Compliance Solutions quarterly newsletter — September 2023

General

UCC Form amendments

The International Association of Commercial Administrators (IACA) is a professional organization which drafts Uniform Commercial Code (UCC) forms consistent with what the UCC requires pursuant to secured transactions and what industry leaders identify as efficient and a best practice. Additionally, the IACA maintains a jurisdictional list of filing offices both nationally and internationally.

Recently, the IACA held its annual conference where it voted to amend and adopt five changes to the following UCC filing forms:

• UCC1 Financing Statement
• UCC3 Financing Statement Amendment
• UCC3AD Financing Statement Amendment Addendum
• UCC5 Information Statement
• UCC11 Information Request

The promulgated changes became effective July 1, 2023. It should be noted they are not official state or government recommendations. The adoption and acceptance of the amended forms varies by state. Many states have already adopted and accept or will adopt and accept some or all the amended forms. It is important to identify which form version is required in each jurisdiction your financial institution files UCC forms to ensure proper perfection and priority is obtained and maintained.

To identify which form version is accepted by a specific jurisdiction or to contact a jurisdiction in which you file UCC forms, please visit Jurisdictional Information | IACA.

Below is a list of changes made to the forms listed above. To view the amended forms as adopted by the IACA please visit UCC Forms | IACA.

• UCC1, UCC3, UCC5, UCC11: Requests contact information of “Submitter” rather than “Filer” in Items A and B.
• UCC1, UCC3: Adds the statement “SEE BELOW FOR SECURED PARTY CONTACT INFORMATION” below Items A, B, and C.
• UCC3: Adds instruction in Item 3 to “check ASSIGN collateral box in Item 8”; adds instruction in Item 8 to “Check ASSIGN COLLATERAL only if the assignee’s power to amend the record is limited to certain collateral and describe the collateral in Section 8”; and removes the check box at the beginning of Item 8 to indicate a collateral change.
• UCC3AD: Adds a checkbox in Item 14 to indicate whether additional space is being used for "Collateral" or for "OTHER INFORMATION", and, if Other Information, "Please Describe."
• UCC11: Item 2 now asks for “SEARCH TYPE” with check boxes for "NON-CERTIFIED" or "CERTIFIED", revises the definition of a search of ALL records to “Results provide all matching records, including those that have lapsed”, adds a check box to "INCLUDE ALL AVAILABLE LIEN TYPES IN INDEX (if applicable)”; moves “COPY REQUEST ONLY” to Item 3; and moves “ADDITIONAL SERVICES” to Item 4.

CFPB Releases Summer 2023 edition of Supervisory Highlights

The Consumer Financial Protection Bureau (CFPB) recently released its Summer 2023 edition of Supervisory Highlights which notes recent supervisory findings of abusive acts or practices. The findings included in the report cover examinations in the areas of auto origination, auto servicing, consumer reporting, debt collection, deposits, fair lending, information technology, mortgage origination, mortgage servicing, payday and small-dollar lending, and remittances.

Key findings by CFPB examiners include:

Auto origination and servicing

• Deceptive marketing of auto loans with advertisements that pictured cars that were significantly larger, more expensive, and newer than the advertised loan offers were good for.
• Representations made in advertisements were likely to mislead consumers, as the “net impression” to consumers was that the advertisements applied to a subset of cars to which they did not actually apply.
• Unfair or abusive acts or practices at auto servicers related to charging interest on inflated loan balances, cancelling automatic payments without sufficient notice, and collection practices after repossession.

Consumer reporting

• Deficiencies in consumer reporting companies’ compliance with Fair Credit Reporting Act (FCRA) permissible purpose-related policy and procedure requirements and furnisher compliance with FCRA and Regulation V dispute investigation requirements.

Debt collection

• Violations of the Fair Debt Collection Practices Act (FDCPA) as well as the Consumer Financial Protection Act of 2010 (CFPA) including, unlawful attempts to collect work-related medical debt by collecting an amount not permitted by law or agreement, falsely representing the character, amount, or legal status of a debt, engaging in conduct which had the natural consequence of harassing, oppressing, or abusing the consumer, and by using false, deceptive, or misleading representations in connection with the collection of a debt.
• Debt collectors advised consumers that if they paid the balance in full by a certain date, any interest assessed on the debt would be reversed. The debt collectors then failed to credit the consumers’ accounts with the accrued additional interest, resulting in the consumers paying more than the agreed-upon amount, which violated the CFPA.

