February 2015 Newsletters

Propose Rule Regarding Submission of Credit Card Agreements Under TILA

The American Savings Promotion Act

Oil Price Drop Praised by Consumers but has Banks Concerned

Auto Debit and Loans - Pay Close Attention

Propose Rule Regarding Submission of Credit Card Agreements Under TILA

On Feb. 25, 2015, the CFPB issued a proposed rule to suspend the credit card requirement in 12 CFR 1026.58. The section, as it’s currently written, requires creditors to post agreements for open-end consumer credit card plans on the creditors’ websites and also to submit those agreements to the CFPB. The CFPB is proposing to suspend the submission requirement for a year in order to allow for the creation of a more efficient electronic submission system. The rule would suspend the requirement for submissions as early as the first submission due after April 30, 2015. The rule would not suspend the other requirements in 1025.58.

If you’re unaware of this Regulation Z requirement, it may be because your bank is not required to comply with the online disclosure of credit agreements. There are three exceptions for submitting the credit card statements to the CFPB: 1) The issuer has fewer than 10,000 open credit card accounts; 2) the credit card agreement is not offered to the public and is used only for one or more private-label credit card plans with credit cards usable only at a single merchant or a group of affiliated merchants and involves fewer than 10,000 open accounts; and 3) The agreement currently is not offered to the public and the agreement is for one or more plans offered to test a new product offered only to a limited group of consumers for a limited time and involves fewer than 10,000 open accounts. If your bank does currently submit their consumer credit card plans, your organization may want to consider commenting on this rule prior to the comment due date on March 13, 2015. For more information, you can find the CFPB press release and proposed rule here.

The American Savings Promotion Act

The American Savings Promotion Act was signed into law on Dec. 18, 2014. The law amends the Revised Statutes of the United States, the Federal Reserve Act, the Federal Deposit Act and the Home Owners’ Loan Act to allow Savings Promotion Raffles. Savings promotion raffles where prizes are awarded and the entrance to the contest is a deposit into the customer’s savings account. The amount that has to be deposited must be specified and there must be an equal chance of winning for each entry. This means that the Lottery Rule (12 USC 25a) is effectively amended so that a deposit of a specified amount into a savings account is excluded from the definition of “consideration.”

The purpose of the Act is to allow banks to encourage customers to contribute (or start) a savings account. The Bill indicates that 40 percent of Americans do not have savings that would cover three months of expenses in case of a lay-off or family emergency. As we have become all too aware, a lack of savings in the event of an unexpected financial emergency can have catastrophic consequences.

There are some caveats to the Act, however. First, it leaves room for regulators to further define the act so it’s not clear how the act may be regulated in the future. There’s currently no official regulatory guidance on the Act and, therefore, it would be prudent to contact your regulator prior to implementing such a promotion. In addition, some states don’t allow banks to participate in lotteries or raffles and the changes apply to National Banks, Federal Reserve Banks, Insured Depository Banks and Federal Savings and Loan Associations. If your institution may be located in a state that does not allow banks to participate in raffles or is a state-chartered bank, you will need to check state law to ensure such a promotion would be in compliance with pertinent laws.

For more information, you can find the text of the bill here.

Oil Price Drop Praised by Consumers but has Banks Concerned

Falling oil prices are welcomed by consumers at the gas pumps, who are happily paying under $1.75 per gallon for gas in Texas and other states. But the price decline is an all-too-familiar sign of financial instability for oil patch bankers. Oil prices are continuing to fall after recently hitting a 5-year low due to a boom in U.S. production and a recent decision by the Organization of the Petroleum Exporting Countries not to cut production nor balance global supply. Analysts predict that the current oil surplus could push prices as low as $43 a barrel this year.

The U.S. crude boom is attributed to improved drilling technologies and developments in hydraulic fracking. The equipment and manpower needed to conduct these activities is expensive, so oil producers rely on bank loans to fund them. With the world’s oversupply by an estimated millions of barrels per day, oil demand and prices are on a steep decline, and fewer rigs have incentive to drill. Consequently, banks and investors are looking closely at the increased exposure to lower revenues on their books.

While banks can hedge against the short-term impact of oil prices falling with relative ease, uncertainty can take over when oil prices stay low for an extended period, especially in the economies of more energy-dependent states like Oklahoma. Banks will ask borrowers for more collateral to protect themselves, causing strain for the borrowing oil producers who are already weaker from lower revenues. A longer period of low oil prices can also impact jobs, consumer spending and even the real estate market, particularly through banks that have made substantial loans to energy companies. Federal regulators may also look harder at banks that have exposure to the energy businesses.

While the impact of the energy slowdown is not entirely clear, some banks will move certain loans and/or adopt more stringent underwriting standards to brace themselves for losses, especially in more energy-dependent regions of the country. Energy markets can vary by region, which makes some underwriters skeptical of loans in an entire area, despite the generally conservative debt leverage and underwriting approaches that have prevailed in the past couple of years. But some lenders welcome the flocking to more conservative approaches to real estate deals and believe this will strengthen the market despite the oil price decline.

As the oil industry has seen countless times before, the market will bounce back into balance. But in the meantime, lenders and investors in equity and debt will continue to become skittish when market patterns deviate from the norm, leaving banks to decide whether to act or implement a “wait and see” approach. We recommend that banks consider and internally discuss their potential exposure to the recent fluctuations of the oil market.

Auto Debit and Loans - Pay Close Attention

Does your bank require auto debit as a condition of extending credit?  If you answered yes or even maybe to this question, your bank is in violation of Regulation E, and you need to revise your loan policy and re-train your lending staff.

Section 1005.10 of Regulation E provides:

(e) Compulsory use—(1) Credit. No financial institution or other person may condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account.

(2) Employment or government benefit. No financial institution or other person may require a consumer to establish an account for receipt of electronic fund transfers with a particular institution as a condition of employment or receipt of a government benefit.

12 CFR 1005.10(e).

This means, for any consumer credit, the bank cannot require an auto debit from a bank account. That includes any requirement for auto debit, even if the account is held at another financial institution.

An underlying purpose behind this prohibition was to avoid excessive fees being charged to your borrowers. For example, if you required auto debit, then a customer who is having trouble paying their loan will not only be assessed a late fee on the loan, but they will also now be hit with an NSF or OD fee from their depository bank. The rule prevents banks from forcibly overdrawing accounts with insufficient funds.

So, what would be permissible? You can require the borrower to have a deposit account. You can also make having an auto debit tied to the loan appeal to the customer. For example, you can provide a .25 percent discount on the loan for individuals who use auto debit to pay their monthly loan payment. This type of discount will usually entice the borrower into signing up for the auto debit program.

Note as well the other prohibition in that section. While it seems out of context for this specific subject, the bank cannot require direct deposit of payroll checks for your employees into an account at your bank; however, you may require direct deposit, but the employee can choose the institution where the direct deposit is received.

Because the prohibition is inconspicuously tucked into Regulation E, many banks have overlooked it. Make sure you review your policies to avoid this prohibited practice. Penalties for violating Reg E can be steep and includes actual damages and up to $1,000 per individual and up to $500,000 for a class action.