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School-Introduction Consumer Lending Regulations

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School-Introduction Consumer Lending Regulations Powered By Docstoc
					CUNA Regulatory Compliance
     School-Introduction
Consumer Lending Regulations

              Bill Klewin
      Associate General Counsel
         CUNA Mutual Group
          Truth in Lending
Subpart C--Closed-End Credit
1. 226.17 - General disclosure requirements
2. 226.18- Content of disclosures
3. 226.19 - Certain residential mortgage and
   variable-rate transactions
4. 226.20- Subsequent disclosure requirements
5. 226.21- Treatment of credit balances
6. 226.22- Determination of annual percentage
   rate
7. 226.23- Right of rescission
8. 226.24- Advertising
                  Truth in Lending
226.17 - General disclosure requirements
1. Form of disclosures-clear and conspicuous in
   a form the member can keep 226.17(a)
2. “FINANCE CHARGE” and “ANNUAL
   PERCENTAGE RATE” must be more
   conspicuous when used with a number
   226.17(a)(2)

3. Timing of disclosures-before consummation
   226.17(b)

4. Basis of disclosures-actual terms. If not know,
   may use estimates and mark with “e” 226.17(c)
          Truth in Lending
• “The disclosures shall be grouped
  together, shall be segregated from
  everything else, and shall not contain
  any information not directly related to
  the disclosures required under §
  226.18.”        226.17(a)

• This grouping is known as…..