Deposits

Financial institutions engaged in an unfair act or practice by assessing both an NSF fee and a line of credit transfer fee on the same denied transaction where the consumer’s checking account did not have sufficient funds to pay a transaction and the consumer’s overdraft line of credit also did not have sufficient funds to cover the transaction.

Fair lending

• Mortgage lenders violated ECOA and Regulation B by discriminating in the incidence of granting pricing exceptions across a range of ECOA-protected characteristics, including race, national origin, sex, or age.
• Several institutions engaged in discriminatory lending restrictions by conducting enhanced or second-level underwriting review pursuant to the discovery of criminal records without detailed or consistent policies and procedures.

Technology

• Institutions engaged in unfair acts or practices by failing to implement adequate information technology security controls that could have prevented or mitigated cyberattacks.

Mortgage origination and servicing

• Violations of the Regulation Z requirement that disclosures must reflect the terms of the legal obligation when standard adjustable-rate promissory notes stated that the result of the margin plus the current index should be rounded up or down to the nearest one-eighth of one percentage point, but the institutions’ loan origination system was not programmed to round.
• Servicers violated Regulation X when they failed to evaluate complete applications received more than 37 days prior to a scheduled foreclosure sale within 30 days of receipt. Some servicers evaluated the application within 30 days but failed to provide the required notice to borrowers within 30 days as required.
• Servicers engaged in deceptive acts or practices when they informed consumers, orally and in written notices, that they would evaluate their complete loss mitigation applications within 30 days, but then moved toward foreclosure without completing the evaluations.
• Servicers violated Regulation X by failing to maintain adequate continuity of contact procedures to ensure that personnel were made available to borrowers via telephone and that they were provided timely live responses. When consumers did speak with personnel, the personnel failed to provide accurate information about loss mitigation options that were available.
• Servicers violated Regulation X by failing to include the required language stating that the borrower should consider contacting servicers of any other mortgage secured by the same property to discuss loss mitigation options on Spanish language application acknowledgment notices but did include it on English language acknowledgment notices sent to English-speaking consumers.
• Servicers violated Regulation X and Regulation Z by failing to provide accurate or complete loss mitigation information in various circumstances.
• Servicers treated payments received by a transferor servicer during the 60-day period after the effective date of transfer, but not transmitted by the transferor to the transferee until after the 60-day period, as late.
• Servicers violated Regulation X when they failed to maintain policies and procedures reasonably designed to achieve the objective of facilitating transfer of information during servicing transfers.

Payday and small-dollar lending

• Lenders engaged in abusive and deceptive acts or practices in connection with short-term, small-dollar loans, by including language in loan agreements purporting to prohibit consumers from revoking their consent for the lender to call, text, or e-mail the consumers.
• Supervised institutions made false collection threats related to litigation, garnishment, and late fees, each of which constituted deceptive acts or practices in violation of the CFPA. 
• Lenders engaged in unfair acts or practices with respect to consumers who signed voluntary wage deduction agreements by sending demand notices to consumers’ employers that incorrectly conveyed that the employer was required to remit to the lenders from the consumer’s wages the full amount of the consumer’s loan balance. In fact, the consumer had agreed to permit the lenders only to seek a wage deduction in the amount of the individual scheduled payment due. The lenders then collected wages from the consumers’ employers in amounts exceeding the single payment authorized by the consumer.
• Lenders engaged in deceptive acts or practices when they misrepresented to borrowers the impact that payment or nonpayment of debts in collection may have on the sale of the debt to a debt buyer and the subsequent impact on the borrower’s credit reports.
•  Installment lenders created a risk of harm to borrowers protected by the Military Lending Act by, before engaging in loan transactions, and contrary to their policies, failing to confirm that several thousand borrowers were not covered borrowers under the Military Lending Act as implemented by Department of Defense regulations. 
• Lenders failed to retain for two years evidence that they delivered clear and conspicuous closed-end loan disclosures in writing before consummation of the transaction, in a form that consumers may keep, in violation of the record-retention provision of Regulation Z, and creating a risk of a violation of the general disclosure requirements of Regulation Z.

