Consumer Compliance Outlook: Fourth Quarter 2013

Overview of E-Banking Compliance Considerations

INTRODUCTION

According to a recent survey, 51% of U.S. adults bank online, and 32% bank with their mobile phones.1 Both consumers and banks have benefited from this migration to e-banking. Consumers enjoy the convenience of conducting many banking transactions with their computers or mobile devices, while financial institutions appreciate the cost savings from e-banking. But the shift to Internet banking can also raise compliance concerns. As banks adapt products and services to allow for more electronic banking options, the risk of noncompliance with applicable consumer protection laws and regulations increases. This article provides a high-level overview of some e-banking compliance considerations for Regulation X — Real Estate Settlement Procedures Act (RESPA), Regulation Z — Truth in Lending Act (TILA), Regulation B — Equal Credit Opportunity Act (ECOA), Regulation E — Electronic Fund Transfer Act, and Regulation DD — Truth in Savings Act (TISA).

Regulations X and Z

An increasing number of residential mortgages are originated online.2 Creditors relying on electronic disclosures to satisfy mortgage disclosure requirements must ensure they are complying with the Electronic Signatures in Global and National Commerce Act (E-Sign Act), 15 U.S.C. §7001 et seq. The E-Sign Act permits the use of electronic disclosures to satisfy laws or regulations requiring written disclosures if the E-Sign Act’s consumer consent requirements are satisfied.3 The Federal Reserve Board’s 2007 final rule amending Regulation Z to include E-Sign Act compliance requirements discussed which sections of the regulation that were in effect at the time require compliance with the E-Sign Act consumer consent requirements and which sections permit electronic delivery without regard to the consent requirements.4 Similarly, the Consumer Financial Protection Bureau (CFPB) amended Regulation X effective January 10, 2014, to reiterate that the electronic disclosures are permitted under the E-Sign Act for all provisions of the regulation, provided the consent requirements are satisfied.5

Institutions must ensure that when a borrower submits a completed, closed-end residential mortgage application electronically, the application disclosures currently required by Regulations X and Z are provided to consumers within three business days: the Good Faith Estimate (GFE),6 the Servicing Disclosure,7 and the early TILA disclosures.8 In addition, for closed-end loans with adjustable rates, the disclosures required by 12 C.F.R. §1026.19(b) must be provided at application or before the consumer pays a nonrefundable fee. For home-equity lines of credit, the disclosures required by 12 C.F.R. §1026.40(d) and (e) must be provided at application unless an exception applies.9

Another concern with electronic mortgage originations is the requirement in Regulation X, 12 C.F.R. §1024.7a(4), that fees other than a credit report fee cannot be imposed until a consumer receives the GFE and indicates an intent to proceed with the transaction:

The lender is not permitted to charge, as a condition for providing a GFE, any fee for an appraisal, inspection, or other similar settlement service. The lender may, at its option, charge a fee limited to the cost of a credit report. The lender may not charge additional fees until after the applicant has received the GFE and indicated an intention to proceed with the loan covered by that GFE.10 (emphasis added)

If a consumer submits an application online, the loan originator should have a procedure to verify and capture the applicant’s intent to proceed after the required disclosures have been provided. For example, after providing the disclosures, the creditor could call the borrower or send a follow-up e-mail to determine if the borrower wants to proceed with the loan. If the creditor does this by phone, the call should be documented in the creditor’s systems.

Additionally, an institution must ensure that its online advertisements for mortgages comply with Regulation Z’s advertising requirements. The regulation contains specific advertising requirements for open-end home equity lines of credit in 12 C.F.R. §1026.16(d) and for closed-end dwelling-secured credit in 12 C.F.R. §1026.24(f). The regulation also has requirements for electronic advertisements that use terms requiring additional disclosures.11

In this changing regulatory environment, it is also important that financial institutions maintain systems to monitor and implement regulatory changes, including changes to e-banking systems, so they are prepared to implement final rules. For example, the CFPB’s integrated disclosure rule contains significant changes to the application and consummation disclosures as well as accompanying regulatory requirements that will require significant changes to creditors’ systems.

Regulation B

Regulation B requires creditors to notify consumers of the action taken on a submitted application, including those submitted electronically. The time frame depends on the creditor’s decision on the application, as prescribed by 12 C.F.R. §1002.9(a), which requires a creditor to notify an applicant of action taken within:

  1. 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application
  2. 30 days after taking adverse action on an incomplete application, unless notice is provided in accordance with paragraph (c) of this section
  3. 30 days after taking adverse action of an existing account, or
  4. 90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.

