Compliance Matters

An NCUA Letter to CUs addresses indirect lending red flags.

October 1, 2010

NCUA’s Indirect Lending Concerns

The National Credit Union Administration (NCUA) has issued Letter to Credit Unions No. 10-CU-15 that addresses how credit unions should exercise good risk management practices in their indirect lending programs. The agency notes that it “has seen seemingly healthy credit unions fail in a matter of months due to indirect lending programs that spun out of control.”

An indirect lending program typically involves a credit union having an arrangement with a merchant to originate its loans at the point of sale, especially for automobile purchases. Other indirect lending relationships allow a third party, such as a credit union service organization (CUSO), to perform activities related to indirect lending, such as underwriting, servicing, repossession, or insurance processing.

In the past, NCUA has cautioned credit unions about rapid growth in indirect lending because it can quickly result in a notable change in the credit union’s balance sheet. NCUA issued its recent letter because of concerns about an increase in repossessed cars, indirect lending delinquencies, and loan losses.

NCUA says that “regardless of the type of indirect lending relationship established, no credit union should delegate loan-approval authority to a third party. Every credit union has the responsibility to perform its own due diligence [and] establish effective control and monitoring systems to mitigate the risks to the credit union’s earnings and net worth.”

NCUA’s letter advises credit unions about what warning signs or “red flags” its examiners will look for that may require a credit union to slow down its indirect lending.  Examples include inadequate controls, incentive programs for loan officers tied to volume, and frequent refinancing.  NCUA details what due diligence steps it expects in a sound indirect lending program.

Credit unions should make sure they track these letters because many of them discuss issues of high priority for examiners. Find all the agency’s Letters to Credit Unions at,where you also can sign up for an “NCUA Express” subscription and receive e-mail notifications when the agency posts new letters.  

 New ATM Accessibility Rules

The Justice Department has issued new rules implementing the Americans with Disabilities Act (ADA), which update ADA standards governing the construction and alteration of facilities covered by the ADA protections. The 2010 standards are based on revised minimum guidelines the U.S. Access Board previously established in 2004. Of interest to many credit unions will be the board’s new standards for ATMs. 

The standards detail new requirements for ATMs, including communication-related requirements to make ATMs usable by people who are vision-impaired. Where ATMs are provided, at least one accessible machine must be provided at each location. If a credit union provides both interior and exterior ATMs, generally they will be considered separate locations. 

To meet the accessibility standard, ATMs—including those with speech capabilities and those that are wheelchair-accessible—will have to provide all the functions provided to consumers at that location at all times. For example, it will be unacceptable for the accessible ATM only to provide cash withdrawals while inaccessible ATMs have additional functions.

While the department’s new regulations will generally take effect next spring, compliance with the 2010 standards for accessible ATMs isn’t required until early 2012. Complete requirements and compliance dates are available at CUNA’s eGuide to Federal Laws and Regulations.

Monitor FDIC’s Overdraft Proposal

The Federal Deposit Insurance Corp. (FDIC) issued a proposal requiring state-chartered banks under its jurisdiction to go further in incorporating consumer protections in their overdraft programs than the Federal Reserve Board’s overdraft regulations that went into effect in mid-August. Why monitor what the FDIC is proposing?

Under the Fed’s new overdraft rules, all banks and credit unions must now obtain “opt-in” consent from accountholders before charging fees for covering ATM and one-time debit transactions when there are insufficient funds in the account. An “opt-in” isn’t required by the Fed’s rules to cover a check or an automated clearing house (ACH) payment (such as used for online bill-paying services) when the account doesn’t have adequate funds.

The FDIC proposes that banks that rely on automated overdraft payment programs must establish procedures to address all types of overdrafts, including those triggered by checks and ACH transfers. The FDIC says that bank practices should:

• Promptly honor a customer’s request to decline payment rather than to cover the overdraft and charge a fee (that is, to “opt-out” of an overdraft system).

• Educatethe account-holder about alternative overdraft payment products.

• Monitoraccounts and take meaningful action to limit overdraft use by a customer, including “giving customers who overdraw their accounts on more than six occasions during a 12-month period” less costly alternatives or eliminating overdraft protection on the account.

• “Instituteappropriate daily limits on overdraft fees” (whether by capping the amount of transactions subject to an overdraft fee or putting a dollar daily limit on the fee); and

• Not processtransactions in a manner designed to maximize the cost to consumers (such as processing largest checks first).

Bank examiners would use this guidance to evaluate the adequacy of a bank’s overdraft program. A number of the proposed provisions were drawn from bills in Congress to restrict overdraft programs.

If adopted by the FDIC, CUNA believes the new Consumer Financial Protection Bureau could eventually apply such requirements to credit unions as well as to all banks. While many credit unions already address points raised in the FDIC’s proposal by educating members on alternatives, addressing overusage, and honoring “opt-out” requests, having these actions subject to examiner scrutiny may raise concerns about credit unions losing additional flexibility in designing their overdraft protection programs.

A final FDIC decision isn’t expected for several months.

Compliance Q & A

Q: If a credit union increased its annual percentage rate (APR) on cash advances on all members’ credit card accounts in July 2009 based on a review of market conditions, will it be required to review all of its credit card accounts every six months to determine whether a reduction in the cash advance APR is warranted?

A: The credit union won’t be required to conduct a separate review on each individual credit card account, in order to comply with the new Regulation Z rules that became effective Aug. 22, 2010, which implement requirements in the 2009 Credit Card Accountability, Responsibility, and Disclosure (CARD) Act. Since the APR increase was imposed after Jan. 1, 2009, however, the credit union would be required to re-evaluate the cash advance APR increase no less than every six months based on factors such as market conditions or its cost of funds that it currently uses to determine whether general rate increases are necessary.

If the credit union determined that a rate reduction is required as a result of the review, the final Reg Z rule requires the rate be reduced within 45 days after completion of the evaluation. The rule doesn’t require any specific rate reduction, but only requires a reduction to a lower APR. The rule also requires the credit union to continue to review such rate increases every six months unless the rate is reduced to the same or lower rate that applied prior to the increase.

Postsecondary Educational Expenses

The term “postsecondary educational expenses” has been defined in Reg Z as any of the expenses listed as part of a student’s cost of attendance—as defined by the Higher Education Act of 1965—at a covered educational institution.

These expenses include tuition and fees, books, supplies, miscellaneous personal expenses—including a reasonable allowance for the documented rental or purchase of a personal computer—room and board, and an allowance for any loan fee, origination fee, or insurance premium charged to a student or parent for a loan incurred to cover the cost of the student’s attendance. 

Q: While applying for a closed-end loan, a credit union member indicated that she would use the loan proceeds to purchase a computer for her son in college. Will the credit union have to comply with the Reg Z disclosure requirements for private education loans.

A: Yes, it will, because the borrower has expressly indicated the loan proceeds will be used to pay for postsecondary educational expenses--a computer for her son in college. Section 46(b)(5)2i of the Reg Z commentary states that “…If the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses by indicating the loan’s purpose on an application, the loan is a private education loan…."

Section 46(b)(5)2ii states that “…The creditor may rely solely on a check-box, or a purpose line, on a loan application to determine whether or not the applicant intends to use loan proceeds for postsecondary educational expenses…”

Nevertheless, the Fed has indicated that a verbal indication that loan proceeds will be used for postsecondary educational expenses also would obligate the credit union to provide the required Reg. Z disclosures.