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On July 17, the CFPB announced a new Compliance Assistance Statement of Terms Template (CAST Template) under its Compliance Assistance Sandbox (CAS) Policy issued to a company’s program designed to help employees build emergency savings. Specifically, under the approved template, known as “Autosave,” interested employers could help employees build emergency savings by directing a portion of the employee’s pay to an employee-designated account at a financial institution; or if an employee does not designate an account, directing the funds to an “Autosave” account at an employer-designated institution. The Bureau notes that a CAST Template is necessary for this program due to the legal uncertainty around the application of the “compulsory use” prohibition in the Electronic Fund Transfer Act (EFTA), and Regulation E. However, the applicants assert the Autosave program embodies a “reasonable default enrollment method,” which, according to the Bureau, can be consistent with the consumer choice requirements of the EFTA and Regulation E.
On April 13, the CFPB issued an Interpretive Rule (IR) addressing the “Treatment of Pandemic Relief Payments Under Regulation E and Application of the Compulsory Use Prohibition.” Pursuant to the CARES Act, many consumers are entitled to pandemic relief payments, generally provided through direct deposit to the consumer’s bank account. When that information is unavailable, or when the consumer does not have a bank account, the IR allows government agencies to provide the economic impact payments via alternative means, including by issuing prepaid account cards. However, the Electronic Fund Transfer Act and implementing Regulation E prohibit government agencies from requiring consumers to “establish accounts for receipt of electronic fund transfers with a particular financial institution as a condition of receipt of a government benefit. ” According to the IR, the “compulsory use prohibition” will not apply to prepaid cards and the Covid-19 relief payments will not be classified as government benefits, provided the cards fulfill certain requirements. In order to not be considered “government benefits” the payments must: (i) be to aid consumers impacted by Covid-19; (ii) not be “part of an already-established government benefit program”; (iii) be distributed “on a one-time or otherwise limited basis”; and (iv) not require consumers to apply for the funds.
On April 10, the CFPB announced the release of a policy statement “Supervisory and Enforcement Practices Regarding the Remittance Rule in Light of the COVID-19 Pandemic” addressing the implementation of the Electronic Fund Transfer Act (EFTA), and the Regulation E Remittance Rule (Rule). EFTA’s consumer protections, implemented by the Rule, require financial companies handling international money transfers, or remittance transfers, to disclose the exact exchange rate, fees, and amount delivered to the consumer making the transfer. However, it also provides a temporary exception, which allows institutions that provide remittance transfers to estimate these fees to consumers. (Covered by InfoBytes here.) The temporary exception is set to expire on July 1, and section 919 of the EFTA does not authorize the Bureau to extend it past that date. Accordingly, “[i]n order to minimize the impact of the pandemic on the remittances market…the Bureau will neither cite supervisory violations nor initiate enforcement actions against certain remittance transfer providers” for disclosing estimated fees and exchange rates from July 1 until January 21, 2021.
On December 18, the CFPB issued its mandated annual report to Congress covering activity in 2016 and 2017 pertaining to the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). The report describes enforcement actions brought by the Bureau and federal agencies related to TILA, EFTA, the CARD Act (and respective implementing Regulations Z and E), as well as data on required reimbursements to consumers. The report also includes a compliance assessment of TILA and EFTA violations. Federal Financial Institutions Examination Council (FFIEC) member agencies report that more institutions were cited for violations of Regulation Z than Regulation E during the 2016 and 2017 reporting periods, and that the most frequently reported Regulation Z violations include (i) failing to disclose, or to accurately disclose, the finance charge on closed-end credit; (ii) failing to disclose good faith estimates on disclosures for closed-end credit; and (iii) failing to provide consumers with specific loan cost information on closing disclosures. The most commonly cited Regulation E violations include (i) failing to comply with investigation and timeframe requirements when resolving errors in electronic fund transfers; and (ii) failing to provide applicable disclosures. In addition, the report recaps FFIEC outreach activities related to TILA and EFTA, such as workshops, blogs, and other outreach events.
