Challenges with Technology

1
Challenges with Technology Compliance

• Presented by
• Sean J. Kulczycki, CRCM
• Principal
• September 13, 2007

2
Agenda

• Regulations on E-Banking
• E-Sign Act
• Online Loan Applications
• Opening Accounts Online
• Online Statements
• Website Compliance
• New Payment Methods
• Electronic Check Conversion

3
Regulations on E-BankingWhats the Scoop?

• Many of the requirements currently listed within
  the
• regulations are not actual requirements
• March 30, 2001 Federal Reserve issued Interim
  Final Rules Amending Regulations B, E, M, Z and
  DD
• August 2, 2001 Federal Reserve lifted mandatory
  compliance dates
• April 30, 2007 Federal Reserve proposed
  withdrawing interim final rules

4
Regulations on E-BankingWhere Does that Leave Us?

• Okay to rely on interim final rules
• Otherwise, rely on regulations as they were prior
  to 3/30/01 Interim Final Rule!
• Good idea to rely on proposed guidance now

5
E-Sign ActConsumer Consent Provisions

• Section 101(c) of the E-Sign Act allows
  disclosures
• required to be in writing to be provided
  electronically
• if
• The consumer has affirmatively consented to such
  use and has not withdrawn such consent
• The consumer, prior to consenting, is provided
  with a clear and conspicuous disclosure statement
  that meets the following requirements

6
E-Sign ActClear and Conspicuous Statement

• Statement must
• Inform consumer of any right to have the record
  provided or made available in non-electronic form
• Inform consumer of their right to withdraw
  consent and of any conditions, consequences or
  fees in the event of such withdrawal

7
E-Sign ActClear and Conspicuous Statement

• Inform consumer of whether the consent applies
  only to
• The particular transaction that gave rise to the
  obligation to provide the record
• To identified categories of records that may be
  provided or made available during the course of
  the parties relationship

8
E-Sign ActClear and Conspicuous Statement

• Describe procedures the consumer must use to
  withdraw consent and to update information needed
  to contact the consumer electronically
• Inform consumer how they may obtain a paper copy
  of an electronic record after consent and whether
  any fee will be charged for such copy

9
E-Sign ActStatement of Hardware and Software

• Consumer must also be provided with a statement
  of the hardware and software requirements for
  access to and retention of the electronic records

10
E-Sign ActConfirmation of Consent

• Consumer must consent electronically, or confirm
  consent electronically in a manner that
  reasonably demonstrates the consumer can access
  information in the electronic form that will be
  used to provide the information that is the
  subject of the consent

11
Online Loan Applications Home Equity Lines of
Credit (HELOC)

• If an application for a HELOC is provided
  on-line,
• the following additional disclosures must also be
  provided

• Application disclosure
• Home equity brochure (Youre Home Is On the
  Line)

E-Sign disclosures not required
12
Online Loan Applications Providing HELOC
Disclosures

• Recent proposed guidance from the FRB indicates
  that banks have flexibility in providing
  disclosures and provides the following example
  methods
• Automatically appear on screen
• Appear elsewhere on the page if a clear
  reference is made
• Provide link to disclosures if it cannot be
  by-passed

13
Online Loan Applications General Purpose
Applications (For HELOCs)

• The Commentary to Section 226.5b(b) of Regulation
  Z states that the disclosure and brochure need
  not be provided if a general purpose application
  is provided unless the application or
  accompanying information indicate that it can be
  used to apply for a HELOC

14
Online Loan Applications Closed-End Mortgage
Loans

• If an application for an ARM loan is
• provided online, the following
• additional disclosures must also be
• provided
• ARM program disclosure
• CHARM booklet

E-Sign disclosures not required
15
Online Loan Applications ARM Disclosures

• The proposed rule from the FRB requires ARM
• disclosures to be provided using same methods as
• HELOCs
• Automatically appear on screen
• Appear elsewhere on page if clear reference is
  made
• Provide link to disclosures if it cannot be
  by-passed

16
Online Loan Applications General Purpose
Applications (For ARMs)

• ARM Loan Applications
• No exception exists, as with HELOCs, stating that
  ARM disclosures need not be provided with generic
  application forms

17
Opening Deposit Accounts Things to Consider

• Things to consider when establishing such a
  process
• include
• Providing initial disclosures
• Funding the account
• Identification and BSA considerations

18
Opening Accounts Online Required Disclosures
The following disclosures must generally be
provided prior to an account being opened or
service provided

• Initial Truth in Savings
• Initial Electronic Funds Transfer
• Initial Expedited Funds Availability
• Initial Privacy Disclosures
• Check 21 Disclosure (depending)

E-Sign disclosures are required for above
19
Check 21Disclosure Requirements

• Account Opening Must be provided at time
  customer relationship is initiated if paid
  original (or substitute) checks are provided
  with periodic statement
• Subsequent Disclosures
• Customers that request a copy of an original
  check and are provided a substitute check
• Customers that receives an unpaid returned
  substitute check

20
Opening Accounts Online Method of Disclosure

• Disclosures must be provided clearly and
  conspicuously, in writing and in a form the
  consumer may keep
• No additional requirements regarding the manner
  in which the disclosures must be provided e.g.,
  direct on screen versus link that cannot be
  by-passed

