Compliance Q and A
Thursday, April 25, 2013
Posted by: Erin Thacher
Compliance Q and A: Interest Rates for Military, RESPA Servicing Final Rule, NCUA Credit Rating Investment Rule
Interest Rate on Accounts for Members in the Military Service
Our member with a credit card account was on military active duty until recently. When the member went on active duty, the Annual Percentage Rate (APR) on the credit card account was lowered to 6%. Now that the member is no longer on active duty, does the credit union have to send the member a notice before increasing the APR on the account to the level that existed prior to active duty?
Yes, when the Servicemember Civil Relief Act (SCRA) ceases to apply, Regulation Z Section 1026.9(c) generally requires the credit union to provide 45 days advance notice of any increase in the APR. The right to reject does not apply to rate increases, but Section 1026.55(b)(6) limits the ability of a credit union to increase the rate that applies to the existing balance on a credit card account. Paragraph (b)(6) provides that, if the SCRA requires a credit union to reduce an interest rate on an existing balance when a borrower enters military service, the rate applied to that balance when the borrower leaves military service cannot exceed the rate that applied prior to military service. In other words, borrowers may not be charged higher rates once the SCRA ceases to apply than they were before the SCRA began to apply.
RESPA’S Servicing Rule on Forced Placed Insurance
Under the CFPB’s RESPA Servicing Final Rule, a credit union may assess a borrower a charge related to force-placed insurance when the credit union has a reasonable basis to believe the borrower has failed to maintain hazard insurance. During what time period may the borrower be responsible for payment of forced-place insurance?
The Mortgage Servicing Final Rule requires a credit union to provide two written notices to the borrower. The first notice must be mailed or delivered at least 45 days before a borrower may be charged for forced place insurance. The second notice must be mailed or delivered at least 15 days before a charge is assessed. However, the rule doesn’t prohibit a credit union from adding force-placed insurance the instant it learns that the borrower has failed to maintain the required coverage; the credit union just can’t charge the borrower prior to the provision of the two notices and the expiration of 45 days from the date of the first notice.
As the following text from the RESPA Commentary indicates, a credit union may purchase force-placed insurance retroactive to the first day of any time period the borrower failed to maintain the required coverage:
Paragraph 37(c)(1)(i). Assessing premium charge or fee. Subject to the requirements of § 1024.37(c)(1)(i) through (iii), if not prohibited by State or other applicable law, a servicer may charge a borrower for force-placed insurance the servicer purchased, retroactive to the first day of any period of time in which the borrower did not have hazard insurance in place.
New NCUA Investment Rule on the Use of Credit Ratings
Is my credit union still allowed to rely upon credit ratings in determining acceptable investments? Does the rule apply to federally insured state chartered credit unions?
Yes, as a factor in the new requirement that a credit union determines the "investment grade” of a security. So what’s changed?
Credit rating agencies put a lot of questionable high ratings on investment products before the "Great Recession.” In the Dodd-Frank Act in 2010, Congress required NCUA (and the federal banking agencies) to remove all references to credit ratings in their regulations and substitute another standard. Effective June 11, 2013, NCUA substitutes "investment grade” wherever a specific credit rating appears in Section 703 of its regulations.
This means that the credit union is required to analyze and be comfortable in concluding that the risk of default by the issuer is low and timely repayment of principal and interest is expected. The regulations suggest a list of eight factors a credit union may consider in its analysis. Although NCUA can’t rely on a credit rating, there is nothing that prohibits a credit union from using credit ratings in its analysis.
NCUA’s Section 703 regulation on investments only applies to federal credit unions. However, if a federally insured state chartered credit union (FISCU) holds an investment not permissible for an FCU, it may be subject to special reserving on that investment. In it new regulation (Section 741.3), NCUA points out that if an FISCU relies upon a ratings-based investment permissible under state law, the FISCU should go through the same "investment grade” analysis that an FCU is now required to do.