September 2016 Newsletters
The new Military Lending Act (“MLA”) amendments effective this October created quite a bit of anxiety and a touch of hysteria among bankers over the opacity of the new rules. The industry’s confusion of the rules included issues such as over who is covered under the MLA, how to check for covered borrowers, what loans are covered, how to calculate the MAPR and even whether or not creditors could accept a check as payment. Some financial institutions went as far as to put a moratorium on covered loans or even lending to active duty servicemembers altogether. Luckily, the Defense Department heard your complaints and issued a new interpretive rule in the form of an FAQ to settle some nerves. (81 FR 58840).
First, the short and skinny of it:
- Can you accept a check for a loan payment? YES
- Can you use an existing CD or deposit account to secure a loan? YES
- Can you exercise the right of setoff? YES
- Can you charge an annual participation fee when there is no balance on an open-end loan? YES (up to $100)
- Can we provide the MLA disclosures in connection with the TILA disclosures? YES
- Do I need to amend my notes to remove the arbitration clause? NO (so long as you have a “savings” clause)
- Are late fees included in the MAPR calculation? NO
These are the major points to take away from the guidance which should settle some nerves. Now a bit more detail.
Questions 16, 17 and 18 from the interpretive rule provide the most relevant relief to banks. Question 16 concerns checks. A few consultants had taken an especially conservative interpretation of the new MLA rule and concluded that banks may not take checks or other methods of accessing a deposit, savings or other financial account maintained by the covered borrower. The answer to Question 16 clears this up:
“As a general proposition the prohibition of a creditor's use of a check or other method of access in § 232.8(e) does not in any way imply that a creditor cannot be paid. In no case does paragraph (e) prevent covered borrowers from tendering a check or authorizing access to a deposit, savings or other financial account to repay a creditor. Section 232.8(e) also does not prohibit a covered borrower from authorizing automatically recurring payments, provided that such recurring payments comply with other laws, such as the Electronic Fund Transfer Act and its implementing regulations, including 12 CFR 1005.10, as applicable.”
So, yes, you can take a check or an ACH payment from a covered borrower. What the MLA does prohibit is taking payment by using a borrower’s account information to create a remotely created check, remotely created payment or post-dated check in order to collect payments from the borrower.
Q&A 17 answers the question of whether you can take a current deposit account as security in the affirmative. Covered borrowers “may convey security interests in checking, savings or other financial accounts by describing a permissible security interest granted by covered borrowers. Thus, for example, a covered borrower may grant a security interest in funds deposited in a checking, savings, or other financial account after the extension of credit in an account established in connection with the consumer credit transaction.”
Additionally, Q&A 18 specifically states that the MLA does not curtail the creditor’s rights of set-off under state law. The MLA does not impeded your statutory rights to “take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by applicable law.”
The issue of participation fees gets a bit tricky. Question 5 clarifies that when an open-end credit has “no balance,” and you therefore can’t compute a MAPR, you are allowed to charge a participation fee or minimum balance charge and calculate the MAPR the same way you would calculate the APR under section 1026.14(c) of Regulation Z. In other words, you won’t be in violation if you charge a participation or minimum finance charge so long as it is under $100.
However, the Q&A still leaves open the question of how you can charge a participation or minimum finance charge on open-end credit accounts with a low balance. For example, if the balance were $10, then the exception articulated in Question 5 does not apply and you would have to include any participation fee in the calculation of the MAPR. So, even if you only charge a $5 annual fee during this cycle, which has a $10 balance, then your MAPR would be well over the 36% threshold. As a side note, you are allowed to waive fees for active duty members to get under the threshold.
And one final note on the interpretive rule: you can keep your arbitration clause in the contract so long as you include “savings clause” as well. A “savings clause” simply states that a particular provision in a contract does not apply to MLA-covered borrowers or some similar language, but the rest of the contract will still be enforceable. This will allow you to have one contract for all borrowers, rather than a separate set of loan docs for covered borrowers.
At the end of last month, the CPFB released a new report on the “widespread prevalence” of elder financial exploitation. Although it’s likely that only a small number of cases are reported, estimated losses range from $2.9 billion to as high as $36.5 billion each year, in addition to the economic losses suffered by financial institutions and other entities.
The report highlights that no single entity can be entirely responsible for preventing and responding to elder abuse and focuses on the role of “networks” in addressing the problem. For this purpose, networks are partnerships or alliances of public and private entities, organizations, and individuals that work to prevent, detect, and respond to this type of abuse.
The basic conclusion of the research is that networks greatly help combat elder financial exploitation. The CFPB recommends developing and enhancing existing networks and creating new networks in areas where they don’t already exist. While this is more of a long-term solution, it would be worthwhile to review the findings and recommendations in the full report and accompanying resource guide.
