NAFCU Compliance Blog

Welcome to the NAFCU Compliance Blog

Welcome to NAFCU's Compliance Blog!  We write about credit union compliance issues five days a week.  

• All Are Welcome. If you've found the blog useful, consider sharing the blog with your friends and colleagues. It is free, and we make it available to everyone.  
  

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• Use the Blog as a Resource Tool. The blog has a search function in the upper-left corner. Additionally, when we write a post, we add it to one or more categories - which are located on the right-hand side of the blog. And, be sure to check out NAFCU's CFPB Mortgage Rules webpage which organizes all of NAFCU's resources to help your credit union comply with the new requirements.

You'll find our blog posts below, starting with our most recent postings. Best of luck, and by all means, stay compliant.

             

Clarifications to the 2013 Escrows Final Rule

Written By JiJi Bahhur, Regulatory Compliance Counsel

Last week, the Consumer Financial Protection Bureau (CFPB) issued a final rule clarifying and making technical amendments to the 2013 Escrows final rule.  Besides providing additional guidance, the final rule has two primary purposes (we also blogged about this not too long ago when the rule was in proposal stage): 

1. Maintaining Consumer Protections.  The 2013 Escrows Final Rule can be read to cut off the old protections regarding assessments of consumers’ ability to repay and prepayment penalties on certain higher-priced mortgage loans (HPMLs) before the new expanded protections take effect. This would create a six-month period when those consumer protections would not apply. The final rule establishes a temporary provision to ensure existing protections remain in place for HPMLs until the expanded provisions take effect in January 2014. 

2. “Rural” and “Underserved” Definitions.  The 2013 Escrows Final Rule exempts HPMLs made by certain small creditors that operate predominantly in rural or underserved counties from the requirement to create escrow accounts for a minimum of 5 years for HPMLs.  The final rule discussed in this blog clarifies how to determine whether or not a county is considered “rural” or “underserved” for purposes of applying an exemption in the 2013 Escrows Final Rule (and three other provisions of mortgage regulations issued this past January).  The determination is made based on currently applicable Urban Influence Codes or UICs, which are established by the USDA’s Economic Research Service (for“rural”), or based on HMDA data (for “underserved”).

The CFPB has also published a final list (see box to the right of screen for download options) of rural and underserved counties for 2013.  For purposes of applying the exemption in the 2013 Escrows Final Rule, creditors may rely on this list as a safe harbor to determine whether a county is “rural” or “underserved” for loans made from June 1, 2013, through December 31, 2013.

CFPB YouTube Videos on the Mortgage Rules; Small Entity Compliance Guides; NAFCU Resources

Written by Bernadette Clair, Regulatory Compliance Counsel

Last week, the CFPB posted seven video presentations on the new mortgage rules.  The purpose of these videos is to provide a plain language overview of the rules.  We thought it might be handy to have the links to these videos, along with links to the CFPB’s Small Entity Guides in one place.

CFPB videos:

• Overview of the 2013 New Mortgage Rules

• Ability-to-Repay and Qualified Mortgage Rule

• 2013HOEPA Rule

• ECOA Valuations and TILA Higher-Priced Mortgage Loan Appraisal Rules

• Loan Originator Compensation Rule

• Mortgage Servicing Rules

• TILA Escrow Rule

CFPB Small Entity Compliance Guides:

• Ability-to-Repay and Qualified Mortgage Rule

• 2013 HOEPA Rule

• ECOA Valuations Rule

• TILA Higher-Priced Mortgage Loans Appraisal Rule

• TILA Escrow Rule

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NAFCU Mortgage Rules Compliance Resources.  Remember that NAFCU has a webpage to help organize compliance resources related to the CFPB’s new mortgage rules.  The webpage includes links to the individual rules, scope-and-applicability charts, webcasts, compliance blog posts and more.

NCUA to Cease Paper Mailings - Sign-Up for NCUA Express; Google Reader Ending Service on July 1st

Written by Steve Van Beek

Last week Bernadette highlighted the May 2013 NCUA Report. On the very last page was this notice:

"NCUA will stop mailing Letters to Credit Unions and other regulatory alerts as part of its ongoing efforts to reduce operating costs and become more efficient.

NCUA CU Express recipients automatically get the latest regulatory guidance and letters. All credit unions CEOs and Board Chairmen with emails provided in the CU Profile system are automatically subscribed to NCUA CU Express, and should currently be getting all regulatory letters or alerts.

NCUA CU Express emails are mandatory for credit union CEOs and Board Chairmen, while the separate, but similar NCUA Express is open to the public and subscriber-driven. In addition to regulatory alerts, you can sign up and receive NCUA’s monthly newsletter, The NCUA Report, legal opinions, press releases and more, using the NCUA Express system.

