Regulation Z

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After several years of rulemaking, amendments, and delays, the CFPB’s Prepaid Rule (the “Rule”) is finally set to take effect on April 1, 2019.  This rapidly approaching effective date means that prepaid issuers have only two months left to confirm that their prepaid programs and materials are fully compliant with the Rules’ complex and specific new requirements.

Ballard Spahr attorneys will hold a webinar, “The Prepaid Rule Takes Effect: Considerations for Properly Implementing the CFPB’s Prepaid Accounts Rule” to discuss key compliance considerations ahead of the Prepaid Rule’s effective date. The webinar will take place on February 27, 2019, from 12:00 p.m. to 1:00 p.m. ET and a registration form is available here.

The Rule brings most prepaid accounts within the consumer protection regime of Reg. E. The Rule also applies certain Reg. Z requirements to prepaid products involving credit features.  On top of the existing complexity of those regulations, the Rule adds provisions unique to prepaid accounts, including rigorous and specific requirements for pre-acquisition short and long form disclosures and disclosures on the prepaid access device itself. Because much of the Rule applies uniformly across the spectrum of prepaid products, many of the Rule’s real-world applications to actual products will require significant analysis beyond the language of the Rule itself, the CFPB’s samples and illustrations, and currently available guidance. This compliance challenge will require deep familiarity with the existing Reg. E and Reg. Z frameworks, the Rule itself and its rulemaking background, the Rule’s commentary in its current form, and the practical and legal implications of prepaid products.

Some of the complicated applications of the Rule include:

  • Proper formatting and wording of the pre-acquisition short and long form disclosure documents. Both formatting and wording require deep analysis where a prepaid product differs from the CFPB’s samples and illustrations.
  • Determining how many and which additional fees and fee types to disclose on the pre-acquisition short form disclosure.
  • Adequately describing each and every fee on the long form disclosure, including appropriate categorization and grouping of fee types.
  • Navigating the provisions and exceptions applicable to retail and telephone acquisition contexts.
  • Understanding other specific requirements and exceptions, including the tests and thresholds applicable to the posting and submission of cardholder agreements and the re-printing of existing consumer disclosure materials.
  • Applying Reg. Z requirements to hybrid prepaid accounts with credit features, including both disclosures and substantive provisions.
  • Determining where changes to the specific provisions for payroll or government benefit cards are required.
  • Harmonizing new terms and references across all existing product materials without jeopardizing compliance with Reg. E and Reg. Z, as amended by the Rule.

Prepaid issuers and other entities involved with the provision of prepaid products should take advantage of the remaining two months to confirm that their prepaid programs and documentation are fully compliant with the Rule. Compliance risks are particularly significant for prepaid programs in which a third-party program manager or similar entity with more limited compliance resources is responsible for preparing disclosures and consumer-facing materials.  It is even more important in such programs to bring adequate expertise into the review process early enough to work through necessary changes.

Confirming complete compliance with the Rule will require more analysis and diligence than many entities are accustomed to performing in the existing and relatively well-defined worlds of Reg. E and Reg. Z. The universe of prepaid products involves countless unusual or unique features that will not fit neatly within the CFPB’s new framework or model forms. In addition, because the Rule is new and interpretive guidance is limited, the compliance challenge it presents will be particularly difficult.  Ballard Spahr’s Consumer Financial Services group possesses the deep experience with prepaid and other consumer financial products necessary to help navigate the Rule’s complexity, its highly nuanced relationship with existing regulatory regimes, and its implications for specific prepaid account characteristics.

Webinar. On February 27, 2019, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The Prepaid Rule Takes Effect: Considerations for Properly Implementing the CFPB’s Prepaid Accounts Rule,” to discuss key compliance considerations ahead of the Prepaid Rule’s effective date. The webinar registration form is available here.

The CFPB, Fed, and OCC have published notices in the Federal Register announcing that they are increasing three exemption thresholds that are subject to annual inflation adjustments. Effective January 1, 2019 through December 31, 2019, these exemption thresholds are increased as follows:

On February 8, 2018 the United States House of Representatives passed The Mortgage Choice Act, H.R. 1153, to revise the definition of “points and fees” for purposes of the Regulation Z ability to repay/qualified mortgage requirements and high-cost mortgage loan requirements.  Although a voice vote was held on February 7, Chairman of the House Financial Services Committee Jeb Hensarling demanded a roll call vote.  The roll call vote was 280 to 131.