On December 3, the CFPB issued a Notice of Proposed Rulemaking (NPRM) relating to the Remittance Transfer Rule (Rule), which implements the Electronic Fund Transfer Act’s (EFTA) protections for consumers sending international money transfers, or remittance transfers. The NPRM makes three proposals. First, the Bureau proposes to increase the Rule’s safe harbor threshold, mitigating compliance costs for financial institutions. The EFTA and the Rule consider a “remittance transfer provider” to include “any person that provides remittance transfers for a customer in the normal course of business.” However, the Rule currently includes a “safe harbor” provision that excludes persons that process 100 or fewer remittance transfers annually. The NPRM proposes increasing this threshold from 100 to 500 international remittance transfers per year. According to the Bureau’s announcement, the change would “reduce the burden on over 400 banks and almost 250 credit unions that send a relatively small number of remittances—less than .06 percent of all remittances.”
Second, the NPRM proposes adopting two permanent exceptions. The first is a permanent statutory exception that would allow certain insured institutions to estimate exchange rates and money transfer fees they are required to disclose, rather than provide consumers with exact costs when they send money abroad. Such an exemption would only apply in instances where a remittance payment is made in the local currency of the designated recipient’s country and the insured institution processing the transaction made 1,000 or fewer remittance payments to that country in the previous calendar year. An identical exemption provision is currently set to expire July 21, 2020. (Previous InfoBytes coverage here.) The NPRM proposes adopting a second permanent exception to allow insured institutions to estimate covered third-party fees for remittance transfers to a recipient’s institution provided, among other things, the insured institution made 500 or fewer remittance transfers to the recipient’s institution the prior calendar year.
Third, the NPRM requests comments on a list of safe harbor countries for which providers may use estimates for remittance transfers.
Comments must be received 45 days after publication in the Federal Register. In conjunction with the NPRM, the Bureau also released a summary of the NPRM, a table of contents, and an unofficial redline of the proposed amendments to the Rule.
11th Circuit reverses dismissal of EFTA action alleging inadequate overdraft notice, denies EFTA safe harbor defense
On August 27, the U.S. Court of Appeals for the 11th Circuit reversed the dismissal of a consumer’s action against her credit union, in which the consumer alleged the credit union used the wrong balance calculation method to impose overdraft fees. According to the opinion, the consumer filed suit against the credit union for using an “available balance” calculation method to impose overdraft fees on her account when the credit union allegedly agreed to use the “ledger balance” method at the time of account opening, in violation of the Electronic Fund Transfer Act (EFTA) and various state law contract claims. The district court dismissed the action, concluding that the agreements “unambiguously permitted [the credit union] to assess overdraft fees using the available balance calculation.”
On appeal, the 11th Circuit disagreed with the district court’s interpretation of the agreements. The court noted that while the opt-in overdraft agreement used by the credit union is based on Regulation E’s (the EFTA’s implementing regulation) Model Form A-9, the model does not address which account balance calculation method is used to determine whether a transaction results in an overdraft. The language chosen by the credit union, according to the appellate court, is “ambiguous because it could describe either the available or the ledger balance calculation method for unsettled debits” and therefore, does not describe the calculation in a “clear and readily understandable way” as required by Regulation E. Because the language was ambiguous, the consumer did not have the opportunity to affirmatively consent to the overdraft service. Moreover, the appellate court concluded that the credit union was not protected under the EFTA’s safe harbor because it used the Model Form A-9 text. Specifically, the appellate court reasoned that the “safe-harbor provision insulates financial institutions from EFTA claims based on the means by which the institution has communicated its overdraft policy,” but does not provide a shield from allegations of inadequacy. Because the consumer argued that the credit union violated the EFTA due to its failure to prove enough information to allow for affirmative consent, the safe-harbor provision does not preclude liability.
