April 6, 2012
Consumer Financial Protection Bureau
Office of the Executive Secretary
1500 Pennsylvania Ave. NW
Washington, DC 20220
RE: Docket No. CFPB–2011–0009; Electronic Fund Transfers
Dear Ms. Jackson:
On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I am writing to you regarding the Consumer Financial Protection Bureau’s (CFPB) proposed rule and request for comment on changes to Regulation E in regards to remittance transfers. The agency’s proposed rule – as well as the final rule it issued simultaneously – is very problematic for credit unions of all sizes. The vast majority of credit unions that offer international remittances use open network systems. As the agency acknowledged in the final rule, it will be exceedingly difficult for open network systems, as currently configured, to comply with the rule. NAFCU appreciates the agency’s decision to seek more input regarding the unique problems that arise with preauthorized or reoccurring electronic fund transfers.
NAFCU welcomes the proposed exception for remittance transfer providers that send less than 25 remittances a year; however, the exception is so low as to be nearly useless. Virtually no institution that has taken the time and effort to establish the capability to provide transfers covered by this regulation would fall under the exception. While many credit unions offer the service simply because there is some limited demand, it is unlikely an institution would expend the necessary resources if the demand was less than 25 transactions per year. Further, most institutions considering the impact of the rule would, practically speaking, have to comply, even if the recent history indicates they might fall under the exception. Unless a credit union decides it simply will cut off the service after the first 25 transactions each year – a completely unrealistic and impractical option – it will have no choice but to comply with the onerous provisions in the final rule. This is all the more true given that the rule covers virtually any electronic transfer of funds delivered abroad.
Further, even those that may not exceed the threshold will need to comply in advance or risk being forced to hurriedly set up a compliance program in the middle of the year once the threshold is exceeded. This simply is not realistic. Accordingly, NAFCU recommends the agency consider increasing the threshold exception to 600 covered transactions per year; an average of just 50 per month. This threshold would more accurately reflect the intent of the proposal; to exempt institutions that provide these services infrequently and in response to a specific customer request.
Regardless of the ultimate threshold exemption, NAFCU recommends the agency address how a remittance transfer provider should respond once it exceeds the threshold. NAFCU recommends that providers be given six months to comply with the final rule’s requirements after exceeding the threshold. It is impractical for a credit union to make use of the exception if, upon reaching the threshold, it must immediately begin complying in full. The agency must allow institutions in this position some sort of mechanism that allows for a transition from an exception to the rule to full compliance with all of its requirements.
Given the myriad concerns, detailed below, with the proposed rule, it is possible that some credit unions may simply stop offering preauthorized transfers of this kind. It is our understanding that preauthorized transfers make up a very small percentage of the overall number of foreign wire transfers that would be covered under the final rule. Consequently, given the significant risk associated with guaranteeing foreign exchange rates ten days in advance, the cost of managing that risk and the relatively small number of such transactions, it will likely be easier for institutions that currently provide this service infrequently to simply eliminate it altogether.
NAFCU has several thoughts regarding the proposal as it relates to transfers scheduled in advance or preauthorized transfers. First, NAFCU supports allowing estimates for transfers scheduled in advance. Second, estimates should be permitted for transactions scheduled less than ten days in advance. Third, the proposed extra receipt for these transactions is unduly burdensome and only further complicates the already cumbersome disclosure regime established by the final rule. Fourth, and more generally, NAFCU does not believe prepayment disclosures are necessary for each subsequent transfer in a series of transactions. Fifth, the three day right of cancellation is problematic.
Estimates for Transfers Scheduled in Advance
NAFCU strongly recommends the CFPB allow estimates for transfers scheduled more than ten days in advance. As the system currently operates, remittance transfer providers that use open networks (as the vast majority of all credit unions do), cannot accurately provide the disclosures required by the rule even a few days in advance. It is simply not possible for credit unions to provide disclosures with the specificity required by the CFPB for transfers scheduled well in advance. The risks associated with setting a transaction ten days in advance are potentially severe given the volatility of exchange rates. These risks can be managed to some extent, but at a significant cost to the remittance transfer provider. Accordingly, institutions should be able to, at a minimum, use estimates.
Additionally, the CFPB should permit institutions to disclose the exchange rate using a formula, if they so choose. This would eliminate the need for remittance transfer providers to manage and hedge against the risk of fluctuation. Further, it would permit the institution to provide the disclosure well in advance in a manner that would enable the sender to accurately determine the exchange rate on the date the transfer is made. Thus, a formula would provide consumers with more accurate, up to date information, while reducing the burden for remittance transfer providers. This would benefit all interested parties.
Requiring the disclosures ten days in advance, without permitting estimates, would be incredibly burdensome for any remittance transfer provider. Exchange rates can fluctuate rapidly over a short period of time, much less ten days. As discussed briefly above, these risks can be managed to some extent, but there is an additional cost to providers for managing that risk. This additional cost, however, provides little if any offsetting benefit, particularly in the case of a series of preauthorized transactions. If a consumer wishes to set up a series of preauthorized transactions, he or she presumably is most concerned with the ease of effort and peace of mind attached to setting up a recurring transaction. It is axiomatic that an individual who preauthorizes a recurring transaction months in advance is not worried about the exact cost of each subsequent transaction. Consequently, the added costs of the proposed ten day advance notice does not appear to provide any tangible benefit to consumers, while it will inevitably increase the cost of the transaction.
For all the reasons listed above, NAFCU encourages the CFPB to permit estimates for transactions scheduled in advance and to permit the exchange rate to be disclosed using a formula.
The Ten Day Notice Requirement is Unduly Burdensome
Regardless of the agency’s determination regarding estimates, the proposed ten day notice requirement should be modified. Under the proposed rule, estimates would not be permitted for a remittance transfer scheduled less than ten days in advance. The agency should instead permit estimates for remittance transfers scheduled more than two business days in advance. Consumers would still have sufficient time to cancel the transaction. At the same time, this would help minimize the considerable cost to financial institutions of guaranteeing foreign exchange rates ten days in advance of the scheduled transfer.
The Additional Receipt for Preauthorized Transactions is Unnecessary
The agency’s proposal to require a “second receipt” in certain circumstances is unnecessary. Specifically, the agency proposed a second receipt in instances where the provider uses an estimate because (1) the transfer is scheduled to occur more than ten days in advance, or (2) the amount of the transfer can vary and the provider does not know the exact amount of the first transfer at the time the disclosure is provided. To begin, the disclosure regime required by this rule is already unnecessarily complex and unduly burdensome. To require a “second receipt” in this instance would mean consumers receive three total disclosures for each initial transaction of this sort; the pre- payment disclosure when the transaction is authorized, the “second receipt” ten days before the transaction is scheduled, and a third and final receipt. For future transactions, consumers would receive two disclosures; one ten business days before the scheduled transfer and one receipt. This portion of the proposal complicates an already unnecessarily complex process without providing much benefit to consumers.
First, providing multiple disclosures that may be virtually identical might potentially confuse consumers. Indeed, it is difficult to imagine how a consumer wouldn’t become confused when he or she receives three disclosures for a single transaction. Second, as discussed above, consumers who wish to set up a recurring transfer are presumably less concerned with the precise cost of each transaction and more concerned with ensuring the transaction occurs as scheduled, thus the value of these additional disclosures is questionable. Further, the process may result in consumers being denied the actual service they seek; preauthorized, reoccurring transfers. The market for this particular service is very small. The more complicated, costly and burdensome the service becomes, the less value providers will see in offering it. The benefit is insubstantial; however, the cost to consumers – the service becoming less widely available – is very real.
Finally, the second receipt is only required in certain instances where remittance providers use estimates; a proposal intended to minimize the burden of this rule. By requiring a “second receipt” in these instances, the CFPB takes away with one hand, much of the benefit of estimates that it provided with the other hand.
Prepayment Disclosures for Preauthorized Transactions are of Little Value
NAFCU does not support requiring prepayment disclosures for each transfer in a series. The CFPB asked for input on this issue, and NAFCU strongly supports the second alternative, which would eliminate the requirement for prepayment disclosure for each transfer. As the CFPB notes, one of the primary goals of the rule is to enable consumers to comparison shop. In the context of a preauthorized, recurring remittance transaction, NAFCU questions whether the prepayment disclosure would further that goal. Consumers who set up reoccurring remittance transactions are presumably more interested in the simplicity the product provides and are less concerned with comparison shopping. As such, consumers would realize little actual benefit, while providers would be required to pay for a significant new cost, which would, in turn, be passed on to consumers.
The Three Day Right of Cancellation is Problematic
NAFCU does not support a three day right to cancellation if the CFPB insists on requiring institutions to essentially guarantee the cost of the transaction ten days in advance. NAFCU understands the need to permit consumers to cancel transactions; however, forcing institutions to guarantee the cost of the transaction and bear the exchange rate risk ten days in advance of the transactions, while permitting consumers to cancel until three days before the transaction is a considerable burden. The best way to address this situation is to shorten the amount of time for which providers must guarantee the cost of the transaction – as discussed above – to two business days.
Finally, I want to take this opportunity to express NAFCU’s concerns with the agency’s final rule on remittances. As the agency is aware, credit unions and other providers that rely on open network systems will have a very difficult time complying with the disclosure requirements included in the final rule. Indeed, the CFPB itself said that it “believes that a number of providers likely do not currently possess or have easy access to the information needed to satisfy the new disclosure requirements for every transaction. For these providers, as well as their operating partners, compliance may require modification of current systems, protocols, and contracts.” Electronic Fund Transfers, 77 Fed. Reg. 6194, 6201 (Feb. 7, 2012) (to be codified at 12 C.F.R. pt. 1005). NAFCU finds it troubling that the CFPB would promulgate a rule with the understanding that compliance is not currently technically feasible. The rule will require massive reconfiguration of the way this service is offered. It is our position that requiring this sort of major transformation is an inefficient use of resources, particularly for not-for-profit credit unions. NAFCU understands there may be some remittance providers that are operating in a deceptive manner. NAFCU would encourage the CFPB to use its considerable authority to take action against those actors, rather than forcing the entire financial services industry to refashion the payment network in order to provide consumers only slightly improved disclosures.
Credit unions will have a particularly difficult time managing exchange rate risk for ten days, as the proposed rule would require. This is a significant issue for credit unions as the rule has an impact on our ability to provide our members with the same services that they can receive at other financial institutions. Simply put, larger institutions will have a significant advantage in navigating this rule as smaller institutions simply do not have the resources to operate on a global basis. Obviously, there are dozens of other services that larger institutions offer that smaller institutions do not. The difference in this case, however, is that the reason smaller institutions may stop offering this service is not because of economies of scale, a lack of expertise or, more generally, a lack of resources. Instead, smaller institutions will be disadvantaged simply because the regulatory hurdles associated with this long standing product will be too cumbersome under the rule. While NAFCU understands the goal the CFPB is trying to achieve – improved disclosures – we believe the infinitesimal benefits of the rule do not justify the
Consumer Financial Protection Bureau April 6, 2012
very significant costs. Accordingly, we respectfully request the CFPB reconsider its final rule on remittance transfers.
NAFCU appreciates the opportunity to comment on this important issue. Should you have any questions or concerns, please feel free to contact me or Dillon Shea, NAFCU’s Regulatory Affairs Counsel, at 703-842-2212.
Fred R. Becker, Jr.