Fed to clarify final rules under Regs E, DD

WASHINGTON (2/22/10)--The Federal Reserve on Friday released a series of proposals that would clarify the portions of Regulation E, Electronic Fund Transfers, and Regulation DD, Truth in Savings, that address overdraft services.

The proposals are meant to "provide further guidance regarding compliance with certain aspects of the final overdraft rules," with a particular emphasis on portions that prohibit financial institutions from "assessing overdraft fees without the consumer's affirmative consent."
The proposal seeks to affirm that this prohibition "applies to all institutions, including those with a policy and practice of declining ATM and one-time debit card transactions when an account has insufficient funds."

According to the Fed, the Reg E proposal would clarify that the prohibition on assessing overdraft fees without the consumer's affirmative consent applies to all institutions that charge such fees for ATM and one-time debit card overdrafts. Credit unions that do not have formal overdraft programs are also covered by this opt-in requirement if they charge any fees for ATM and one-time debit card overdrafts.

The Fed also clarifies that the fee prohibition applies if a credit union falls under the regulation's exception for institutions that have a policy and practice of declining ATM and one-time debit card transactions when an account has insufficient funds.

The Reg E proposal also addresses sustained overdraft, negative balance, or similar fees associated with paying overdrafts and clarifies that an institution is not prohibited from assessing a fee when a negative balance is attributable in whole or in part to a transaction that is not subject to the fee prohibition.

The Fed's proposed amendments to Reg DD clarify the application of the rule to retail sweep programs and the required use of the term "total overdraft fees" for overdraft fee disclosures. The Fed has also added references to the Reg E amendments into Reg DD.

The proposals, which will be open for comment for 30 days after they are published in the Federal Register, would also make certain technical corrections and conforming amendments, the Fed added.

From: CUNA News Now

Reporting for Discharges of Indebtedness to the IRS

For reporting purposes, the IRS considers indebtedness discharged on the occurrence of an identifiable event indicating the debtor will never have to pay the indebtedness. If appropriate, the lender may report discharges of indebtedness if the indebtedness meets one of the following tests:

A debt discharged in bankruptcy, but only if the debt was for
business or investment purposes;

A debt discharged by an agreement between the financial
institution and the member to accept an amount less than the
full amount of the debt;

A debt that the credit union decided not to pursue through
collection activity and discharges;

A debt on which a 36-month, non-payment testing period has
expired;

A debt extinguished because the statute of limitations the
debtor raised as an affirmative defense has expired;

A debt canceled or extinguished in receivership or foreclosure
in state or federal court;

A debt canceled or extinguished when the financial institution
elects foreclosure remedies; or

A debt canceled or extinguished, rendering it unenforceable in
probate.

(Note: A bookkeeping entry to charge off a loan does not by itself
qualify as an identifiable event.) Lenders should consider the
trigger points above in conjunction with the charge-off to
determine whether a discharge has occurred.
Additional reporting requirements include:

The discharge must be $600 or more, no aggregation;
lenders must provide copy of 1099-C to the borrower by
January 3 1 of the year following discharge; and

lenders must provide original of 1099-C to the IRS by
2/28 of the year following discharge.

Lenders must keep records of the return or the ability to
reconstruct the required data for four years from the required filing
date. For more information, review Section 6050.P of the Internal
Revenue Code.

Source: the NCUA

The Servicemember's Civil Relief Act (SCRA)

Most credit union's have members who are in one of the military branches. Make sure that when you discover that a member is on active duty that you follow all the provisions of the SCRA.

The SCRA gives relief to individuals who are called to active duty in any of the military branches, including reservists or members of the National Guard. SCRA replaces and expands the Soldiers' and Sailors’ Civil Relief Act of 1940.

Major provisions of the SCRA that may affect credit unions include:

• Allowing borrowers to have their interest rates reduced to 6% on loans granted before going on active duty, if the call up to military service materially affected their ability to pay.

• Permitting active duty servicemembers, who are unable to appear in a court or administrative proceeding due to their military duties, to postpone court proceedings for a mandatory minimum of ninety days upon the servicemember's request.

• Prohibiting foreclosures or repossessions without prior court approval, up until three months after leaving active service.

• Prohibiting future adverse credit decisions based on the grant of SCRA relief. The 6% interest limitation only affects loans granted before the member entered active duty. Any loan granted after the member entered onto active duty would continue to have the terms at the time the loan was granted.

The provisions related to foreclosures and repossessions apply to dependents also. The provision related to the maximum interest rates only apply to a dependent when the member of the military also signed the note, prior to entering active duty.

