Bankin’ Bits

Compliance Update: Does your ATM have the required on-machine fee notice?

(Original E-Alert dated February 16, 2010)

Class action lawsuits have been filed across the country against financial institutions and other ATM operators for failure to display the required on-machine notice on ATMs. Although a number of articles and alerts have been written on this topic, it appears that a number of ATM operators still do not display the required notices on their ATMs. We have seen a flurry of these lawsuits recently in Missouri and Kansas.

The Electronic Fund Transfer Act (15 USC 1693b(d)) and Regulation E (12 CFR 205.16) require ATM operators that impose a fee on a consumer for initiating an electronic fund transfer or balance inquiry to provide notice that a fee will be imposed for that service. To meet this notice requirement, an ATM operator must have both (1) an “on-machine” notice that a fee will or may be imposed for providing electronic fund transfer services or for a balance inquiry and (2) a notice on the ATM screen or on paper before the consumer is committed to paying the fee. Most ATM operators properly display the on-screen/paper notice, but the failure also to display the on-machine notice has subjected a number of ATM operators to lawsuits.

Regulation E permits an ATM operator to impose a fee on a consumer for initiating an electronic fund transfer or balance inquiry only if the consumer is provided both the on-machine and on-screen/paper notices. The fact that the consumer agreed to the fee on-screen does not, by itself, relieve the ATM operator from liability. The ATM operator may, however, have other defenses (discussed below).

What should you do to prevent being a target of this type of class action lawsuit?

• Immediately check your ATMs to ensure they display the required notice. The on-machine notice need not (and should not) disclose the amount of the fee, although the amount of the fee must be disclosed in the on-screen/paper notice.
• As ATM stickers can be vandalized (covered up or peeled off), your compliance program should include a policy of inspecting your institution’s ATMs on a periodic basis (for example, whenever your ATM is serviced) and documenting that each ATM contains the required notice. We recommend that ATM operators maintain a supply of on-machine stickers to immediately replace missing or vandalized stickers.

What is the potential liability for a class action lawsuit under the EFTA?
Some, but not all, of these lawsuits have been filed for the nuisance value and the hope of a quick settlement. The Electronic Funds Transfer Act (15 USC 1693m(a)) caps class action damages at the lesser of $500,000 or 1% of the net worth of the defendant (plus attorney fees and costs). The cost of litigation, coupled with the potential class action damages, can make these lawsuits an expensive proposition for community banks.

Are there any defenses?
There are a number a defenses that can be raised by an ATM operator who is the target of an ATM fee notice class action lawsuit. ATM operators are not liable under the EFTA if:

• The on-machine notice was removed, damaged or altered by any person other than the ATM operator (15 USC 1693h(d));
• The alleged violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error (15 USC 1693m(c)); or
• The bank can demonstrate a good faith attempt at compliance with any rule, regulation, or interpretation by the Board of Governors of the Federal Reserve Board (15 USC 1693m(d)(1)).

In Dover v. Union Building and Loan Savings Bank, 2009 WL 212355, Union was able to avoid liability for failure to post the on-machine notice by asserting that it was entitled to the good faith defense. Specifically, it argued that its ATM conformed with the FDIC’s Compliance Examination Handbook by providing the on-screen notice. This argument was based on a prior version of the FDIC’s handbook that suggested that the bank could comply with the Regulation E fee notice requirement by providing either the on-screen/paper notice or the on-machine notice. The FDIC handbook has since been revised. Union also asserted that its fee notice was removed, damaged or altered, but it was not necessary for the court to reach this alternative defense.

Take Action Now!
Don’t subject your institution to a class action lawsuit for failure to post the required on-machine fee notice. Check your institution’s ATMs now and continue to inspect them periodically for compliance with this rule. 

Class action lawsuits have been filed across the country against financial institutions and other ATM operators for failure to display the required on-machine notice on ATMs. Although a number of articles and alerts have been written on this topic, it appears that a number of ATM operators still do not display the required notices on their ATMs. We have seen a flurry of these lawsuits recently in Missouri and Kansas.

