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity and that originated at least 100 covered originations in each of the two preceding calendar years.
  • The final rule applies to a variety of entities that engage in small business lending as long as they satisfy the origination threshold. Applicable institutions will need to determine if they are considered “covered” on an annual basis.
  • A covered financial institution must collect and report data about an application if the application is from a small business and is for a covered credit transaction. A covered credit transaction is an extension of business credit under Regulation B.  Such transactions can include loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes.
  • Under the final rule, a “covered financial institution” is required to collect and report the following data points:
    • A unique identifier;
    • The application date;
    • The application method;
    • The application recipient;
    • The action taken by the covered financial institution on the application; and
    • The action taken date.
  • For reportable applications that are denied, there is an additional data point for denial reasons.
  • For reportable applications that are approved but not accepted or that result in an origination, there are additional data points for the amount approved or originated and for pricing information.
  • The final rule requires a financial institution to report data points based on information that could be collected from the applicant or an appropriate third-party source. The data points include information specifically related to the credit being applied for and information related to the applicant’s business.  These data points are:
    • Credit type;
    • Credit purpose;
    • The amount applied for;
    • A census tract based on an address or location provided by the applicant;
    • Gross annual revenue for the applicant’s preceding fiscal year;
    • A three-digit North American Industry Classification System (NAICS) code for the applicant;
    • The number of people working for the applicant;
    • The applicant’s time in business; and
    • The number of the applicant’s principal owners.
  • The final rule requires a financial institution to report certain data points based solely on the demographic information collected from an applicant. These data points are:
  • The applicant’s minority-owned, women-owned, and LGBTQI+ owned business status; and
  • The applicant’s principal owners’ ethnicity, race, and sex.
  • A financial institution is required to ask applicants to provide this information and is required to report the demographic information solely based on the responses the applicant provides. However, an institution can not require an applicant/other person to provide this information. If an applicant fails/declines to provide the information, the institution would report the failure/refusal.
  • The final rule also includes a sample data collection form that financial institutions can use to collect this demographic information from applicants and to provide these required notices. Institutions can not discourage applicants from responding to a request for applicant data and must maintain procedures to collect applicant-provided data at a time and in a manner that are reasonably designed to obtain a response.
  • Institutions are permitted to rely on information provided by an applicant or appropriate third-party source; institutions are required to report verified information it chooses to verify
  • Generally, institutions are required to report the data to the CFPB by June 1 of the year following the calendar year in which the financial institution collected the data. The Bureau will determine what data will be made available to the public on an annual basis.
  • The final rule has recordkeeping requirements, including the requirement to retain copies of small business lending application registers and other evidence of compliance for at least three years.
  • The rule becomes effective 90 days after publication in the Federal Register. However, compliance is not required at that time. The rule has established compliance date tiers that differ depending on the number of covered originations an institution originated in 2022 and 2023.

Summary: CFPB Statement of Policy Regarding Prohibition on Abusive Acts or Practices 

12 CFR Chapter X

The Consumer Financial Protection Act (CFPA) prohibits any “covered person” or “service provider” from “engaging in any unfair, deceptive, or abusive acts or practices” and defines abusive conduct.  An abusive act or practice: materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service, or takes unreasonable advantage of a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product/service, the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service, or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

The CFPB issued this policy statement to summarize those actions and explain how the CFPB analyses the elements of abusiveness through relevant examples, with the goal of providing an analytical framework to fellow government enforcement/supervisory agencies and industry on how to identify violative acts or practices.

The policy statement is applicable as of April 12, 2023.  The Bureau is accepting comments on this policy statement until July 3, 2023. 

Summary

The Consumer Financial Protection Act of 2010 (CFPA) banned abusive conduct.  Under the CFPA, there are two abusiveness prohibitions.  An abusive act or practice is an act or practice that:

  • materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product/service; or
  • takes unreasonable advantage of:
  • A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the products or service;
  • The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
  • The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Abusiveness requires no showing of substantial injury to establish liability, but is focused on conduct that Congress presumed to be harmful or distortionary to the proper functioning of the market.  An act/practice need only fall into one of the categories noted above to be considered “abusive.”

Materially Interfering with Consumers’ Understanding of Terms/Conditions

  • The first abusiveness prohibition concerns situations where an entity “materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service.” Material interference can be shown when an act or omission is intended to impede consumers’ ability to understand terms or conditions, has the natural consequence of impeding consumers’ ability to understand, or actually impedes understanding.
  • Material interference may include actions/omissions that obscure, withhold, de-emphasize, render confusing, or hide information relevant to the ability of a consumer to understand terms and conditions. Interference can take numerous forms, such as buried disclosures, physical or digital interference, overshadowing and various other means of manipulating consumers’ understanding.
  • There are a number of methods to prove material interference with a consumer’s ability to understand terms or conditions, including but not limited to those described below.
  • While intent is not a required element, it is reasonable to infer that an act or omission materially interferes with consumers’ ability to understand a term or condition when the entity intends it to interfere;
  • Material interference can be established with evidence that the natural consequence of the act or omission would be to impede consumers’ ability to understand; and
  • Material interference can also be shown with evidence that the act or omission did in fact impede consumers’ actual understanding.

