Chapter 10: Credit Industry Rules & Regulations
IN THIS LESSON
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Also known as the Currency and Foreign Transactions Reporting Act, the Bank Secrecy Act (BSA) is U.S. legislation created in 1970 to prevent financial institutions from being used as tools by criminals to hide or launder their ill-gotten gains.
The law requires banks and other financial institutions to provide documentation, such as currency transaction reports, to regulators. Such documentation can be required from banks whenever their clients deal with suspicious cash transactions involving sums of money in excess of $10,000. The law grants authorities the ability to more easily reconstruct the nature of the transactions.
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For consumer loans of at least $2,500 but less than $10,000 (including commercial loans of at least $2,500 but less than $5,000), before disbursing loan proceeds to a borrower, a finance lender must offer a borrower a credit education program or seminar that has previously been reviewed and approved by the Department of Business Oversight (DBO).
The credit education program or seminar may be provided by an independent third party. The program or seminar may be provided in writing, electronically, or orally. If provided orally, however, the program must be accompanied by written or electronic materials.
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Under current law, a seller, lessor, or company issuing a credit or charge card is prohibited from imposing a surcharge against a person who elects to pay for a sales or lease transaction by using a credit or charge card. The act:
Repeals the prohibition; and
Limits the maximum surcharge amount per transaction to 2% of the total cost to the buyer or lessee for the sales or lease transaction or the merchant discount fee, which is defined as the actual fee that a seller or lessor (merchant) pays its processor or service provider to process the transaction.
A merchant is required to display notices regarding the surcharge on the merchant's premises or, for online purchases, before an online customer's completion of the sales or lease transaction.
The act clarifies that a merchant is prohibited from applying the surcharge to cash or check payments, debit card payments, or payments made by redemption of a gift card.
If a merchant imposes a surcharge in violation of the act, the merchant is subject to liability as a creditor under the "Uniform Consumer Credit Code"”
(Note: This summary applies to this bill as enacted.)
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The Community Reinvestment Act (CRA, P.L. 95-128, 91 Stat. 1147, title VIII of the Housing and Community Development Act of 1977, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.
Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.
The Act instructs the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.) To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance and take this information into consideration when approving applications for new bank branches or for mergers or acquisitions (Section 804.)
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The CFPB implements and enforces federal consumer financial laws to ensure that all consumers have access to markets for consumer financial products and services that are fair, transparent, and competitive.
The CFPB’s rulemaking process typically starts with research and is further informed by public input, including field hearings, consumer and industry roundtables, advisory bodies, and in some cases, small business review panels. We carefully assess the benefits and costs of the regulations we are considering for consumers and financial institutions.
Proposed rules are generally published to give the industry, consumers, and other external stakeholders an opportunity to comment on their potential impact. Once a regulation is in place, we provide support and resources to help stakeholders understand and comply with the rule.
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The Financial Accounting Standards Board (FASB) issued a new current expected credit loss standard—or CECL—in June 2016.
CECL changes how financial institutions account for expected credit losses. Following the financial crisis, much of the immediate focus of the Federal Reserve and other supervisory authorities was on recapitalizing institutions and guarding against systemic risk with an increased focus on stress testing as the preferred tool to protect the global economy from further erosion. But perhaps more important to the bottom line are the revolutionary changes to accounting standards that determine the appropriate level of balance sheet reserves for credit losses.
FASB's CECL standards apply to any institution issuing credit, including banks, savings institutions, credit unions, and holding companies filing under GAAP accounting standards.
Banks
CECL took effect in 2020 for large SEC registrants (and 2023 for all other banks). Click here for CECL information from the American Bankers Association (ABA).Credit Unions
CECL became effective for federally insured CUs for fiscal years beginning after December 15, 2022. Click here CECL resources from the National Credit Union Administration (NCUA). -
The Dodd-Frank Wall Street Reform and Consumer Protection Act is legislation that was passed by the U.S. Congress in response to financial industry behavior that led to the financial crisis of 2007–2008. It sought to make the U.S. financial system safer for consumers and taxpayers.