The Electronic Fund Transfer Act (15 USC 1693b(d)) and Regulation E (12 CFR 205.16) require ATM operators that impose a fee on a consumer for initiating an electronic fund transfer or balance inquiry to provide notice that a fee will be imposed for that service. To meet this notice requirement, an ATM operator must have both (1) an “on-machine” notice that a fee will or may be imposed for providing electronic fund transfer services or for a balance inquiry and (2) a notice on the ATM screen or on paper before the consumer is committed to paying the fee. Most ATM operators properly display the on-screen/paper notice, but the failure also to display the on-machine notice has subjected a number of ATM operators to lawsuits.

Regulation E permits an ATM operator to impose a fee on a consumer for initiating an electronic fund transfer or balance inquiry only if the consumer is provided both the on-machine and on-screen/paper notices. The fact that the consumer agreed to the fee on-screen does not, by itself, relieve the ATM operator from liability. The ATM operator may, however, have other defenses (discussed below).

What should you do to prevent being a target of this type of class action lawsuit?

• Immediately check your ATMs to ensure they display the required notice. The on-machine notice need not (and should not) disclose the amount of the fee, although the amount of the fee must be disclosed in the on-screen/paper notice.
• As ATM stickers can be vandalized (covered up or peeled off), your compliance program should include a policy of inspecting your institution’s ATMs on a periodic basis (for example, whenever your ATM is serviced) and documenting that each ATM contains the required notice. We recommend that ATM operators maintain a supply of on-machine stickers to immediately replace missing or vandalized stickers.

What is the potential liability for a class action lawsuit under the EFTA?
Some, but not all, of these lawsuits have been filed for the nuisance value and the hope of a quick settlement. The Electronic Funds Transfer Act (15 USC 1693m(a)) caps class action damages at the lesser of $500,000 or 1% of the net worth of the defendant (plus attorney fees and costs). The cost of litigation, coupled with the potential class action damages, can make these lawsuits an expensive proposition for community banks.

Are there any defenses?
There are a number a defenses that can be raised by an ATM operator who is the target of an ATM fee notice class action lawsuit. ATM operators are not liable under the EFTA if:

• The on-machine notice was removed, damaged or altered by any person other than the ATM operator (15 USC 1693h(d));
• The alleged violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error (15 USC 1693m(c)); or
• The bank can demonstrate a good faith attempt at compliance with any rule, regulation, or interpretation by the Board of Governors of the Federal Reserve Board (15 USC 1693m(d)(1)).

In Dover v. Union Building and Loan Savings Bank, 2009 WL 212355, Union was able to avoid liability for failure to post the on-machine notice by asserting that it was entitled to the good faith defense. Specifically, it argued that its ATM conformed with the FDIC’s Compliance Examination Handbook by providing the on-screen notice. This argument was based on a prior version of the FDIC’s handbook that suggested that the bank could comply with the Regulation E fee notice requirement by providing either the on-screen/paper notice or the on-machine notice. The FDIC handbook has since been revised. Union also asserted that its fee notice was removed, damaged or altered, but it was not necessary for the court to reach this alternative defense.

Take Action Now!
Don’t subject your institution to a class action lawsuit for failure to post the required on-machine fee notice. Check your institution’s ATMs now and continue to inspect them periodically for compliance with this rule.

February 17, 2011 at 4:56 pm Scott Smalley Leave a comment

Changes to Risk-Based Pricing Rules – Compliance Deadline Looming

(Original E-Alert dated November 12, 2010)

On January 1, 2011, the new risk-based pricing rules amending Regulation V issued by the Federal Reserve Board (Fed) and the Federal Trade Commission (FTC) on December 22, 2009, will become effective (Final Rules). The Final Rules are available by clicking here.