Taking Unreasonable Advantage

  • The second form of “abusiveness” under the CFPA prohibits entities from taking unreasonable advantage of certain circumstances. Congress determined that it is an abusive act or practice when an entity takes unreasonable advantage of three particular circumstances.  The circumstances are:
  • A “lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.” This circumstance concerns gaps in understanding affecting consumer decision-making.
  • The “inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” This circumstance concerns unequal bargaining power where consumers lack the practical ability to switch providers, seek more favorable terms, or make other decisions to protect their interests.
  • The “reasonable reliance by the consumer on a covered person to act in the interests of the consumer. This concerns consumer reliance on an entity, including when consumers reasonably rely on an entity to make the a decision for them or advise them on how to make a decision.
  • Under the CFPA, it is illegal for an entity to take unreasonable advantage of one of these three circumstances, even if the condition was not created by the entity. Evaluating “unreasonable advantage” involves an evaluation of the facts and circumstances that may affect the nature of the advantage and the question of whether the advantage-taking was unreasonable under the circumstances.  The policy statement provided examples such as:
    • Lack of Understanding
      • When there are gaps in understanding regarding the material risks, costs, or conditions of the entity’s product or service, entities may not take unreasonable advantage of that gap. The prohibition does not require that the entity caused the person’s lack of understanding through untruthful statements or other actions or omissions.
    • Inability of Consumers to Protect Their Interests
      • When there are concerns about “the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service.” In these instances, there is concern that entities will take unreasonable advantage of the unequal bargaining power. This may occur at the time of, or prior to, the person selecting the product or service during their use of the product or service or both.
      • The consumer “interests” contemplated include monetary and non-monetary interests including but not limited to property, privacy or reputational interests. People also have interests in limiting the amount of time or effort necessary to obtain consumer financial products or services or remedy problems related to those products or services.  People also have interests in limiting the amount of time or effort necessary to obtain consumer financial products/services or remedy problems related to those products/services.
      • A consumer’s “inability” to protect their interests includes situations when it is impractical for them to protect their interests in selecting or using a consumer financial product or service.
      • The nature of the customer relationship may also render consumers unable to protect their interests in selecting or using a consumer financial product or service. People are often unable to protect their interests when they do not elect to enter into a relationship with an entity and cannot elect to instead enter into a relationship with a competitor.
      • Entities may not take advantage of the fact that they are the only source for important information or services.
    • Reasonable Reliance
      • Entities can not take unreasonable advantage of a consumer based on the “reasonable reliance by the consumer on the covered person to act in the interests of the consumer.”
      • There are a number of ways to establish reasonable reliance, including but not limited to the two described below:
      • Reasonable reliance may exist where an entity communicates to a person or the public that it will act in its customers’ best interest, or otherwise holds itself out as acting in the person’s best interest.
      • Reasonable reliance may also exist where an entity assumes the role of acting on behalf of consumers or helping them to select providers in the market.

Summary of NCUA Letter 23-CU-04: Interagency Policy Statement on Allowances for Credit Losses
(Revised April 2023)

NASCUS Legislative and Regulatory Affairs Department
April 25, 2023

The National Credit Union Administration, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) are issuing a revised interagency policy statement on allowance for credit losses (ACLs).  The revision is issued in response to changes to U.S. generally accepted accounting principles (GAAP) promulgated by the Financial Accounting Standards Board (FASB) in March 2022.

On June 1, 2020, the agencies published an interagency policy statement[1] related to changes to GAAP as promulgated by the FASB in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

In March 2022, the FASB further amended Topic 326 with the issuance of ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures.  ASU 2022-02 eliminates the recognition and measurement accounting guidance for Troubled Debt Restructurings (TDR) by creditors upon adoption of Topic 326.

To maintain conformance with GAAP, the agencies are revising their ACLs policy statement to remove references to TDRs and correct a citation in footnote 4 of the original statement.  No other changes are being made.

The policy statement continues to describe the measurement of expected credit losses in accordance with FASB ASC Topic 326; the design, documentation, and validation of expected credit loss estimation processes, including the internal controls over these processes; the maintenance of appropriate ACLs; the responsibilities of boards of directors and management; and examiner reviews of ACLs and is effective at the time of each institutions adoption of Topic 326[2].

The following policy statements are no longer effective for an institution upon its adoption of FASB Topic 326:

  • The December 2006 Interagency Policy statement on the Allowance for Loan and Lease Losses;
  • The July 2001 Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions; and
  • The NCUA’s May 2002 Interpretive Ruling and Policy Statement 02-3, Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions.

The aforementioned ALLL Policy Statements will be formally rescinded after FASB Topic 326 is instituted for all institutions.

[1] 85 FR 32991 (June 1, 2020).

[2] As noted in Accounting Standards Update 2019-10, FASB ASC Topic 326 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, for public business entities that meet the definition of a Securities Exchange Commission (SEC) filer, excluding entities eligible to be small reporting companies as defined by the SEC. FASB ASC Topic 326 is effective for all other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early application of FASB ASC Topic 326 is permitted as set forth in ASU 2016-13.