Named for sponsors Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), the act contains numerous provisions, spelled out over 848 pages, that were to be implemented over a period of several years.
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What is it
The Equal Credit Opportunity Act (ECOA) is a federal civil rights law that forbids lenders to discriminate against loan applicants for any reason other than their ability to repay. Specifically, ECOA protects consumers from discrimination based on race, color, religion, national origin, sex, marital status, age, eligibility for public assistance, or the exercise of any rights under the Consumer Credit Protection Act.
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The Act (Title VI of the Consumer Credit Protection Act) protects information collected by consumer reporting agencies such as credit bureaus, medical information companies, and tenant screening services. Information in a consumer report cannot be provided to anyone who does not have a purpose specified in the Act.
Companies that provide information to consumer reporting agencies also have specific legal obligations, including the duty to investigate disputed information. In addition, users of the information for credit, insurance, or employment purposes must notify the consumer when an adverse action is taken on the basis of such reports.
The Fair and Accurate Credit Transactions Act added many provisions to this Act, primarily relating to record accuracy and identity theft. The Dodd-Frank Act transferred to the Consumer Financial Protection Bureau most of the rulemaking responsibilities added to this Act by the Fair and Accurate Credit Transactions Act and the Credit CARD Act, but the Commission retains all its enforcement authority.
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FACTA (FACT ACT) amends the Fair Credit Reporting Act to help consumers combat identity theft, establish national standards for the regulation of consumer report information, and assist consumers in controlling the amount and type of marketing solicitations they receive.
It also limits the use of sharing medical information in the financial industry. It also allows consumers free access to their credit reports at least once a year from all three credit bureaus.
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An additional 5th reason code will be returned when inquiries are not in the top four key reason codes facilitating lender compliance with the Fair and Accurate Credit Transactions Act (FACTA). Exclusion scores are 4-digit scores that are returned when a profile is not able to be scored.
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The Fair Credit Reporting Act (FCRA) is a federal law that helps to ensure the accuracy, fairness, and privacy of the information in consumer credit bureau files. The law regulates how credit reporting agencies can collect, access, use, and share the data they collect in their consumer reports.
Passed in 1970, the FCRA helps consumers understand what actions they can take in regard to the information in their credit reports. Information is being gathered about consumers all the time: In addition to the three major consumer credit bureaus (Experian, TransUnion, and Equifax), there are other organizations that may collect and use your information. For example, banks and credit unions may use information from your credit history to determine whether to approve you for a loan.
Why does it matter how information about your credit is used? Whenever you apply for a credit card, a car loan, a mortgage loan, or any other form of credit, the issuing company checks your credit history to assess your creditworthiness. The terms you are offered for credit (such as a loan) may be based in part on your credit score and information in your credit report.
Your credit history affects more than just your ability to get loans or the annual percentage rate (APR) on your credit cards. For instance, prospective landlords could check your credit report to see how creditworthy you are when deciding whether they can trust you to pay your rent on time.
In some states, employers may check your credit report for hiring purposes. Also, depending on the state, insurance companies may check your credit to determine whether to offer you coverage.
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The Federal Financial Institutions Examination Council (FFIEC) is a formal U.S. government interagency body composed of five banking regulators that is "empowered to prescribe uniform principles, standards, and report forms to promote uniformity in the supervision of financial institutions". It also oversees real estate appraisal in the United States. Its regulations are contained in Title 12 of the Code of Federal Regulations.
FFIEC includes five banking regulators—the Federal Reserve Board of Governors (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB).
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The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, (Pub. L. 106–102 (text) (PDF), 113 Stat. 1338, enacted November 12, 1999) is an act of the 106th United States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies, and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. Furthermore, it failed to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies. The legislation was signed into law by President Bill Clinton.
A year before the law was passed, Citicorp, a commercial bank holding company, merged with the insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities, and insurance services under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998. Less than a year later, GLBA was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall's conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank."