For more information about NCUA Express and to subscribe, free of charge, visit http://go.usa.gov/TDsC."

If you haven't already, consider signing up for the NCUA Express. At a minimum, be sure to pass this along to your colleagues in case they rely on the paper mailings. And, while you are at it - make sure your CEO and Board Chairmen's emails are current so they are getting all the information from the NCUA CU Express.

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Google Reader. Many blog readers use an RSS aggregator such as Google Reader. On July 1st, Google will no longer be supporting Google Reader - so it makes sense to begin the migration to a new RSS aggregator soon. Personally, I've switched over to Feedly (and since wondered multiple times why I didn't earlier). And, best of all - you can connect your existing feeds from Google Reader over to Feedly. Of course, there are additional alternatives as well. 

If you're wondering what RSS is, Wikipedia has some good information. In short, RSS feeds (and an RSS aggregator) allow you to receive updates to a particular blog (or other website) when they occur. If your email inbox is overflowing with blog posts and other resources, having an RSS aggregator can help you stay on top of the news you need without it cluttering up your inbox.  

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Asheville, North Carolina. Last week, Erin and I had the chance to head down to Asheville for NAFCU's Board of Directors Conference. Asheville is a special city for us as we got engaged there over Labor Day weekend in 2010.

Biltmore Gardens

Chimney Rock State Park, Chimney Rock, NC. And, that is Lake Lure in the background. Erin informed me numerous times (plus or minus 20) that Lake Lure was where "Dirty Dancing" was filmed.

NCUA's Derivatives Proposal; Can't Help Myself

Written By JiJi Bahhur, Regulatory Compliance Counsel

Today, the NCUA Board issued a proposed rule to provide qualified credit unions limited authority to engage in derivatives activities for purposes of mitigating against interest rate risk (IRR). But, the proposal establishes a “pay-to-play” regulatory scheme for credit unions that are permitted to engage in derivatives activities. I’ll get into that in a moment. 

First, I should probably give some background on what derivatives are and what NCUA is proposing. NCUA has created a Q&A document addressing this, among other things.  From the Q&A document:

“Q.1: What are derivatives? What kinds of derivatives is NCUA proposing to allow for credit unions?

The Commodities Futures Trading Commission (CFTC) broadly defines a derivative as: “A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., “derived from”) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They can be used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps.”

While the term “derivatives” covers a broad spectrum of financial instruments in today’s market, NCUA is only recommending authorizing the use of plain-vanilla, US Dollar-denominated (USD) interest rate swaps and purchased-only interest rate caps. These instruments are widely transacted in today’s capital markets, have deep and transparent pricing and afford end users with strong liquidity and execution. The Bank for International Settlements reports that interest rate swaps are the largest component of the global over-the-counter (OTC) derivatives market.

With regard to interest rate swaps, the NCUA Board is proposing to authorize only standard “pay-fixed/receive-floating” and “pay-floating/receive-fixed” interest rate swaps. It is currently anticipated that most interest rate swaps users would enter into “pay-fixed/receive-floating” transactions to hedge against rising interest rates. This “plain vanilla” interest rate swap affords some protection against the most common interest rate exposure experienced by credit unions with material interest-rate risk (IRR) sensitivity—namely, a balance sheet with an asset portfolio that does not reset to external rate changes as quickly as its liabilities. Most credit unions use non-maturity and other short-term shares to fund longer duration assets, creating an inherent re-pricing mismatch for which pay-fixed/receive-floating interest rate swaps can provide some effective mitigation.”

Eligible credit unions seeking derivatives authority must submit an application for one of two levels of authority.  Level I authority contains more stringent limits, including limits to the notional value of interest rate swaps, aggregate book value of interest rate caps, combined limit of interest rate swaps and caps, and the maximum weighted average life of all derivatives transactions cannot exceed 5 years.  Level II authority has fewer limits, but credit unions that seek Level II authority must show why the Level I limits are not adequate to meet their IRR mitigation needs.

So what’s the catch? You have to “pay-to-play.”  The proposed rule calls for application fees and pretty hefty ones at that.  Level I application processing costs would range from $25,000 to $50,000 and Level II applications would range from $75,000 to $125,000.  If that’s not bad enough, there is an associated fee for every year after that. 

NAFCU has long advocated for expanded investment authorities for credit unions, but the "pay-to-play" proposal raises concerns as this would be the first time “pay-to-play” will be required in the credit union industry. 