The Act would amend the definition of “points and fees” for purposes of the requirements to exclude charges for title examinations, title insurance or similar purposes regardless of whether the title company is affiliated with the creditor.  Currently for such charges to be excluded from points and fees the title company must not be an affiliate of the creditor.  The Act also would make a conforming change to exclude escrowed amounts for insurance from points and fees.  Currently escrowed amounts for taxes are excluded from points and fees.

As we reported previously, last year the House passed the Financial CHOICE Act.  The Act included the same amendments to the “points and fees” definition, but was never enacted into law.  Prior bills including the same amendments have suffered the same fate.

The focus now shifts to the Senate.  Because the Mortgage Choice Act would amend Dodd-Frank provisions, that can pose difficulty for Senate passage.  With 52 Democrats joining with Republicans to pass the Act, this may indicate that the Act has a greater chance of success than Financial CHOICE Act.  No Democrats voted for the Financial CHOICE Act, and that Act included more sweeping Dodd-Frank changes than the narrow changes included in the Mortgage Choice Act.

The CFPB recently published a fact sheet for small creditors operating in rural or underserved areas. As we have reported, the CFPB issued a final rule, which became effective on January 1, 2016, revising the definitions of “small creditor” and “rural areas” under Regulation Z of the Truth in Lending Act (TILA). Regulation Z allows small creditors operating in rural or underserved areas to make balloon-payment qualified mortgage loans (under the ability to repay rule) and balloon-payment high cost mortgages, and may avoid the escrow account requirement for certain higher priced mortgage loans. The fact sheet explains the changes made to these definitions. The fact sheet also refers to the application process for requesting a county or census block to be designed as rural, which we previously addressed.

The CFPB also published a small creditor qualified mortgage flowchart reflecting the rules in effect as of April 1, 2016. The chart addresses small creditor qualification, loan features, balloon payment features, underwriting, points and fees, portfolio, and compliance presumption factors. Our discussion of some of these factors can be found here.

The factsheet and chart can be found under “Quick references” on the CFPB Compliance & Guidance page, at this link.

As we have addressed, Congress passed the Helping Expand Lending Practices in Rural Communities Act of 2015 (HELP Act) on December 4, 2015, in efforts to expand the designation of additional areas as being “rural” under Regulation Z of TILA.   The HELP Act was passed after the CFPB issued a final rule to expand the definition of “rural areas” under Regulation Z with regard to the authority of small creditors to make certain qualified mortgage loans under the ability to repay rule and avoid the escrow account requirement for certain higher priced mortgage loans, as we previously discussed.

The CFPB issued its first rule to the implement the HELP Act on March 3, 2016. The procedural rule establishes the application process for persons or businesses who would like to have a geographic area designated as “rural.” Further discussion can be found here.

On March 22, 2016, the CFPB announced that it issued an interim final rule to implement the HELP Act’s amendments to TILA which would potentially increase the number of creditors that may be eligible for certain special provisions under TILA. The provisions permit the origination of balloon-payment qualified mortgages and balloon-payment high cost mortgages, and provide an exemption from the requirement to establish an escrow account for higher-priced mortgage loans. Before the HELP Act, to be eligible for these provisions, a small creditor had to operate predominantly in rural or underserved areas, meaning that the small creditor had to make more than half of its covered mortgage loans on properties located in rural or underserved areas in the prior calendar year. In contrast, the HELP Act provides that a small creditor will be eligible even if it operates in rural or underserved areas that are not the predominant area of its operations. More specifically, Congress struck out the word “predominantly” from TILA provisions.

The interim final rule amends Regulation Z to provide that a small creditor will be eligible for the special TILA provisions if it originates at least one covered mortgage loan secured by a property located in a rural or underserved area (1) in the prior calendar year or (2) for applications received before April 1 of a calendar year, in either of the two prior calendar years.

In addition, the final rule amends the current rule for determining whether an area is rural for the purposes of Regulation Z, by inserting a reference to any areas designated as rural through the application process mandated by the HELP Act.  Also, this amendment establishes that only counties or census blocks are eligible for designation as rural under the application process, which is consistent with the current definition of rural area under Regulation Z.

This final rule is effective on March 31, 2016. Comments are due by April 25, 2016. However, the petition process may be limited as it will apply only to lenders that do not make at least one loan in a census block or county already designated as rural.

A copy of the interim final rule can be found here.

 

The CFPB issued a proposed rulemaking last week to amend various provisions of the mortgage servicing rules under Regulation X and Regulation Z. Comments are due 90 days from the date of publication in the Federal Register. Ballard Spahr’s Mortgage Banking Group will continue to analyze the proposal and work with our clients and industry groups on its impact.

