UDAP!  Lately, the mere mention of this term gets my attention very quickly.  The Federal Trade Commission's Unfair or Deceptive Acts and Practices (UDAP) seems to be the "go to" for regulatory agencies.  Especially when there isn't a specific regulatory reference for something the bank's doing or involved in that they don't like.   At the ABA Conference in June the message from the regulatory agencies was quite clear:

1. Protect the consumer!
2. Regulators think they are getting better at applying the UDAP concept -yikes!
3. Watch out for the following:

• Posting debit transactions from high dollar amoun to low dollar amount
• Mortgage pre-qualification and pre-approval letters language

Over the next couple weeks we will be featuring some blogs of little tid bits we learned at the ABA Conference this past June.  First on the list, "what is a PEL"?

PEL simply stands for Private Education Loan.   If you didn't already know, Regulation Z now has very specific disclosure and timing rules concerning closed end consumer loans not secured by a dwelling that are intended to be used in whole or in part for education expenses.  Sounds pretty simple right, well.... not quite.  

Many banks have indicated they have not and do not intend to make private education loans only to find out through an audit that their lenders do in fact make these types of loans.  For example, a PEL includes funds used to purchase books, boarding, tuition, computers, consolidation loans and yes, even transportation (i.e. a car). 

At the very least lenders need to know what is considered a PEL so they can confidently explain to an examiner that they do not make PELs.  Now may be a good time to review this with your lending personnel.

As most of you are already aware, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010.  This Act permanently raised the current standard maximum deposit insurance amount to $250,000. The reason we wanted to bring this to your attention is that we have been hearing examiners are already looking for updated FDIC signs, website disclsoures, etc.  According to FIL 40-2010, official FDIC signs may be ordered free of charge.  Add this to your "to do" list today!

There are a lot of compliance resources out there.  Knowing which one to use is difficult.  My favorite regulatory manual is the Federal Reserve's Consumer Compliance Handbook.  You can download the entire manual for free from the FRB (warning: It's 552 pages!).

If you have this handbook already, the FRB updated 3 chapters in the not too recent past:  HMDA, TISA and RESPA.  Here's an announcement from the FRB about these updates:

Updates to the Regulation C examination procedures reflect changes to the threshold for the reporting of pricing information on higher-priced loans. The changes to Regulation C conform the threshold for rate spread reporting to the definition of "higher-priced mortgage loans" included in amendments to Regulation Z (Truth in Lending).

Changes to the Regulation DD examination procedures address the requirement that all depository institutions must disclosure aggregate overdraft fees on periodic statements. The changes also address the requirements for balance disclosures provided to consumers through automated systems.

RESPA examination procedures have been updated to reflect regulatory changes by the Department of Housing and Urban Development (HUD) to Regulation X. A number of technical changes provide streamlined mortgage servicing disclosure language, eliminate outdated escrow account provisions regarding the phase-in period, and permit an "average charge" to be listed on the Good Faith Estimate (GFE) and HUD-1/1A Settlement Statement. Key substantive changes include a standardized and binding GFE form and revised HUD-1/1A Settlement Statement.

I keep a copy of the FRB Handbook on my computer desktop in an Adobe (pdf) version.  That way I can cut/paste, highlight, take notes, etc. in an electronic format. Of course, you'll need the full version of Adobe to do more than just read it.

It doesn't appear the FRB is selling a "hard" copy of the manual anymore.  You can download chapters of the Handbook, rather than the entire 552 pages.  You can find it, and other FRB manuals, at the FRB's Supervision Manuals page.  If you are a subscriber to our monthly newsletter, Banking on BCC, we alerted you to this update back in July.

The Federal Reserve Board recently issued clarification about TISA's requirement to list month-to-date and year-to-date overdraft fees on periodic statements.  The memo:

• Indicated the term "Total Overdraft Fees" is required when disclosing such fees on periodic statements (effective October 1, 2010).
• Clarified that when disclosing balance information through automated systems for retail sweep accounts, the regulation does not require an institution to exclude funds from the consumer's balance that may be transferred from another account pursuant to a retail sweep account program.
• Stated when listing overdraft fees and returned item fees in the required table on periodic statements, the table should have internal lines to distinguish rows and columns. The FRB provides the following illustration:

The FRB also issued updated exam procedures for Regulation DD. You can find them here.

I'm outraged!  Not because President Obama signed the new Dodd-Frank Wall Street Reform and Consumer Protection Act - that makes me mad too - but there's more.  The White House released a video called "What Wall Street Reform Means to  You."  The video explains briefly and grossly the financial crisis we just went through, blaming banks for the mess and then justifies the new law.  The video:

• Compares banks to gamblers, "playing and gambling with (consumers) money", at casino's.
• States "As a result millions became unemployed."
• Says "Consumers had to fill out unintelligible mortgage documents for the bank." Now let me ask "Who requires all of those documents?" Duh - the government!
• States "This risky behavior had to be stopped."

