open-end loan advertising compliance• unfair, deceptive or abusive acts or practices •...

Open-End Loan Advertising Compliance

John Zasada Principal CliftonLarsonAllen 218 790 1086

Agenda •Advertising compliance importance •Regulation Z open end loan requirements

–APR –Trigger terms –HELOCs –Credit cards

•Regulation B •UDAAP

Top Compliance Violations

• Regulation Z • RESPA • TIS • HMDA • Flood

Regulatory Changes

• Thousands of pages • ATR/QM • TRID • HMDA

Context

• Top regulatory compliance risk? • Not advertising compliance

BUT…

Managing Advertising Compliance

• Wait and see • Clean past exam • New world

– CFPB – Unfair, Deceptive or Abusive Acts or Practices

What’s the big deal? • Closer scrutiny • Advertising is indicative of overall

compliance • An examiner can look at your advertisements and website and in a few minutes get a good idea of how firm a grasp you have on regulatory compliance

Compliance Integration

• Elevation of business line over the compliance function

• Get compliance involved • Compliance over the long haul • Risk/reward

Survey Question #1

• Does your credit union periodically test advertisements for compliance? – YES – NO

Closed End vs. Open End • Advertising rules very different for each • Closed-end anything other than open end! • Open -end

– Repeated transactions – Creditor may impose finance charge

from time to time on outstanding balance

– Amount of credit extended is made available to the extent that any outstanding balance is repaid

What is an Advertisement

• Regulation Z - A commercial message in any medium that promotes, directly or indirectly, a credit transaction

Truth in Lending – Regulation Z

• Before the TIL - “$45 per month for new car!”

• True cost unknown • TIL introduced trigger terms

APR

• TIL requires specific terminology

• APR is fine • No need to spell out “Annual

Percentage Rate”

Fixed

• Fixed Rate – Cannot use the word “fixed” unless:

• You include a specific period of time the rate will be fixed or

• The rate will not increase while the plan is open

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Terms must be available

• Bait and switch prohibited • Terms must be attainable • Cannot state “4% HELOCs

available” if in fact the currently offered best rate is 5%

Trigger Terms • Any terms initially disclosed:

– APR – Variable rate information – Minimum interest charge – Fees – Transaction charges – Grace period – Balance computation method

• Implicit terms

Open vs. Closed-End

• APR is a trigger term for open-end loans

• APR is not a trigger term for closed-end loans

Affirmatively or Negatively

• “No fees” • “No transaction charges” • Not:

–“check out our low fees” –“ask us about our competitive APR”

Triggered Disclosures

• Finance charges • APR • Variable rate • Membership or participation fee

Disclosing the APR

• Different options – Disclose current APR – Disclose APR as of a specific date

• Variable rate – APR may vary – Variable rate APR

Promotion Rate

• Trigger term (APR, etc.) requires: – Finance charges and membership or

participation fee – Introductory APR and how long it applies – APR after the introductory period and that it

may vary

Promotional Rates and Fees

Use the words “Introductory” or “Intro” to describe it Does apply to radio/television Does not apply to HELOCs

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Compliant Example

• “4% APR FOR THE FIRST 12 MONTHS! After first 12 months, APR will be 8.5%, subject to increase"

Compliant Ad

• Pay just 14% APR on your credit card from ABC Credit Union!(Annual fee $30; minimum monthly finance charge of $1; $2 service charge on each cash advance.)

Problem:

Our Credit Cards have no annual fee!

Solution

Our Credit Cards have no annual fee!

• 12.00% APR • $25 cash advance fee. 1% Foreign

Transaction fee.

Deferred Interest • Deferred interest period must be clear and

conspicuous • “No interest” must be preceded by “if paid

in full” • “Deferred interest” , the deferred interest

period of time and “if paid in full” must be stated next to: – “no payments” – “no interest – similar terms

Disclosures Appearing Apart From Ad

• “clearly refer” • Link used for electronic

advertisements

Radio and TV Ads

• Treated differently –Annual Percentage Rate –If variable rate –A toll free phone number

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Credit Cards

• All of the general Open-End Rules apply • In addition…

– Open end rules require you to disclose all applicable finance charges. For credit cards, all transaction fees are finance charges: • Cash advance • Balance Transfer • Foreign Transaction

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Credit Card Agreements

• If CU provides credit cards, then must: –Post copy of credit card agreement

–Provide ability for member to request copy

Credit Card Application Disclosures

– Annual percentage rate for purchases, balance transfers, cash advances

– Penalty APR and when it applies – How to avoid paying interest on purchases – Minimum interest charge – For credit card tips from the federal reserve

board – Fees

• Annual fee • Transaction fees • Penalty Fees • Other fees

– How we will calculate your balance

Credit Card Application / Solicitation

Survey Question #2

• Does your credit union use advertisements that include credit card rates? – YES – NO

HELOCs

• Special rules • Disclosures are IN ADDITION to

disclosures applicable to general open-end loans

• Open-end loan secured by a consumer’s dwelling, vacation or 2nd home

Trigger Terms

• Terms from the initial disclosure: – APR – When the finance charges begin to accrue – Method of determining the balance to be used

to compute finance charges – Method of determining the finance charge – The amount of any charge other than a

finance charge that may be imposed as part of the plan

– Payment terms

Required Disclosures – Finance Charge – APR, variable rate, maximum APR – Membership or participation fee – An estimate of fees for opening plan – Balloon payment information – Tax advisor information

More on Balloon Payments

• Additional required disclosures: – If you promote a minimum payment that may

result in a balloon payment, you must also disclose: • That a balloon payment will result; and • The amount and timing of the balloon

payment that will result if the consumer makes only the minimum payments for the maximum period of time that the consumer is permitted to make such payments.