In the news: "Well, if you saw '60 Minutes,' you probably saw this. President Obama coming under fire, because he has only spoken to the U.S. commander in Afghanistan once in the last six months. Well, whose fault is that? Hey, if the general wants to talk to President Obama, get a talk show. That's how you do it." "Well, actually, to be fair, I thought this was nice, President Obama said he's been very busy lately, but he would be willing to add the general as a Facebook friend." --Jay Leno

The new CARD Act Includes Gift Card Changes

As you may have noticed, the CARD act applies to much more than just credit cards. Your Gift Card program will also be affected. Along with Home Equity Lines, unsecured, and other secured lines of credit. It even takes a shot at gift certificates. . . and don't forget Protecting the Right of Individuals to Bear Arms in Units of the National Park System - I'm not kidding, this is actually in the CARD Act. Ever wonder how many laws and regulations our lawmakers can actually come up with? I'm hoping they run out of ideas soon.

The law amends Regulation E to prohibit a credit union from charging dormancy/inactivity fees, or service fees on a gift certificate, store gift card or general-use prepaid card. But a fee may be assessed after 12-months of inactivity. Only one fee can be charged each month, and the proper disclosures have been given at the time the card was purchased.

In addition, a gift certificate, store gift card or general-use prepaid card cannot have an expiration date earlier than 5 years after the instrument was issued or the date on which funds were last loaded on to the card, and the terms of expiration must be clearly stated. The Fed has yet to provide the amount of fees that are acceptable. The Fed is to issue final regulations with an effective date 15 months after the President signed the CARD ACT.

Risk Based Examinations. A Quick Overview.

Examinations have migrated considerably from the "bad old days" where an examiner would review a slew of items and report any number of minutia. If I didn't know better (I don't for sure), I would have bet big money that they were paid by the word. The reports were often useless in determining where potential risk, if any, needed to be addressed. Since then, examinations are intended to be more focused on "the forest instead of the trees". Hence the advent of the Risk Focused Examinatin Program.

Right from the NCUA examination manual; "While performing risk-focused supervision, examiners should look for sources of uncertainty within the operation of the credit union. Based on their findings and using their professional judgment, examiners will prioritize these risks by the magnitude of the potentially adverse effect on the earnings and capital of the credit union".

Regardless of what the examiners will review, your credit union should focus on risk management, it's just smart management. This includes a strategic plan with implementing policies, procedures, and internal controls necessary to manage inherent risk. The seven categories of risk for credit union supervision purposes are Credit, Interest Rate, Liquidity, Transaction, Compliance, Strategic, and Reputation risk. Ignoring any one of these risks can mean big trouble. Be sure you have policies in place that address all of these areas, and DOCUMENT your efforts to ensure that your credit union actually follows your policy and procedure. Examiners are funny about this.

Unrelated but in the news: on President Obama's discussion with children across the U.S. . . .
"The President also said that kids -- he told them if they study hard, the United States will continue to prosper. Then he added, 'But just to be safe, bone up on your Chinese.'" --Jimmy Fallon

Credit Card Act Compliance. A Little Break. Maybe.

The Credit Card, Accountability, Responsibility, and Disclosure Act of 2009. I get it! the C.A.R.D. Act . . . those wacky congress folks are so darn clever with the names of their regs.

Under the CARD Act, credit unions are required to deliver periodic statements for open-end consumer credit plans at least 21 days before the payment due date, this portion of the Act is effective August 20, 2009. According to a recent NCUA Release, "the Federal Reserve Board acknowledged that some creditors may experience difficulties, for open-end credit plans other than credit cards, with revising their billing systems by August 20", and "that for a “short period of time” a creditor “may remedy this technical issue by prominently disclosing elsewhere on or with the periodic statement that the consumer’s payment will not be treated as late for any purpose if received within 21 days after the statement was mailed or delivered.”

The NCUA will review credit unions on a case-by-case basis to determine if reasonable efforts have been taken to come into compliance with the CARD Act. In any case, no late fees should be imposed under these circumstances.

Speaking of credit cards, my card was stolen a few weeks ago. I told the credit union to just let the thief keep it . . . he spends a LOT less than my wife. Ba-dum-dump!

SAR Improvements and Other Fun Facts.

Priority = High

Ever wonder whether anyone gets a Suspicious Activity Report (SAR) you filed? Does anyone really care about all the hard work you put into filling out the form just right? Unless the filing gets the attention of law enforcement (or you made a glaring error), you really can't be sure that the SAR arrived safely at it's destination. Until now, that is. on September 12, 2009, FinCEN will implement SAR Acknowledgements for BSA Electronic Filing submissions. More information can be found on FinCEN's SAR Acknowledgements and Validations Questions and Answers Guide.

