[Kimberly Boatwright, CAMS, CRCM]

If you force place a policy the regulations states, The amount of insurance must be at least equal to the lesser of:

• The outstanding principal balance of the designated loan;
• The maximum limit of coverage available for the particular
type of property under the Act;
• The value of the improvements (building or mobile home)
and any personal property that secures a loan and not the
land itself. [Insurable Value or Replacement Cost Value]

You are only required to do it when the policy lapses falling all requirements. If you were to choose to monitor and reduce this for the borrower you will need to be ready to do this for all borrowers or you could have a UDAP/UDAAP issue.

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[Kimberly Boatwright, CAMS, CRCM]

There is no formal guidance on filtering. However, you must consider UDAAP, Fair Lending and Fair Banking when you utilize filters to narrow down marketing. For example using home value and income standards are a sure way to have a CRA and fair lending issue. Using Age (except for legal contract age), gender, and marital status are protected class categories which will cause fair lending and fair banking issues. In some cases using households with children could also cross the fair lending line.

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[Kimberly Boatwright, CAMS, CRCM]

For CD advertisement or anything account earing interest for that matter. Reg DD states:

RATES AND YIELDS
Section 230.8(b) restricts the use of rates in advertisements. First, if an advertisement states a rate of return, the rate must be identified as an “annual percentage yield” (using that term). No other term can be used except for “interest rate,” provided it is stated in conjunction with the annual percentage yield. The abbreviation “APY” may be used if the term “annual percentage yield” is stated at least once in the advertisement. Often, advertisements will use the abbreviation in the text of the advertisement and direct the consumer to the bottom of the advertisement for the expansion of the abbreviation. Second, if the annual percentage yield is stated in an advertisement, §230.8(c) requires that the following additional disclosures be made clearly and conspicuously:
• Variable rates. For variable-rate accounts, a statement that the rate may change after the account is opened.
• Time annual percentage yield is offered. The period of time the annual percentage yield will be offered or a statement that the annual percentage yield is accurate as of a specified date.
• Minimum balance. The minimum balance required to obtain the advertised annual percentage yield. For tiered-rate accounts, the minimum balance required for each tier shall be stated in close proximity and with equal prominence to the applicable annual percentage yield.
• Minimum opening deposit. The minimum deposit required to open the account, if it is greater than the minimum balance necessary to obtain the advertised annual percentage yield.
• Effect of fees. A statement that fees could reduce the earnings on the account.
• Features of time accounts. For time accounts:
o Time requirements. The term of the account.
o Early withdrawal penalties. A statement that a penalty will or may be imposed for early withdrawal.
o Required interest payouts. For noncompounding time accounts with a stated maturity greater than one year that do not compound interest on an annual or more frequent basis, that require interest payouts at least annually, and that disclose an APY determined in accordance with section E of Appendix A of the regulation, a statement that interest cannot remain on deposit and that payout of interest is mandatory.

Recognizing Reg DD doesn’t address when no rate is used, but UDAAP and UDAP speak to unfairness and is a foundation to Fair Banking. I can see your concern with no rate. Because the question in my mind is someone getting quoted something different? Why can’t the rate and APY be in the add? etc.

Ultimately, this would be a business decision. But I agree it needs to be looked at through a UDAP lens.

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[Annmichele]

Our marketing team wants to post an ad that states, “Grand Opening Special 15-month certificate of deposit. Call for Rate.” Is this allowed? Not to give a rate. UDAAP is in the back of my mind….
Thanks,
Ann Michele

[Kimberly Boatwright, CAMS, CRCM]

Hi Cindy –

I guess my questions is why do they want to do this? Pretty risky in today’s environment. However, you are correct in your whole assessment.

1. Yes, you will have to update the language in your disclosures, agreements, and provide the proper notification.

2. Yes, Fees are being scrutinized heavily using UDAAP standards. Firstly, you would need to have a very good reason for the $10 additional fee. You will need to clearly be able to explain ” the Why”. Without using explanations that show it to be fee income for the financial institution. To do that you will mostly likely need a break out of how much it costs the FI to have them close the CD early. It will be a hard sale if this process for opening and closing is basically automated. Even “employee” time spent opening or closing the account is probably not much by way of time or process.

The institution will need to prove the new standard is not “unfair” or “abusive”. Unfair because people are living paycheck to paycheck right now and we are in an “recession”. So why charge the interest penalty and the extra $10. Abusive because it will be a policy that could hurt a person or persons who really need their money. They could be in financial hardship that they didn’t have when it was opened. As long as disclosures properly explain the fee the institution should be able to avoid a “deceptive” standard.

