October 2016 Newsletters

The MLA Changes Have Arrived. How Do We Apply Them?

The Long Awaited Prepaid Account Rule Has Arrived!


CFPB Approves New URLA and Provides HMDA Implementation Period

Paid Search Engine Advertising and “Equal Housing Lender” – Are You in Compliance?


The MLA Changes Have Arrived. How Do We Apply Them?

On Monday, October 3, 2016, the changes to the Military Lending Act (MLA) officially went into effect. While the MLA is still mainly intended to be a restriction on prohibitive short-term and payday lending, its increased scope means it now will affect financial institutions — including smaller banks — in potentially significant ways. What follows is a breakdown of the most significant aspects of the rule for community bankers.

Lot Loans, ODLOCs
First off, many community banks may be wondering, “How does the MLA apply to me?” The answer to that is, in most cases, it probably won’t. However, there are two notable exceptions: vacant lot loans and overdraft lines of credit (ODLOCs) subject to Regulation Z. 

For lot loans, the MLA has an exemption for loans secured by a “dwelling,” but obviously this would not apply to vacant land, which doesn’t have a house of any kind on it. Furthermore, there is another exemption in the MLA for “personal property” purchase loans, but vacant land is real property rather than personal property, so this exemption doesn’t apply to lots either. Accordingly, the way we see it, lot loans fall through a hole in the exemptions to the regulation and appear to be fully subject to the MLA’s restrictions, meaning you should be running a covered borrower check and providing the proper Military Annual Percentage Rate (MAPR) disclosures to all of your military lot loan borrowers going forward. 

It’s also important to note that if your institution is originating ODLOCs for which you’re providing Regulation Z disclosures, those now will be subject to the MLA as well. On the other hand, “overdraft services” covered by Regulation E, rather than Regulation Z, are not “extensions of credit” as defined by the MLA and, therefore, won’t fall under the regulation.

Calculation of the MAPR
We’ve received a multitude of questions at Compliance Alliance regarding the proper calculation and disclosure of the Military Annual Percentage Rate (MAPR). “Does the actual calculation need to be disclosed to the borrower?” “What about open-end lines of credit?” “Do we have to do any additional math?” We can assure you that the MAPR calculation, in most cases, will be fairly straightforward and will not involve any special mathematical calculations. For example, for closed-end credit, unless you are charging annual fees or participation fees that would normally be excluded from your APR under Regulation Z, your MAPR is probably going to be the exact same as your standard APR. What’s more, the rule carries absolutely no requirement to disclose an exact MAPR number for the loan to the borrower at any time; all you need to do is provide the borrower with a generic description of what the MAPR is (the “statement of the MAPR” paragraph found in the regulation) and a generic description of how periodic payments work (a “description of the payment obligation”). Please note that the CFPB recently suggested in its examination procedures (which the other agencies will likely follow) that banks should nevertheless be able to demonstrate to examiners they have systems in place to ensure they’re aware of what the MAPR is for each loan in their internal systems, and that it never exceeds 36% as required by law.

Vehicle Purchase Loans
In light of some confusing language from the Department of Defense (DoD) in a recent Q&A clarification it issued, some of the form providers and compliance professionals have been drawing attention to vehicle purchase loans, where the amount of the loan exceeds the purchase price of the vehicle due to things like GAP insurance and vehicle warranties being thrown in. We want to assure you that we do not see this as an issue. As we see it, such loans are still “expressly intended” to finance the purchase of a vehicle so they are still exempt from the MLA. The DoD in its Q&A specifically was concerned with cash-out loans, where the amount of the loan covers both the purchase price of the vehicle and an additional amount of straight cash given to the borrower. Such a loan would not be “expressly intended” to buy a car and, therefore, would not be exempt from the MLA. But there’s a big difference between a cash-out/purchase loan and a warranties +insurance/purchase loan. The spirit and intent of the MLA includes the former but excludes the latter.
These are the hot-button issues that we’re hearing about regarding the MLA but there are surely more to come as the rule makes its way through the early stages of being implemented. Make sure to check out the variety of MLA products we now offer on our website, and stay tuned to our newsletters and updates for all your MLA needs! 
As always, contact us by phone, chat or email if you have any other questions.

The Long Awaited Prepaid Account Rule Has Arrived!

It took almost two years for the CFPB to issue the final rule to amend Reg E and Reg Z and extend their coverage to certain prepaid accounts, but on October 5, 2016, the final rule was finally issued. 