The proposal runs nearly 500 pages and includes several notable proposals, including an exemption from the periodic statement requirement for charged-off loans, expanded requirements for borrowers in bankruptcy, and additional loss mitigation protections. Continue Reading CFPB Proposes Additional Servicing Rule Amendments

In notices published in yesterday’s Federal Register, the CFPB adjusted the thresholds of the asset-size exemptions for collecting HMDA data and establishing an escrow account for certain mortgage loans under TILA.

Pursuant to Regulation C, which implements HMDA, depository institutions with assets below an annually adjusted threshold are exempt from HMDA data collection requirements. In its notice, the CFPB increased the 2013 threshold of $42 million to $43 million for 2014.  Thus, depository institutions with assets of $43 million or less as of
December 31, 2013 will be exempt from collecting HMDA data in 2014.  (An institution’s exemption from collecting data in 2014 does not affect its duty to report data it was required to collect in 2013.)

Regulation Z, which implements TILA, requires creditors to establish an escrow account to pay property taxes and insurance premiums for certain first-lien higher-priced mortgages.  The rule contains an exemption for creditors that operate predominantly in rural or underserved areas that meet certain other criteria, including an annually adjusted asset-size threshold.   In its notice, the CFPB increased the 2013 threshold from $2 billion to $2.028 billion for 2014.  Thus, loans made by creditors with assets of less than $2.028 billion on
December 31, 2013 that operate predominantly in rural or underserved areas and meet the other exemption criteria will be exempt in 2014 from the TILA escrow account requirement for higher-priced mortgage loans.

 

The CFPB has released its proposed ability-to-pay rule. The proposed rule would amend the section of Regulation Z that currently provides that a credit card issuer must not open a credit card account or increase any limit on the account unless the card issuer considers the consumer’s independent ability to make the required minimum periodic payments based on the consumer’s income or assets and current obligations. The CFPB is proposing to remove all references to an “independent” ability to pay and to permit issuers to consider income or assets to which an applicant who is 21 or older has a “reasonable expectation of access.”

As we previewed in an earlier post, the proposed rule would reverse the Federal Reserve Board’s contentious March 2011 decision to add the independence requirement to the regulation. In 2011 and in the time since, members of Congress, card issuers, trade associations, and consumers have said that the Board went beyond the plain language of the Truth in Lending Act, as amended by the Credit CARD Act, by requiring that all credit card applicants, regardless of their age, show an independent ability-to-pay. Their concern, which the Board rejected, was that the rule might restrict access to credit for consumers who do not work outside the home, including certain married women.

The CFPB reviewed summary data from credit card issuers and found that, under the independent ability-to-pay standard, several issuers denied card applications from otherwise creditworthy individuals based on the applicant’s stated income — even though credit bureau data suggested that some of the applicants had demonstrable access to funding sources. Based on discussions with card issuers, the CFPB said, a significant number of these applicants may be stay-at-home spouses or partners with access to income from an employed spouse or partner. We are pleased that the CFPB acted quickly to review data and gather other industry intelligence.

The CFPB’s proposal includes updating the official Reg Z staff commentary to explain when a card issuer may consider a household member’s income in evaluating an applicant’s ability-to-pay. The CFPB believes that the applicant has a “reasonable expectation of access” to a household member’s income if the household member: (1) deposits salary into a joint account shared with the applicant; (2) regularly transfers a portion of salary to an account to which the applicant has access; or (3) regularly uses salary to pay for the applicant’s expenses. The CFPB is soliciting comment on whether these examples are appropriate and comprehensive.

The CFPB is also soliciting comment on how card issuers can best obtain this information, since the proposed rule would continue to require an independent ability-to-pay standard for applicants younger than 21 years who do not have a cosigner or similar party. Given that issuers can still rely on information provided by the consumer, the CFPB has suggested that issuers may want to consider revising their applications to request “income” and “other accessible income” (a term which may need to be defined so that it is restricted to those categories of income to which the applicant will be deemed to have a reasonable expectation of access).

Finally, the CFPB is soliciting comment on whether it needs to provide additional guidance to clarify how the rule applies to spouses or partners under 21 who do not work outside the home, as they may now have a more difficult time obtaining credit as compared to spouses or partners who are 21 or older who do not work outside the home. Under the rule as proposed, those younger nonworking spouses or partners might have to apply jointly with, or provide a guarantee from, their respective income earning spouses or partners.