June 2020 OBA Legal Briefs

• Coronavirus Compliance Changes
• Changes in UCCC Amounts Effective 7/1/20

Coronavirus Compliance Changes

By Andy Zavoina

We are in a much different compliance environment than we were when the calendar went to 2020 – or are we? I want to highlight some recent rulings that have come down from the regulatory agencies so that you can see that the agencies are providing a bit of latitude in the tasks we bankers do on a daily basis. These are temporary adjustments the examiners are going to let banks take advantage of, without criticism. For example, under the Fair Credit Reporting Act a bank has a limited time to investigate a claim that a file is reported with errors to a credit reporting agency. Because of COVID-19 many common tasks take longer today than they did a few months ago and it is not the bank’s fault. But the bank still needs to have sound policies, and procedures, understand what should be happening, and document why it is not. That is, the bank needs to show a good faith effort that it is not dragging out a process just because it can. The examining agencies will provide breaks where breaks are due, but it will not turn a blind eye to outright violations or unsafe or unsound practices.

So, as compliance and internal audit go on following the audit calendars they planned out for the year, what should be cited when an issue is found in an audit? I have some recommendations. First, be aware of the areas where the examining agencies have expressed their ability to provide some relief. Then be sure that if a deadline or task was not met as you would have normally done, ask why and ensure that it is documented in the bank’s files so that when an examiner reviews it they too will understand and hopefully agree with your findings. Exceptions need to be reasonable and requirements in the laws and regulations are not to be broken but may be bent temporarily.

In an audit report I recommend noting what the issue was, how it was beyond the bank’s control, and when the requirement was finally met or why it remained unmet. This may well require a follow-up from the Point of Contact in the bank responsible for the area being audited. Consumer protections should not be ignored because they can be, but only because they had to be due to circumstances beyond the bank’s control. If the issue being reviewed requires only an investigation withing the four walls of the bank, no retailer or vendor had to be contacted as an example, there would need to be a high degree of documentation to justify why bank staff couldn’t complete its own review. Personnel shortages could be one justification, and I would document it well. I believe that by identifying all these exceptions found in your own audits, your examiners will see that exceptions were correctly noted and justified and that consumer protections were not ignored, just delayed. And one item examiners will look at are your own audits so they will backtrack to the files and records for verification. Note the agency’s guidance documents permitting these exceptions wherever possible.

Mortgage Servicing Rules

On April 3, 2020 the agencies, specifically The Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the State Banking Regulators released a joint statement providing latitude in servicing mortgage loans under Reg X – RESPA. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides many home loan borrowers with forbearance options and the agencies understand that it will take a great deal of manpower to manage the requests and documentation to carry out the requests that would soon be coming in. There is also much to be done with systems and credit reporting and bank personnel may already be taxed with COVID-19 absences. Compliance guidance in the form of FAQs was issued to better inform bankers/loan servicers as to what adjustments they could make. The intent here is to allow staff to work with borrowers based on the changes triggered by the pandemic. This is meant to be a consumer-friendly extension of consumer protection rules.

For example, under the CARES Act mortgage servicers for federally-backed mortgage loan are required to provide a CARES Act forbearance program of 180 days, extendable to a second 180 day period, if the borrower makes a request and affirms that they are experiencing a financial hardship during the COVID-19 emergency. The bank/servicers cannot require any additional information from the borrower before granting the forbearance. This applies to federally backed mortgages— think Fannie Mae, Freddie Mac, HUD, the FHA, the Department of Agriculture (USDA direct and guaranteed loans) or VA loans.

A borrower need not be delinquent to request forbearance and in many cases the bank/servicer may want to seek out borrowers before they are past due to avoid an account being reported as past due or a workout under troubled debt restructuring rules which were addressed in the April 2020 Legal Briefs.

Loss mitigation rules may apply to loans the bank is servicing even when CARES Act forbearance requirements do not. It is important to review the guidance as the mortgage servicing document explains that the CARES Act forbearance program qualifies as a short-term payment forbearance program under Reg X which means it is excluded from some of the loss mitigation requirements normally followed. In addition, servicers can provide multiple sequential short-term payment forbearance programs under the servicing rules.

Beyond mortgage servicing, allowances such as these must be known and understood, and I suggest you reference them in your own audits when you come across them. You may also want to target the accounts which take advantage of some of these exceptions just to verify that the relaxed compliance rules are followed, but not violated (being used in excess, or with documentation problems). Training may also be needed for those executing these rules and servicers may use checklists or short reference documents. Be sure to include timelines so key dates are known. A second 180-day forbearance, as an example, must be requested prior to expiration of the first to qualify under the federally backed mortgage forbearance guidance. And any “special rules” that include an expiration date would need to be noted in a conspicuous way.