The final rule defines “prepaid account” to specifically include payroll cards; government benefit accounts; accounts that are marketed or labeled as prepaid (or usable at an ATM), if the access device is issued on a prepaid basis or has the capability of being loaded; and if the access device is used primarily to conduct transactions with multiple, unaffiliated merchants, ATMs or P2P transfers. The rule also specifically excludes checking accounts, share draft accounts and NOW accounts.  

Keep in mind, since the term “prepaid account” is added to the definition of “account” under Reg E, it is important to remember that Reg E covers only those accounts that are primarily used for family or household purposes. That being said, the CFPB has said that the definition of prepaid account IS NOT limited to general purpose reloadable cards or prepaid products that are used as alternatives to traditional transaction accounts, so that means this definition can be interpreted very broadly. In other words, the definition covers more than traditional prepaid cards, including general purpose reloadable cards. It also applies to mobile wallets, person-to-person payment products and other electronic prepaid accounts that can store funds. Other prepaid accounts covered by the new rule include: payroll cards; student financial aid disbursement cards; tax refund cards; and certain federal, state and local government benefit cards such as those used to distribute unemployment insurance and child support.

The final rule focuses mainly on disclosures, error resolution, liability and periodic statement requirements. The disclosures must generally be given before the consumer acquires the prepaid account. Much of the information required in the disclosures focuses on fees and information about the features of the account. 

Error resolution and limits on liability are very similar to the existing requirements of Reg E; however, these requirements have been extended to all prepaid accounts. The rule also requires the bank to provide periodic statements for these prepaid accounts, but before you pass out, read a little further: the rule permits an alternative to the periodic statement. The alternative is to provide the consumer with account balance information (by phone), as well as electronic account transaction histories and written account transaction histories (upon request). These histories (periodic statements) also are required to have a summary of all fees assessed by the bank against the account.

As if this isn’t enough to digest, the rule goes on to say that there is a newly defined “hybrid” prepaid-credit card with Regulation Z implications. 

What is a prepaid-credit card under the new definition? If the card can be used to access credit from a credit account that is separate from the prepaid account’s asset feature (i.e., a separate credit feature), the separate credit feature is offered by the prepaid account issuer, its affiliate or its business partner and the card can be used to access the separate credit feature in the course of authorizing, settling or otherwise completing transactions conducted with the card to obtain goods, services, cash or to conduct P2P transfers.

A prepaid card may also be a hybrid prepaid-credit card if it is a single device that can be used to access credit through a negative balance on the prepaid account’s asset feature, with some exceptions.

Extending the coverage and disclosure requirements of Regulations E and Z to prepaid accounts is a significant change for banks who issue prepaid financial products.

As always, if you'd like to comment or have a question, don't hesitate to call, chat or email us at (888)353-3933 or info@compliancealliance.com

CFPB Approves New URLA and Provides HMDA Implementation Period

The Consumer Financial Protection Bureau (CFPB) quietly issued a recent notice that addresses two separate Reg. B issues. First, the notice puts in writing that use of the new Uniform Residential Loan Application (URLA) is indeed compliant with Reg. B. Second, and more importantly, the notice clarifies that banks will not be in violation of Reg. B for allowing applicants to self-identify using the disaggregated ethnic and racial categories in 2017 before it’s absolutely required by Home Mortgage Disclosure Act (HMDA) in 2018.

Status of New URLA under Regulation B
There’s not much to the first part of the notice besides confirmation that the 2016 URLA does, in fact, comply with Reg. B requirements on requests for information under §1002.5, despite that the regulation itself has not been updated to reflect this. Note that like its predecessor, the new URLA is not necessarily required to be used, but if it is used generally without modification, it is deemed to be in compliance with Reg. B.  

Implementation Period for Expanded HMDA Information about Ethnicity and Race 
The second part of the notice is more substantial. It allows institutions to collect the newly- expanded “disaggregated” ethnicity and race categories in 2017 (a year before the new HMDA rules actually require it) and not be in violation of Reg. B. Although the CFPB isn’t well known for giving banks much time to prepare for big changes, this seems to be a welcome step toward improvement. The Bureau stated that it believes this allowance “may provide creditors time to begin to implement the regulatory changes and improve their compliance processes before the new requirement becomes effective.”