A little bit about SARs:
A credit union must file a SAR when it knows or suspects that:
The funds come from illegal activity or disguise funds from illegal activity; the transaction is structured to evade BSA requirements, (for instance a member makes more than one deposit to circumvent the $10,000 cash reporting rules); apparent unlawful purpose; or, the credit union is being used to facilitate criminal activity.

Credit Unions are required to file an SAR report following the discovery of: insider abuse involving any amount, violations aggregating $5,000 or more where a suspect can be identified, or violations aggregating $25,000 or more regardless of a potential suspect.

Considering all the attention on Privacy rules, the requirement to file an SAR only upon a "hunch" seems oxymoronic (no moronic jokes, please). So it's tempting to error on the side of caution and file an SAR only when the law has clearly been violated. But be careful, there are penalties for those individuals that fail to file an SAR as required or disclose to the member that they have filed a SAR about them. Penalties include extremely high fines and long prison sentences if found guilty. In addition, financial institutions face penalties for failing to properly file CTR and SAR reports, including heavy fines and regulatory restrictions, even to the point of charter revocation.

But not to worry, the government says you can't be held liable for information filed on a SAR report.

Right to Financial Privacy (RPFA). Be Careful.

RISK LEVEL = HIGH

RFPA protects the personal financial privacy of federal credit union members by restricting access to the member's financial records.

A scenario: a local police officer comes into your office and tells you that he is investigating your member for his role in a fraud case involving the member's checking account. Just give him what he needs, right? Not so fast! The RFPA requires that the credit union obtain written authorization from the member, or secure from the government authority a subpoena or summons, a search warrant, a judicial subpoena, or a formal written request to release information about a member. Afraid to tell the cop you can't help him? Try this, it works for me . . . look around the room suspiciously, then quietly inform him that you can't help him because you believe he exists only in your imagination. He'll likely get scared and leave - at the very least, he'll go ask someone else.

In addition, policies and procedures for complying with the requirements of the Right to Financial Privacy Act (RFPA)are required. A good policy and due diligence to comply with the Act will keep you out of trouble. Compliance risk can occur when the credit union fails to implement the necessary controls to comply with RFPA; and Reputation risk can occur when members of the credit union learn of its failure to comply with RFPA. Risky business, that RFPA.

Appraisers Under New Scrutiny - Revisit Your Appraisal Policy

An article appeared in the Wall Street Journal on 8/18/09 that (again) scrutinizes the validity of real estate appraisals. (Click here for the complete article). The Regulators have been vilified in the press regarding their role in missing the housing debacle. You can be sure they are paying close attention to media scrutiny.

The role that appraisers played in the crisis is a matter of considerable discussion. Regardless of where you stand on the matter, the Regulators are taking a closer look at whether or not financial institutions use competent appraisers. It would be a good time to review your appraisal policy and at the very least, be sure you have all your "ducks in a row"; make sure you have a current list of approved appraisers, an updated copy of their license, etc. And don't just look at the bottom line value. Check each appraisal to be sure all required components are included. A checklist is always a good idea, and an appraisal policy is REQUIRED.

Speaking of crisis, the Chinese word for "crisis" contains two characters. One of them means "opportunity". Now that real estate values are correcting themselves, mortgage loans may have become a safer bet, at least as far as the underlying collateral value is concerned. But, due to historically low rates, be aware of interest rate risk. No need to stop selling to Fannie and Freddie. But to book mortgages in your portfolio, wait for the perfect storm - rates rise to a "normal" level, unemployment levels off, and collateral values can be trusted.

NCUA Regs require state-certified or state-licensed appraisers. The Reg states that appraisers must (1) have demonstrated competency, (2) subject their professional conduct to effective supervision, and (3) perform written appraisals in accordance with the Uniform Standards of Professional Appraisal Practice.

Do you need your state's appraisal licensing board contact information? Click Here

Real home values depend upon an appraisal about as much as the economy depends on economists as the weather does on forecasters. You should know your market, use common sense, and be sure your appraisers valuation makes sense.

Business Continuity Plan (aka Disaster Recovery). Teacher's Manual.

When I was in elementary school, I was always amazed at how smart the teachers were. Then I found out that THEIR book had all the answers . . . .