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Know Your Client (KYC) is a standard in the investment industry that ensures advisors can verify a client's identity and know their client's investment knowledge and financial profile.
Three components of KYC include the customer identification program (CIP), imposed under the USA Patriot Act in 2001, customer due diligence (CDD), and ongoing monitoring or enhanced due diligence (EDD) of a customer's account once it is established.
Know Your Customer (KYC) guidelines and regulations in financial services require professionals to verify the identity, suitability, and risks involved with maintaining a business relationship with a customer. The procedures fit within the broader scope of anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
Companies of all sizes also employ KYC processes for the purpose of ensuring their proposed customers, agents, consultants, or distributors are anti-bribery compliant, and are actually who they claim to be. Banks, insurers, export creditors, and other financial institutions are increasingly required to make sure that customers provide detailed due diligence information. Initially, these regulations were imposed only on financial institutions, but now the non-financial industry, fintech, virtual assets dealers, and even non-profit organizations are liable to oblige.
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The Military Lending Act1 (MLA), enacted in 2006 and implemented by the Department of Defense (DoD), protects active duty members of the military, their spouses, and their dependents from certain lending practices. These practices could pose risks for service members and their families and could pose a threat to military readiness and affect service member retention.
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A comprehensive series of initiatives designed to enhance the accuracy of credit reports and make the process of dealing with credit information easier and more transparent for consumers.
NCAP 1
The Plan prohibits data furnishers from reporting debts that do not arise from a contract or agreement to pay (including tickets and certain fines) and institutes a process to remove such data from consumer credit reports.
As of July 1, 2017, new and existing public record data will now have had to adhere to these two standards:
The minimum requirement of consumer identifying information: name, address, social security number and/or date of birth.
The minimum frequency (at least every 90 days) of courthouse visits to obtain newly filed and updated public records is required.
NCAP 2
Requires credit reports have the following changes:
Do not report medical debt collection accounts less than 180 days old. This is required for collection agencies and debt buyers.
Report a “delete” for accounts that are being paid or were paid in full through insurance. This is required for collection agencies and debt buyers.
Report full date of birth for new authorized users on all accounts. This is required for reporters of authorized user data.
Depending on which credit scoring model your property uses, phase two can potentially drastically affect the rental market. Prior to NCAP, FICO® utilized medical debt within its credit scoring algorithm. Rental applicants with medical debt might see an increase in their FICO® credit score, spurring an increase in eligible rental applicants now that phase two is effective.
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Congress enacted section 1071 for the purpose of:
Facilitating enforcement of fair lending laws.
Enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses.
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The Patriot Act, or USA PATRIOT Act, was passed shortly after the terrorist attacks in the United States that occurred on September 11, 2001, and gave law enforcement agencies broader powers to investigate, indict, and bring terrorists to justice. It also led to increased penalties for committing and supporting terrorist crimes.
An acronym for “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,” the USA PATRIOT Act lowered the threshold for law enforcement to obtain intelligence and information against suspected spies, terrorists, and other enemies of the United States.
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a) A person shall not obtain the credit report of a consumer unless:
the report is obtained in response to the order of a court having jurisdiction to issue such an order; or
the person has secured the consent of the consumer, and the report is used for the purpose consented to by the consumer.
(b) Credit reporting agencies shall adopt reasonable procedures to ensure maximum possible compliance with subsection (a) of this section.
(c) Nothing in this section shall be construed to affect:
the ability of a person who has secured the consent of the consumer pursuant to subdivision (a)(2) of this section to include in his or her request to the consumer permission to also obtain credit reports, in connection with the same transaction or extension of credit, for the purpose of reviewing the account, increasing the credit line on the account, for the purpose of taking collection action on the account, or for other legitimate purposes associated with the account; and
the use of credit information for the purpose of prescreening, as defined and permitted from time to time by the Federal Trade Commission. (Added 1991, No. 246 (Adj. Sess.), § 1.)