Final Rule Summary NCUA: Subordinated Debt

NASCUS Legislative and Regulatory Affairs Department
March 24, 2023

The NCUA Board has issued a final rule amending the Subordinated Debt Rule, which was finalized in December 2020 with an effective date of January 1, 2022. This final rule makes two changes to the December 2020 rule. The changes are related to the maturity of Subordinated Debt Notes and Grandfathered Secondary Capital (GSC).

Specifically, the final rule replaces the maximum permissible maturity of Subordinated Debt Notes (Notes) with a requirement that any credit union seeking to issue Notes with maturities longer than 20 years must demonstrate how the instrument would continue to be considered “debt.”  The final rule also extends the Regulatory Capital Treatment of GSC to the later of 30 years from the date of issuance or January 1, 2052. This extension aligns with the U.S. Department of Treasury’s Emergency Capital Investment Program (ECIP).

The final rule also includes four minor modifications to the current rule to make it more user-friendly and flexible.

The rule is effective April 26, 2023. The final rule can be found here.

Summary

At the September 2022 meeting, the Board issued a notice of proposed rulemaking to amend the current rule in several ways. [1] The final rule adopts the proposed rule without further amendment.

First, to align with Treasury’s Emergency Capital Investment Program (ECIP), the final rule revises §702.401(b) permitting Grandfathered Secondary Capital to be included in Regulatory Capital for up to 30 years from the later of the date of issuance or January 1, 2022.

Relevant to the final rule, Treasury offered either 15 or 30-year maturity options for ECIP investments. Before the issuance of this final rule, the maximum term for Subordinated Debt Notes (Notes) was limited to a maximum of 20 years.

Second, the final rule removes the maximum maturity of 20 years from §702.404(a)(2). In its place, a credit union must provide certain information in its application for preapproval under §702.408 when applying to issue Notes with maturities longer than 20 years. To demonstrate the issuance is debt, the final rule requires a credit union applying to issue Notes with maturities longer than 20 years to submit, at the discretion of the Appropriate Supervision Office, one or more of the following:

  • A written legal opinion from Qualified Counsel.
  • A written opinion from a licensed certified public accountant (CPA).
  • An analysis conducted by the credit union or independent third party.

In addition to the substantive changes discussed, the final rule makes several minor changes to provide clarity, make the rule more user-friendly, and align the rule with current agency practices.

First, the rule amends the definition of “Qualified Counsel” to clarify where such person(s) must be licensed to practice law by removing the phrase “in the relevant jurisdiction(s)” from the definition of “Qualified Counsel.”

Second, the final rule amends §702.408(b)(7) and 702.409(b)(2) to remove the statement of cash flow from the Pro Forma Financial Statements requirement and replace it with a requirement for “cash flow projections.”

Third, the final rule amends the section of the current rule addressing the filing of documents and inspection of documents by removing the phrase “inspection of documents” from the titling of this section. It replaces the current requirement that a credit union submits all applicable documents via the NCUA’s website with a requirement that a credit union makes all submissions directly to the Appropriate Supervision Office.

Finally, the final rule revises §702.414(c) by removing “(“discounted secondary capital” recategorized as Subordinated Debt)” from the description of Grandfathered Secondary Capital that may be redeemed by a credit union.

[1] 87 FR 60326 (Oc. 5, 2022)

Summary re: CFPB Review/Request for Comment: Regulation Z Mortgage Loan Originator Rules Review Pursuant to the Regulatory Flexibility Act

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) issued a notice and request for comments regarding a review of Regulation Z’s Mortgage Loan Originator Rules pursuant to Section 610 of the Regulatory Flexibility Act (RFA).

Comments must be received by May 1, 2023 and the notice can be found here.

Summary:

Regulation Z, which implements the Truth in Lending Act, among other things, imposes certain requirements on: loan originator compensation; qualification of; and registration or licensing of, loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single premium credit insurance.  As part of the review, the Bureau is seeking comment on the economic impact of the loan originator rules on small entities. These comments may assist the Bureau in determining whether the loan originator rules should be continued without change or amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities, consistent with the stated objectives of applicable Federal statutes.

Section 610 provides that the purpose of the review is to determine whether such rules should be continued without change, or should be amended or rescinded, consistent with the stated objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of such small entities. In each review, agencies must consider several factors:

  • The continued need for the rule;
  • The nature of public complaints or comments on the rule;
  • The complexity of the rule;
  • The extent to which the rule overlaps, duplicates, or conflicts with Federal, State, or other rules; and
  • The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.

Request for Comment:

The Bureau asks the public to comment on the impact of Regulation Z’s Mortgage Loan Originator Rules on small entities by reviewing the following factors.  Where possible, please submit detailed comments, data, and other information to support any submitted positions.

  • The continued need for the Rules based on the stated objectives of applicable statutes and the Rules;
  • The complexity of the Rules;
  • The extent to which the Rules overlap, duplicate or conflict with other Federal rules, and, to the extent feasible, with State and local governmental rules;
  • The degree to which technology, market conditions, or other factors have changed the relevant market since the rule was evaluated, including:
  • How the impacts of the Rules as a whole, and of major components or provisions of the Rules, may differ by origination channel, product type, or other market segment;
  • The current scale of the economic impacts of the Rules as a whole, and of major components or provisions of the Rules, on small entities; and
  • Other current information relevant to the factors that the Bureau considers in completing a Section 610 review under the RFA, as described above.