21
Opening Accounts Online Funding the Account

• Transfer from another financial institution
• Transfer from existing account
• Mailed check

22
Opening Accounts Online BSA Considerations

• The FFIEC BSA/AML Examination Manual states the
  following regarding online identification
• Banks engaging in transactional Internet
  banking should
• have effective and reliable methods to
  authenticate a cust-
• omers identity when opening accounts on-line
  and should
• establish policies for when a customer should be
  required to
• open accounts on a face-to-face basis.
• The Manual also makes reference to
  Authentication in an Internet Banking Environment
  issued by the FFIEC, October 13, 2005

23
Online StatementsThings to Consider

• Other than E-Sign, no restrictions exist on the
  method of providing electronic periodic
  statements as long as periodic statements are
  provided within the specified times and in a form
  that consumer may keep

E-Sign disclosures are required
24
Online Payments Bill Pay Disclosure Pitfall

• Disclosures must be given in close proximity to
  the event requiring disclosure, e.g., when the
  consumer contracts for bill pay services

• Initial disclosure are usually provided when
  consumers sign up for online banking
• If bill pay services are subsequently obtained,
  new disclosures are frequently overlooked

25
Getting it WrongThe Consequences
Not accurately providing the required Regulation
E disclosures can have significant consequences

• A consumer may only be held liable, within the
  limitations of Regulation E if the financial
  institution has provided the initial account
  disclosures
• Consumers are liable for transactions that occur
  60 days after transmittal of periodic statement
  (but what if that statement is not properly sent)

26
Website Compliance Advertising Deposit Accounts

• If a website displays a triggering term (APY or a
  bonus), the additional required disclosures must
  be provided
• Do not have to be on same page, but must be a
  clear reference to where the disclosures begin
• This can include a link that takes the consumer
  directly to additional information

27
Website Compliance APYs and Interest Rates

• While the disclosures triggered by an APY may be
  accessed via link, if an APY and interest rate
  are disclosed, they must be provided together
• Section 230.8(b) prohibits interest rates from
  being stated alone or from being stated more
  conspicuously than the APY to which it relates

28
Website Compliance Overdraft Privilege

• If advertisement promotes overdraft service, it
  must also disclose
• Fee or fees for overdraft
• Categories of transactions for which fees
  imposed
• Time period to repay
• Circumstance bank will not pay

• Proposed rule on Regulation
• DD includes new comment
• to clarify rules that apply to
• advertising disclosures also
• apply to the advertisement
• of overdraft protection

29
Website Compliance Closed-End Triggering Terms

• The following terms, if used on a banks website,
  
• require the disclosure of additional terms
• The number of payments or period of repayments
• The amount of any payment
• The amount of any finance charge

We offer consumer loans with terms of 5 to 30
years!
30
Website Compliance Advertising HELOCs

• For home equity line of credit advertisements,
  affirmative as well as negative terms trigger the
  additional disclosure requirements, so the
  following statements trigger additional
  disclosures

No closing costs!
No points!
No annual fee!
31
New Payment MethodsPayroll Cards

• Beginning 7/1/07, payroll card accounts became
  covered by Regulation E

• A payroll card account is defined as an account
  that is directly or indirectly established
  through an employer and to which electronic fund
  transfers of the consumers wages, salary or
  other employee compensation (such as commission)
  are made on a recurring basis

32
New Payment MethodsStored Value Cards

• Not covered by Regulation E
• Customer may have 0 liability through Visa
• OCC and OTS have issued gift card guidance
• Have BSA implications

33
Electronic Check ConversionInitial Disclosure
for Regulation E

• Regulation E changes effective 1/1/07, required
  initial disclosures for Regulation E to identify
  electronic check conversion (ECK) transactions as
  a type a consumer can make

34
Electronic Check ConversionRevised Model Language

• The FRB issued the following model language to
  satisfy the ECK disclosure requirement
• Electronic check conversion. You may authorize
  a
• merchant or other payee to make a one-time
  electronic
• payment from your checking account using
  information
• from your check to
• (i) Pay for purchases
• (ii) Pay bills

35
Electronic Check ConversionRevised Model Language
Existing model language was also modified
relating to the consumer liability 205.7(b)(1)
and the telephone and address requirement
205.7(b)(2) Tell us AT ONCE if you believe
your card code has been lost or stolen, or
if you believe that an electronic fund transfer
has been made without your permission using
information from your check.
36
Electronic Check ConversionRevised Model Language

• If you believe your card code has been
  lost or stolen, call
• Telephone number or write Name of person or
  office to be
• notified Address
• You should also call the number or write to the
  address listed
• above if you believe a transfer has been made
  using the information
• from your check without your permission.

37
Electronic Check ConversionCollecting Loan
Payments Via ACH

• Effective 1/1/07, financial institutions that
  convert checks to electronic funds transfers,
  e.g., to collect loan payments, using the
  information on checks must provide notice to
  consumers for each conversion

38
Electronic Check ConversionCollection of
Mortgage Payments

• Coupon Books ECK disclosures placed in a
  conspicuous location on a coupon book are deemed
  to be placed on each coupon for purpose of
  obtaining a consumers authorization
• Periodic Statements If periodic statements or
  billing statements are sent, disclosures must be
  provided on each statement

39
Contact Information
Sean J. Kulczycki, CRCM 314.231.5544 skulczycki_at_b
kd.com