       “The Fed Box”
226.18
                Truth in Lending
Subsequent disclosure requirements-
 226.20
  Refinancings. A refinancing occurs when an existing
  obligation that was subject to this subpart is satisfied and
  replaced by a new obligation undertaken by the same
  consumer. A refinancing is a new transaction requiring
  new disclosures to the consumer. The new finance
  charge shall include any unearned portion of the old
  finance charge that is not credited to the existing
  obligation. The following shall not be treated as a
  refinancing:
• A renewal of a single payment obligation with no change
  in the original terms.
• A reduction in the annual percentage rate with a
  corresponding change in the payment schedule.
  Subsequent Disclosure Requirements-226.20
• An agreement involving a court proceeding.
• A change in the payment schedule or a change
  in collateral requirements as a result of the
  consumer's default or delinquency, unless the
  rate is increased, or the new amount financed
  exceeds the unpaid balance plus earned finance
  charge and premiums for continuation of
  insurance of the types described in Sec.
  226.4(d).
• The renewal of optional insurance purchased by
  the consumer and added to an existing
  transaction, if disclosures relating to the initial
  purchase were provided as required by this
  subpart.
                Truth in Lending
Advertising-226.24-
• Actually available terms, no misleading terms
   “free money”
• “Triggering terms”-
    1.   Amount or percentage of down payment.
    2.   Number of payments
    3.   Amount of any payment
    4.   Amount of any FC
•    If any of the above given, must state:
    1. Amount or percentage of any down payment.
    2. Terms of repayment
    3. “APR, and if the rate may increase after consummation.
•    NOTE: “APR” is triggering term for open-end, but
     not for closed-end advertising.
         Truth in Lending
• 226.21-Treatment of credit balances
• 226.22-Determination of annual
  percentage rate
• 226.23-Right of rescission
           Truth in Lending
Right of rescission-226.15 and 226.23
 “Consumer's right to rescind. In a credit
 transaction in which a security interest is
 or will be retained or acquired in a
 consumer's principal dwelling, each
 consumer whose ownership interest is or
 will be subject to the security interest shall
 have the right to rescind the transaction.”
       226.15 and 226.23
           Truth in Lending
Right of rescission-226.15 and 226.23
The Process-
  Send written notice within three business days of
• Signing security instrument on principal
  dwelling-Mortgage, Deed of Trust, Title, UCC
• Receiving correct notice of right to rescind (each
  person with rescission right gets two copies of
  notice)
• Receiving correct material disclosures-eg-APR,
  Amt. Financed, Total of Payments for CE or
  method of determining FC for OE.
               Truth in Lending
Right of rescission-226.15 and 226.23
The Process-
   If member rescinds, within 20 days CU
   must return everything they have
   received from the member, at which
   point, the member must return everything
   she/he has received from the CU. 226.15(d)
   and 226.23(d)
                   Truth in Lending
Right of rescission-226.15 and
   226.23
Exempt Transactions-
 (1) A residential mortgage transaction.
  (2) A refinancing or consolidation by
   the same creditor of an extension of
   credit already secured by the
   consumer's principal dwelling. 226.15(f)
   and 226.23(f)
             Truth in Lending
Right of rescission-226.15 and
   226.23
Waiver of Rescission Right-
A consumer may waive her rescission right if
   they believe they have a bona fide
   financial emergency. Must be in writing
   stating nature of emergency and signed
   by all parties. No preprinted forms.
   226.15(e) and 226.23(e)
Question-What is a “bona fide financial
  emergency”?
         Truth in Lending
Waiver of Rescission Right-
A consumer may waive her rescission right if
  they believe they have a bona fide
  financial emergency. Must be in writing
  stating nature of emergency and signed by
  all parties. No preprinted forms.
Question-What is a “bona fide financial
  emergency”? 226.15(e) and 226.23(e)
          Truth in Lending
Rescission-Ramifications
1. Failure to give correct TIL material
   disclosures or correct rescission notices
2. Systematic disclosure or process errors
3. How do you make sure member can pay
   you after you pay them?
4. Correction vs. time?
         Truth in Lending
Topics not thoroughly covered-
1. Home equity-
  – 226.5b and 226.6(e)
2. Residential mortgage transactions-
  – 226.18, 226.19, 226.20, 226.30, 226.31,
    226.32, 226.33, and 226.34
3. E-disclosures
      Changes Are Coming
• Closed-end first mortgage disclsoures
• HELOCs
• RE related rules (right of rescission, higher
  rate, high fee mortgages, reverse
  mortgages) next?
• CE consumer loans likely to follow soon.
      Fair Credit Reporting Act-
       15 U.S.C. 1681 et seq.
Purpose-
• “Accuracy and fairness of credit reporting.” 602(a)
• “It is the purpose of this title to require that
   consumer reporting agencies adopt reasonable
   procedures for meeting the needs of commerce
   for consumer credit, personnel, insurance, and
   other information in a manner which is fair and
   equitable to the consumer, with regard to the
   confidentiality, accuracy, relevancy, and proper
   utilization of such information in accordance with
   the requirements of this title.” 602(b)
   Fair Credit Reporting Act
604. Permissible purposes of consumer
  reports-
To a person which it has reason to believe-
• (A) intends to use the information in connection
  with a credit transaction involving the consumer on
  whom the information is to be furnished and
  involving the extension of credit to, or review or
  collection of an account of, the consumer; or
• (B) intends to use the information for employment
  purposes; or
• (C) intends to use the information in connection
  with the underwriting of insurance involving the
  consumer; 604(3)(A-C)
  Fair Credit Reporting Act
A difficult concept to understand and explain-
  When you make a request for information, you
  can’t use it for other purposes. For example,
  you get information for a loan. You can’t then
  use that information to market products and
  services based on that information. You couldn’t
  have gotten that information for that purpose
  legally in the first place, you can’t use it in that
  way now that you have it.
                 Prescreening
“Furnishing reports in connection with credit or
  insurance transactions that are not initiated by the
  consumer.
  (1) In general. A consumer reporting agency may
  furnish a consumer report relating to any consumer
  pursuant to subparagraph (A) or (C) of subsection (a)(3)
  in connection with any credit or insurance transaction
  that is not initiated by the consumer only if
  (A) the consumer authorizes the agency to provide such
  report to such person; or
  (B) (i) the transaction consists of a firm offer of credit or
  insurance;…”
                                   604(c)
   Fair Credit Reporting Act
Other issues-
1. FACT Act-Among your duties
• Truncated debit, credit, and s.s. numbers
• Information available to victims
• Red Flag program to identify fraud
• Disputed information-duties
     Servicemembers Civil Relief Act
               (SCRA)
50 U.S.C. 501 et seq.
  Gives some protections to
  servicemembers on “active duty.” The
  term "active duty" means full-time duty in
  the active military service of the United
  States and includes reserves and Guard
  called up to active service by the federal
  government.
    Servicemembers Civil Relief Act
              (SCRA)
• Applies to debts incurred prior to entering into
  active duty, so CU’s most likely will be concerned
  about servicemembers called to active duty.
• Member notifies CU of change in duty status.
• CU must reduce interest rate to 6%.
• Includes loans where co-borrower not on active
  duty.
• 6% includes all service, renewal, or other charges.
  (Best strategy is to reduce to 6% and waive all fees
  to stay below 6% limit.)
    Servicemembers Civil Relief Act
              (SCRA)
• Could have to keep track of different rates-Eg-what
  happens when member notifies you of going to
  active duty, then charges more on card?
• Direct repossession of personal property
  prohibited. Need court order.
• Foreclosures prohibited during active duty and up
  to 3 months after.
• Active duty servicemember can stay proceedings
  on debt. They must initiate proceeding to obtain
  stay.
• Can’t deny or adversely change terms based on
  exercising rights under SCRA.
  Servicemembers Civil Relief Act
            (SCRA)
Final Thoughts-
1. Processes in place to take care of these
   situations.
2. Err on side of servicemembers.
3. Want bad publicity?
      Dept. of Defense Rules
•    The purpose the regulation is to impose
   limitations on the cost and terms of certain
   defined extensions of consumer credit to Service
   members and their dependents, and to provide
   additional consumer disclosures for such
   transactions. 232.1(b)
• Protections extended to “covered borrower”
   means-
1. Service member-regular or called up
2. Spouse
3. Children               232.3(c)
      Dept. of Defense Rules
Substantive provisions-
1. Applies to-
• CE 91 days or fewer and less than $2,000
• Vehicle title loans-Non-purchase money
   loan of 181 days or fewer
• Tax refund anticipation loans 232.3(b)
2. Maximum MAPR is 36% 232.4(b)
3. Can determine if person covers.
4. Can avoid by not doing these kinds of loans
  NCUA Lending Regulations
General Loan Policies-701.21
1. Written Loan Policies-Board Duties
   701.21(c)(2)

