August 2014 Newsletters

Regulation AA Proposal for Repeal?

CFPP Issues Annual Adjustments for CARD Act, HOEPA and ATR/QM

Virtual Currency

CFPB Issues Proposed Changes to Home Mortgage Disclosure Act (HMDA) Rules

Regulation AA Proposal for Repeal?

You read that right; Reg AA  is up for repeal. Ah, but don’t get too excited, because as the proposal for repeal by the Fed was announced so was the issuance by the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) on an interagency guidance covering unfair and deceptive credit practices. Unfair, deceptive or abusive acts or practices are still illegal and will be viewed as such by all of the regulatory agencies.

The proposed repeal of Reg AA is a result of Dodd-Frank’s repeal of the banking regulatory agencies’ authority to write rules and regulations. Reg AA was excluded from the Fed’s authority transferred to the CFPB under Dodd-Frank, but Dodd-Frank gave the CFPB authority to issue rules and regulations that prohibit unfair, deceptive or abusive acts or practices. 

The interagency guidance makes it clear that the repeal should not be viewed as an approval of any of Reg AA’s prohibited practices. In other words, do not take the repeal as carte blanche to now go ahead and do anything that was prohibited in Reg AA. 

We doubt any financial institution would begin to do anything that would violate the previous standards set forth in the FTC Act or Reg AA, but just to make sure, the guidance goes on to remind financial institutions that the regulatory agencies retain their supervisory and enforcement authority regarding UDAAP, and will continue to use that authority.

The guidance also notes that the FTC rule has not been repealed and remains in effect for creditors within the FTC’s jurisdiction and, for nonbank creditors, this rule can be enforced by the CFPB as well as by the FTC.  

One other noteworthy section is the Notice to Cosigner requirement. The newly issued guidance notes that the FTC Rule and the repealed credit practices rule required creditors to provide a “Notice to Cosigner.” The agencies state that they believe creditors “have properly disclosed a cosigner’s liability if, prior to obligation, they continue to provide a “Notice to Cosigner.”

One thing to consider is that there are some states that have statutory provisions that exempt a creditor from a state law requirement to give a state cosigner notice if the creditor gives the required federal notice, but since banks will no longer be subject to a federal law cosigner notice requirement, they should consult with counsel regarding how to proceed.

If you want to comment on this proposed repeal, comments are due by Oct. 24, 2014.

CFPP Issues Annual Adjustments for CARD Act, HOEPA and ATR/QM

The CFPB has published the annual adjustments that are required under TIL (truth-in-lending) that implemented the infamous CARD Act (Credit Card Accountability Responsibility and Disclosure Act), HOEPA (Home Ownership and Equity Protection Act) and the ATR/QM (Ability to Repay/Qualified Mortgage) portions of Dodd-Frank. 

These adjustments will not be effective until January 1, 2015. This final rule was issued in the Federal Register, last week. 

The CARD Act contains requirements for the CFPB to calculate annual adjustments for:

The minimum interest charge threshold that triggers disclosure of the minimum interest charge in the credit card applications, solicitations and account opening disclosures, and
The fee thresholds for the penalty fees for safe harbor. The calculation did not result in a change to the current $1.00 minimum interest charge threshold. However, in the final rule, the CFPB increased the current penalty fee for safe harbor of $26 for a first late payment and $37 for a subsequent late payment within the following six months to $27 and $38 respectively. 

HOEPA requires the CFPB to annually adjust the total loan amount threshold that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount. In the final rule, the CFPB increased the current dollar thresholds from $20,000 to $20,391, and $1,000 to $1,020.  

The ability to repay/QM rule requires annual adjustment to the points and fees limits that a loan cannot exceed to satisfy the requirements for a QM loan. The CFPB is also required to make annual adjustments to the related loan amount limits. In the final rule issued last week, the CFPB increased these limits to:

  • For a loan amount greater than or equal to $101,953 (currently $100,000), points and fees may not exceed 3 percent of the total loan amount.
  • For a loan amount greater than or equal to $61,172 (currently $60,000) but less than $101,953 (currently $100,000), points and fees may not exceed $3,059 (currently $3,000).
  • For a loan amount greater than or equal to $20,391 (currently $20,000) but less than $61,172 (currently $60,000), points and fees may not exceed 5 percent of the total loan amount.
  • For a loan amount greater than or equal to $12,744 (currently $12,500) but less than $20,391 (currently $20,000), points and fees may not exceed $1,020 (currently $1,000).
  • For a loan amount less than $12,744 (currently $12,500), points and fees may not exceed 8 percent of the total loan amount.

Virtual Currency?

Yes, no, maybe? It depends. Here’s the latest on the virtual currency world.

First of all, what is considered virtual currency? Virtual currency is an electronic medium of exchange that does not have all the attributes of real currencies. Virtual currencies include cryptocurrencies, such as bitcoin and litecoin, which are not legal tender and are not issued or backed by any central bank or governmental authority. Virtual currencies have legitimate purposes and can be purchased, sold, and exchanged with other types of virtual currencies or real currencies like the U.S. dollar. This can happen through various mechanisms such as exchangers, administrators or merchants that are willing to accept virtual currencies in lieu of real currency. More businesses, such as DISH Network, Expedia, Intuit, and, are starting to allow consumers to pay for goods and services using bitcoins.