The Final Rules require any person (lender) who uses a consumer report in connection with the extension of credit to a consumer primarily for personal, family or household purposes and, based on that report, extends credit to the consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that lender, to provide a risk-based pricing notice to that consumer. The Final Rules apply to both extensions of new credit and reviews of existing accounts.

To assist lenders in determining which consumers must receive a risk-based pricing notice, the Final Rules provide two alternative methods: the “credit score proxy method” and the “tiered pricing method.” The Final Rules also have a special test for credit card issuers with multiple-rate offers.

The Final Rules specify the content of the risk-based pricing notice and include several model forms that can be used as a safe harbor. Generally, the notice must be given after the terms of credit have been determined, but prior to the consumer becoming contractually obligated; however, the Final Rules specify specific timing depending on the type of credit extended by the lender. The duty to provide the notice is imposed on the original lender, even where the credit is extended as part of a three-party financing arrangement. The Final Rules contain a special provision for indirect automobile lending, providing that the lender can either provide the notice itself within the required time period or arrange to have the automobile dealer provide the notice on its behalf if the lender maintains policies and procedures to verify the automobile dealer provides the notice within the required time period.

The Final Rules also contain numerous exceptions to the requirement to provide a risk-based pricing notice, including:

• Consumer applies for and receives specific material terms
• Consumer is provided an adverse action notice
• Lender obtains a consumer report that is a prescreened list and uses that consumer report to make a firm offer of credit to consumers
• Extension of credit will be secured by 1-4 units of residential real property and the consumer is provided a notice consisting of the consumer’s credit score and certain additional information
• Consumer is provided a credit score disclosure with certain additional information that provides context for the credit score disclosure
• Credit score is not available from the agency where the lender regularly obtains a credit score and the lender does not obtain a credit score from another consumer reporting agency and provides the consumer a notice containing specified information

November 30, 2010 at 4:38 pm Scott Smalley Leave a comment

FDIC, Federal Reserve Board, OCC, and OTS Announce Revisions to the Community Reinvestment Act Regulations

(Original E-Alert Dated October 19, 2010)

On October 4, 2010, the FDIC, the Federal Reserve Board, the OCC and the OTS (the Agencies) issued a joint final rule (the Rule), which revises the rules implementing the Community Reinvestment Act. The Rule implements certain statutory changes, and provides that the Agencies (i) will consider low-cost education loans to low-income borrowers and (ii) may consider capital investment, loan participation, and other ventures undertaken by financial institutions in connection with minority-owned or women-owned financial institutions or low-income credit unions as positive factors when determining a financial institution’s CRA rating. Specifically, the Rule:

• provides a definition of “low-income borrower” consistent with current CRA definitions (50% of area median income), including borrowers’ and co-borrowers’ income;
• defines “low-cost” based on the rates and fees charged under U.S. Department of Education lending programs;
• includes loans for higher education by accredited institutions listed by the U.S. Department of Education and loans covered by Truth in Lending protections;
• enables consideration of loans outside assessment areas if the needs are adequately addressed inside assessment areas;
• does not require any institution to make low-cost loans to low-income students or change how consumer loans are otherwise considered during CRA evaluations;
• incorporates the statutory language in Section 804(b) that the Agencies may consider as a factor capital investment, loan participation, and other ventures undertaken by the institution in cooperation with minority-owned and women-owned financial institutions and low-income credit unions in assessing the CRA rating of non-minority-owned and non-women-owned institutions; and
• clarifies that activities described in the previous bullet-point are not limited to the institution’s CRA assessment area, but such activities outside the assessment area will not compensate for poor lending performance within the assessment area.

The Rule will become effective November 3, 2010. A copy of the complete text of the Rule can be found here.

November 30, 2010 at 4:36 pm Scott Smalley Leave a comment

FDIC v. Colonial BancGroup

(Original E-Alert Dated October 4, 2010)

A September 1, 2010, United States Bankruptcy Court ruling could influence the FDIC’s attempt to collect billions of dollars on alleged capital maintenance commitments on behalf of various failed bank receiverships. 

