Following the Credit Card Act of 2009 and the creation of the Consumer Financial Protection Bureau, lending officers find themselves spending more time than ever crossing compliance T’s and dotting regulatory I’s. The CFPB’s “Know Before You Owe” initiative is creating a number of proposed regulations that would apply to mortgages, credit cards and student loans. What has been put out for comment so far is already making lending officers’ heads swim.
Here are some of the most burdensome, difficult and confusing regulations and proposed rules facing credit union lending officers today.
Mortgage Disclosure Consolidation
Leading the pack is an effort to consolidate Truth in Lending and Real Estate Settlement Procedures Act disclosures. NAFCU President/CEO Fred Becker called the proposal a step in the right direction, but said conflicting requirements inherent in the two statutes might make the task impossible.
The proposed consolidation could require credit unions to fill out the RESPA portion of the settlement document, which would be problematic because most credit unions lack expertise when it comes to the back end of residential real estate transactions.
CUNA Mutual Director of Compliance Bill Klewin said the disclosure consolidations will cause credit unions “to spend quite a bit of time understanding the rules,” as well as creating a lot of new work for data processors and documents providers.
In addition to the consolidation, the CFPB is overhauling the appearance of mortgage disclosures, implementing the so-called “tabular” format that has already been applied to credit card disclosures. Tabular forms require that items of most interest to consumers be published in a table or box, separated from other text in the disclosure.
“The Federal Reserve did consumer testing on this form and it showed it was easier for consumers to see the information in a tabular format,” said NAFCU Director of Compliance Steve Van Beek. “But, I don’t think they tested how long it will take for credit unions to get their systems to convert these disclosures to the tabular format.”
Van Beek said the process will be similar to changes made in credit card disclosures two years ago, when tabular formats were mandated for late payment warnings. Credit unions had to undergo major system changes to meet the requirement, and had to put a lot of marketing projects on the backburner until new forms were created. Ambiguity is a problem, he said.
“There’s really no instruction manual that comes with these disclosures—usually just a 500-page regulation,” Van Beek said. “The Federal Reserve and CFPB have model forms, but publishing a model form and providing information on how to replicate the model are two different things.” For example, he said, there is no clear mandate on the exact font size expected by the CFPB.
Six-Month Credit Card Look Back
The Credit Card Act of 2009 required institutions to continuously review and monitor the business reasons behind raising a cardholder’s interest rate, or the institution’s overall interest rates. For example, if a member’s credit score decreases due to a job loss or other event, and the credit union raises his or her interest rate, regulations require a review of the member’s credit score six months later to see if it has improved. If it has, the credit union must lower the rate accordingly. Additionally, if a credit union increases its credit card APRs across the board or in any risk-based category, it would have to document the business reasons for the increase, and re-evaluate the decision after six months to ensure the business reasons are still valid.
“One big issue is there’s no end time, so theoretically, these reviews will go on indefinitely into the future,” Van Beek said.
The CFPB released a compliance bulletin April 17 stating the agency will apply the disparate impact doctrine to the institutions it regulates, which includes the three largest credit unions, when assessing if they violate the Equal Credit Opportunity Act. The NCUA has jurisdiction over most credit unions when it comes to fair lending auditing, but the Department of Justice has said it will actively investigate discrimination complaints it receives from CFPB or any source, like consumer groups.
Disparate impact occurs when a lender’s practices or policies are facially neutral but have discriminatory effects. Basically, it lowers the standard of proof to enforce lending discrimination laws. If the NCUA follows suit, it could create problems for credit unions that have fields of membership that restrict lending to a limited geographical area or a specific group that may not reflect the diversity fair lending laws require.
Many are familiar with the Department of Justice’s suit against former mortgage giant Countrywide, but Klewin said the DOJ’s Civil Rights Division also pursued discrimination charges against the $69 million Nixon State Bank of Nixon, Texas.
“It doesn’t matter how large or small you are, if you are violating ECOA, the Justice Department will look at you,” he said, adding that litigation could be “extremely destructive” to a credit union’s reputation.
One potential form of discrimination the Federal Reserve has warned its supervised institutions about is related to maternity leave. Some lenders refuse to consider a woman’s employment status or income if she applies for credit while on maternity leave. Such a policy may violate the ECOA on the basis of sexual discrimination, and may also violate Regulation B, which prohibits using assumptions related to the likelihood that any person would receive interrupted or diminished income as a result of raising children. The Fed suggests lenders mitigate risk by not assuming a woman won’t return to work after childbirth, and to ensure that underwriting standards treat maternity leave applicants equal to other applicants on leave.
Spousal Discrimination and Credit Restrictions
The Federal Reserve’s most common regulation citation in 2011 was a violation of Regulation B, which prohibits a lender from requiring the signature of a spouse, unless the applicant does not qualify for credit and the spouse chooses to provide credit support. Adding to the confusion about credit and spouses is a mandate from the Credit Card Act, which prohibits credit card issuers from considering household income when a non-working spouse applies. Under the rule, which went into effect Oct. 1, 2011, only an individual’s own income can be considered. That means stay-at-home parents without significant outside income can no longer qualify for credit cards or establish their own credit history independent from their spouses.
It could get even more confusing. The CFPB may look at the rule because it affects consumer access to credit and may be discriminatory.
Equal Housing Lender poster
During its March board meeting, the NCUA created a new requirement for credit unions to display a new Equal Housing Lender poster that updated the NCUA’s address from the Office of Examination and Insurance to NCUA’s Office of Consumer Protection. The new poster was declared effective immediately, but the agency added a caveat of compliance “within a reasonable amount of time” because the NCUA had not yet created a new poster. This has left many credit unions wondering about the NCUA’s definition of reasonable amount of time and when the posters will be available. NCUA spokesman John Zimmerman said the new posters are expected in early May.
CFPB Republishing of Inherited Regulations
When it was formed, the CFPB inherited regulations from seven other agencies, and republished them in its section of federal code. That means 13 regulations now have different code designations, which requires credit unions to make changes to their policy manuals, training and language. Additionally, the CFPB has made technical changes to applications, disclosures and other required information for consumers; for example, required credit card disclosures used to refer consumers to the Federal Reserve for more information regarding how to effectively manage debt. Consumers should now be referred to the CFPB. Credit unions have until Jan. 1, 2013 to make the changes, but there are several tweaks to be made in several areas.