2. Overdrafts-Need app on file except if
   overdraft and there is an overdraft policy
   on file, maximum amount, fees for
   service established. 701.21(c)(3)
3. Limitation of 15 years 701.21(c)(4)
4. Limitations on amount to be loaned to
   one person-no more than 10% of
   unimpaired capital and surplus 701.21(c)(5)
  NCUA Lending Regulations
Other issues-
• Maximum interest rate-18%
• Loan Participations-701.22
• Master participation agreement from
   board
• Loans empowered to grant
• Approval to disburse funds from board or
   investment committee
• Copies of documents
  NCUA Lending Regulations
Other issues-
3. Unfair and deceptive practices and acts- Part 706
  –    Applies to both state and federally chartered CUs.
       Only difference is the regulator-NCUA for FCU’s,
       FTC for all others
  –    May not include-
  1.   Cognovit clause
  2.   Executory waiver
  3.   Assignment of wages
  4.   Nonpossessory security interest in household goods
  5.   Notice to Co-signer rule 706.3
           NCUA Business
        Lending Rules-Part 723
What is a member business loan?
  – Loan or line of credit proceeds used for-
    Commercial, corporate, business investment
    or agricultural
Is not a member business loan if-
  –   Secured by principal dwelling
  –   Fully share secured
  –   Loans totaling less that $50K
  –   Fully federal or state insured or guaranteed
         NCUA Business
      Lending Rules-Part 723
Prohibited Loans-
• CEO/President
• Executive officers
• CFO
• Family of the above