Remittances

• Some remittance transfer providers had not complied with the Remittance Rule requirement to develop and maintain written policies and procedures designed to ensure compliance with the error resolution requirements applicable to remittance transfers.

Overall, the CFPB’s periodic release of Supervisory Highlights does not refer to any specific institution but shares important findings to help the industry limit risks to consumers and comply with federal consumer financial law. Often, violations detailed in the Supervisory Highlights result in enforcement actions or agency guidance. The CFPB’s findings are a useful tool to stay informed of potential violations and areas the CFPB examiners are likely to scrutinize as well as what violations may form future enforcement actions.

Words matter: a ruling by the Supreme Court of Indiana

On March 21, 2023, the Supreme Court of Indiana ruled in Decker v. Star Financial Group, Inc., holding that the bank could not add an arbitration and no-class-action addendum to the account agreement through the change-of-terms clause. The ruling’s resounding message: words matter.

Background

In October 2019, the bank assessed overdraft fees to the Deckers’ account, which the Deckers contend was improper since their account was not overdrawn. In August 2020, the Deckers received their monthly bank statement, and at the end of the fourteen-page document, the Bank had included a two-page addendum to the account agreement. The addendum stated that claims filed against the Bank were subject to arbitration and could only be brought in the customer’s individual capacity (no-class-action). In response, the Deckers filed a class-action suit against the Bank for improper overdraft fee practices.

Court’s analysis and decision

The Supreme Court of Indiana granted transfer and heard the Deckers’ three arguments. The Supreme Court focused on the Deckers’ second argument: that the account agreement’s change-of-terms clause did not allow the bank to add the addendum.
The bank’s account agreement change-of-terms clause read, “We may change any term of this agreement.” Subsequently, the bank acted with broad actions as if the clause allowed amendment to the agreement in any way the bank wished. However, the Court reasoned that the bank limited their power of modification to terms that existed in the original account agreement by using the words “any term of this agreement.” Justice Slaughter, writing for the majority, includes, “Words matter. The difference between a far-reaching power to amend ‘this agreement’ and the narrower power to amend ‘any term of this agreement’ makes all the difference on this record.” Importantly, the original account agreement did not contain provisions for dispute resolution or mention class-action filings. Without reference, the bank could not amend “any terms” it desired to obtain the same results as the additional addendum could.
Ultimately, the Supreme Court of Indiana ruled against the bank and held the arbitration and no-class-action addendum was not a valid amendment to the Deckers’ account agreement. 
Words matter. This is especially true in contract language as evidenced in the Indiana Supreme Court’s decision. For additional reference to the decision, visit Cliff Decker, et al. v. Star Financial Group Inc.

Consumer Lending

CFPB issues report concerning consumer use of Buy Now, Pay Later

Earlier this year, the Consumer Financial Protection Bureau (CFPB) issued a report regarding Buy Now, Pay Later (BNPL) products entitled, Consumer Use of Buy Now, Pay Later: Insights from the CFPB Making Ends Meet Survey. The report examines the consumer financial profiles of borrowers who use BNPL products by using the CFPB’s Making Ends Meet survey, which was taken from January-March 2022, as well as the Consumer Credit Panel (CCP), which contains an anonymized sample of credit bureau records.

Background

BNPL is a type of short-term financing that allows consumers to make purchases and pay for them at a future date over a series of installments. BNPL arrangements have become increasingly popular with younger consumers, mainly Millennials and Gen Z consumers, due to the COVID-19 pandemic and the desire to avoid credit card debt. Between 2019 and 2021, the number of BNPL loans issued to consumers increased almost tenfold. BNPL providers include companies like Affirm, Afterpay, and Klarna.

There were several key findings in the report:

• BNPL borrowers were, on average, more likely to be highly indebted, revolve on their credit cards, have delinquencies on traditional credit products (such as credit and retail cards, personal loans, auto loans and student loans), and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers.
• BNPL borrowers have higher credit card utilization rates and lower credit scores. For instance, non-borrowers had an average credit score classified as near-prime (670-739) while BNPL borrowers had an average score in the sub-prime category (580-669).
• BNPL borrowers are more likely to have traditional credit products when compared to non-borrowers, including retail accounts (62% compared to 44%), personal loans (32% compared to 13%), and student loans (33% compared to 17%).
• BNPL is mostly used by consumers with substantial access to and use of other forms of credit. However, most of these credit sources would be much more expensive than BNPL for the typical user, so BNPL appears to be a less expensive borrowing option.