The proposal can be accessed here.  NCUA’s Q&A document – which provides an understanding of the rule’s intent and the main contents – can be accessed here.  Also, NAFCU’s Regulatory Affairs team is in the process of drafting a Regulatory Alert (NAFCU Member Log-In required) on this proposal so keep your eyes peeled for that. 

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I just had to share these pictures with you all.  Have a great weekend.

Remittance Transfer Final Rule; NAFCU Final Regulation

Written by Michael Coleman, Regulatory Compliance Counsel

On April 30th, the CFPB issued its latest final rule on remittance transfers. Most importantly, this final rule set the effective date of the remittance transfer final rule(s) as October 28th, 2013. Meaning, the entirety of the remittance transfer rule, including all of the previous final rules, are effective October 28th, 2013. 

This latest final rule also amended several other disclosure requirements and error resolution requirements from the previous remittance transfer final rule(s), here is an excerpt from the preamble: 

"The amendments address three specific issues. First, the 2013 Final Rule 
modifies the 2012 Final Rule to make optional, in certain circumstances, the requirement to 
disclose fees imposed by a designated recipient’s institution. Second and relatedly, the 2013 
Final Rule also makes optional the requirement to disclose taxes collected by a person other than 
the remittance transfer provider. In place of these two former requirements, the 2013 Final Rule 
requires disclaimers to be added to the rule’s disclosures indicating that the recipient may receive 
less than the disclosed total due to the fees and taxes for which disclosure is now optional. 
Finally, the 2013 Final Rule revises the error resolution provisions that apply when a remittance 
transfer is not delivered to a designated recipient because the sender provided incorrect or 
insufficient information, and, in particular, when a sender provides an incorrect account number
or recipient institution identifier that results in the transferred funds being deposited in the wrong 
account." 

As always, the best place to look for the nitty gritty details of these amendments is going to be the regulation itself, you can find the amended regulatory text here, and the amended official commentary here. This final rule has not been posted in the Federal Register yet, but when it has you should be able to find it as published in the Federal Register on the CFPB's webpage for the remittance transfer rule. Also, don't forget the categories listed on the right side of the blog, you can click "Remittances" to see all our recent posts on the topic, including this post which provides a nice list of resources on the remittance transfer final rules.  

NAFCU's Final Regulation on 2013 Remittances Final Rule. Confused yet? Don't worry, you are not alone, this rule has been an extremely difficult rulemaking process to follow. NAFCU’s Regulatory Affairs Team has prepared a Final Regulation, 13-EF-07, on the 2013 Remittances final rule. It is available for download here (NAFCU login required). Also, the Regulatory Affairs team is working on a comprehensive guide for all the remittance transfer final rules. Stay tuned. 

NCUA Report: Electronic Banking Threats and Security

Written by Bernadette Clair, Regulatory Compliance Counsel

One of the articles in NCUA's May 2013 Report, takes a look at Electronic Banking Threats and Security. The article reminds credit unions to be diligent in safeguarding member information and ensuring proper security and controls when offering E-banking services, such as internet banking, phone banking, mobile banking, etc. (Exam Tip: According to the article, NCUA examiners have received updated training on E-banking security and have been instructed to review these areas in more detail during exams.)

The article highlights guidance from the regulators related to E-banking. From the article:

"In October 2005, the Federal Financial Institution Examination Council (FFIEC) issued guidance entitled Authentication in an Internet Banking Environment. The guidance provided minimum supervisory expectations for effective authentication controls related to high-risk online transactions involving access to customer information or the movement of funds to other parties.

In 2006, NCUA issued a Letter to Credit Unions, No. 06-CU-13, to aid in the implementation of the authentication guidance and provided answers to frequently asked questions. The letter reinforced the risk-management framework specified in the FFIEC’s earlier letter and updated supervisory expectations for effective member authentication mechanisms, layered security and other controls to combat identity theft, cyber attacks and online transaction fraud.

A 2011 Letter to Credit Unions, No. 11-CU-09, reflects a more layered approach to risk-management, and includes annual risk assessments for E-banking services. It discusses minimum monitoring requirements at initial login and for funds transfers, as well as additional guidance on challenge question authentication techniques. The letter also has valuable information about new expectations for customer awareness programs, as well as, recommendations for increased scrutiny of commercial accounts.

In February 2013, NCUA issued additional guidance in the form of a Risk Alert, 13-Risk-0[1]. The Alert encourages risk mitigation strategies, against DDoS attacks such as: 

• performing risk assessments aimed at identifying risks associated with DDoS attacks;
• ensuring incident response programs include DDoS attack scenarios during testing; and
• performing ongoing third-party due diligence of Internet and web-hosting service providers to identify risks and implement appropriate traffic management policies and controls."