Question-what about board members?
                NCUA Business
             Lending Rules-Part 723
Implementing a business lending
   program-
1.       Policies-board reviews at least annually-
     –     Types of loans
     –     Trade area
     –     LTV
     –     Qualifications of lenders
     –     Loan analysis
     –     Collateral requirements
2. Lender must have at least 2 years business lending
    experience-either employee or outsource
3. Limits on business loans in CU portfolio-the lesser of
    1.75 times net worth or 12.25% of total assets.
    Uniform Commercial Code-
             Article 9
• What is the UCC?
• What effects does the UCC have on a
  credit union’s operations?
• What are the biggest issues raised by the
  UCC?
          What is the UCC?
• Uniform Commercial Code is a codification of all
  the best practices of the common law.
• Deals with sales, bills and notes, secured
  transactions
• The theory is to create uniform laws throughout
  the various states to make commerce as
  predicable as possible. Thus, the rules in one
  state are the same as the rules in another.
• In practice, it working reasonably well, BUT,
  there are differences that are very important.
  Some states modify basic rule.
• For example, self help repossession is allowed
  in most states, but not all.
    What effects does the UCC have on a
        credit union’s operations?
•     Articles 3 and 4 deal with checks
     1. How to handle
     2. Duties
     3. Liability
•     Article 9 deals with secured transactions
     1. Creating a valid security interest
     2. Perfecting a security interest
     3. Procedures in dealing with collateral
•     Not all transactions covered by all parts Art. 9
     1. Real estate
     2. Titled property like autos, trailers, boats
 What are the biggest issues raised
        by the UCC-Art. 9?
1. What is needed to get an enforceable
   security interest in property?
• Value has been given
• Debtor has rights in collateral
• The collateral is sufficiently identified
• Debtor authenticates a security
   agreement pledging the property
 What are the biggest issues raised
        by the UCC-Art. 9?
2. What can a security interest cover?
• After acquired property (except
   consumer goods unless bought within 10
   days of value given)
• Future advances (often referred to as
   cross-collateral, spreader, or anaconda
   clause)
  What are the biggest issues raised
         by the UCC-Art. 9?
3. How do you “perfect” a security
   interest?
• Possession
• Consumer goods-perfected on
   attachment
• Titled property-Title process
• Real Estate-register of deeds
• Other property-filing a financing
   statement
  What are the biggest issues raised
         by the UCC-Art. 9?
4. What if the pledgee leaves the
   jurisdiction?
• Filing is good for a certain period of time
   (generally three years)
• Extension can be filed (generally for
   another two years)
• For 4 months after change of jurisdiction
• Must file in new jurisdiction-need to know
   where collateral is located
 What are the biggest issues raised
        by the UCC-Art. 9?
5. What duties does the credit union
   have in disposing of collateral?
• Repossession rules
• Timely notification of intent to sell
• Commercially reasonable disposition
• Explanation of Calculation of Deficiency
   or Surplus
 What are the biggest issues raised
        by the UCC-Art. 9?
6. What happens when the underlying
   loan is paid?
• Credit union must file termination
   statement
• Within one month of satisfaction of debt
   or 20 days of a demand to release.
• Potentially $500 penalty for failure of
   credit union to comply
          Fair Debt Collection
             Practices Act
15 U.S.C. 1692 et seq.
  “Purposes It is the purpose of this subchapter
  to eliminate abusive debt collection practices by
  debt collectors, to insure that those debt
  collectors who refrain from using abusive debt
  collection practices are not competitively
  disadvantaged, and to promote consistent State
  action to protect consumers against debt
  collection abuses.”      15 U.S.C. 1692(e)
        Fair Debt Collection
           Practices Act
Debt Collector-Anyone using interstate
 commerce (mail, telephone, internet) to
 collect a debt.
Not include-credit union unless are
 collecting for someone else.
        Fair Debt Collection
    Practices Act-Requirements

• Identify themselves and notify the consumer,
• Give the name and address of the original
  creditor
• Notify the consumer of their right to dispute the
  debt, in part or in full, with the debt collector.
  This is known as “validation notice”.
• Provide verification of the debt
• File a lawsuit in a proper venue
         Fair Debt Collection
      Practices Act-Prohibitions
• Hours for phone contact: contacting consumers by telephone
  outside of the hours of 8:00 a.m. to 9:00 p.m. local time[2
• Contact after being asked to stop-written notice
• Contacting consumers at their place of employment after having
  been told to stop
• Contacting consumer known to be represented by an attorney
• Contacting consumer after request for validation
• Misrepresentation or deceit
• Publishing the consumer's name or address
• Seeking unjustified amounts,
• Threatening arrest or legal action
• Abusive or profane language
• Contact with third parties
• Contact by embarrassing media, such as communicating with a
  consumer regarding a debt by, for example, post card
• Reporting false information on a consumer's credit report
        Fair Debt Collection
           Practices Act
Remember-
 Most important issue for the credit union is
 to make sure to do due diligence on any
 collector they use. While liability is not on
 the credit union, the credit union is going
 to at least suffer damage to reputation in
 the event of bad publicity or a lawsuit.
                The Future-
            It’s in Front of Us!
1. Truth in Lending
  –   Subprime
  –   Student Loans
  –   Credit cards
  –   Multi-featured open-end lending
  –   Home equity
  –   Closed-end
2. RESPA
3. ECOA?
    Anything Else You’d
      Like to Discuss?

• 608.231.7009
• Bill.klewin@cunamutual.com