As a reminder, the disaggregated categories are those that further break down the aggregate categories of ethnicities and races. Starting in 2018, banks are required to permit applicants to self-identify using both the aggregate and disaggregated subcategories. For example, when requesting ethnicity, the aggregate categories are Hispanic or Latino, while the disaggregated categories are Mexican, Puerto Rican, Cuban, or Other Hispanic or Latino. Further, if the applicant chooses “Other Hispanic or Latino,” the applicant must be allowed to provide her own ethnicity category that isn’t provided on the form.

Reporting of this information will vary depending on when final action is taken. For 2017 applications on which final action is also taken in 2017, only the current aggregated information will be reported even if applicants have chosen to self-identify using the disaggregated categories as well. If final action is taken on or after Jan. 1, 2018, however, the bank may choose to report the disaggregated information but is not required to. Again, for 2018 applications, collecting and reporting the disaggregated information is required.

So the CFPB is allowing banks to use 2017 as a transition year and it would be highly advisable to take advantage of this uncommon implementation period. While this may seem to be a relatively innocuous change, any opportunity to transition to new forms and processes ahead of time is sure to make mandatory reporting in 2018 smoother. The full notice is relatively short and worth glancing over in its entirety here.

As always, if you'd like to comment or have a question, don't hesitate to call, chat or email us at (888) 353-3933 or info@compliancealliance.com

For an interesting (and time-wasting?) activity, consider going to your favorite search engine, typing your home city along with the word “mortgages” into the Search box, and seeing what comes up in the results page. Near either the top or bottom of the results, you’ll probably find multiple paid advertisements (usually indicated with the words “Ad,” “Advertisement” or “Sponsored Content”) for mortgages from banks in your area—possibly your own institution. And what, pray tell, is almost certainly missing from each one of those paid ads? Our old friend: the Equal Housing Lender or “doghouse” logo. Uh oh.

Section 338.3(a) of Chapter 12 of the Code of Federal Regulations clearly states, “Any bank which directly or through third parties engages in any form of advertising of any loan for the purpose of purchasing, constructing, improving, repairing or maintaining a dwelling or any loan secured by a dwelling shall prominently indicate in such advertisement, in a manner appropriate to the advertising medium and format utilized that the bank makes such loans without regard to race, color, religion, national origin, sex, handicap or familial status [emphasis added].” The regulation goes on to state that for written and visual advertisements, this requirement “may” be satisfied by including the ‘logotype’ of a small house with an equals sign, below which the words “Equal Housing Lender” (in the FDIC regulations) or “Equal Housing Opportunity” (in the HUD regulations) appear. The use of the words “may” and “in a manner appropriate to the advertising medium” indicates this requirement still potentially can be satisfied by other ways instead of the doghouse logo, such as simply using the words “Equal Housing Lender.” But regardless of the method chosen, the advertising bank must make some actual attempt to show it doesn’t discriminate in lending to others.

Like us, you may be asking yourself: “What in the world happened to the Equal Housing Lender logo for these ads?” There could be a few answers for this. First of all, there is a commonly-adopted practice in banks’ electronic advertising known as the “one click away” option. This allows banks to place things like triggering terms outside of short web banner and social media advertisements via the use of a hyperlink to a different page. Note that this practice doesn’t work for the Equal Housing Lender logo requirement which is completely separate from Regulations DD and Z where the “one click away” exception is found. There simply is no language in §338.3 of the FDIC regulations that allows for “one click away.” So it’s possible banks have been fooled by believing the “one click away” defense covers them for this, when it does not.

Another possibility for the logo’s absence could be the fact that large search engine companies (Google, Microsoft, Yahoo, etc.) cloak themselves in the aura of invincibility. “Surely, such a big corporation, with an army of lawyers at their beck-and-call, would never let an obvious violation like this come to pass?” Well apparently they would and they have.

Finally, it may just be the case that the federal agencies haven’t caught on to how widespread this particular violation is so they haven’t done anything about it. But as has been the case with so many things in the past, and as will be the case with many more things going forward (especially in light of the CFPB’s increasing influence), it may only be a matter of time before the hammer comes down and the FIRREA penalties start flowing. The fact that this particular violation is so open, obvious and frequent should only add to the level of concern.

In light of this glaring issue, you should check to see whether your institution has any web search mortgage lending advertisements, and if it does, whether they at least contain the words “Equal Housing Lender” or “Equal Housing Opportunity” that appear when the paid search results come up.

For any additional questions regarding these ads, be sure to contact Compliance Alliance and stay tuned to our newsletters and updates for any information coming out regarding loan advertising in the future. 

As always, if you'd like to comment or have a question, don't hesitate to call, chat or email us at (888)353-3933 or info@compliancealliance.com