3. Two other consideration,
a. Fair Banking. Fee Waivers – If there is the ability for the employee to waive any of the fees (interest and/or the $10) you are going to need a very good policy, procedure, and tracking mechanism. It will need
to be monitored and trended to spot potential issues/disparities, which ultimately for deposit accounts will tie back to UDAAP.
b. Reputation Risk – Complaints – You’re going to want to watch these closely as well. As you know, no amount of disclosing ever prevents complaints by depositors. So you will want to look for these as they could
be early warning signs. If they hit social media they could catch the eye of the CFPB and/or your Federal and State regulators, as well as special interest groups.

Hope this helps provide another opinion on the risky practice charge fees. Please let us know if you have other thoughts or question.

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[Kimberly Boatwright, CAMS, CRCM]

No, you may not place any funds on hold unless you have reason per Availability of Funds and Collection of Checks (Reg CC )(https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-229).

From a business decision – Suggestions to consider: Placing the funds on deposit into a short term CD. A draw type account for the construction loan purposes that they can make interest on.

These are of course just suggestions but are not hard fast requirements. Your FI, will need to make decisions on how you would handle and disclose this type of transaction for all borrowers to avoid potential fair lending, fair banking, and/or UDAAP issues.

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[Kimberly Boatwright, CAMS, CRCM]

Choosing to provide a coupon book is a business decision. If your FI is choosing to not provide these in the future you will just need to determine the date you will eliminate the practice and use that date as your go forward standard. Things to consider:
1. You can charge for the book if you have customers who would like one. However, you will not want to use it as a fee income opportunity. To avoid any potential UDAAP issues, the fee needs to be reasonable. IMO, reasonable will be the cost to the bank is passed off to your customer. If lenders are allowed to waive fees, this will be another one you will need to track and monitor to ensure customers are being treated the same.
2. Monthly statement for car loans – there is no regulatory requirement that FIs send out periodic statements for this type of loan. So not offering coupon books will not change the practice you are using today. There are FIs that do send out periodic statements on installment loans, however it is a business decision.

Best,
Kimberly

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[Kimberly Boatwright, CAMS, CRCM]

When considering an answer to your question. It appears you have a policy in place that doesn’t allow for the release of liability and considerations to policy is an exception to your FI’s lending requirements. In my opinion you have more fair lending risk than either UDAAP or Consumer Purpose at this stage of the life of loan. You need to look at this as a business decision and the impact it would have on safety and soundness and fair lending risks. If you were to grant an exception to policy couple of things to consider:
1. What happens in the case of a default? How will the FI recover the loss?
2. Do you have strong guidelines in place to make an exception to the policy? Have you have clearly defined requirements to grant the exception so that any other borrower has the same opportunity? Factors of consideration are based on tangible equally achievable standards, things like payment history, LTV, DTI and credit score. Nothing that is subjective? (I.e. good customers, good friends with so and so… )

Hope this helps.

Kimberley

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[James White]

We have a borrower situation presented recently that concerns consumer-purpose and UDAAP:

Two brothers operate a partnership, and the partnership as an entity, with the two brothers signing, have a mortgage on one of the brother’s homes. This was deemed consumer-purpose at the time (5+ years ago), but the brothers have recently decided they wish to disband the partnership. Our question came up as to doing a release of liability vs. doing a refinance. Given current market conditions, the brothers would prefer to not refinance as it would cause a dramatic rate increase for the loan. Our policy mentions that any consumer loan is not eligible for release of liability. Would we be in danger of a UDAAP violation if we entertained the release of liability in this case, if we then had to consider future similar situations for a release of liability? Ability to Repay for the brother and the home are considerations, are there any other compliance concerns in Reg X or elsewhere to consider?

[susan costonis]

The CFPB has raised recent concerns about ODP programs. This is a link to a press release in January: https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-launches-initiative-to-save-americans-billions-in-junk-fees/

The OCC also spoke about ODP concerns and POSSIBLE reforms at this link: https://www.occ.treas.gov/news-issuances/news-releases/2021/nr-occ-2021-129.html

This is a link to the basic ODP requirements: https://www.consumerfinance.gov/rules-policy/regulations/1005/17/#c-1

My best suggestion is to check directly with YOUR primary regulator regarding this question. The FDIC has additional requirements, for example.

Generally speaking, regulators have cited enforcement actions for ODP that focused on UDAAP, unfair, deceptive, and abusive acts and practices. These actions are issued when the deposit agreement and ODP agreement aren’t sufficiently clear for a consumer to anticipate how fees are assessed.

