Compliance Blog

Written by Steve Van Beek

We've discussed the Philadelphia Federal Reserve's Consumer Compliance Outlook a few times - including the following common compliance violations:

• Regulation B - Spousal Signatures
• Regulation B - Adverse Action Notices

Today, I wanted to highlight a common Reg Z violation (according to Federal Reserve examiners) which stems from the multitude of changes in Regulation Z over the past 3-4 years.  And, unfortunately, we ain't seen nothing yet!

Regulation Z - Account Opening Disclosures for Open-End (Not Home-Secured) Credit Plans.  Here is the description of the issue from the Philadelphia Federal Reserve:

"The Board of Governors of the Federal Reserve System (Board) amended some of the Regulation Z disclosure requirements for open-end credit (not home-secured) in a January 2009 final rule that became effective July 1, 2010.¹⁷The changes include new requirements for account-opening disclosures.¹⁸ Consumer testing revealed that consumers responded favorably to a table format that summarized key terms (based on the Schumer Box format used for credit card solicitation and application disclosures). As a result, the Board required in 12 C.F.R. §1026.6(b)  that creditors use a table format substantially similar to model form G-17 to disclose certain key account terms.¹⁹

The failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit. As with the RESPA tolerance requirements, this violation reflects the compliance challenges that arise with a significant regulatory change. Financial institutions relying on third-party software to create disclosures should verify that the software reflects the changes in regulatory requirements. For internally created software, institutions should ensure that regulatory changes are communicated in a timely manner to the IT department and that the software is tested to verify that the changes have been implemented. For a more detailed discussion of vendor risk management, refer to the Outlook article “Vendor Risk Management” in the First Quarter 2011 issue.^{20" Â} (emphasis added).

As the underlined text indicates - this is an issue partly because of the magnitude of regulatory changes and the inability for smaller institutions to simply keep up.  

Inadequate Model Forms.  I'd also like to add another observation on why this might be a common compliance issue.  The model forms for these disclosures are located in Appendix G to Regulation Z.  From Appendix G, the account opening tables are the G-17 Series:

• G-17(A) Account Opening Model Form
• G-17(B) Account Opening Model Form
• G-17(C) Account Opening Model Form
• G-17(D) Account Opening Model Form

The article indicates that "the failure to use a table format substantially similar to model form G-17 has been a frequent violation for account-opening disclosures for overdrafts and personal lines of credit."

If you click through the model form links above, you'd see that G-17(A); G-17(B) and G-17(C) are all designed as model forms for credit card accounts.  Only G-17(D) provides any guidance on open-end account opening disclosures for non-credit cards.  Thus, three of the four forms are designed for credit cards and not other types of open-end products. 

I wonder if that is part of the reason this is a common compliance violation?  And - this is the part of the feedback loop that the CFPB needs to improve on if it truly wants to lessen the regulatory burden on smaller institutions.  If there are numerous compliance violations - the CFPB needs to look internally and see if their regulations, forms and guidance are making the requirements clear and straightforward.  

Work with Us.  Other regulators have not succeeded in the past and they also haven't shown much effort.  Usually, the regulation gets promulgated and that is the end of it.  But that isn't good enough.  It isn't good enough for the regulator, it isn't good enough for credit unions and it isn't good enough for consumers.  The real test is whether the CFPB improves in the future or whether it follows the same old story.