CFPB Summary re: Credit Card Penalty Fees Proposal

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) issues this proposal to amend Regulation Z, which implements the Truth in Lending Act (TILA) to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under TILA.  The proposal would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; provide that the current provision that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount; and provide that late fee amounts must not exceed 25 percent of the required payments.

Comments must be received by May 3, 2023.  The proposal can be found here.

Summary:

The Bureau is proposing to amend provisions in Section 1026.52(b) and its accompanying commentary as they relate to credit card late fees.  Currently, under this section, a card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end consumer credit plan, such as a late payment, exceeding the credit limit or returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in Section 1026.52(b)(1) or complies with the safe harbor provisions set forth in Section 1026.52(b)(1)(ii).  Section 1026.52(b)(ii) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $41 for each subsequently violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.

The Bureau’s proposal is limited to late fees at this time.  The proposal would amend Section 1026.52 and its accompanying commentary to ensure that late fees are reasonable and proportional.  Specifically, it would:

  • Amend the section to lower the safe harbor dollar amount for late fees to $8 and to no longer apply to late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles.
  • The proposal would remove the annual inflation adjustments for the safe harbor late fee dollar amounts.
  • The proposal would amend the section to provide that late fee amounts must not exceed 25 percent of the required payment; currently, late fee amounts must not exceed 100 percent.
  • The proposal would also amend the commentary to revise current examples of late fee amounts to be consistent with the proposed $8 safe harbor late fee amount discussed.

Comments Requested:

The Bureau seeks comment on the following:

  • Whether card issuers should be prohibited from imposing late fees on consumers that make the required payment within 15 calendar days following the due date.
  • Whether, as a condition of using the safe harbor for late fees, it may be appropriate to require card issuers to offer automatic payment options or to provide notification of the payment due date within a certain number of days prior to the due date or both.
  • Whether the same or similar changes should be applied to other penalty fees such as over the limit fees, returned-payment fees and declined access check fees or in the alternative, whether the Bureau should finalize the proposed safe harbor for late fees and eliminate the safe harbors for other penalty fees.
  • Whether instead of revising the safe harbor provisions in Section 1026.52 (as they apply to late fees), the Bureau should instead eliminate the safe harbor provisions in Section 1026.52 for late fees or should instead eliminate the safe harbor for all penalty fees, including late fees, over the limit fees, returned payment fees and declined access check fees.
  • Whether or not the cost analysis provisions found in Section 1026.52, would need to be amended, and if so, how?
  • All aspects of these proposed amendments to the commentary to Section 1026.52 including comment on what additional amendments may be needed to help to ensure clarity and compliance certainty.
  • The proposed clarification of the commentary to Section 1026.52(b)(1)(i), including comment on whether any additional clarification may be needed.
  • Whether there are other specific clarifications that should be made to the provisions of the commentary providing guidance on how to perform a cost analysis under the rule.
  • Whether potential revisions to the cost analysis provisions are relevant to both retaining the safe harbor provisions as proposed or eliminating the safe harbor provisions for late fees.
  • What additional guidance, if any, should be added to the commentary concerning the specific costs and other factors that card issuers may take into account in determining late fee amounts, including any relevant data or information.
  • Whether and to what extent to rely on the Bureau’s analysis of data related to collection costs, deterrence, and consumer conduct, as discussed above, in making any revisions to the cost analysis provisions.
  • What additional requirements related to card issuer’s internal processes and procedures for calculating and documenting costs, if any, the Bureau should adopt to ensure compliance.
  • Whether to eliminate the safe harbor for all other credit card penalty fees, including fees for returned payments, over the limit transactions, and fees charged when payment on a check that accesses a credit card account is declined.
  • What guidance, if any, should be added to the cost analysis provisions in Section 1026.52 or related commentary concerning the specific costs and other factors that card issuers may take into account in determining that fee amounts are reasonable and proportional to the costs of the specific violations.
  • Potential future monitoring or other approaches to ensure that the late fee amount is consistent with the reasonable and proportional standard.
  • Whether automatic annual adjustments to reflect changes in the CPI should be eliminated for all other penalty fees subject to Section 1026.52 including over the limit fees, returned payment fees, and declined access check fees.
  • Whether Section 1026.52 should be amended to provide for a courtesy period which would prohibit late fees imposed within 15 calendar days after each payment date.
  • Whether, if a 15 day courtesy period is required, the courtesy period should be applicable only to late fees assessed if the card issuer is using the late fee safe harbor amount or, alternatively, if the courtesy period should be applicable generally (regardless of whether the card issuer assesses late fees pursuant to the safe harbor amount set forth in Section 1026.52.
  • Whether a courtesy period of fewer or greater than 15 days may be appropriate

 