In a case before the United States Bankruptcy Court for the Middle District of Alabama titled “In re Colonial BancGroup, Inc.,” the court examined the failure of Colonial Bank and the subsequent bankruptcy filing of its holding company, Colonial BancGroup, Inc. In the case, the FDIC claimed that Colonial BancGroup agreed to shore up the capital of its subsidiary under three separate agreements between the Bank and the FDIC.  The FDIC claimed there was a reserve deficiency of approximately $1 billion. The FDIC supported its claim by citing to portions of one of these agreements, which provided in relevant part, that Colonial BancGroup would make a “good faith” effort to take “corrective action” and to offer assistance to improve Colonial Bank’s declining status with the FDIC. In its request for relief, the FDIC asked the court to either require the Debtor to immediately pay a $1 billion deficiency in capital that the Bank was required to fund at the time of its failure or, in the alternative, convert the case to a Chapter 7 case under the Bankruptcy Code. Converting the case to a Chapter 7 would have required the liquidation of Colonial BancGroup’s assets. 

The United States Bankruptcy Court disagreed with the FDIC’s interpretation of the statements in the agreements it had entered into with Colonial BancGroup. The court held that the agreements thereby required Colonial BancGroup to provide assistance to its flagging bank and did not represent Colonial BancGroup’s assumption of Colonial Bank’s liabilities. Moreover, the court held that a memorandum of understanding entered into between Colonial BancGroup, the Federal Reserve and state banking authorities, “as an informal supervisory action is not enforceable, and violation of the same cannot serve as a basis for assessing civil monetary penalty.” The court did take some care in distinguishing this case from others involving the FDIC in which firm commitments were made. 

What this Means to You
Agreements between banks, holding companies, and either the FDIC, Federal Reserve Banks and state banking regulators will be under increased scrutiny for potential infirmities. Existing claims involving FDIC attempts to collect capital maintenance commitments may be affected. Moreover, future agreements between bank holding companies and federal authorities will need to be drafted with an eye towards this important case.

November 30, 2010 at 4:35 pm Scott Smalley Leave a comment

President Obama Signs Mini-TARP Legislation Into Law

(Original E-Alert Dated September 27, 2010)

President Obama signed the Small Business Jobs and Credit Act of 2010 (Act) into law on September 27, 2010. Among other goals, the Act aims to ease credit for small businesses by creating financial institution access to a Small Business Lending Fund (Fund) to incent lending to small businesses. Republicans have equated the Fund to a smaller version of the Troubled Assets Relief Program (TARP) at the center of the 2008 federal bank bailout.

The Act will allow banks and other eligible depository institutions with assets under certain thresholds to apply for and receive inexpensive capital investments from the $30 billion Fund, the oversight of which is tasked to the Treasury Department. Eligible financial institutions with assets of $1 billion or less could apply to borrow up to 5 percent of their risk-weighted assets from the Fund. For eligible financial institutions with assets between $1 billion and $10 billion, up to 3 percent of their risk-weighted assets would be available to borrow from the Fund. 

For institutions other than a community development financial institution, the Treasury Department will use assets reported in the fourth-quarter call reports in calendar year 2009 to determine the institution’s eligibility. For community development financial institutions, the Treasury Department will look to the institution’s audited financial statements for calendar year 2009 as the indicator of eligibility. Institutions that are currently on or have been on the FDIC’s problem bank list within the past 90 days are not eligible to apply for capital investments from the Fund.

Capital investments received from the Fund must be used in small business lending. Excluded from the definition of small business lending are loans with an original amount of more than $10 million, or loans that are given to a business with more than $50 million in revenues. Recipient institutions will be required to issue a quarterly report detailing new loans to small businesses. In addition to other requirements in the Act, institutions receiving investments from the Fund will be required to provide a small business lending plan and a plan to provide “linguistically and culturally appropriate outreach” in their service area. Institutions are required to target minorities, women and veterans with such outreach efforts. 