The FFIEC has published their Business Continuity Plan examination manual. Because your examiner uses the manual, just follow the guide and you should have no problem passing your next exam with flying colors. A hint - examiners are BIG on testing. Put your plan in place, test the various parts of the plan, and document your efforts. If you don't document your efforts, then the examiner will assume it wasn't done. How many of us have learned this lesson time and again? I just raised my hand.

Follow this "examination manual" link and you will have all the Business Continuity information you could ever ask for, and more.

A little conversation I had with my fifth grade teacher one day. . . Me : I don't think I deserved zero on this test. Mrs Norton: I agree, but that's the lowest mark I could give you.

Regulation B. Equal Credit Opportunity Act.

RISK LEVEL = HIGH

Purpose: to promote the availability of credit and prohibit discrimination to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (protected class). Also to notify members of approval or denial of their application; to report credit history in the names of both spouses on an account; to collect information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans; and to provide copies of appraisal reports if requested.

Regulators mainly look for two types of discrimination. 1.Discrimination against an individual. We are all familiar with this type of discrimination and should know the repercussions, and 2.Disparate Impact or practices that have the effect of discrimination against a protected class. There is considerable risk to the credit union because under Disparate Impact, proof of discriminatory motive is not required. For example, let's say an examiner reviews your loan portfolio and finds that the percentage of loans to minorities is lower than that of the percentage of minorities in your field of membership. Did you know this? You should, and you should take action to rectify the situation.

An examiner is required to report incidences of discrimination to the Justice Department. Can I state the obvious? You don't want this.

Recommendation: conduct your own "due diligence". Download your loan (especially mortgages) demographic information and analyze the info. If you can show that you have taken steps to determine whether or not your portfolio may have a Disparate Impact against a protected group, and have taken action to attempt to rectify the matter, you could save not only monetary penalties, but reduce reputation risk as well.

The entire Reg can be found at: http://www.fdic.gov/regulations/laws/rules/6500-2900.html Have fun with that!

An aside on the economy:
"President Obama is going to be working in the broadcast booth during the All-Star Game. Everybody says, 'Oh, that's cute.' But let me tell you something. You know the economy is bad when the President has to take a second gig." --David Letterman

Mortgage Disclosure Improvement Act Reminder

A reminder: beginning July 30, the Federal Reserve Board's new Mortgage Disclosure Improvement Act (MDIA) goes into effect. The rule will change the way the Truth In Lending Act (TILA) is disclosed to consumers. Your mortgage people should be on top of this by now. More information can be found in an article by Richard Triplett at http://www.allregs.com/ealerts/updates090526_MortgageDisclosureImprovementAct-2MonthsEarly.htm.

Totally unrelated:

"Banks are hurting. I opened a new account, and the lady asked me for a toaster." --Bill Maher

"Good news for GM today. They emerged from bankruptcy and the newly appointed CEO said that the company will now build cars that Americans want. After hearing this, GM employees said, 'You can tell this guy's new around here.'" --Conan O'Brien

Amendments to Regulation D - The Forgotten Regulation

I was reading the recent amendments to Reg D (Reserve Requirements of Depository Insititutions) the other day and I heard this thump!. It took me a second to realize that it was my head hitting the desk. It's not a particularly interesting Regulation, even by Regulation standards. Nonetheless, there are a couple of minor changes that will affect you.

About the Reg: Reg D seems to be a grab-bag kind of regulation. When someone comes up with a rule that doesn't fit nicely into another Reg, someone says - "just give it to Reg D, he doesn't have much to do". The Feds use the reporting requirements of Reg D to track the money supply, it details some restrictions related the sale of securities, sets the amount of money fiancial institutions must set aside (reserve requirements), and restricts the number and types of transfers and withdrawals from savings accounts.

Here's a Trivia Question: What makes a savings account different from a demand (checking) account? Both can pay interest, and both can be accessed with a check, debit card, etc. So how are they different? I'll bet your CEO doesn't know the answer - just for fun, ask him.

The answer appears right here -> While normally you allow your members to withdraw money upon demand from their savings account, by regulation you must reserve the right to require a seven day notice for a withdrawal from savings (it should be in your disclosure). Money in a checking account must be made available on demand. Also, the types and number of withdrawals that may be made from a savings account is limited. This is where one of the new Reg D revisions come into play: the final amendment increased from three to six the number of third party transfers or withdrawals that can be made from a savings account each month. Six, wow, six. Other amendments include interest on "excess balance deposits" held a Federal Reserve Banks.

What about reserve requirements? Chances are, you have enough cash in your vault to satisfy the requirement. All credit unions are required to file a periodic Reg D 2900 report that helps you determine your reserve requirement. Hey, what was that thud?

Here is a link to the revisions: http://www.federalreserve.gov/newsevents/press/monetary/20090520b.htm

Electronic Funds Transfers (EFT) aka Regulation E.

Due to the advent of electronic banking, we need to keep the EFT Act in mind any time we add or change a product. The Reg was put into place to protect the consumer from the likes of YOU! The Act places virtually all liability for EFT-related errors on the financial institution.

Regulation E outlines the rights, liabilities, and responsibilities of the credit union and members in electronic fund transfer systems such as ATM transfers, bill-payment services, point-of-sale (POS) terminal transfers in stores, and pre-authorized transfers from or to a consumer's account (such as direct deposit and social security payments).

You say you love disclosures? Reg E has plenty, including: the Initial Disclosure, changes in terms, on statements, at electronic terminals, on receipts, pre-authorization, and more!

The EFT Act applies to all financial institutions. Here's a link to the entire Act on FDIC's site. http://www.fdic.gov/regulations/laws/rules/6500-3100.html

Do you have an EFT-related member complaint dispute? Read your EFT disclosures before deciding how resolve to the problem. It could save you from legal/regulatory headaches.

How to Avoid a $500,000 Penalty.

OK, the headline is shamelessley sensational, but who would read about "Placing Holds on Checks"? Remember the cartoon strip "Calvin and Hobbs"? They would come up with games where they would make up the rules as they go; things would get pretty convoluted and quite hilarious! Regulation CC, or the Expedited Funds Availability Act kind of reads like that. Definitely a regulation that was written by committee.

Financial institutions are limited to the types and lengths of holds on checks and "must disclose their hold policies to all account holders, and make the policy available in written form upon request by any customer. It must also be provided at the time of opening of all new accounts. Additional disclosures are required on deposit slips, at ATMS, and when policy is changed in any way". Wikipedia.

Wikipedia has a pretty good chart that details the rules related to check holds. http://en.wikipedia.org/wiki/Expedited_Funds_Availability_Act

Make sure that your Reg CC policy is posted in your lobby, policies and disclosures are up to date, and be sure employees are TRAINED to understand the requirements. It IS true . . . penalties for non-compliance can run as high as a half a million dollars!

Exciting News!!! New RESPA Rules!

New Real Estate Settlement Procedures Act (RESPA) Rules are effective January 2010.
First a little trivia: RESPA was enacted in 1974 to help members make informed choices regarding settlement costs pursuant to a loan transaction. It allows consumers to obtain information on the costs of a mortgage so they can shop for settlement services and it also protects consumers from excessive settlement costs and fees.

The new rules require additions and changes to the disclosures you provide to your members. Follow this link to a nice summary by First American Title Insurance Co. http://sw.firstam.com/az/index.php?option=com_content&task=view&id=99&Itemid=55.

If you need more information than this, go to . . .
http://www.getalifedudeorapuppycauseyouhavetoomuchtimeonyourhands.com/

Red Flag on Red Flag Rules

By now you should have your Red Flag Policy and program in place. Simply put, The National Credit Union Administration’s (NCUA) Red Flags Rule requires federal credit unions to develop and implement a written, risk-based identity (ID) theft prevention program to detect, prevent, and mitigate ID theft in connection with “covered accounts".

Here's a head's up: be sure your indirect dealers understand the rules and abide by your policy.

Office of Foreign Asset Control (OFAC)

OFAC requires credit unions to verify that new members are not on the "SDN" list. The list includes names of terrorists and drug dealers and other bad guys. A "hit requires you to freeze assets and contact OFAC. In addition, existing members must be scanned to be sure they haven't gone astray since the account was opened. Be sure your efforts are documented - even if you miss one, the Feds will likely give you a pass if you did proper due-diligence.

Hint: go to http://www.ustreas.gov/offices/enforcement/ofac/sdn/index.shtml to get the list in Word or PDF format. You can then "control F" on your keyboard to search the list for free.

Bank Secrecy Act (BSA) Annual Review

BSA reviews are required to be completed on an annual basis. There is no requirement that the review be completed by an audit firm or other third party. It is recommneded thay you assign the project to someone within the credit union who is reasonably independent from the process to SAVE MONEY. For example, the audit/review should not be done by a branch manager because she would be auditing herself. The NCUA and FDIC (Gasp!) both have a nice checklist that most examiners consider to be quite thorough.

Examiners look for assurances that the internal control process is reasonable so be sure training is a major component of your BSA program.