After blaming bankers for the economy, it goes on to explain how the new consumer protection agency will:

• "Make those unintelligible mortgage documents a whole lot easier." (Yeah - can't wait to see that!)
• Says there will be "no more betting - just banking."
• And then says at the end "(this law) protects consumers from the bank."

Amazing!  I've always said you can't regulate ethics and I also believe regulations suppress the free enterprise system.  Not that this is new, but this Act will punish the ethical and suppress our economy even more - mark my words.  I predict many smaller institutions will simply sell or close as the dozens of new regulations will be a huge burden.

So who pays for all of these new regulations?  Consumers, of course.  This is the same government that believed the new RESPA rules would save home loan borrowers $800+ dollars per loan (this isn't supposed to be funny), this new law will cost Americans severely.

Sorry to be so pessimistic, but this law is BAD!  And the White House video is very unprofessional, blankets all bankers and blames bankers for the decisions of a few.  Shame on them!

On July 15, 2010, a press release from the House of Representatives indicated that they had passed H.R. 5114, which makes key reforms to the National Flood Insurance Program (NFIP) and reauthorizes the flood program for 5 years.  Action is still required by the Senate before the reforms take effect.

Congresswoman Maxine Waters (D-CA) stated, "Reauthorizing and improving the flood insurance program helps homeowners, businesses and communities throughout the country...this legislation restores stability to NFIP which it lacked while subject to lapses and only temporary extensions.  During lapses in the flood insurance program over the past year, FEMA was not able to write new policies, renew expiring ones or increase coverage limits."

Improvement to the flood insurance program by phasing in actuarial rates for pre-FIRM properties (those built before the effective date of the first Flood Insurance Rate Map for a community), along with raising the maximum coverage limits, providing notice to renters about content insurance, and establishing a Flood Insurance Advocate (similar to the Taxpayer Advocate at the Internal Revenue Service) is what this new H.R. 5114 is all about.

While these will all be good changes, I think the one we are most excited about is the extension of the NFIP for 5 years.  This will create a lot less headaches because you won't have to be constantly checking if the program has expired.

It appears to be inevitable that the financial regulatory reform bill will pass.  The House passed the bill on June 30, by a vote of 237-192.  The Senate appears to have the necessary votes to pass their version of the bill - perhaps today.  President Obama said he plans to sign the bill next week.

The New York Times reported the following summary today:

"To reduce the odds of a future crisis, the Democratic plans would take three basic steps. First, regulators would receive more authority to monitor everything from mortgages to complex securities. This is meant to keep future financial time bombs, like the no-documentation loans and collateralized debt obligations of the past decade, from becoming rife. Second, financial firms would be forced to reduce the debt they take on and to hold more capital in reserve. This is the equivalent of requiring home buyers to make larger down payments: more capital will give firms a bigger cushion when investments start to go bad. Finally, if that cushion proves insufficient, the government would be allowed to seize a collapsing financial firm, much as it can already do with a traditional bank. Regulators would then keep the firm operating long enough to prevent a panic and slowly sell off its pieces."

But there's more . . . lots more.  The new legislations established a new regulatory agency - the Consumer Financial Protection Bureau (CFPB).  The sole mission of the CFPB is to protect consumers.  From whom?  Bankers!  The CFPB will serve as a "cop" according to the Consumer Federation of America.  You read that right.  In the past, consumer regulations were meant to inform intelligent consumers about a transaction or account.  The times have changed.  Now the government assumes consumers are ignorant and they need protection - not just information.

According to the Baltimore Business Journal, these new requirements will strike small, community banks hard.  It will add many more regulatory compliance requirements to an already heavy burden.

Now, bankers say, they are facing as many as 30 new regulations.

Among the changes: They will have to provide regulators with reams of new information about loans to small businesses and other customer transactions. They will be required to disclose more information to consumers about mortgages and other loans. And banks will see limits on how much they can charge retailers for processing debit card transactions, reducing a significant revenue stream.

"It will be a new world for community banks," said Kathleen Murphy, CEO of the Maryland State Bankers Association. The new rules will be on top of 50 regulations already imposed on banks in the past two years, bankers say.

The burden of complying with a new financial regulatory reform bill could push some of the nation's community banks to merge or sell to larger institutions, the head of the Maryland State Bankers Association said.  Ouch!

This new bill weighs in at over 2,500 pages.  (Here's an 11 page summary of the Senate's version of the bill.)  It promises to most changes to our nation's banking system since the New Deal in the 1930's.  And it comes at a tough time for community banks.

My only advice is to hang in there and be ready for change.  In fact, we're suggesting a new title for Compliance Officers: "Change Officers".

As I predicted, the Senate did pass the Financial Reform Bill today.  Wolters Kluwers wrote a great summary of the Bill and have a short audio podcast you can listen to.  Unfortunately, this is just the beginning of many regulatory changes to come.  Have a NICE day!

Congress has done it again.  They extended the Flood Insurance program today until September 30, 2010.  Here we go again.  If memory serves me correctly, this is the 3^rd time this year the NFIP has lapsed and Congress has extended it for a short time.  So what do you think will happen on September 30^th? 

Here's a link if you'd like to read it yourself.