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Gremlins Changed the System Parameters Again

Dec 18, 2018

We all rely a great deal on systems and system parameters to help keep us in compliance with numerous rules and regulations, but it can cause havoc when system parameters go awry. A compliance management system would not be complete without a periodic checkup to make sure system parameters are functioning as intended.


Usually at the time a new product is created, the system parameters are set up to correspond with the product’s features and disclosures. Parameters are verified at the time of initial setup, but this is not a one and done function. Parameters should be periodically rechecked, especially after any system updates or changes to existing products and services. 


For deposit accounts, the obvious inspection is to verify interest rates, annual percentage yields and corresponding tier ranges are properly set. However, some other things to consider would be verification of compounding and crediting frequencies, minimum balances, forfeiture of interest, account fees, interest calculation and accrual methods and penalties. 


For all applicable deposit products, verify that compounding and crediting frequencies match the Truth in Savings disclosures. Minimum balances, including the minimum balance(s) required to obtain interest or minimum to avoid a service fee, should be compared to applicable disclosures. Sometimes the minimum to avoid a fee will have a more complicated structure such as a monthly fee if the daily balance falls below a certain amount or the average daily balance falls below a different amount. There could also be a minimum aggregate balance of all accounts to maintain to avoid the monthly fee. System parameters would need to be reviewed to ensure all scenarios are working properly.


If the account disclosure is silent regarding forfeiture of interest when the account is closed before accrued interest is credited or states that accrued interest will be paid, verify the parameters for those products are set to credit the final interest amount at closing.


All deposit account fees should be reviewed to ensure the dollar amount and timing matches the fee schedule. For example, if the disclosure includes a continuous overdraft fee starting on the third business day an account is overdrawn, verify the system parameter is set to properly charge the fee on the correct day and is accurately tracking business days. If using calendar days, determine when the system will charge the fee if the calendar day falls on a non-banking day and ensure the method used will not result in consumer harm.


Early withdrawal penalties for certificates of deposit (CDs) may be another area of concern if parameters are not set up properly or perhaps the original CD disclosure was set up for the correct penalty, but upon renewal, new disclosures were provided with a new penalty structure, without a corresponding change to system parameters.


Also verify the correct timing is set up in the system to generate CD renewal notices. The renewal notices must be mailed or delivered at least 30 calendar days before maturity of the existing account or if a grace period of at least five calendar days is provided, then the notices may be mailed or delivered at least 20 calendar days before the end of the grace period on the existing account.


For Regulation CC exception holds, verify the accuracy of the release time. For instance, if funds are to be available on the seventh business day, but the system is set up to release the funds at 10:00 a.m. on the seventh business day, the funds would be released too late because they were not available for the entire seventh business day.


For the loan system, late fees could be a problem area. Late fees may be disclosed as a certain percent or a dollar amount, whichever is greater, but the system is set up with only a dollar amount or only a percentage amount or the wrong amounts. Another issue could be that late fees are not disclosed in the agreement for certain products, but the system was not updated to remove the late fee parameters.


For open-end credit, verify minimum payment amounts are set up properly. The agreement may say that the minimum payment will be a certain dollar amount or percent, whichever is greater, but the system was only set up with just the minimum dollar amount or just the minimum percentage amount. Sometimes the system will be set to round the minimum payment up or down to the nearest dollar amount, but the agreement did not call for rounding or vice versa.


For adjustable rate mortgages, verify the system is set up to use the correct index. The note may state that a weekly average is used for the index, but the system parameters were set up to use the daily index rather than the weekly average. Also, make sure that indexes are being uploaded to the system properly. Sometimes the employee responsible has left and the responsibility for uploading indexes was not transferred to another employee or the new employee doesn’t understand how to input the correct index. System indexes could have become outdated, which could cause incorrect rate changes or incorrect initial disclosures with possible annual percentage rate violations. 


Other areas to consider while reviewing adjustable or variable rate parameters would be to verify proper margin amounts, accuracy of rounding, accuracy of rate caps and overall minimum or maximum rate limitations. Sometimes an adjustable rate mortgage will disclose a minimum or maximum rate limitation for only the first rate change that differs from subsequent rate changes, but the system parameters were not set up to accommodate the different limits. If the system is incapable of such an accommodation, it might require an adjustment to be made to the limits after the first rate change has taken place, but determine whether there is a mechanism in place to ensure the update occurs. 


Hopefully, a review of system parameters that incorporates some of these suggestions will help to avoid regulatory criticism and costly mistakes.



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