  • Whether a 15 day courtesy period should apply to the other penalty fees that are subject to Section 1026.52 including the over the limit fees and returned payment fees and if so, why?
  • Whether the dollar amount associated with the other penalty fees covered by Section 1026.52 should be limited to 25 percent of the dollar amount associated with the violation.
  • Whether the late fee amounts of $35 in the sample forms/clauses, as applicable, should be revised to set forth late fee amounts of $8, and whether the maximum late fee amounts of “up to $35” in these sample forms or clauses should be revised to set forth a maximum late fee amounts and maximum late fee amounts in the examples are consistent with the proposed $8 late fee safe harbor.
  • Whether to restrict card issuers from imposing a late fee on a credit card account unless the consumer has not made the required payment within 15 calendar days following the due date.
  • Effective ways to help ensure that consumers understand that a 15-day courtesy period only relates to the late fee, and not to other possible consequences of paying late, such as the loss of a grace period or the application of a penalty rate.
  • Whether the $8 safe harbor threshold amount that is being proposed for late fees should also apply to other penalty fees, including over the limit fees and returned-payment fees.
  • Whether the Bureau should revise the maximum amount of the over the credit limit fees and returned payment fees should on these forms to be “up to $8.”
  • Whether the 15-day courtesy period should be provided with respect to all penalty fee, including the over the credit limit fees and returned payment fees. If the Bureau were to adopt the 15-day courtesy period to all penalty fees, the Bureau solicit comment on the 15-day courtesy period should be disclosed in the five sample forms discussed.

Summary – CFPB Compliance Bulletin and Policy Guidance 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts

12 CFPB Chapter X

The Consumer Financial Protection Bureau issued this Compliance Bulletin and Policy Guidance to address the treatment of certain private student loans following bankruptcy discharge.

The bulletin becomes effective upon publication in the Federal Register and can be found here.

Summary:

In order to secure a discharge of “qualified education loans” in bankruptcy, borrowers must demonstrate that the loans would impose an undue hardship if not discharged.  Qualified education loans receive special treatment under Section 523(a)(8) of the Bankruptcy Code.  In practice, the majority of student loans meet at least one of the criteria for “special treatment” under the Bankruptcy Code and therefore, are not eligible for discharge by a general order of discharge.

However, some loans for educational purposes that borrowers may think of as “private student loans” are not exempt from the general order of discharge.  These include:

  • Loans made to attend non-Title IV schools;
  • Loans made to cover fees and living expenses incurred while studying for the bar exam or other professional exams;
  • Loans made to cover fees, living expenses incurred while studying for the bar exam or other professional exams;
  • Loans made to cover fees, living expenses, and moving costs associated with medical or dental residency;
  • Loans made in amounts in excess of the cost of attendance,
  • Loans to students attending school less than half-time; and
  • Other loans made for non-qualified higher education expenses.

Any private student loans in these categories are discharged by standard bankruptcy discharge orders, just like most other unsecured consumer debts.  In addition to not fitting the definition of “qualified education loan” these loans are not made, insured or guaranteed by a governmental unit, and are not educational benefits, scholarships or stipends.  The obligations at issue here are originated as loans requiring repayment; educational benefits, scholarships, and stipends.  In contrast are grants, where repayment is only triggered if the student fails to meet a condition of the grant.

CFPB examiners found that servicers of various types of student loans failed to maintain policies/procedures for distinguishing between loan types that are discharged in the regular course of a bankruptcy proceeding (generally, non-qualified education loans) and loan types that require consumers to initiate an adversarial proceeding and meet the “undue hardship” standard to receive bankruptcy relief.  Examiners determined that student loan servicers engaged in an unfair act or practice, in violation of the Dodd Frank Act, when they resumed collection of debts that were discharged by bankruptcy courts for non-qualified education loans.

The CFPB’s supervisory observations and consumers complaints show that servicers continued to make collection attempts on student loans that were discharged through bankruptcy in many instances.  This violates Federal consumer financial law.  The CFPB expects servicers to proactively identify student loans that are discharged without an undue hardship showing and permanently cease collections following a standard bankruptcy discharge order.

The CFPB is prioritizing student loan servicing oversight work in the coming year, including a focus on evaluating whether lenders and servicers cease collection of applicable student loans once they have been discharged.  The CFPB plans to play particular attention to:

  • Whether student loan servicers continue to collect on loans that are discharged by a bankruptcy discharge order;
  • Whether servicers and loan holders have adequate policies and procedures to identify loans that are discharged by a bankruptcy discharge order and loans that require the borrower to go through an adversarial proceeding to demonstrate that they meet the undue hardship standard; and
  • Whether servicers provide accurate information to borrowers about the status of their loans and the protections that bankruptcy offers.
Notice of Proposed Rulemaking and Request for Comment
NCUA: Chartering and Field of Membership

NASCUS Legislative and Regulatory Affairs Department

On February 28, 2023, the NCUA published a notice of proposed rulemaking that would amend its chartering and field of membership (FOM) rules. If finalized the proposal would provide amendments to:

  • Expand financial services to low- and moderate-income communities;
  • Expand membership eligibility to family members after the death of a member
  • Streamline requirements for community-based FOM applications and clarify procedures.