The mortgage servicing guidance states, “As of April 3, 2020, and until further notice, the agencies do not intend to take supervisory or enforcement action against servicers for:

• delays in sending the loss mitigation-related notices and taking the actions described in Regulation X, 12 CFR 1024.41(b)-(d), (h)(4), and (k), which, among other things, include the five-day acknowledgement notice, the 30-day evaluation and notice, and the appeals notice, provided that servicers are making good faith efforts to provide these notices and take the related actions within a reasonable time;

• delays in establishing or making good faith efforts to establish live contact with delinquent borrowers as required by Regulation X, 12 CFR 1024.39(a), provided that servicers are making good faith efforts to establish live contact within a reasonable time; and

• delays in sending the written early intervention notice to delinquent borrowers required by Regulation X, 12 CFR 1024.39(b) (the 45-day letter), provided that servicers are making good faith efforts to provide this notice within a reasonable time.”

In this case, there will be an end date for the exception on sending these notices, but it will be published later. This requires an ongoing review of guidance documents and communication streams so staff knows when it does end.
Servicing rules also address escrow statements, stating, “as of April 3, 2020 and until further notice, the agencies do not intend to take supervisory or enforcement action against servicers for:

• delays in sending the annual escrow statement required by Regulation X, 12 CFR 1024.17(i), provided that servicers are making good faith efforts to provide these statements within a reasonable time”

Note my emphasis above in italics. There is both an expected but unknown end date, and the expectation that the bank/servicer is making a good faith effort to get escrow statements delivered. If the timing requirements cannot be met, the bank/servicer should have a documented plan on when it believes obstacles to compliance will be overcome.

Fair Credit Reporting

The CARES Act (Section 4021) amended the Fair Credit Reporting Act (FCRA) (Section 623(a)(1)) with the intent of stopping adverse credit reporting during the period of national emergency. As a furnisher of credit reporting entries, your bank should be aware that its procedures for responding to consumer disputes should not be relaxed.

There are two separate issues to address here. First, the amended FCRA requires the bank to report an account as current if it was current at the time an “accommodation” was made. An accommodation is an agreement to:

1. Defer one or more payments;
2. Allow a partial payment;
3. Forbear any delinquent payments;
4. Modify a loan or contract; or
5. Any other assistance or relief granted to a consumer who is affected by the coronavirus disease during the covered period.

If the borrower was delinquent on their loan before an accommodation was made, the bank must both continue to show the delinquent status during the period of accommodation, and report the loan as current if the borrower brings their account current during the period of accommodation. Loans which have been charged-off are not subject to the FCRA amendment and may still be reported as such.

I am not sure why a bank offering an accommodation would not have tried to bring the account current when the accommodation was made, but as was noted in the Legal Briefs in April, some accommodation programs are targeted for corrective actions only for payments during the period declared a national emergency. A borrower involved in an accommodation should be made aware of the bank’s position and how the account will be reported. This will hopefully reduce disputes whereby borrowers claim they believed the agreement with the bank would have brought them current.

Second, in compliance with the CARES Act, the CFPB issued a nonbinding policy statement on April 3, 2020. The “Supervisory and Enforcement Practices” says the CFPB will take a “flexible supervisory and enforcement approach during this pandemic regarding compliance” with the FCRA recognizing that the coronavirus crisis “poses operational challenges for consumer reporting agencies and furnishers.”

The CFPB “will consider a consumer reporting agency’s or a furnisher’s individual circumstances and does not intend to cite in an examination or bring an enforcement action against [such entities] making good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory time frame.”

Thus, the bank may take more time to investigate a FCRA reporting complaint, but it must make a good faith effort to comply. As noted earlier, make your best effort and document why it was not successful when that is the case. Further, note when the issue was closed so that it is evident that it was completed as soon as possible. This should appease examiners, but would it appease a court if the bank’s actions and time to resolve the dispute were challenged? The FCRA allows 30 days after receiving a dispute to investigate and respond to it. The CARES Act did not extend the time period, and the CFPB only said it would not plan to enforce it. Although courts have generally held that there is no private right of action for consumers against data furnishers under 15 U.S.C. § 1681s-2(a), enforcement of that section is given to state and federal governmental agencies under 15 U.S.C. § 1861s-2(c) and (d)..

The CFPB also reminded banks and other report furnishers that the FCRA includes a provision which eliminates your requirement to investigate a dispute that is reasonably thought to be frivolous. So, if the bank begins to see similar disputes made, perhaps following a template for the complaint, the bank may be able to quickly determine it to be frivolous but must be prepared to defend that action.

