June 2016 Newsletters
FinCEN released their final rule related to Customer Due Diligence program requirements on May 11, 2016. While the final rule is effective on June 11, 2016, it’s important to note that mandatory compliance isn’t required until May 11, 2018. Thus, banks have time to get their programs and procedures updated and to work with their vendors in relation to any necessary documents – including the model certification form.
The Final Rule mandates that banks gather identifying information on beneficial owners at account opening, like they do for CIP. That means for entities like LLCs, LLPs, etc., instead of having the option to collect information on individuals related to the business, as needed, banks will be required to collect information on up to 5 individual beneficial owners. The Final Rule defines beneficial owners as each individual who owns 25 percent or more of a legal entity customer and a single individual with the responsibility to control or manage. Responsibility to control or manage refers to executive officers, senior managers or any individual who acts in that capacity. If there is a trust that owns 25 percent or more, the trustee will be treated as a beneficial owner for identification purposes. Persons who are Phase I exempt from CIP requirements (government entities, companies with common stock on the NYSE/ASE/NASDAQ and their subsidiaries) are also exempt from this rule (among other entities).
Unlike CIP, the bank is allowed to use a certification form (a model form is provided in Appendix A) or use any other reasonable means to gather identifying information. The model form is to be filled out by the natural person opening the account and contains information about the name and title of the natural person opening the account, the name and address of the business, and the name, date of birth, address and the Social Security Number (for US residents) or Passport Number (Foreign Persons) of each individual. Another difference from the CIP requirements is that the bank may rely on customer-provided copies of identifying documents. Finally, the information (the certification and copies of documentation) supplied by the customer can be relied upon provided that the bank has no indication the documentation or the information is false.
The record retention requirements are also very similar to CIP requirements and identifying information must be retained for five years after an account is closed and verification documents must be kept for five years after the record is made. Those records will include any non-documentary methods used to verify the beneficial owner’s identity and any discrepancies. You can find the full Final Rule here.
Privacy Notice Reminder:
We’ve recently been getting a lot of hotline questions about the annual privacy notice. There may be issues in searching for the information our members are looking for as the changes were not in Regulation P but rather, buried in a highway safety bill called the FAST Act. The FAST Act mandated that the annual disclosure is not required if: 1) no changes to the policy have been made; and 2) that the bank is not required to offer an opt-out. The Act was effective December 4, 2015. Pursuant to legal authority the Act supersedes Regulation P. That being said, there is no estimated date of amendment to Regulation P and in addition, at least one member indicated during the compliance huddle that their regulator indicated that they expect to see that annual disclosure. Thus, best practice would get your regulator’s expectations directly from the source. You can find the Fast Act here. The privacy information can be found way at the bottom under “Title LXXV – Eliminate Privacy Notice Confusion.”
The CFPB issued a much anticipated payday, title and high-rate installment loan proposal aimed to curb predatory lending. The rule is primarily aimed at the payday lender industry which the CFPB sees as an industry that sets debt traps on consumers, leading to multiple high cost loans that rack up fees. The proposal attempts to end this practice.
The proposed rule covers certain short-term and longer-term credit products aimed at what the CFPB considers “financially vulnerable” customers. Specifically, the rule covers:
Loans with a term of 45 days or less;
Loans with a term of more than 45 days, if:
The total cost of credit exceeds 36%; and
The creditor takes a lien or other security interest in the consumer’s vehicle, or gives the right to initiate transfers from the consumer’s account or to obtain payment through a payroll deduction or other direct access to the consumer’s paycheck.
There are several exclusions, including:
- Loans extended solely for the purchase of a car or other consumer good (i.e. purchase money loans);
- Loans secured by real property or a dwelling;
- Credit cards;
- Student loans;
- Non-recourse pawn loans; and
- Overdraft services and lines of credit.
For covered transactions, a creditor must first make a reasonable determination that the borrower would be able to pay the loan back – something reminiscent of the current Ability to Repay rule for dwelling secured loans, where a creditor must first verify and consider the applicant’s income and assets before consummating the loan.
Additionally, there will be restrictions on covered loans, including a limit on how many times a similar loan can be offered to the same borrower. A creditor will be limited to 3 loans taken out within 30 days of the last loan extended, and each successive loan will have to be for a smaller amount. A fourth loan will not be allowed if requested within 30 days of repaying the third. The limits will be set out in a disclosure given to the borrower.
The silver lining to all of this is that it likely won’t likely have a big impact on the community banker because most community banks don’t offer short-term payday or title loans. In fact, this rule may drive out many of the payday lenders in your community and drive some of their customers to seek more traditional forms of credit from a depository institution.
Note that the CFPB also issued an information request on payday loans, vehicle title loans, installment loans, and open end lines of credit in addition to this proposal – so expect some new rules coming down the pipe for these products. Check back with CA in the coming weeks for a full summary of this proposed rule.
It’s been more than eight months since the Consumer Financial Protection Bureau (“CFPB”) implemented its magnum opus on mortgage lending: the ‘Know Before You Owe’ and TILA/RESPA Integrated Disclosures Rule, or “TRID.” The results so far have been, shall we say, less than satisfying. Delayed closings, higher origination costs and rampant rejection from loan investors have caused quite the logjam for financial institutions, not to mention consumers themselves, 64% of whom said in a recent survey that getting a mortgage under TRID—a rule that took millions of dollars and years of consumer research to implement—is more difficult than it was under the prior GFE/TIL/HUD Rules.