The CFPB also determined that between the first quarter of 2021 and the first quarter of 2022, 17 percent of consumers borrowed using BNPL at least once in the year prior to the survey. Consumers of every age and income group, education level, race, ethnicity, and credit score used BNPL, but some groups were much more likely than others to borrow using BNPL. Black, Hispanic, and female consumers and those with household income between $20,001-$50,000 were significantly more likely to borrow using BNPL compared to white, non-Hispanic, and male consumers, or those with household income below $20,000. In contrast, those with at most a high school degree were less likely to use BNPL than consumers with at least a bachelor’s degree.
However, the CFPB indicated that there were significant limitations to its findings:

• Identification of BNPL use is based solely on consumer self-reporting and reported for only one point in time.
• Because the sample frame for the Making Ends Meet survey encompasses consumers with a credit record, this report necessarily omits information on the estimated 11 percent of consumers without a credit record.
• The data in the report did not allow the CFPB “to distinguish the direction of causality — namely whether consumers in distress are more likely to use BNPL, for instance, in order to substitute away from high-interest loans that they already have, or whether BNPL use leads consumers to increase borrowing using other non-BNPL products.” Thus, the CFPB states that an important question for future research is, “whether BNPL improves the financial health of consumers in distress or exacerbates these differences.”
• The time period covered by the survey and the CCP was a tumultuous economic period. Online shopping and BNPL use increased since the COVID-19 pandemic.

According to the CFPB report, “[d]espite these limitations, our results show that BNPL is mostly used by consumers with substantial access to and use of other forms of credit. However, most of these credit sources would be much more expensive than BNPL for the typical user, so BNPL appears to be a less expensive borrowing option, not the only option.”
The number of BNPL providers is increasing and consumers and merchants are readily adopting the products they offer. Although BNPL has benefits for both consumers and merchants, the offerings are new enough that potential risks may not yet be well understood. The risks to consumers have resulted in calls for regulatory attention domestically and internationally. As a result, the CFPB has encouraged BNPL providers in the United States to take steps to ensure users are adequately informed of the risks BNPL presents. The previously issued CFPB report on BNPL was released in September 2022 and focused on the potential consumer risks associated with BNPL products including, discrete consumer harms, such as lack of clear disclosures of the loan terms, data harvesting, and overextension. The CFPB stated that it would take steps to address these risks and possibly issue rules to address them to ensure BNPL is fair, transparent, and competitive. However, this most recent BNPL report indicates that perhaps BNPL could be beneficial to consumers’ financial health and poses an important question for future research: whether BNPL improves the financial health of consumers in distress or exacerbates certain differences.

To view the report, visit Consumer Use of Buy Now, Pay Later: Insights from the CFPB Making Ends Meet Survey.

Question of the quarter

Question: When offering the ability to convert credit card purchase transactions to a new transaction type at a lower, fixed rate to be paid in equal installments over a set period of time (Installment Plan), should this be disclosed as a promotion for the credit card account?

Answer: No, Installment Plans offered as part of your credit card program are a feature of the credit card account and must be disclosed as such. Regulation Z § 1026.16(g)(2) describes a promotional rate as “any annual percentage rate applicable to one or more balances or transactions . . . for a specified period of time that is lower than the annual percentage rate that will be in effect at the end of that period on such balances or transactions.” While Installment Plans often have a lower APR than the purchase APR, once a cardholder converts a purchase transaction to an Installment Plan, that amount ceases to be a purchase for purposes of calculating the required minimum payment, determining balances, and calculating interest and finance charges. The Installment Plan is its own transaction type and is a feature of the account, much like balance transfers and cash advances.