In the past, the financial industry had largely ignored virtual currencies, but that is starting to change. JPMorgan has tried to patent a virtual currency-like system and a number of banks have released less negative research reports. For example, Bank of America has issued a report that noted that virtual currencies could become an important new part of the payment system, allowing money to move through the system cheaper than using credit cards and money transmitters.

Everyone has an opinion on the virtual currency industry and they always seem to contradict each other. Even the advocates and investors disagree on the future direction for the digital currency. There are some who would prefer that it die rather than see it as a part of the traditional financial system. But, with that being said, the Silicon Valley investors firmly believe that regulatory oversight is necessary for virtual currency to go mainstream.

Whatever virtual currency’s future, it’s certainly quite a story. William Luther, an economics professor at Kenyon College in Ohio, who refers to himself as a virtual currency skeptic, says, “Bitcoin has brought the question of alternative currencies back to the table. Money is a very old concept and it’s difficult for me to think that there’s not a better way to make transactions.”

With all of this attention on the virtual currency industry, we knew it would not be long until the CFPB weighed in. This week the CFPB issued a new warning to consumers, advising that they should exercise caution when engaging with the virtual and digital currency markets. The warning stated that the greatest risks to consider when dealing with digital currency is the volatile exchange rates, unclear costs, security threats posed by hackers and scammers and the possibility that companies may not always be able to provide help or refunds for lost or stolen funds. Also, since virtual currency is not backed by any government or central bank, it is not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund; if a virtual currency company fails (and many have), the government will not cover the loss.

So, how does this affect us at the bank? Well, to purchase virtual currency, the customer must first have “real” currency. The purchase or exchange of virtual currency is through the credit line on credit cards or simply by purchasing or exchanging for cash. Since the use of “real” currency is required, you can imagine how, in the event of a loss, a dissatisfied customer will complain. With the virtual currency being outside the realm of our regulatory system (at this point), banks may be caught in the middle of complaints and customers may have an expectation of banks making them whole in situations where they used their bank account or credit card to purchase the virtual currency. Maybe, maybe not, but it should be a consideration in the least.

We will be monitoring the virtual currency regulatory landscape, and should anything change we will keep you informed. But as a cautionary action, the bank should relay the CFPB consumer warnings to its customers.

CFPB Issues Proposed Changes to Home Mortgage Disclosure Act (HMDA) Rules

A couple of weeks ago the CFPB announced a proposed rule that they claim willsimplify the reporting process under HMDA and Regulation C. The intention from these changes is to shed more light on consumers’ access to mortgage loans, and will be accomplished by updating the reporting requirements of the HMDA regulations. Under the current reporting requirements, the public and regulators can use the information to monitor whether or not banks are serving the housing needs of their individual communities and identify possible discriminatory lending patterns.

When Congress passed the Dodd-Frank Act in 2010 the CFPB was directed to expand the HMDA data reporting requirements to include additional information about loans that would be helpful to better understand the mortgage market because it was determined that the current HMDA data does not provide adequate information about loan features that were identified as being culprits in the mortgage crisis, for example, adjustable-rate mortgages and non-amortizing loans.

First, let’s take a look at how the CFPB proposes to simplify the reporting requirements. Here are some highlights from the proposal:

Adoption of a uniform loan-volume threshold of 25 loans. Which simply stated, means banks would need to report HMDA data if they originated 25 qualifying closed-end loans or reverse mortgages in a year.
In addition, the proposal would eliminate reporting of certain home improvement loans, such as those unsecured home improvement loans.
The proposal includes an ease in reporting requirements for some small banks.  With the proposed standardized reporting threshold, small banks that have a low loan volume, fewer than 25 mortgages a year, would not have to report HMDA data. The new threshold would reduce the overall number of banks required to report HMDA data by 25 percent, but because those banks receive a low volume of applications and originate a low volume of mortgage loans, the change would not compromise the usefulness of the data being reported.
The CFPB is also looking to improve the electronic reporting process by considering what new technological tools would make the data submission process more efficient, easing the data formatting requirements and helping banks prevent errors.
The CFPB is also looking at ways to improve how the public can use HMDA data modified to protect applicant and borrower privacy.

The CFPB is also proposing to require reporting for several new data points as required by Dodd-Frank, as well as additional data that the CFPB believes may be necessary to carry out the purposes of HMDA. These data points can be grouped into four broad categories:

Information about applicants, borrowers and the underwriting process, such as age, credit score, debt-to-income ratio, reasons for denial if the application was denied, the application channel and automated underwriting system results.
Information about the property securing the loan, such as construction method, property value, lien priority, the number of individual dwelling units in the property and additional information about manufactured and multifamily housing.
Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features and the type of loan.
Certain unique identifiers, such as a universal loan identifier, property address, loan originator identifier and a legal entity identifier for the financial institution

Banks with at least 75,000 reported transactions in the prior calendar year will also be required to submit their data quarterly instead of annually. Reported transactions include covered loans, applications and purchased covered loans.

Finally, on a positive note, the CFPB proposed to add an instructions section to Appendix A and the Staff Commentary to Regulation C in order to address questions and concerns that have been raised by commenters over the years. This is a 600 page proposal, so with that being said, keep in mind that this a very broad overview. However, Compliance Alliance will monitor this proposal and begin working on all affected tools as well as preparing a comprehensive Cliff Note. 

The proposed rule will be open for public comment through October 22, 2014.