On June 13, the FDIC released a new publication, Consumer Compliance Supervisory Highlights, intended to provide information and observations related to the FDIC’s consumer compliance supervision activities in 2018. Specifically, the report covers approximately 1,200 consumer compliance examinations conducted by the FDIC in 2018. Overall, the FDIC noted that, “supervised institutions demonstrated strong and effective management of consumer compliance responsibilities.” The report identifies some of the most salient compliance issues identified by the FDIC during 2018, including (i) overdraft programs, which were found to be potentially unfair or deceptive when an institution used an “available balance method,” sometimes resulting in more overdraft fees than were appropriate because the institution assessed a fee when the transaction did not overdraw the account; (ii) RESPA anti-kickback violations, which concerned payments “disguised as above-market payments for lead generation, marketing services, and office space or desk rentals” or as marketing and advertising agreements; and (iii) Regulation E, where certain institutions were found to have incorrectly calculated consumer liability for unauthorized transfers, failed to resolve errors properly, or discouraged consumers from filing error resolution requests. The report also covers issues with skip-a-payment loan programs and the calculation of finance charges and disclosures related to lines of credit.
On February 22, the FDIC issued FIL-9-2019, which announces revisions to interagency examination procedures for evaluating compliance with the CFPB’s Prepaid Accounts Rule. The Rule was originally finalized in October 2016 and expands coverage under Regulation E to provide consumers, among other things, additional federal protections on prepaid financial products, person-to-person payment products, and other electronic accounts with the ability to store funds. (Covered by InfoBytes here.) In January 2018, the CFPB finalized updates to the Rule and delayed the effective date until April 1, 2019. (Covered by InfoBytes here.) The FIL contains a link to the interagency procedures listed in the FDIC Compliance Examination Manual and confirms that after April 1 the examination staff will begin supervising institutions for compliance with the rule.
As previously covered in InfoBytes, the CFPB recently released its summer 2017 Supervisory Highlights (Highlights) outlining its supervisory progress this year. Included among the issues highlighted by the Bureau is its recent activity in the remittance transfer rule (RTR) space under Regulation E. The Highlights indicate that the CFPB intends to continue its focus on RTR compliance at both large and small institutions. Of particular note, the Bureau—for the first time—has provided informal guidance on international mobile top-up products for telephone airtime. Prior to the Highlights, it was unclear to what extent these products were subject to the RTR. The Highlights confirm that the CFPB will take the position that these products fall within the scope of the rule and has taken supervisory action against at least one institution for that institution’s failure to treat international mobile top-ups in excess of $15 as remittance transfers subject to the RTR.
This edition of the Highlights helps to clear up prior confusion around the industry regarding international mobile top-ups and bill pay products, as discussed in a recent article.
Buckley Sandler Special Alert: CFPB Releases Four Prototype Overdraft Disclosure Forms and a Report on Frequent Overdrafters
On August 4, the CFPB released four new prototype overdraft opt-in model disclosure forms and a report titled “Data Point: Frequent Overdrafters.” A summary of the forms and report are provided below. The prototype forms are still in the process of being developed, and the Bureau is requesting feedback as it works toward finalizing them, but the prototypes are intended to replace the current model form A-9 found in Appendix A of Regulation E. The report focuses on bank customers who overdraft their accounts more than 10 times per year and provides context to the Bureau’s concerns on the impact overdraft services may have on financially vulnerable consumers.
Although overdrafts have long been a focus of the CFPB’s enforcement and supervisory activities, this represents the first sign of movement by the Bureau toward the potential new overdraft services rulemaking listed on its 2017 rulemaking agenda, which is currently in the pre-rule stage. We anticipate that aspects of the approach and language contained in these prototype forms may eventually make their way into account agreements. We invite you to review the forms and report to gain insight into the CFPB’s view of overdraft services and the types of concerns the Bureau may attempt to address in future rulemaking.
If you have questions about the report or other related issues, please visit our Retail Banking practice page, or contact a Buckley Sandler attorney with whom you have worked in the past.
- Jonice Gray Tucker to moderate “Pandemic relief response and lasting impacts on access, credit, banking, and equality” at the American Bar Association Business Law Section Spring Meeting
- Jeffrey P. Naimon to discuss "Post-pandemic CFPB exam preparation" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Making fair lending work for you" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Reading the tea leaves of President Biden’s initial financial appointees" at LendIt Fintech
- Moorari K. Shah to discuss “CA, NY, federal licensing and disclosure” at the Equipment Leasing & Finance Association Legal Forum
- Jonice Gray Tucker to discuss "Compliance under Biden" at the WSJ Risk & Compliance Forum
- Sherry-Maria Safchuk to discuss UDAAP at an American Bar Association webinar
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference