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Consumer Compliance Outlook: First Quarter 2013

2012 Year in Review Webinar: Questions and Answers *

By Kenneth Benton, Senior Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia

On December 4, 2012, the Federal Reserve System conducted an Outlook Live webinar titled “Consumer Compliance Hot Topics — 2012 Year in Review.”1 We received a significant number of questions during the event and were not able to address all of them. This article answers the most frequently asked questions concerning the Consumer Financial Protection Bureau’s (CFPB) remittance transfer rulemaking and the Biggert-Waters Flood Insurance Reform Act of 2012.

Remittance Transfer Rule

  1. Does the 100 remittance transfers per year safe harbor provision apply only to transfers that exceed $15 or the total number of transfers regardless of the amount?

    The final rule applies to remittance transfer providers, who are defined in 12 C.F.R. §1005.30(f)(1) PDF External Link as persons providing remittance transfers to consumers in the normal course of business. To facilitate compliance, the final rule includes a safe harbor provision that states that providers who conducted 100 or fewer remittance transfers in the previous calendar year and who continue to make 100 or fewer remittance transfers in the current year are deemed to not be providing remittance transfers in the normal course of business. “Remittance transfer” is defined in 12 C.F.R. §1005.30(e) as an electronic transfer of funds conducted by a remittance transfer provider at the request of a sender to a designated recipient. Under 12 C.F.R. §1005.30(e)(2)(i), transfers in the amount of $15 or less are specifically excluded from the definition of “remittance transfer.” Therefore, only transfers that exceed $15 count toward the 100 safe-harbor threshold. In addition, the CFPB’s International Fund Transfers Small Entity Compliance Guide PDF External Link states that “[w]hen counting to 100, you need to count all types of remittance transfers covered by the rule together” (emphasis added). See Compliance Guide, p. 12.2

    Note: On January 29, 2013, the CFPB issued a final rule delaying the February 7, 2013, effective date for the remittance transfer rule. See 78 Fed. Reg. 6,025 (Jan. 29, 2013) PDF External Link . The effective date was delayed because the CFPB issued a rulemaking proposal on December 31, 2012, to amend the final rule. See 77 Fed. Reg. 77, 188 (Dec. 21, 2012) PDF External Link . When the proposal is made final, a new effective date will be announced.

  2. Does the 100 remittance transfers per year safe harbor apply to all foreign wires or just consumer wires to foreign countries?

    As discussed in Q&A 1, only transfers that are “remittance transfers” under the regulatory definition should be counted in determining whether a person is within the safe harbor threshold. A “remittance transfer” is defined in 12 C.F.R. §1005.30(e) as an electronic transfer of funds conducted by a remittance transfer provider at the request of a sender to a designated recipient. A “sender” is defined in 12 C.F.R. §1005.30(g) as “a consumer in a State who primarily for personal, family, or household purposes requests a remittance transfer provider to send a remittance transfer to a designated recipient” (emphasis added). Therefore, consumer to business foreign wires are considered “remittance transfers” (see Q&A 4 below), but business to business foreign wires are not and should not be counted when determining whether a person meets the 100 remittance transfers safe harbor.

  3. If we do not provide more than 100 remittance transfers a year, are we required to provide error resolution rights as well as cancellation and refund rights?

    If you conducted 100 or fewer remittance transfers in the previous calendar year and in the current year, you are not a remittance transfer provider subject to the remittance transfer provisions of Regulation E (subpart B). See 12 C.F.R. §1005.30(f)(2). Therefore, you would not be subject to 12 C.F.R. §1005.33 (error resolution for remittance transfers) or 12 C.F.R. §1005.34 (cancellation and refund). However, the Regulation E error resolution procedures for electronic fund transfers, as described in 12 C.F.R. §1005.11 External Link, may still apply. For example, if a consumer alleged that a remittance transfer that was also an electronic fund transfer was made from the consumer’s checking account in the total amount of $1,000, but the consumer’s account was erroneously charged $1,500, the account-holding financial institution would have to investigate following the procedure specified in 12 C.F.R. §1005.11, even if the financial institution was not a remittance transfer provider subject to the remittance transfer provisions. Outlook published an article on these procedures in the Fourth Quarter 2012 issue.3 In addition, requirements under state law may also apply.

  4. Is it true that this rule applies only to consumers and not businesses?

    The rule only applies when a sender is a consumer. See 12 C.F.R. §1005.30(g). However, comment 30(c)-1 states that a designated recipient can be either a natural person or an organization, such as a corporation. Therefore, remittance transfers covered under the rule include transfers from a consumer to a business.

  5. How do you provide “proof of payment” when using the combined disclosure for remittance transfers when the actual payment is a debit from the customer’s account conducted after the customer has left the branch? This is currently done by our wire room after the entities go through our screening processes.

    When a transfer is scheduled in advance, the regulation and commentary allow the provider to provide proof of scheduling in lieu of proof of payment. Comment 31(b)(3)-2 states: “Where a transfer (whether a one-time remittance transfer or the first in a series of preauthorized remittance transfers) is scheduled before the date of transfer and the provider does not intend to process payment until at or near the date of transfer, the provider may provide a confirmation of scheduling in lieu of the proof of payment required by §1005.31(b)(3)(i). No further proof of payment is required when payment is later processed” (emphasis added). The confirmation of scheduling “must be clear and conspicuous, provided in writing or electronically, and provided in a retainable form.” See 12 C.F.R. §1005.31(b)(3)(ii).

  6. Explain the changes to Regulation J and to the rules for the Clearing House Interbank Payments System (CHIPS) to address the Uniform Commercial Code (UCC) Article 4-A issue for remittance transfers.

    Section 4-A-108 of the UCC External Link specifies that UCC Article 4-A does not apply to any transaction subject to the Electronic Fund Transfer Act (EFTA). The Dodd-Frank Wall Street Reform and Consumer Protection Act amends the EFTA to add consumer protection requirements for foreign remittance transfers in new EFTA section 919, 15 U.S.C. §1693o-1 External Link. Therefore, Article 4-A would not apply to a consumer foreign remittance transfer subject to EFTA 919 and its implementing regulation (subpart B of Regulation E,12 C.F.R. §§1005.30-1005.36). This situation can be problematic for remittance transfers conducted through open-network systems, where remittance transfer providers do not control the remittance transfer from start to finish but instead rely on intermediaries to complete a transfer. The parties to an open-network remittance transfer typically rely on Article 4-A to provide the legal framework for their rights and responsibilities. Most remittance transfers are conducted through the Federal Reserve System’s Fedwire® Funds Service (Fedwire) or through CHIPS, an electronic payment, clearing, and settlement service operated by the Clearing House.

    To address this issue, the Federal Reserve Board amended its Regulation J (Fedwire) in April 2012. See 77 Fed. Reg. 21,854 PDF External Link (April 12, 2012). The amendment, which became effective July 12, 2012, clarifies that Article 4-A applies to Fedwire remittance transfers subject to EFTA section 919, unless there is a conflict with the EFTA, in which case the EFTA governs. See 12 C.F.R. §210.25. External Link

    Similarly, in March 2012, the Clearing House amended the choice of law provision in its Rules and Administrative Procedures PDF External Link to clarify that Article 4-A of the New York UCC applies to remittance transfers subject to section 919 of the EFTA that are made through CHIPS, except in the case of an inconsistency between New York law and the EFTA, in which case the EFTA governs. The New York legislature also amended New York UCC section 4-A-108 External Link in August 2012 to provide that Article 4-A applies to remittance transfers subject to the EFTA, unless there is a conflict with the EFTA, in which case the EFTA governs. For additional information, view the presentation slides External Link on this issue from a September 6, 2012, symposium at the Federal Reserve Bank of Atlanta (“A Symposium on 1073: Exploring the Final Remittance Transfer Rule and the Path Forward”).4 External Link

Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) PDF

  1. Where in the Biggert-Waters Act does it refer to the force-placement 45-day period based on which the lender can be reimbursed for the premium?

    Section 100244(a)(1) of the Biggert-Waters Act amends the Flood Disaster Protection Act of 1973 to allow lenders to be reimbursed for the cost of purchasing flood insurance and incidental fees beginning on the day a policy lapsed or had insufficient coverage: “If the borrower fails to purchase such flood insurance within 45 days after notification under paragraph (1), the lender or servicer for the loan shall purchase the insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount” (emphasis added).

  2. Was there a technical error in the flood act that required escrows for loans secured by nonresidential buildings?

    As originally drafted, section 100209 of the Biggert-Waters Act contained escrow requirements that apply to “improved real estate.” This language raised a concern in the industry that loans secured by commercial real estate would also be subjected to escrow requirements. In response, Congress passed S.3677, which makes a technical correction to the escrow requirements to clarify that they apply only to residential improved real estate. On January 14, 2013, the President signed the bill into law, PDF External Link which became effective that day.

  3. What is the effect of the Biggert-Waters Act on grandfathered properties?

    Grandfathering is the practice of allowing certain building owners to lock in the current flood zone ratings and premiums for their properties before rates are increased because of a flood map change with a higher flood zone rating. Grandfathering is available for property owners who either have a flood insurance policy in effect when a new flood insurance rate map (FIRM) becomes effective and then maintain continuous coverage, or if the building complied with the FIRM requirements in effect at the time of construction. However, grandfathering does not apply if a building has been substantially damaged or improved. For additional information on grandfathering, refer to FEMA’s publication “NFIP Grandfather Rules.”5 External Link

    Section 100207 of the Biggert-Waters Act phases out grandfathering. This provision provides that upon the effective date of any revised or updated FIRM, any property located in a community participating in the National Flood Insurance Program shall have the risk premium rate charged for flood insurance on such property adjusted to accurately reflect the current risk of flood to such property. The premium increase will be phased in over a five-year period.

    To reflect the current risk of flooding, FEMA periodically updates the nation’s FIRMs. In addition, section 100216 of the Biggert-Waters Act requires FEMA to establish an ongoing program to review and update FIRMs and to follow the requirements in section 100216 in doing so. If FEMA assigns a higher flood risk rating to an area after an update, the flood insurance premiums in that community will increase.

    Specific issues and questions should be raised with your primary regulator.