Real estate lending

Early disclosure historical table

The Home Equity Early Disclosure is required to be provided at the time a home equity line of credit (HELOC) application is given to a consumer. Within the document, Regulation Z § 1026.40(d)(12)(xi) requires a historical example, based on a single $10,000 credit advance, illustrating how annual percentage rates and payments would have been affected by index value changes implemented according to the terms of the plan. The historical example is based on the most recent 15 years of index values and will reflect all significant plan terms that would have been affected by the index movement during the period. Note that the historical table reflects the terms of the HELOC plan currently offered and does not reflect the terms of the plan offering during the year noted in the historical table.

The historical table must be updated annually to reflect the most recent 15 years of index values. If the values for an index have not been available for 15 years, you only need to go back as far as the values have been available.

How the historical tables are updated for TruStage Compliance Solutions clients depends on the product licensed. Clients licensed for TruStage Compliance Solutions’s Tech Solution (formerly Compliance Systems) will update the historical table using the Configuration tool, whereas clients licensed for TruStage Compliance Solutions’s Classic Solution (formerly LOANLINER) will receive updated historical tables automatically from TruStage Compliance Solutions. Irrespective of whether a client is licensed for TruStage Compliance Solutions Tech or Classic Solution, historical tables are updated effective either the last day of January or July.

When a financial institution offers an initial discounted rate, they may select a discount that they have used during the six months preceding preparation of the disclosures. The table will include a footnote that the discount is one that the creditor has used recently. The discounted rate will also appear in the first year of the table to show the impact to the payment and a history based on what the index has done over the past 15 years. This may seem backwards, but it is simply a representative rate.

The Home Equity Early Disclosure provided with the HELOC application does not constitute the contract between the consumer and the financial institution. The Home Equity Addendum and Credit Agreement and Truth in Lending Disclosure describes the HELOC’s terms and conditions and is the legally binding contract between the consumer and the financial institution.

Question of the quarter:

Question: Why would the historical table not have the monthly payment in all 15 years?
Answer: The payment may not fill in all the years if the one-time $10,000 advance would be paid off before the 15 years.

Deposit

Treasury management services

Treasury management services play a crucial role in day-to-day operations and long-term planning for financial institutions. An effective treasury management solution can help financial institutions drive deposits and attract a broader customer base through services like cash management and payment processing solutions for their business customers. It helps financial institutions manage their liquidity risk and improve their liquidity profile while generating income. But while hand-in-glove support has always been part of a successful financial institution’s offerings, today’s tech-savvy business customers expect more than superior client support. They expect convenience in transacting their business.

Managing treasury management services agreements manually is cumbersome, tedious and, ultimately, an ineffective use of time for institution staff. To draft compliant content, financial institutions either need to engage outside counsel or hire someone to manage their treasury content in-house. If leveraging outside counsel, they are then tasked with the burden of maintenance, tracking any regulatory changes and reengaging counsel to make changes when necessary. Meanwhile, hiring in-house counsel is expensive and tasks the financial institution to create their content and ensure it is current. Both options are costly, and both expose them to a considerable amount of risk.

The ideal solution should allow financial institutions to build their own customized treasury management services documentation with compliance guardrails that ensure the solution fits and remains compliant. This allows them to share and promote custom, user-defined content that describes the treasury services that they offer to commercial customers in a single master services agreement that can be shared in branch or online. Leveraging multiple delivery options for this content is a huge boost to financial institutions that want to provide options for commercial customers.

Without a standard, well-defined process for updating treasury management disclosures, financial institutions can run the risk of releasing inconsistent or inaccurate content to commercial customers. They should look for solutions that have well thought out change management processes. Solutions that offer an easy workflow, allow for customization while maintaining compliance, and integrate into their existing technology stack is icing on the cake.

Investing in technology that streamlines treasury management documentation not only helps reduce the maintenance costs associated with compliance, but it also allows the ability to leverage a self-service model. Updates can be handled internally, rather than reengaging counsel or putting the content through a rigorous compliance review.

If financial institutions are looking to strengthen their treasury management services, a useful place to start is exploring technology partnerships to help create and maintain their content. It frees up skilled staff to focus on the things that build business relationships, rather than words on a page.