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Terms

• Affirmative or negative terms • “we waive closing costs”

• Misleading – “fixed” better be

Problem:

Our HELOCs have no annual fee and no points !!!

Solution 1: Our HELOCs have no annual

fee and no points!!! • Low variable rate of 5% APR with

maximum rate of 18% APR • Interest paid may be tax deductible,

Please consult your tax advisor

Solution 2:

We’ve got really good deals on HELOCs;

phone us for details

More Rules for HELOCs • Minimum payment

– If it could, then state it will • Discounted/premium/promotional rates

– Duration and current rate – Close proximity

• Promotional payment – Amount and time periods of applicable

payments • “Free money” a no-no

Home Equity Lines of Credit

WRONG: 1.99% APR HELOC! *initial rate for 6 months

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Home Equity Lines of Credit

CORRECT:

1.99% APR HELOC for 6 months then Prime +2 (Currently 4.99% APR)

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Home Equity Lines of Credit

• HELOC Applications – If you provide an application with written or

electronic ad, you must also provide: • HELOC Early Disclosure • HELOC Early Brochure: “What You Should Know

About Home Equity Lines of Credit”

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Survey Question #3

• Does your credit union review advertisements for compliance before they are released? – YES – NO

Equal Credit Opportunity Act- Regulation B

• Real estate-related loan advertisements , including HELOCs, must prominently indicate that the credit union makes such loans without regard to race, color, religion, national origin, sex, handicap, or familial status.

• Include a copy of the logotype with "Equal Housing Lender" or "Equal Housing Opportunity,"

• Or use any other method reasonably calculated to satisfy the notice requirement

Problem:

Which is correct?

Advertising Discrimination

• Indirectly discouraging persons from applying for credit based on a prohibited basis under Regulation B? Suppose an advertisement contains pictures of people. It is possible that someone could allege that by not including persons of a protected class in these pictures, the credit union is discouraging them from applying for credit.

Advertising Discrimination

• The commentary to Regulation B states: – Practices prohibited by this section include: “Use of words, symbols, models or other forms of

communication in advertising that express, imply or suggest a discriminatory preference or a policy of exclusion in violation of the act.”

• Consequently, credit unions should consider what pictures of people they include on advertisements in terms of Regulation B and fair lending

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Common Fair Lending Deficiency • Age-based deposit account with credit

feature • Senior accounts for those 50 and older

Problem:

Super Seniors Club Members aged 55 and older

receive a special newsletter, free travelers’ checks, and discounts on loan rates

Solution: Super Seniors Club

Members aged 55 and older receive a special newsletter, and free travelers’ checks.

OR Members aged 62 and older receive a special newsletter, free travelers’ checks, and discounts on loan rates.

UDAAP • Unfair, Deceptive or Abusive Acts or

Practices • Compliance with regulations not enough • Please examiners and consumers • Objective to subjective • 4 Ps • 3rd party relationships • Footnotes

Unfair Acts or Practices

• Substantial injury; • Cannot be reasonably avoided;

and • Injury not outweighed by benefits

Deceptive Act or Practice

• Misleads consumer; • Consumer makes reasonable

interpretation; and • Misleading act is material

Abusive Act or Practice

• Interferes with consumer understanding the product or service;

• Takes advantage of: – Consumer’s lack of understanding; – Consumer’s inability to protect

themselves; or – Consumer’s reliance on credit union

acting in his/her interests

4 Ps

• Prominence • Presentation • Placement • Proximity

UDAAP

• Look at ethical behavior versus legal requirements

• Something can be legal but is it ethical? • That is what can get you into trouble

Clear as Mud

• Guidance? • Hits every part of the product life cycle • Tip of the iceberg

UDAAP Examples

• Collecting debts outside of the agreement • Failure to post payments and then

charging late fees • Misrepresenting that the credit union is

acting on behalf of the government • Misrepresenting whether information about

a payment would be reported to a credit bureau

More UDAAP Examples

• Police report • CD renewal • Increase in non-interest

income sparks scrutiny • Disclosures fair?

UDAAP Cases

• Bancorp • Discover • American Express

Eyes and Ears

• Beyond technical violations to overall fairness

• Can one person do it? • Each department • Each staff person

Records Retention

• Incorporate into your overall records retention schedule

• Regulation B, Z, TIS

John Zasada CliftonLarsonAllen, LLP 218 790 1086 John.zasada@cliftonlarsonallen.com

Thank You