We’ve been getting more questions about how to respond to elder abuse on an everyday basis, though, so we thought it would be worth backtracking to a corresponding report issued earlier this year on how to detect and take action on elder financial abuse within the bank. These are the six general recommendations and some notable details from the earlier report:
Develop, implement, and maintain internal protocols and procedures for protecting account holders.
Include training requirements, procedures for making reports, compliance with Reg. E, means of consent for information-sharing with third parties, and procedures for collaborating with key stakeholders.
Note that Compliance Alliance has a model Elder Abuse Policy here.
Train management and staff to prevent, detect, and respond.
Train staff frequently and tailor trainings to specific roles.
Include warning signs that may signal financial exploitation, including specific behaviors and transactions that are red flags.
Detect exploitation by employing fraud detection systems.
Use predictive analytics and review filtering criteria against individual account holders’ transactional patterns.
Report all cases of suspected exploitation to appropriate federal, state and local authorities.
File SARs when required and consider filing them voluntarily in other cases.
Provide documentation quickly and at no charge when requested by Adult Protective Services, law enforcement, or other investigating entities.
Note that reporting, in general, does not violate the GLBA according to guidance issued in 2013.
Consult with counsel and/or your state bankers association on state reporting requirements.
Protect older account holders.
Offer age-friendly services that can help protect against financial abuse, like convenience accounts, protective opt-in features, and information about planning for incapacity.
Collaborate with other stakeholders.
This is where the bank’s participation in network initiatives would come in. The report underscores that banks are “valuable members” of networks and uniquely able to educate on the “nuances of banking policy and procedures.”
While the CFPB emphasizes that these are not necessarily requirements, it does go so far as to deem them “best practices,” so it would be advisable for banks to consider them in developing policies and procedures on elder financial exploitation. You can review the details of these recommendations in the full report and supplementary advisory.
Recently, there has been much discussion in the media about negative interest rates coming to America. Japan, Switzerland and other nations have already implemented negative rates at the government level by telling bond purchasers to take a haircut on the return for government bonds they purchased. With the Federal Reserve yet again refusing to raise interest rates this month, but with the economy also still stagnating, some are left wondering if there’s only a matter of time before the negative rate bug hits our shores. At its worst, negative interest rates could result in a.) banks requiring customers to pay a tax-like premium to hold the customers’ money; b.) banks paying customers a bonus to take out loans or c.) all other manner of horrors … but, in all honesty, these bizarre scenarios probably will remain the stuff of science fiction and interest rates won’t dare dip below zero. Here are a few reasons why:
FDIC Insurance. All accounts have deposits insured by the federal government under statute and regulation for losses up to $250,000. What would happen if U.S. customers were to incur losses due to negative interest rates on existing deposit accounts that have their interest rates tied to an index? True — a loss of funds due to a negative rate is not the same as a loss due to a bank closure — but we are in uncharted territory. Since negative interest rates have never existed in America, nobody could say for certain … it may at the very least result in massive lawsuits against banks and the federal government for failing to honor the central premise of FDIC insurance, which is to protect bank deposits in the event of a loss of funds.
Loss of new deposits, risk of a run. If a customer is presented with the option of either parking her money at a bank and essentially paying the bank to hold onto it or keeping the money herself and not incurring any penalty, which option is more likely? For smaller community banks, it seems pretty clear the latter option would be closer to reality. Obviously, a major loss of new business on the deposit side could result from this. But to take it a step further, what about accounts already on deposit that have interest rates that suddenly turn negative? Lines out the door of customers clutching empty coffee cans and shoeboxes are not completely outside the realm of possibility. The threat of a bank run is likely to make the Fed think twice about dropping rates down to a level that simultaneously ends up penalizing savvy Americans and cratering the amount financial institutions — especially smaller banks — have on deposit.
Bond rates separate from deposit and loan rates. Even if the Federal Reserve ends up lowering central bank rates and/or rates on U.S. government bonds, it’s unlikely to completely trickle down all the way to deposit and loan accounts. This has been the case in other countries that currently have negative or near negative interest rates, such as the U.K. and Germany, and would likely be the case for the U.S. as well. So a temporary dip below 0 in federal rates in order to spur investment from the larger banks may not have any major long-term implications on rates for community bankers at all.
These three major consequences are just a few of the reasons why the Federal Reserve would be wary to try out the unprecedented financial experiment of taking rates negative in the U.S. But stranger things have happened! Make sure to stay vigilant with any news coming out of the Fed about rate decreases in the future, and remember to contact Compliance Alliance with any questions you may have.