The proposed amendments result from the agency’s experience in addressing FOM issues relating to community charters and service to underserved areas, along with its study of FOM issues through the Board’s Advancing Communities through Credit, Education, Stability, and Support (ACCESS) initiative. Additionally, the Board is seeking feedback about several aspects of FOM issues for consideration with respect to future policy refinements.

Due to the scope and complexity of the proposed changes and additional issues presented for feedback, the Board has issued the proposal with a 90-day comment period.

The proposed rule can be found here. Comments are due May 30, 2023.

Summary

The proposed rule would make nine changes to the NCUA’s Chartering and Field of Membership Manual (Manual) to enhance consumer access to financial services while reducing duplicative or unnecessary paperwork and administrative requirements. The NCUA states the goal of the proposed changes is to eliminate unnecessary burdens while enhancing the agency’s focus on the core principles of credit union membership. The proposed changes cover underserved areas, community-based FOMs, and some more broadly applicable FOM provisions.

Underserved Area Additions

The Federal Credit Union Act (FCUA) currently permits only multiple common bond FCUs to add underserved areas to their FOM beyond the common bond requirements specified in the FCUA. [1]

Currently, if a multiple common bond FCU seeks to add an underserved area to its FOM as an investment area it must satisfy the CDFI Fund’s economic distress criteria.[2] Based on feedback from the industry surrounding these criteria and the requirements of the current Manual the NCUA Board is proposing four changes to the requirements that apply to multiple common bond FCUs that seek to serve underserved areas.

The proposed changes would accomplish the following:

  1. Clarify the Board’s intent to provide flexibility to multiple common bond FCUs serving underserved areas based on rural districts;
  2. Clarify how the NCUA applies the CDFI Fund’s economic distress criteria as the FCUA requires;
  3. Eliminate census block groups as a geographic unit for composing underserved areas, in adherence to a regulatory change that the CDFI Fund has adopted; and
  4. Simplify and reduce the burden for FCUs on the required statement of unmet needs that must accompany a request to serve an underserved area.

Community Charter Conversions and Expansions

The proposed rule would make three changes to reduce the regulatory burden for community charter applications or conversions. Specifically, the proposed rule would:

  1. Establish a simplified business and marketing plan for community charter applications;
  2. Provide a standardized, fillable application for community charter conversion or expansion requests; and
  3. Eliminate the requirement for Federally Insured State Chartered Credit Unions (FISCUs) applying to convert to a federal community charter to submit a business and marketing plan under certain conditions.

After studying the existing requirements and considering its “substantial experience in processing and reviewing various applications” the Board is proposing targeted relief in this area. The agency feels the changes would not undermine the goals that the plans serve and would instead reduce or eliminate paperwork requirements while “sharpening the agency’s focus on the substantive merits of each application.”

Simplified Business and Marketing Plan

Currently, credit unions are required to provide a description of the current and proposed office/branch structure, including a general description of the location(s), parking availability, public transportation availability, drive-through service, lobby capacity, or any other service feature illustrating community access.

Under the proposed rule, the credit union would be required to provide branch details including how many service facilities are in the area, whether the credit union participates in shared branching, the number of ATMs (owned and shared), any new branches planned, use of electronic delivery channels, and how the credit union will sign up low- and moderate-income individuals. By eliminating the need for providing granular details about the branch structure, the NCUA hopes to encourage applicants to spend more time determining how to best meet the evolving needs of their members and considering innovative service delivery channels like virtual banking.

Standardized Fillable Application for Community Charter Requests

The proposed rule would require the use of a fillable, standardized application for all community charter actions. The standardized application should better focus credit unions on critical requirements and ensure uniform NCUA reviews across applications. The use of the standardized application form should reduce the number of follow-up requests from the NCUA for additional information. The proposed form is available for review within the Regulations.gov docket for this notice of proposed rulemaking.

Requirements for Community-Based State-Chartered Credit Unions Converting to an FCU

The proposed rule would amend the Manual’s business and marketing plan requirements for FISCUs that already serve the community applying to become a federal community charter. In place of the plan’s current requirements,[3] the proposed rule would require a FISCU to submit a statement addressing the following topics:

  1. Does the existing community consist of a portion of a Core Based Statistical area or a Combined Statistical area? If so, please explain the credit union’s basis for selecting its service area.
  2. Describe products and services you offer or plan to offer to low- and moderate-income and underserved members.
  3. How will you market to the low-and moderate-income, and underserved (economically distressed) people, and those with unique needs, in the community?

This proposed change would NOT apply to single or multiple common bond FISCUs converting to an FCU community charter. These credit unions would have to submit a business and marketing plan. This change would also not apply to non-federally insured credit unions.

Groups Sharing a Common Bond with Community Areas

The Board is also proposing a targeted addition to the affinity groups eligible for membership in community-based FCUs. The manual currently defines an affinity as a relationship on which a community charter is based outlining four types of affinity groups eligible for membership in FCUs serving communities or rural districts, primarily persons who live, work, worship, or attend school in the community or rural district.[4]

To address the increasing trends in telecommuting and decentralized workspaces, the Board is proposing to add a fifth affinity to include a paid employee for a legal entity headquartered in the community, neighborhood, or rural district. The NCUA believes this proposed change will help FCUs adapt to serve everyone with ties to a community by providing employees access to a community credit union with which they have a bond through their employer, even if they do not physically work in the well-defined local community or rural district.