Regs E, DD and Z – Working with Customers

Like the guidance above, the CFPB issued three guidance documents on May 13, 2020, designed to aid banks in helping consumers during the COVID-19 period:

1. A statement for credit card issuers and those offering open-end lines that the CFPB will provide supervision and enforcement flexibility during the pandemic with respect to the timeframe for banks to complete billing error investigations under Reg Z;

2. FAQs on flexibility in Reg E and Reg DD for checking, savings, or prepaid accounts; and

3. FAQs on existing flexibility for open-end credit in Reg Z.

Let’s review those guidance documents—

Statement for credit card issuers and open-end lenders: This guidance provides information on your banks billing error responsibilities now, and on temporary relief measures intended to allow the bank to resolve consumer billing errors with handicaps caused by COVID-19.

The CFPB recognizes that some banks will have a difficult time completing timely investigations because many outside sources such as merchants and others which are needed to complete it are not available. Reg Z at 1026.13(c) addresses the investigations and allows 30 days to complete them. The CFPB indicated it will provide supervisory and enforcement flexibility regarding the allotted period. The CFPB says it intends to consider the bank’s circumstances and does not intend to cite a violation or bring an enforcement action against a bank that takes longer than the maximum timeframe allotted to investigate and resolve a billing error, so long as the bank can demonstrate that it made a good faith effort to obtain the necessary information and make a decision on the claim as quickly as possible, and the bank complies with all other requirements it has pending error resolution. Again, look at the italicized text for emphasis and urge your investigators to document what was done, when, why, and if there were delays beyond the bank’s control, describe them as well as when the information was obtained so that a decision could be made. Investigatory notes could be as simple as an estimate from the merchant of when it will be able to respond to the request for information, or determining that the merchant is unable to respond at the time and why that is. Remember, “the palest of ink is better than the best memory” – so have good notes made and be sure to include a discussion on the delays in any audit reports so that management and the board understand what has happened and that these were “allowed” but only when the rules were followed as diligently as possible.

Other sections of Reg Z (1026.13(d)) will apply if the bank must prolong the investigation period. That means they are not making payments on the disputed amount and it is not accruing interest or fees such as credit insurance and it is not reported as a past due account because of the claim. The CFPB also encouraged banks to consider being more flexible on the consumers time requirement of notifying the bank within 60 days of the billing error.

Flexibility regarding deposit accounts: This guidance in is the form of a three-question FAQ. Note that none of those questions address the Reg E claims investigation requirements or timelines for unauthorized electronic fund transfers. While your bank may suffer from the same merchant issues under Reg E and Reg Z, there is no flexibility in the 10- to 90-day time requirements to resolve a claim here. Banks that strove to complete investigations in 10-business days may default to paying provisional credit when necessary and extending the investigation period to 45 calendar days or more as permitted.

The FAQ’s intent was to remind banks that offer checking, savings, or prepaid accounts that, under both Reg E and Reg DD, the bank can change account terms without advance notice to where the change in terms is clearly favorable to the consumer. Any bank wanting to reduce fees such as those charged at ATMs or maintenance fees could do so immediately. These are changes in the consumer’s favor and could be implemented without advance notice for those wanting to help all their customers. This may also act as some compensation to customers for restricted lobby hours and availability. The CFPB also pointed out that the FRB’s interim final rule on Reg D eliminated the six per statement cycle transfer limitations and that required no advance notice.

Open-end (not home-secured) loans: This guidance addresses open-end loans which are not secured by a home. It, too, was in the form of a three question FAQ and addresses change in terms requirements and consumer assistance during COVID-19.
The CFPB restated Reg Z requirements for a change in terms notice in advance (1026.9(c)(i)(A)) for “significant changes” but also noted that there is no advance notice required if, for example, the bank extended the grace period for payments or reduced the cost of credit such as with an interest rate or a fee reduction. Also, no advance notice is required at the outset of an arrangement between the bank and consumer to address paying the loan such as with a rate reduction or deferral due to COVID-19. A “significant change” that may be detrimental to the consumer requires a 45-day advance notice.

The second item in that FAQ carries on with the example of working through hardship relief with a consumer and change notice requirements. No advance notice to the consumer is required to increase charges or payments at the end of the arrangement, so long as notice was provided at the beginning of the arrangement that the increase would occur. If your bank agrees with a consumer to a temporary hardship arrangement by telephone, for example, the bank can put the relief in place after providing the consumer with an oral disclosure of the terms of the arrangement including those that will apply at the end of the arrangement. The bank then mails or delivers a written disclosure of those terms to the consumer as soon as reasonably practicable. This is only the case where the terms that apply at the end of the arrangement are as favorable as the terms that applied prior to the workout arrangement. If at the end of the arrangement the rate or a fee would be higher than it was at the beginning, this exception would not apply. The exception also only applies to a workout or temporary hardship arrangement and does not apply to other accommodations that may be offered during this emergency.