Capital investments from the Fund must be repaid within 10 years. Recipient institutions will issue preferred stock or other financial instruments to the Treasury Department in exchange for loans from the Fund. Dividends or financial instruments are required to pay an interest rate of 5 percent. That dividend or interest rate can be reduced by 1 percent (to a dividend/interest rate low of 1 percent) for each 2.5 percent increase in small business lending conducted by the institution. Changes in the amount of the institution’s small business lending will be measured against the average amount of small business lending reported in the four call reports of the institution immediately prior to September 27, 2010, with adjustments as permitted by the Act. 

Additionally, the Act also permits eligible institutions that accepted monies under TARP to refinance securities issued to the Treasury Department under TARP and convert to the Small Business Lending Fund Program. The Treasury Department is directed to issue regulations governing TARP securities refinance.

November 30, 2010 at 4:32 pm Scott Smalley Leave a comment

Senate Approves “Mini-TARP” Legislation for Small Financial Institutions

(Original E-Alert Dated September 22, 2010)

On September 16, 2010, the Senate passed legislation which aims to ease credit for small businesses. The proposed Small Business Jobs and Credit Act of 2010 (Act), H.R. 5297, has been hailed as a “mini-TARP” by Republicans, drawing comparisons to the Troubled Assets Relief Program (TARP) at the center of the 2008 federal bank bailout.

As passed by the Senate, H.R. 5297 permits insured depository institutions, insured credit unions, and community development financial institutions with assets under certain thresholds to apply for a capital investment from a newly-created Small Business Fund (Fund). Eligible financial institutions with assets of $1 billion or less could apply to borrow up to five percent (5%) of their risk-weighted assets from the Fund. For eligible financial institutions with assets between $1 billion and $10 billion, up to three percent (3%) of their risk-weighted assets would be available to borrow from the Fund. Financial Institutions that are on the FDIC’s problem bank list, or have been on that list within the past ninety days, are ineligible to apply for capital investments from the Fund.

Any monies received by institutions from the Fund must be used in small business lending, although the proposed Act passed by the Senate permits a financial institution to include nonfarm, nonresidential real estate loans of under $10 million per loan in the aggregate amount of the institution’s small business lending. Recipient institutions will be required to issue a quarterly report detailing new loans to small businesses. In addition to other requirements in the proposed Act, applicant institutions will be required to provide a small business lending plan and a plan to provide “linguistically and culturally appropriate outreach” in their service area.

In exchange for loans from the Fund, recipient institutions will pay a five percent (5%) dividend to the Treasury Department. That dividend can be reduced by one percent (1%) (to a dividend low of 1%) for each two and a half percent (2.5%) increase in small business lending conducted by the institution. The proposed Act also permits community banks that accepted monies under TARP to convert to the Small Business Lending Fund Program.

While the Senate version of H.R. 5297 is similar to that passed by the House in June, changes made by the Senate in the proposed Act will require either House approval of the Senate Bill or reconciliation of the two bills by a conference committee.

November 30, 2010 at 4:27 pm Scott Smalley Leave a comment

Federal Reserve Board Announces Final Rules on Loan Originator Compensation and Steering

(Original E-Alert Dated August 7, 2010)

The Federal Reserve Board recently announced final rules intended to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that may arise from loan originator compensation practices. The final rules amend Regulation Z (12 CFR Part 226) which implements the Truth in Lending Act and the Home Ownership and Equity Protection Act.

The final rules will become effective on April 1, 2011, and apply to closed-end transactions secured by a dwelling in which the creditor receives a loan application after April 1, 2011. The final rules will apply to all persons who originate loans, including mortgage brokers and their employers, as well as mortgage loan officers employed by depository institutions and other lenders. The final rules’ effective date of April 1, 2011, is intended to allow lenders and originators time to develop new business models, train personnel, and implement any necessary system changes.

