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NCUA compliance priorities: Overdraft protection and fair lending

Oct 31, 2023

The National Credit Union Administration’s (NCUA’s) September webinar addressed important compliance priorities based upon observations from field staff. Among the consumer complaint trends and consumer compliance hot topics discussed, overdraft protection programs and fair lending continue to be at the top of the NCUA’s list.

Whether you’re looking to strengthen your compliance management system or preparing for an upcoming examimation, here are highlights from the NCUA with valuable takeaways:

Overdraft protection programs

The NCUA has found that overdraft protection programs may be unfair and deceptive. It may be unfair to members when they are assessed unexpected fees for overdraft items, such as when an overdraft fee is charged following a debit card transaction which authorized on positive funds but settled on negative funds (APSN). Fees charged for APSN transactions are considered unfair because a member may be unable to avoid the assessment of overdraft fees. Systems should be set to avoid overdraft fees for APSN transactions.

In addition, charging nonsufficient funds fees on represented items may be considered an unfair and deceptive practice. Deception may occur if disclosures do not clearly describe the circumstances under which the fees may be charged. However, because members cannot control if or when the merchant may resubmit the item for payment and cannot take action to avoid a fee, assessing it may be considered unfair.

Another area of concern were fees charged for returned deposited items. Consumers generally cannot control whether a check they deposited will be returned due to insufficient funds and therefore cannot avoid the fee charged. Charging a fee because these deposits were returned may be considered unfair.

Other issues identified included fee amounts listed in disclosure documents which differed from those posted on the website and missing required overdraft disclosures on periodic statements or in advertisements.

To mitigate risks in overdraft programs, avoid charging overdraft fees on APSN transactions and returned deposited items and consider the risk involved in charging nonsufficient funds fees on represented items. In addition, make sure your compliance management system includes the following for your overdraft program:

  • Board and management oversight
  • Comprehensive identification and management of risks
  • Policies and procedures
  • Training
  • Ongoing monitoring and audits

Fair lending

Fair lending examination priorities included reviewing for redlining, HMDA data integrity and home appraisal bias. Roughly 20% of NCUA’s 2023 fair lending examinations included redlining as a focal point, and this is projected to roll into the 2024 exam cycle.

It is important to understand that the NCUA’s fair lending examinations are risk focused and based on an analysis of the specific credit union’s risks. The NCUA recommends that credit unions with fields of membership that are based on or partially based on geographical boundaries should regularly evaluate their performance in majority minority census tracts within their service areas and adjust for material underperformance.

You may wonder what information NCUA uses in their fair lending exams to identify potential discriminatory practices. The answer is simple — they rely upon information contained in the public HMDA file.

Because of this, the NCUA stressed the importance of ensuring the accuracy of HMDA data. To learn more about the accuracy of HMDA reporting, you can read NCUA’s Letter to Credit Unions 17-CU-04 and the FFIEC’s Uniform HMDA Resubmission Guidelines.

Examiners are also identifying Regulation B/Equal Credit Opportunity Act (ECOA) violations with respect to the use of automated underwriting systems (AUS). In some instances, the AUS referred an application for manual underwriting for or in part based on ECOA’s prohibited factors, such as a minimum or maximum age or marital status.

Home appraisal bias

Another hot topic discussed was avoidance of home appraisal bias. Appraisals, whether conducted manually or through the use of technology, must be free from discrimination. Credit unions should carefully review appraisals to ensure they do not contain bias.

While NCUA understands the benefits of increasingly popular automated valuation models (AVMs), and the related reduction of human error, these systems are not without risk. An AVM may not have current or accurate data and may include data that is biased. This potentially could lead to redlining and perpetuate disparities. Because this risk is emerging, regulatory agencies, the NCUA included, are seeking comments in the development of proposed rules for quality control standards for AVMs.

The NCUA is also encouraging credit unions to establish programs for reconsideration of value (ROV), to address deficient valuations. Programs would establish policies and procedures as well as establish internal controls. It is important to evaluate any third parties used for appraisal review.

Examination citations

Based on the results of recent examinations, an overwhelming portion of the citations, nearly 50%, fall under Regulation V/Fair Credit Reporting Act (FCRA), with disclosure-related findings for risk-based pricing notices and adverse action notices for denials based on information from a credit report. Examiners are also citing insufficient policies and procedures to ensure accuracy and integrity of information being furnished to consumer reporting agencies.

The second most frequent violation, almost 20%, were for Regulation Z/Truth in Lending Act (TILA) disclosure issues for incorrect itemization of amount financed and accuracy of the annual percentage rates. Other citations included Regulation B/ECOA violations for appraisal notice disclosures, adverse action disclosure issues and treating applicants differently on a prohibited basis, the requirement to purchase flood insurance and 12 CFR Part 707/Truth in Savings account and periodic statement disclosures.

Consumer complaints

The NCUA shared its data on consumer complaints received during 2022. By regulatory category, the lion’s share of consumer complaints received by the NCUA involved concerns with Regulation Z/TILA, followed closely by Regulation V/FCRA and Regulation E/Electronic Funds Transfer Act (EFTA) complaints. Complaints spanned across loan and deposit products. Specific concerns included complaints for unexpected closing of accounts, billing disputes, inaccurate credit reporting, funds availability concerns and unauthorized transactions.

Do the consumer complaints received by your credit union fit this pattern? Assessing complaint trends throughout the industry can provide you with a snapshot of areas of concern and give you an idea of areas to review for compliance gaps.

What else can you do?

Consumer compliance laws strengthen communities and build a robust, safe and sound credit union system which is the heart of the credit union movement. At the individual credit union level, a strong compliance management system sets the tone for consumer compliance. Using the data shared by our examiners gives us a snapshot of common gaps.

Use this information to your advantage by assessing your policies and procedures for alignment with industry guidance. Empower your staff by providing ongoing training and, most importantly, keep your fingers on the pulse of the industry to know what roadblocks may be in front of you.

How Wipfli can help

Assessing your policies and procedures is essential to be sure your organization aligns with industry guidance. Wipfli professionals are prepared to help your financial institution address training needs and other support to help you tackle any compliance issues. Our team is ready to provide guidance on best practices to help your organization achieve its goals.

Contact us today to learn more.

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Lisa Lenhard, CUCE, BSACS
Senior Compliance Consultant
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