The final item in the FAQ encourages banks to communicate with its consumers by, for example, putting additional information in with statements to inform them of alternatives and resources available to them as a means of getting ahead of a problem while it is more manageable. Banks may offer this information electronically but cautions banks that required disclosures would still require E-SIGN compliance.

Refresh saved documents – Guidance during the COVID-19 emergency is fluid. Be sure to check each of these guidance documents and FAQs for updates.

We’ll continue our review of guidance for the COVID-19 emergency in another Legal Briefs.

Changes in UCCC Amounts Effective 7/1/20

By Pauli D. Loeffler

Sec. 1-106 of the Oklahoma Uniform Consumer Credit Code in Title 14A (the “U3C”) makes certain dollar limits subject to change when there are changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, compiled by the Bureau of Labor Statistics. You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here.  It is also accessible on the OBA’s Legal Links page under Resources once you create an account through the My OBA Member Portal. You can access the Oklahoma Consumer Credit Code as the changes in dollar amounts for prior years on that page as well.

Increased Late Fee

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to § 1-106. As of July 1, 2020, the amount provided under (b) will increase by $.50 to $26.50.

Late fees for consumer loans must be disclosed under both the UC3 and Reg Z, and the consumer must agree to the fee in writing. Any time a loan is originated, deferred, or renewed, the bank is given the opportunity to obtain the borrower’s written consent to the increased late fee set by the Administrator of the Oklahoma Department of Consumer Credit. However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to unilaterally increase the late fee amount if it states a specific amount in the loan agreement.

On the other hand, the bank may take advantage of an increase in the dollar amount for late fees if the late-fee disclosure is worded properly, such as:

“If any installment is not paid in full within ten (10) days after its scheduled due date, a late fee in an amount which is the greater of five percent (5%) of the unpaid amount of the payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time may be imposed.”

§3-508B Loans

Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges” rather than using the provisions of § 3-508A with regard to maximum annual percentage rate. Section 3-508A contains provisions for a “blended” rate by tier amounts under (1)(a) as well as the alternative of using a flat 25% APR under (1)(b). § 3-508A is NOT subject to annual adjustment without statutory amendment.
The permitted principal amounts for § 3-508B is adjusting from $1,560.00 to $1,590.00 for loans consummated on and after July 1, 2020.

Sec. 3-508B provides an alternative method of imposing a finance charge to that provided for Sec. 3-508A loans. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but other fees cannot be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, or any other kind of fee is allowed. No credit insurance even if it is voluntary can be sold in connection with in § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3 508A instead. Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding $1,590.00. Further, substantially equal monthly payments are required. The first scheduled payment cannot be due less than one (1) calendar month after the loan is made, and subsequent installments due at not less than 30-day intervals thereafter. The minimum term for loans is 60 days. The maximum number of installments allowed is 18 months calculated based on the loan amount as 1 month for each $10.00 for loan amounts between $158.95 and $530.00 and $20 for loan amounts between $530.01 – $1,590.00.

Lenders making § 3 508B loans should be careful and promptly change to the new dollar amount brackets, as well as the new permissible fees within each bracket for loans originated on and after July1. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 may result in excess charges for certain small loans and violations of the U3C provisions.

Since §3-508B is “math intensive,” and the statute whether online or in a print version does NOT show updated acquisition fees and handling fees, you will find a modified version of the statute with the 2020 amounts toward the bottom of the Legal Links page or clicking here. Again, you will need to register an account with the OBA to access it.

The acquisition charge authorized under this statute is deemed to be earned at the time a loan is made and shall not be subject to refund, if the loan is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge will NOT be deemed fully earned and must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. The Department of Consumer Credit has published a Daily Acquisition Fee Refund Chart for prior years with links on this page. Further, if a loan is prepaid, the installment account handling charge shall also be subject to refund. A Monthly Refund Chart for handling charges for prior years can be accessed on the page indicated above, as well as § 3-508B Loan Rate (APR) Table. I expect the charts and table for 2020 to be added to that page

§ 3-511 Loans

I frequently get calls when lenders receive a warning from their loan origination systems that a loan may exceed the maximum interest rate. Nearly always, the banker says the interest rate does not exceed the alternative non-blended 25% rate allowed under § 3-508A according to their calculations. Usually, the cause for the red flag on the system is § 3-511. This is another section for which loan amounts may adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2020 in bold type.

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $5,300.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more than $1,590.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1590.00 or less.

The reason the warning has popped up is due to the italicized language: The small dollar loan’s APR exceeds 18%, and it is either single pay or interest-only with a balloon.

Dealer Paper “No Deficiency” Amount

If dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This is covered in Section 5-103(2) of the U3C. This dollar amount was previously $5,200.00 and increases to $5,300.00 on July 1.