Eligibility of Immediate Family Members of Decedents

The NCUA is also proposing an update to the groups of persons who may join an FCU based on a common bond with its members or the FCU. Under the current options available for FCUs to enroll secondary members, immediate family or household members of decedents are not eligible for membership unless the person was a spouse of a person who died while within the field of membership of the credit union.

The proposal would amend the Manual to update the definition of secondary members for each common bond type to include every member of a decedent’s immediate family or household for a 6-month period following the decedent’s passing.

Updated References for Review of Prospective Management and Officials

Finally, the proposed rule would make a technical clarification and correction to the Manual provision regarding the agency’s evaluation and disapproval of directors and other management officials for applicants for NCUSIF coverage. The goal of the change is to reduce confusion for applicants and provide a clearer explanation of which authorities govern this review process.

Comments

The NCUA Board is seeking feedback on all elements of the proposed rule. Comments can be submitted electronically via regulations.gov or via the NCUA website: https://www.ncua.gov/​regulation-supervision/​rulemakings-proposals-comment. Following the instructions for submitting comments.

[1] 12 U.S.C. 1759(b)

[2] 12 CFR 1805.101

[3] 12 U.S.C. 1771; Manual, Chapter 4, Section II

[4] 12 U.S.C 1771; Manual, Chapter 2, Section V.A.1.

Summary re: CFPB Review/Request for Comment: Regulation Z Mortgage Loan Originator Rules Review Pursuant to the Regulatory Flexibility Act

12 CFR Part 1026

The Consumer Financial Protection Bureau (CFPB) issued a notice and request for comments regarding a review of Regulation Z’s Mortgage Loan Originator Rules pursuant to Section 610 of the Regulatory Flexibility Act.

Comments must be received by May 1, 2023, and the notice can be found here.

Summary:

Regulation Z, implements the Truth in Lending Act, among other things, imposes certain requirements on: loan originator compensation; qualification of; and registration or licensing of, loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single premium credit insurance.  As part of the review, the Bureau is seeking comment on the economic impact of the loan originator rules on small entities. These comments may assist the Bureau in determining whether the loan originator rules should be continued without change or amended or rescinded to minimize any significant economic impact of the rules upon a substantial number of such small entities, consistent with the stated objectives of applicable Federal statutes.

Section 610 provides that the purpose of the review is to determine whether such rules should be continued without change, or should be amended or rescinded, consistent with the stated objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of such small entities. In each review, agencies must consider several factors:

  • The continued need for the rule;
  • The nature of public complaints or comments on the rule;
  • The complexity of the rule;
  • The extent to which the rule overlaps, duplicates, or conflicts with Federal, State, or other rules; and
  • The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.

Request for Comment:

The Bureau asks the public to comment on the impact of Regulation Z’s Mortgage Loan Originator Rules on small entities by reviewing the following factors.  Where possible, please submit detailed comments, data, and other information to support any submitted positions.

  • The continued need for the Rules based on the stated objectives of applicable statutes and the Rules;
  • The complexity of the Rules;
  • The extent to which the Rules overlap, duplicate or conflict with other Federal rules, and, to the extent feasible, with State and local governmental rules;
  • The degree to which technology, market conditions, or other factors have changed the relevant market since the rule was evaluated, including:
  • How the impacts of the Rules as a whole, and of major components or provisions of the Rules, may differ by origination channel, product type, or other market segment;
  • The current scale of the economic impacts of the Rules as a whole, and of major components or provisions of the Rules, on small entities; and
  • Other current information relevant to the factors that the Bureau considers in completing a Section 610 review under the RFA, as described above.
NCUA Final Rule Summary: Cyber Incident Notification Requirements for Federally Insured Credit Unions

NASCUS Legislative and Regulatory Affairs Department
March 7, 2023

At the February 16, 2023, meeting, the NCUA Board approved a final rule amending Part 748 of its regulations to require federally insured credit unions (FICUs) to report an incident to NCUA as soon as possible, but no later than 72 hours after a FICU reasonably believes it has experienced a reportable cyber incident. The notification requirement is intended to be an “early alert” to the NCUA and will not require a FICU to provide a detailed incident assessment within the 72-hour time frame.

The effective date of the final rule is September 1, 2023. The final rule can be found here.

Summary

Background

In July 2022, the Board approved a proposed rule that would require a FICU to notify NCUA of a cyber incident that rises to the level of a reportable cyber incident. The proposed rule would require this notification as soon as possible but no later than 72 hours after a FICU reasonably believes that a reportable cyber incident has occurred.

Shortly before the Board issued the proposed rule, Congress enacted the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (Cyber Incident Reporting Act), requiring covered entities to report covered cyber incidents to the Cybersecurity and Infrastructure Security Agency (CISA) not later than 72 hours after the entity reasonably believes that a covered cyber incident has occurred.

While CISA has until 2025 to publish its final rule, the NCUA Board believed “it would be imprudent in light of the increasing frequency and severity of cyber incidents to postpone a notification requirement until after CISA promulgates a final rule.” The Board intends to coordinate with CISA on any future credit union cyber incident reporting to avoid duplicate reporting to both NCUA and CISA.