As this regulatory shift plays out, industry watchers say that it is probable that at least five limitations are likely:
(1) restrictions on the total dollar amount of fees per day regardless of the number of overdrafts or the amount of account shortage;
(2) allowance of only one fee per overdraft even if the payee re-submits the transaction;
(3) a ban of return check fees (NSFs) when a separate overdraft fee is charged;
(4) prohibition of interest charges on overdraft fees that remain unpaid; and
(5) disallowance of an institution closing an account based solely on repeated overdraft experiences.
In addition to the above, other possible modifications include such things as:
•restrictions on marketing of ODPs and the changes to the prior practices — such as a Pew Trust industry-style-explanatory warning box on monthly account statements;
•regulatory examination of overdrafts as extensions of credit and requiring TILA, ECOA compliance;
•formalized regulatory examination of ODP practices which may include required reporting of fee waivers and refunds in the Call Reports of banks larger than $1 billion in assets (not a current requirement);
•special protections for customers/communities of color which bear the most impact from such fees. Indeed, a recent Financial Health Network study has estimated that Hispanic households paid $3.1 billion in fees in 2020 and Black households paid $1.4 billion;4 and
•discontinuance of immediate recapture in full of ODP fees upon the first deposit made to the accounts and possible repayment periods of 3 months for these fees.
The Bureau’s comment period for new rules closes March 31, 2022. The identified timetable for action is considered to be mid-2022, and many of the larger financial institutions have decided to get ahead on this issue and to voluntarily make changes.

[jholzknecht]

TRID applies to a transaction subject the Regulation Z that is secured by a dwelling. A loan made in the commercial department may be subject to Regulation Z. If the loan is made to an entity, such as a corporation or a LLC, then Regulation Z and TRID do not apply. Although a TRID disclosure is not required in such a transaction, it is not a violation to provide the disclosure. If the TRID disclosure contains errors, the financial institution would have liability, either under Truth in Lending or under UDAAP.

[jholzknecht]

The borrower was offered a set of terms, then the deal changes. If the initial terms were changed because the borrower didn’t qualify, so then different terms were offered and accepted you have a typical counteroffer. If the lender just changed his/her mind about the terms you may have a UDAAP problem – bait and switch.

[jholzknecht]

More information is needed. If the borrower rejected the initial terms and then was offered new terms, the action is a counteroffer. If the borrower was offered one set of terms, but based on underwriting a different set of terms is offered, then the lender’s counter offer may be adverse action. If the terms were changed without cause, the action may be a UDAAP violation.

[afaust]

The following Q&A came in during our recent webinar on “Regulation Z Rules for Home Equity Lines of Credit”:

Question: Since the Official Interpretation of “Advertisement” excludes “Communications about an existing credit account (for example, a promotion encouraging additional or different uses of an existing credit card account)”, our understanding is that marketing materials for existing HELOCs (e.g., promoting additional draws on a HELOC) are not subject to the advertising requirements prescribed in Reg. Z Sec. 1026.16. Thus, if those marketing materials for existing HELOCs refer to a promotional rate, there is no requirement that the materials also refer to a post-promotional rate, as would be required under Sec. 1026.16(d)(6) for “advertisements” promoting the origination of HELOCs.

Do you agree?

Answer: I agree with your logic. I can find nothing in the Regulation or the Official Interpretation that directly addresses the issue.

I do have a concern. If your “non-advertisement” advertisement provides the good news (the promotional rate) but fails to include the bad news (the post-promotional rate) the failure might be viewed as a deceptive act or practice in a UDAP or UDAAP action.

You could raise the issue directly with the CFPB. If the agency agrees with your viewpoint then you would have comfort that the CFPB would be unlikely to cite a violation; however their approval would offer no protection from civil liability. If the CFPB disagrees with your viewpoint, then your organization would be damned if it proceeded without approval.

I suggest that you contact legal counsel and obtain a written legal opinion on the issue. If counsel provides a positive response, then if adverse action results from a regulatory agency or from a civil case, then recourse against counsel would provide some level of offset to the legal liability.

[kmeade]

Question-related to forum post “Requiring deposit acct as condition of loan.”
I am just verifying that it is okay to require the customer to open an account as a condition of the loan. Are there any other restrictions associated with requiring a consumer to open an account as a condition for a loan?

I understand the need to monitor for consistency to avoid Fair Lending and UDAAP violations.

Hypothetical example: Every customer must open or have a deposit account to get a new loan?