On Sept. 8, the CFPB released their final consent judgment against Wells Fargo Bank which included a whopping $100 million fine for illegal practices related to cross-selling products. Wells Fargo employees were found to have opened over 1.5 million deposit accounts funded using existing customer account funds without any knowledge or consent. In addition, bank employees had applied for more than 500,000 credit card accounts without authorization. This means that existing customers were charged annual fees and finance charges, as well as insufficient fund fees when money was pulled out their existing accounts without their knowledge. Beyond fraudulently opening accounts and misusing customer funds, employees issued and activated debit cards for those accounts without authorization and also created fake email addresses to enroll their customer into online banking services.
Due to the breadth of the infractions and various regulations that were violated, the CFPB handed down the largest penalty it has ever imposed. In addition, the final judgment requires refunds to all affected consumers relating to the fees incurred due to these unauthorized accounts. That amount is expected be at least $2.5 million. Going forward, Wells Fargo will be required to ensure compliant sales practices by hiring an independent consultant who will be tasked to conduct thorough reviews of sale procedures and institute things like ethics training and evaluation of the institution’s sales goals to ensure they can be met without improper practices.
So, why does this matter to your bank? It would be too simple to see these large consent orders that are aimed at one of the big banks and disregard them as not pertinent to community banks because of the size of the institution and the monetary penalty. However, the underlying issue that drove this employee behavior was an incentive program that set sales goals and compensation amounts on the number of accounts opened. This type of program is common in any type of sales setting - including at community banks. In addition, we’ve seen these types of incentive-driven program issues come up throughout the Dodd-Frank era - most prominently, in the Regulation Z prohibition against term-based lender compensation on mortgage loans. The Wells Fargo judgment gives us a clear example of when those types of incentive programs can go wrong and also, a chance to review the bank’s compliance management system to ensure proper mitigation of these types of unethical practices.
The Wells Fargo judgment should come as a reminder that while incentive-based sales programs can be important tools for growth and goal production, on the compliance side, it’s really important to monitor and maintain oversight as to how the program is being used and where the sales numbers are really coming from. Proper management of sales practices serves not only to preserve revenue and protect against fines, it also sets a tone about the importance of complying with regulatory requirements and the institution’s commitment to ethical banking practices.
Phase I of NACHA’s Same-Day ACH rules is finally underway. Since we’ve received a number of same-day ACH hotline questions about what’s required, what’s not and how the rules will otherwise affect banks, we thought we’d review some of the most common concerns.
What’s required for Phase I?
RDFIs are required to make funds available from same-day ACH credits to their depositors by the end of their processing day. RDFIs may make funds available earlier at their discretion but ODFIs may not request extensions to these deadlines. Note that only credits are eligible for same-day processing during Phase I. If debits are included with credits in a batch, only the credits will settle the same day.
I have Phase I down — what comes next?
Phase II (September 15, 2017) will require that RDFIs also receive debits in addition to credits as same-day entries. By Phase III (March 16, 2018), all RDFIs will be required to make available funds from same-day ACH credits no later than 5 p.m. local time in order to give recipients access to funds by the end of the business day.
Does the $25,000 value limit apply to single items or batches?
The $25,000 value limit applies to single items for all three phases. If a batch contains some items that are both under and over the value limit, those that are under will be receive same-day settlement and those that are over will receive next-day settlement.
Are forward and reversal entries eligible for same-day settlement?
Generally, yes. They may not be debit entries during Phase I or IAT entries.
What is the default processing schedule?
Processing is based on the Effective Entry Date, so any item received within the same-day processing windows will be processed as a same-day item. ODFIs should develop procedures for postdating or holding entries that the Originator does not want processed as a same-day transaction. Note that credits may be dated no more than two days in the future and debits no more than one day in the future.
Do I have to register my Third-Party Sender?
Yes. NACHA does require ODFIs to identify and register their Third-Party Sender customers during Phase II but there’s no cost for registration.
Can we charge the customer a fee? May it be a flat fee? May it be more than what the Fed charges?
Yes. You’d have to provide notice under Reg. E since it’s a charge imposed for an EFT. Written notice must be mailed or delivered at least 21 days before the effective date of the change. See 12 CFR §1005.7(b)(5) and §1005.8(a). It may be a flat or variable fee, and may be more than what the Fed charges.
Do you have any tools to help with this?
Yes, we have several tools up on the site:
Same-Day ACH Summary
Updated ACH Policy
ODFI Template Letter on Effective Entry Date for Originators
Several more will be posted soon:
Updated ACH Risk Assessment
Updated Originator Agreement
As always, contact us by phone, chat or email if you have any other questions.