Final Rule

Definition – Reportable Cyber Incident

The final rule defines a “reportable cyber incident” as any substantial cyber incident that leads to one or more of the following:

  • A substantial loss of confidentiality, integrity, or availability of a network or member information system that results from the unauthorized access to or exposure of sensitive data, disrupts vital member services, or has a serious impact on the safety and resiliency of operational systems and processes.
  • A disruption of business operations, vital member services, or a member information system resulting from a cyberattack or exploitation of vulnerabilities.
  • A disruption of business operations or unauthorized access to sensitive data facilitated through, or caused by, a compromise of a credit union service organization, cloud service provider, or other third-party data hosting provider or by a supply chain compromise.

A “reportable cyber incident” does not include any event where the cyber incident is performed in good faith by an entity in response to a specific request by the owner or operators of the system. For example, contracting with a third-party to conduct penetration testing or e-mail spoofing testing.

Reporting Process

If a reportable cyber incident occurs, Part 748 will now require FICUs to notify the “appropriate NCUA-designated point of contact of the occurrence via email, telephone, or other similar methods that the NCUA may prescribe. NCUA must receive this notification as soon as possible but no later than 72 hours after a FICU reasonably believes that it has experienced a reportable cyber incident, or within 72 hours of being notified by a third-party with whom the credit union has a contractual relationship with, whichever is sooner.

NCUA has indicated additional information will be issued prior to the September 1, 2023, effective date, including more detailed reporting guidance. NCUA also intends to coordinate with state regulators as much as possible.

NASCUS will provide updates as additional information becomes available.

NCUA Letter 23-CU-02 Summary
Expansion of Permissible CUSO Activities and Associated risks

NASCUS Legislative and Regulatory Affairs Department
February 7, 2023

Summary

On November 26, 2021, a final rule amending NCUA Regulation Part 712 – Credit Union Service Organizations (CUSOs)[1] became effective. NASCUS’ summary of the NCUA rule[2] outlines its expansion of the list of permissible activities and services for CUSOs.  The expanded list includes the origination of any type of loan that a Federal Credit Union (FCU) may originate and grants NCUA additional flexibility to approve permissible activities and services.

NCUA Letter 23-CU-02 reminds the industry of published guidance that broadly outlines the responsibility of a credit union to address primary related risks with CUSO relationships, including the various ways the relationship between the CUSO and credit union impacts the risk profile and to ensure consumer financial protection risks from CUSO originated loans are properly addressed.

NCUA guidance published includes:

  • The CUSO provisions of the NCUA Examiners Guide[3];
  • The CUSO Activities portion of the NCUA’s website[4]; and
  • NCUA Rules and Regulations Part 712.5[5] outlining preapproved activities and services for CUSOs.

The relevant guidance found in the NCUA Examiner’s Guide outlines the statutory definition of a CUSO, the impact of CUSO to credit union relationships, investment, and loan limitations, maintenance of entity legal separation, authorized CUSO services, the CUSO registry, associated primary risks, the impact on earnings and net worth of the credit union, appropriate risk management practices and CUSO review procedures.

The CUSO Activities portion on the NCUA website outlines the approval process for requesting additional preapproved CUSO activities that, once approved, will be added to the webpage to authorize any CUSO which desires to engage in those activities with no further NCUA approval necessary.  Currently, no “newly authorized activities” are listed outside those found within Part 712.5.

[1] Available at www.govinfo.gov/content/pkg/FR-2021-10-27/pdf/2021-23322.pdf

[2] Available at https://www.nascus.org/summaries/final-rule-summary-fcu-cusos/

[3] Available at https://publishedguides.ncua.gov/examiner/Content/ExaminersGuide/CUSOs/IntroCUSO.htm

[4] Available at https://www.ncua.gov/regulation-supervision/cuso-activities

[5] Available at https://www.ecfr.gov/current/title-12/chapter-VII/subchapter-A/part-712/section-712.5

NCUA Risk Alert: 23-RA-01 Change to HMDA’s Closed-End Loan Reporting Threshold

 NASCUS Legislative and Regulatory Affairs Department
February 3, 2023

On February 2, 2023, the NCUA Board issued Risk Alert 23-RA-01. The alert addresses a September 23, 2022, order issued by the U.S. District Court for the District of Columbia that vacated a portion of the CFPB’s 2020 HMDA Final Rule that had established a reporting threshold of 100 closed-end mortgage loans.

The decision by the court reverts the threshold for reporting data on closed-end mortgage loans to 25 loans in each of the two preceding calendar years, the threshold previously established by the 2015 HMDA Final Rule.

The NCUA states they recognize credit unions affected by this change may need time to implement or adjust policies, procedures, systems, and operations to achieve compliance with the reporting requirements. Therefore, the NCUA intends to take a flexible supervisory and enforcement approach, similar to that of the CFPB, and not issue enforcement actions or citations for closed-end mortgage loan data collected in 2020, 2021, or 2022. Credit unions can find additional information on HMDA reporting requirements here, including a Reference Chart for HMDA Data Collected in 2022.