Regulations on Lending: Top Bêtes Noires
Regulatory fallout from the housing crash, the Credit Card Act of 2009 and the new Consumer Financial Protection Bureau are making the daily duties of a loan officer look increasingly more like those of a compliance officer. Below are the most burdensome, difficult and confusing current regulations and proposed rules facing credit union lending officers today.
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,” said NAFCU Director of Compliance Steve Van Beek.
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 appearance 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 CUNA Mutual Director of Compliance Bill Klewin said the department’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.
The Federal Reserve’s most common regulation citation in 2011 was a violation of Regulation B that 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 that prohibits credit card issuers from considering household income when a nonworking 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
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 the NCUA’s Office of Consumer Protection. The new poster was declared effectively immediately but added a caveat for 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.
The most mind-bending proposed regulation is the CFPB’s efforts to consolidate Truth in Lending and Real Estate Settlement Procedures Act disclosures. NAFCU President/CEO Fred Becker called the proposal is 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’s 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.
The CFPB is not only consolidating TILA and RESPA disclosures, it’s also 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’s 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 exact font size expected by the CFPB.
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 verbiage.
Additionally, the CFPB has made technical changes to applications, disclosures and other required information for consumers, including 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 to make the changes, but there are several tweaks to be made in several areas.
Fair and Accurate
The Fair and Accurate Credit Transaction Act of 2003 primarily provides the right for consumers to obtain a free copy of their credit report once each calendar year and guards against identity theft. However, a provision requires lenders to provide a disclosure to borrowers if they do not qualify for the advertised as low as rate.
The FTC and Federal Reserve Board further refined the disclosures requirement in late 2009 by stating consumers must be given adverse action notices if they are denied credit, but lenders must only provide the risk-based pricing notices if the borrower is granted credit at terms less favorable than what others receive.
According to the Department of Justice, the Service Members Civil Relief Act mandates that lenders must provide active duty service members, which include National Guard members deployed for 30 days or more, with credit payment flexibility if they are unable to make regular payments. Additionally, lenders may not change the terms of an existing credit arrangement or file adverse reports relating to creditworthiness.
Klewin said credit unions have struggled to understand when to apply the act, which allows service members to postpone or suspend outstanding credit card debt and mortgage payments, among other things.
Credit unions don’t typically offer the kind of products that would be regulated by Department of Defense, but “it should be on the radar screen for those with members on active duty,” Klewin said.
The 2007 regulations protect service members and their families from high-cost, short-term loans by limiting fees and interest. Specifically, the regulations limit interest charged on payday loans, vehicle title loans and tax refund anticipation loans to 36%.