Nowhere near satisfied with its previous handiwork, the CFPB already has its sights set on its next target: consumer automobile lending. This past Monday, the agency launched what it dubs the “Take Control of Your Auto Loan Initiative.” So far, the initiative seems educational and relatively benign: the agency has done some focus group research and provided consumers with an auto loan “shopping sheet” and a space on their website to aid in comparison shopping (http://www.consumerfinance.gov/consumer-tools/auto-loans/ ). CFPB Director Richard Cordray drops some effective metaphor usage to clarify, “Consumers should feel like they are in the driver’s seat when it comes to financing their car or truck. The CFPB’s auto loan shopping sheet provides a roadmap for consumers to navigate the complexities of a loan. Consumers should know before they owe when it comes to the total cost, not just the monthly payments.” The agency also has issued a bulletin on the initiative, which it states “is intended to share with financial educators what the CFPB has learned from this research and from its work helping consumers prepare for and navigate the complex process of financing a vehicle.” The open question is, of course, whether this sort of initiative truly stops with financial education, or continues working its way through to added regulation.
Although the agency has yet to offer any actual proposed rules, in light of the its track record, one has to wonder just how long it will be before the other shoe drops and more regulation begins to trickle through. The signs are there: certain statements the agency makes in its bulletin seem to hint at this unfortunate conclusion, such as “Because many consumers use auto financing throughout their lives, and because the financing can substantially affect the full cost of auto ownership, there is a great benefit in helping consumers learn to shop effectively for auto loans[,]” “The CFPB delved into consumer perceptions and motivations to identify patterns[,]” and “It is . . . important that consumers feel empowered to comparison shop in advance, to examine documents, and to know they can walk away if they suspect the loan is not in their best interest[, which] suggests the need for financial education initiatives designed to help consumers navigate the automobile financing process and watch out for potential problems.” And just last week, the CFPB issued proposed rules on vehicle title loans, marking its first foray into the world of vehicle-based lending.
Granted, as it stands currently, no actual regulations have been put forth yet, so there’s no need to rush to change consumer lending policies and procedures. Nevertheless, we recommend reviewing the above-mentioned CFPB shopping sheet, bulletin and website address for a possible sign of things to come, and suggest keeping those resources on hand for any potential borrowers who inquire about them. Make sure to stay tuned to Compliance Alliance’s updates for more information coming out of the CFPB regarding auto lending.
 https://www.mba.org/mba-newslinks/2016/march/mba-newslink-tuesday-3-15-16/survey-consumers-still-report-slower-closings-surprises-under-trid (March 15, 2016).
http://files.consumerfinance.gov/f/documents/201606_cfpb_consumer-voices-on-automobile-financing.pdf (June 13, 2016).
About a year ago, the Department of Defense (“DoD”) published the final rule on regulatory changes required by the Military Lending Act (“MLA”). While at this point it may seem like old news, time to reflect on the rule change has yielded some disturbing findings, chiefly among them the realization that the former ‘collateral restrictions’ in subsection 232.8 now appear to cover a much broader swath of loans than before. This has led some to the grave conclusion that the MLA now completely forbids deposit-secured lending or the right of setoff for most types of military non-mortgage consumer lending…which, if true, could be very bad news for military borrowers.
What exactly these MLA ‘collateral restrictions’ are is a bit unclear. They’re based on a single sentence in the US Code (10 U.S.C. §987(e)(5)), which reads, “It shall be unlawful for any creditor to extend consumer credit to a covered member or a dependent of such a member with respect to which . . . the creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the borrower . . . as security for the obligation[.]” Through the magic of federal regulation, this single sentence somehow morphed into to 31 CFR §232.8(e) (formerly §232.8(a)(5)), which ever so eloquently states:
“Title 10 U.S.C. 987 makes it unlawful for any creditor to extend consumer credit to a covered borrower with respect to which . . . [t]he creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR consistent with §232.4(b), the creditor may:
(1) Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law;
(2) Require direct deposit of the consumer's salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law; or
(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction [emphasis added].”
The issue lies with exception (3) above. Read literally, the sentence seems to prevent military borrowers from using funds in pre-existing bank accounts, like CDs and savings accounts, as collateral for a loan. Additionally, it could mean that creditors are now prohibited from accessing pre-existing deposit accounts as set-off for delinquent military loans, which might lead to things like higher interest rates for military members in order to compensate for a greater level of risk. Nobody much cared about this limitation when it applied only to payday loans, vehicle title loans and tax refund anticipation loans—the original sentence in the statute obviously was meant to keep predatory lenders who offer questionable loans from reaching into established savings accounts in order to make monthly payments on such loans. But now that the long arm of the MLA has picked up most other types of consumer lending , serious questions are being raised about this sentence’s impact, and read in the extreme, exception (3) could result in serious negative repercussions for members of the military who try to borrow money.
The concern appears to be well-known and headed for a fix. Numerous trade groups, including the American Bankers Association, have submitted changes to the DoD that definitively would allow for both deposit-secured lending and the right of set-off in case of default, and we are hopeful such changes will be implemented before October, when compliance with the changes is required. The DoD clearly did not anticipate this whole mess when they passed the rule change in the first place, as evidenced by their explanation in the proposed rule’s preamble that entirely consisted of, “Proposed § 232.8(e) generally would track the language of § 232.8(a)(5) of the existing regulation[,]” and their analysis in final rule’s preamble that entirely consisted of, “The Department adopts § 232.8(e) as proposed.” Even so, it is important for bankers to be mindful of this issue, and to have modifications to their deposit-secured lending and set-off procedures at the ready in the event a change doesn’t come through. Make sure to stay in touch with Compliance Alliance for any and all the up-to-date changes regarding the MLA, and don’t hesitate to contact us directly if you have any questions!
 The MLA regulation excludes consumer loans not covered by Regulation Z, as well as home mortgages, automobile purchase loans, personal property purchase loans, and a few other specific types of loans.