For applications submitted online, a creditor must ensure its systems notify the consumer of the action taken within these time frames. Consumer adverse action notices provided electronically are subject to the E-Sign Act’s consent requirements.12

The Dodd-Frank Act amended the ECOA’s notice requirements for appraisals effective January 18, 2014. Under the amendment, a creditor must notify an applicant for a first-lien mortgage loan that the creditor may order an appraisal or other written valuation to determine the value of the property securing the loan and will promptly provide the applicant with a copy, even if the loan is not consummated.13 The appraisal or valuation may be provided electronically subject to compliance with the E-Sign Act’s consent provisions,14 while the notice may be provided without regard to the consent requirements.15

Regulation E

If a consumer applies for credit electronically, a financial institution may believe the consumer is a good candidate to repay the loan using preauthorized electronic transfers. Many institutions prefer this repayment method because the payments are automatic, as well as easier and faster to process than a check payment. However, Regulation E prohibits creditors from conditioning the extension of credit on the consumer’s agreement to repay the loan using a preauthorized electronic transfer:

No financial institution or other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer’s account.
12 C.F.R. §1005.10(e)(1)

Thus, the creditor must ensure that its electronic application for credit does not obligate the consumer to agree to preauthorized electronic transfers to repay the obligation. A creditor may offer the consumer the option to repay through preauthorized electronic transfers, but such transfers cannot be the only permissible method of repaying the extension of credit.

Regulation DD

In addition to processing loan applications online, some financial institutions accept online applications for deposit products. Regulation DD permits electronic disclosures that comply with the requirements of the E-Sign Act and waives the E-Sign Act’s consent provisions for two requirements:16

The disclosures required by this part may be provided to the consumer in electronic form, subject to compliance with the consumer-consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 USC 7001 et seq.). The disclosures required by sections 1030.4(a)(2) [account disclosures upon request] and 1030.8 [advertising] may be provided to the consumer in electronic form without regard to the consumer-consent or other provisions of the E-Sign Act in the circumstances set forth in those sections.

It is also important to note that banks must issue TISA disclosures to a consumer who applies electronically before an account is opened or services are rendered:

If a consumer who is not present at the institution uses electronic means (for example, an Internet website) to open an account or request a service, the disclosures required under [§ 1030.4(a)(1)] must be provided before an account is opened or a service is provided.17

Therefore, banks must ensure that all necessary disclosures are issued to consumers in the required time frame for online deposit account applications.

Online advertisements are also subject to the advertisement requirements under the TISA; therefore, banks must ensure that deposit advertisements, including online advertisements, are compliant. For further information regarding advertising requirements under the TISA, refer to the article “Understanding Regulation DD’s Advertising Requirements” by Amy Armstrong that was published in the Fourth Quarter 2010 issue of Outlook.

CONCLUSION

The migration to e-banking has benefitted consumers and financial institutions. But e-banking can also raise compliance concerns under the E-Sign Act and Regulations B, E, X, Z, and DD. Financial institutions must ensure e-banking products and services comply with these laws and regulations. Specific issues and questions should be raised with your primary regulator.

  • 1 Susannah Fox, “51% of U.S. Adults Bank Online.” External Link Pew Research Center, Aug. 7, 2013
  • 2 Mitch Lipka, “Online mortgages boom despite housing bust,” External Link Reuters, Jan. 23, 2012
  • 3 15 U.S.C. § 7001(c)(1). External Link Outlook reviewed the consent requirements in 2009. See Jeffrey Paul and Gary Louis, “Moving From Paper to Electronics: Consumer Compliance Under the E-Sign Act,” Consumer Compliance Outlook, Fourth Quarter 2009.
  • 4 72 Fed. Reg. 63462 PDF External Link (Nov. 9, 2007).
  • 5 See amended 12 C.F.R. §1024.3 External Link (“The disclosures required by this part may be provided in electronic form, subject to compliance with the consumer consent and other applicable provisions of the [E-Sign Act].”) 78 Fed. Reg. 10696, 10711 PDF External Link (Feb. 14, 2013).
  • 6 12 C.F.R. §1024.7(a)
  • 7 12 C.F.R. §1024.21(b)
  • 8 12 C.F.R. §1026.19(a). The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) directed the CFPB to conduct a rulemaking to integrate the RESPA and TILA mortgage disclosures required at application and at consummation into a single disclosure. The CFPB issued a final rule in November 2013 for the integrated disclosure that becomes effective August 1, 2015, 78 Fed. Reg. 79730 PDF External Link (Dec. 31, 2013). This article is based on the current rule.
  • 9 12 C.F.R. 1026.40(b)
  • 10 See 12 C.F.R. §1024.7(a)(4). The existing regulation does not define “intent to proceed.” The CFPB’s final rule integrating the RESPA and TILA disclosures elaborates on the meaning of “intent to proceed.” See 12 C.F.R. §1026.19(e)(2)(i)(A) and Comment 19(e)(2)(i)(A)-2. This rule is effective August 1, 2015.
  • 11 12 C.F.R. §1026.16(c) and 12 C.F.R. §1026.24(e). The Official Staff Commentary for these sections of the regulation also discusses electronic advertisements.
  • 12 The consent requirements only apply to disclosures that must be provided in writing. For the required notices in §1002.9(a), only consumer adverse action notices must be provided in writing. The other notices can be provided electronically without regard to the consent requirements.
  • 13 12 C.F.R. §1002.14
  • 14 12 C.F.R. §1002.14(a)(5)
  • 15 12 C.F.R. §1002.4(d)(2)
  • 16 12 C.F.R. §1030.3(a)
  • 17 12 C.F.R. §1030.4(a)(1)(ii)