ABA Banking Journal - February 2008 - (Page 60)

COMPLIANCE CLINIC tage Rate (MAPR) of 36%, which is calculated differently than the normal APR for consumer loans. • Prohibition against renewals, refinances, or consolidations of any consumer credit transaction by the same creditor to the same covered borrower that does not result in more favorable terms to the covered party. • Prohibition against requiring covered borrowers to waive their rights to legal recourse under any other applicable statute, including the Servicemembers Civil Relief Act • Prohibition against requiring covered borrowers to submit to arbitration or more onerous legal notice provisions in the case of a dispute. • Prohibition against unreasonable notice from covered borrowers as a condition for legal action by the covered borrower • Prohibition against requiring covered borrowers to establish an allotment to repay the debt. • Prohibition against charging a prepayment penalty, or not allowing prepayment of the debt in full or in part. • Required new disclosures before the loan is consummated including the MAPR, and a statement of the service members’ rights under the DOD Regulation. (Of course, the usual Regulation Z disclosures still apply, too. However, the DOD disclosures must be made separately, both in writing and orally.) failure to pay as agreed is a pertinent element in determining his ability to pay this new loan. In your scenario, I believe you can deny the loan based on either the borrower’s credit or your own experience with the borrower. If you decide to use a credit report, rather than relying on old and possibly outdated information, I would obtain a current credit report, and base the decision on that. reserve.gov/boarddocs/press/bcreg/2003/ 20030825/attachment.pdf. Of particular pertinence to your bank’s inquiry, the proposed guidance states, on Page 7: “Second, section 106 applies only to tying arrangements that are imposed by a bank. The statute does not apply to tying arrangements imposed by a nonbank affiliate of a bank. For example, section 106 prohibits a bank from requiring a person to purchase insurance from the bank‘s insurance affiliate in order to obtain a reduced interest rate on a loan from the bank. Importantly, such an arrangement is prohibited by section 106 even if the customer is informed of the bank‘s reduced-rate offer by the bank’s insurance affiliate (for example, when the customer applies to the insurance affiliate to obtain insurance). In either case, it is the bank that is varying the price of a bank product (the loan) based on a requirement that the customer obtain another product (insurance) from an affiliate. Such action by the bank violates section 106. “On the other hand, section 106 does not apply to the insurance agency affiliate of the bank. Thus, section 106 would not prohibit the insurance agency affiliate of a bank from offering a discount on the premiums the affiliate charges to customers that purchase more than one type of insurance (e.g., homeowners and automobile insurance) from the affiliate. In addition, section 106 would not prohibit the insurance agency affiliate from offering discounts on premiums to customers who also have a loan from, or deposit account with, the bank. In both of these cases, it is the affiliate (and not the bank) that has imposed the condition governing the sale of its products.” [Editor’s note: Please note that we have omitted the footnotes in the original document.] I should also note that there are a number of required disclosures under the Consumer Protections for Bank Sales of Insurance that you need to supply if you do offer to sell insurance in connection with a credit product. Handling loan-insurance tie-ins without getting into knots Can we require customers to insure their home with our affiliated insurance company in order to receive a special loan offer? This appears to be a violation of regulations regarding consumer protections in sales of insurance. Each federal banking regulator was required to adopt regulations to protect consumers in bank sales of insurance, as required in the Gramm-Leach-Bliley Act of 1999. The FDIC’s regulations are found at 12 CFR Part 340. Certain tying arrangements are expressly prohibited, see below: Section 343.30 Prohibited practices. (a) Anticoercion and anti-tying rules. You may not engage in any practice that would lead a consumer to believe that an extension of credit, in violation of section 106(b) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1972), is conditional upon either: (1) The purchase of an insurance product or annuity from the bank or any of its affiliates; or (2) An agreement by the consumer not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity. The Federal Reserve Board proposed guidance on the anti-tying provisions of the Bank Holding Company Act (Section 106) in 2003, and this guidance is still pending. However, for an explanation of the anti-tying statute, the proposal is very valuable. It is posted on the Fed’s website at http://www.federal Q. A. Choices to make If a bank has covered products, there are five basic roads to choose from, in regard to these DOD regulations: • Discontinue products that fall within the scope of the rules altogether. • Discontinue offering such products to covered service members and their dependents, but continue to offer them to other borrowers. • Redesign covered products for everyone so that they do not meet the coverage criteria of the regulation. • Redesign covered products for identified covered borrowers only and continue to offer existing products to others. • Continue to offer existing covered products with the new limitations and disclosures required. BJ 60 FEBRUARY 2008/ABA BANKING JOURNAL

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ABA Banking Journal - February 2008 Contents On ABABJ.COM: Have You Visited Our Brand-New Website? Editor's Column "That's Edutainment" Snapshot: Tier 1 Ratios Stable so Far 100th Anniversary: Then and Now ABA Resources ABA Chairman's Position Don't Despair Pass the Aspirin Cover Story: Socially Responsible Banking Profitably - Incoming America's Community Bankers Council Chairwoman, Dorothy Bridges Demonstrates the Way A True "Rags-to-Banker" Story Retail Banking: On the Money Hunt Community Bank Management: The Ugly Truth About Board Relations Does Core Really Matter? Security 2.0: Not Just a New Kettle of Phish A Personal Case of Mal-Serendipity DOD Credit Regs Demand Attention Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - February 2008

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