The final rules amend Regulation Z to prohibit certain practices relating to payments made to compensate mortgage brokers and other loan originators. Specifically, under the final rules, compensation to a mortgage broker or other loan originator may not be based upon a mortgage transaction’s terms or conditions (for example, the loan’s interest rate), except the amount of credit extended (i.e., compensation based upon a fixed percentage of the loan amount is permissible). Additionally, the rule also prohibits a creditor or any other person from paying compensation to a mortgage broker or loan officer for a particular transaction if the consumer pays the loan originator’s compensation directly.

Under the final rules, mortgage brokers and loan officers are prohibited from “steering” consumers to a lender offering less favorable terms in order to increase the brokers’ or loan officers’ compensation. The final rules do provide a safe harbor to facilitate compliance with the anti-steering provisions. A loan originator is deemed to have complied with the anti-steering prohibition if the consumer is presented with loan options for each type of transaction in which the consumer expresses an interest (i.e., fixed rate loan, adjustable rate loan, etc.) and the loan options presented to the consumer include the following: (1) the lowest interest rate for which the consumer qualifies; (2) no risky features, such as prepayment penalty, negative amortization, or a balloon payment in the first seven years; and (3) the lowest dollar amount for origination points or fees and discount points.

The Board noted that although the Dodd-Frank Wall Street Reform and Consumer Protection Act (Reform Act) includes provisions similar to the Board’s final rules, the Reform Act provisions also address other practices not covered by the final rules. The Board considered whether it would be appropriate to delay the effective date of the final rules so that the Reform Act rules could be implemented at the same time. Ultimately, the Board determined that the benefits to consumers of an earlier effective date for the final rules outweighed any potential savings to lending institutions in compliance costs. The Board plans to implement the Reform Act provisions in a future rulemaking and allow opportunity for public comment.

For additional information, including a summary and text of the final rules, click here.

November 30, 2010 at 4:25 pm Scott Smalley Leave a comment

OTS Cracks Down on Overdraft Practices, Proposes New Guidance

On April 23, 2010, the Office of Thrift Supervision (OTS) reached agreement with Woodforest Bank, a thrift institution located in Refugio, Texas, concerning its overdraft protection program.  The OTS also issued proposed Supplemental Guidance on abusive overdraft practices.

In consenting to two Orders from the OTS, Woodforest Bank agreed to cease certain unsafe or unsound practices identified by the OTS, including the origination of loans with a low probability of repayment, unfair, misleading or deceptive marketing or advertising practices and disclosures in connection with the Bank’s overdraft protection program.  Under the terms of the agreement, the Bank will set aside more than $12 million to pay restitution to existing and past Bank customers harmed by the Bank’s overdraft protection practices, as well as pay $400,000 as a civil money penalty. 

On April 29, 2010, the OTS also published proposed Supplemental Guidance on Overdraft Protection Programs in the Federal Register, which, if finalized, would update the Guidance on Overdraft Protection Programs previously issued by the OTS in 2005.  In its proposed Supplemental Guidance, the OTS emphasized that thrift institutions must accurately represent the features of overdraft protection programs and clarify that overdraft protection is not a “free” account feature, while disclosing applicable program fees to the customer. The OTS also highlights a thrift institution’s responsibility to explain to customers that payment of overdrafts by the thrift institution is discretionary and to disclose circumstances under which the institution will not pay an overdraft.  Additionally, the proposed Supplemental Guidance advises thrift institutions to provide customers with information regarding alternatives to overdraft protection and place reasonable aggregate limits on overdraft fees.  Comments to the proposed Supplemental Guidance are due on or before June 28, 2010.  The proposed Supplemental Guidance may be found here: http://www.ots.treas.gov/_files/482132.pdf.

April 29, 2010 at 7:28 pm Scott Smalley Leave a comment