FCU Member expulsion options expanded

Federal credit unions (FCUs) may have an easier path for expelling members who engage in disruptive behaviors or illegal conduct or otherwise violate the credit union’s membership agreement. Recent amendments to the standard Federal Credit Union Bylaws (FCU Bylaws) will allow an FCU to expel such members by a two-thirds vote of a quorum of the credit union’s board of directors. However, credit unions that wish to use this expulsion option must comply with new notice and procedural requirements. 

In March 2022, the Credit Union Governance Modernization Act (CUGMA) was signed into law as part of the broader Consolidated Appropriations Act. CUGMA expanded the Federal Credit Union Act’s member expulsion provisions to allow FCUs to expel members for “cause.” The NCUA Board, however, was required to adopt a policy for this new expulsion option before credit unions could take advantage of it. In July 2023, the NUCA Board approved a final rule to amend the FCU Bylaws to adopt such a policy. The final rule was effective August 25, 2023.

FCUs may now to expel members in one of three ways:

• By a two-thirds vote of the members present at a special meeting to expel the member
• Under a nonparticipation policy given to each member
• By a two-thirds vote of a quorum of the FCUs board of directors to expel the member for “cause”

The term “cause” is defined to mean:

• A substantial or repeated violation of the membership agreement of the credit union
• A substantial or repeated disruption, including “dangerous or abusive behavior,” to the operations of the FCU (e.g., violence, intimidation, physical threats, harassment, or physical or verbal abuse of officials or employees of the credit union, members, or agents of the credit union)
• Fraud, attempted fraud, or conviction of other illegal conduct in relation to the credit union, including the credit union’s employees conducting business on behalf of the credit union

An FCU’s board of directors may vote to expel a member for cause if the credit union has provided the member with a written copy of the “Expulsion and Withdrawal” article from its bylaws or the optional standard disclosure notice that is set out in the Official NCUA Commentary — Federal Credit Union Bylaws. Refer to page 48067 of the final rule for the model “Optional Standard Disclosure of Expulsion Policy” notice.

FCUs that seek to expel a member for “cause” must provide advance notice in writing along with the reason for the expulsion. Minimally, the notice must include: a) relevant dates; b) sufficient detail for the member to understand the grounds for their expulsion; c) the member’s right to request a hearing and other details of the hearing process; d) that their membership will terminate after 60 calendar days if a hearing is not requested; and e) if applicable, a general statement on the effect of expulsion related to the member’s accounts or loans at the credit union. The notice must also advise the member that any complaints related to their potential expulsion should be submitted to the NCUA’s Consumer Assistance Center if the complaint cannot be resolved directly with the credit union. The FCU must provide the notice in person, by mail to the member’s address, or electronically if the member has consented to receive electronic communications.

FCUs may adopt the amended FCU Bylaws by a two-thirds vote of its board of directors, thereby authorizing the board to expel members for cause. FCUs that do not adopt the new bylaws may only expel members by a vote at a special meeting of its membership or based on a violation of a nonparticipation policy.

Question of the Quarter

Question: For automatically renewable certificate/certificate of deposit accounts, what disclosures are required to be provided prior to the account’s maturity date?

Answer: The required disclosures vary based on the account’s term to maturity.

For accounts with maturities longer than one year, the financial institution must provide:

• The disclosures that were required to be provided when the account was initially opened (e.g., Truth-in-Savings Disclosure), including the dividend/interest rate and the annual percentage yield if they are known (or that those rates have not yet been determined, the date when they will be determined, and a telephone number members may call to obtain the dividend rate and the annual percentage yield that will be paid for the new account); and
• The date the existing account matures.

For accounts with maturities of one year or less but longer than one month, the financial institution must provide:

• The date the existing account matures and the new maturity date if the account is renewed;  
• The dividend/interest rate and the annual percentage or that those rates have not yet been determined, the date when they will be determined, and a telephone number the member may call to obtain the dividend/interest rate and the annual percentage yield that will be paid for the new account); and
• Any difference in the terms of the new account as compared to the terms required to be disclosed in the initial disclosure for the existing account.

Alternatively, the financial institution may provide the same disclosures that must be provided for accounts with terms longer than one year.

The disclosures must be mailed or delivered at least 30 calendar days before maturity of the existing account. Alternatively, the disclosures may be mailed or delivered at least 20 calendar days before the end of the existing account’s grace period, provided the grace period is at least five calendar days.