Here are links to the guidance documents referenced  in the excerpt above:

FFIEC’s Authentication in an Internet Banking Environment

NCUA Letter to Credit Unions, No. 06- CU-13

NCUA Letter to Credit Unions, No. 11-CU-09

NCUA Risk Alert, 13-Risk-01

See the article for additional details and guidance resources.

NCUA Report; FinCEN SAR Activity Review

Written by Bernadette Clair, Regulatory Compliance Counsel

The May issue of the NCUA Report is now available. This issue includes the following:

• Office of Examination and Insurance Report: Demystifying Capital Requirements for Credit Unions – Part 2

• Chairman’s Corner: Secure Liquidity Sources While the Sun is Shining

• Board Actions: Share Insurance And Stabilization Funds Remain on Sound Footing

• Board Perspective: Everyone Comes Out a Winner

• Electronic Banking Threats and Security

• Mobile Banking Offers Credit Unions New Ways to Attract Members, Offer Value

• Deadline for Consulting Service Nominations is May 31

• FFIEC Appraisal Complaint Hotline Opens

• NCUA Discontinues Mailing Regulatory Letters to Credit Unions; Will Send by Email Instead

There are a few good reads in this issue, and we’ll take a closer look at Electronic Banking Threats and Security tomorrow.

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FinCEN SAR Activity Review.  FinCEN has released its 23^rd Issue of the SAR Activity Review – Trends, Tips & Issues, as well as the 18^th Issue of the SAR Activity Review – By the Numbers. These two reports are an excellent source of information on the latest trends and numbers in suspicious activity reporting.

CFPB Proposes to Push Back Compliance Date for Credit Insurance; FSOC Report

Written by Steve Van Beek

Last week, the CFPB proposed to push back the compliance date for the prohibition on single-premium credit insurance. The prohibition - located in the loan originator final rule - is slated to become effective June 1, 2013. The proposed rule would provide a temporary delay to the new rule. In short, there has been quite a bit of confusion since the final rule was issued - mostly due to CFPB's inclusion of examples in the preamble to the final rule.

In addition to the delay, the CFPB has indicated they will be issuing another proposed rule on this issue to gain additional feedback in hopes of clarifying the requirements:

"In light of the interpretive questions that have arisen since publication of the Final Rule, the Bureau intends to publish a new proposal to seek further notice and comment on the provision in June 2013. In that proposal, among other things, the Bureau plans to (1) seek public comment, including from industry stakeholders and consumers, regarding the applicability of the prohibition to transactions in which credit insurance premiums are charged periodically; and (2) propose a new effective date for § 1026.36(i), under which the provision would take effect some time after finalization of that proposal."

Until that future proposed rule, the CFPB is issuing this proposal to temporarily delay the June 1, 2013 deadline. Are we having fun yet?  

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FSOC Annual Report. The Financial Stability Oversight Council (FSOC) recently issued their 2013 Annual Report detailing the activities of the Council, significant market and regulatory developments, and potential emerging threats to the financial stability of the United States. The report includes seven themes; however, notably absent is any discussion of regulatory burden on financial institutions. This is incredibly unfortunate as the FSOC has a statutory mandate from Dodd-Frank to facilitate coordination between federal regulators.   

Unfair, Deceptive or Abusive Acts or Practices: Airline Taxes Edition

Written by Steve Van Beek

Ok, we're going a bit off-topic for a couple of reasons.

1. It is Friday.
2. Why not?
3. It is interesting to think of the issues facing compliance officers in other industries.

The Washington Post ran a recent opinion piece from George Will which highlighted a requirement for airlines when they disclose taxes and fees:

"Spirit, Allegiant and Southwest are low-cost carriers that have thrived since the deregulation of the airline industry, which began in 1978. The government retains a narrow authority to prevent deceptive advertising practices. But as the airlines argued in petitioning the Supreme Court to hear their case, the government is micromanaging their speech merely to prevent the public from understanding the government’s tax burdens.

The government’s total price rule forbids the airlines from calling attention to the tax component of the price of a ticket by listing the price the airline charges and then the tax component with equal prominence. The rule mandates that any listing of the tax portion of a ticket’s price “not be displayed prominently and be presented in significantly smaller type than the listing of the total price.” The government is trying to prevent people from clearly seeing the burdens of government.

These three low-cost carriers compete for the most price-conscious travelers, and they want to tell those travelers which portion of a ticket’s cost the airlines control. The government, far from regulating to prevent customer confusion, is trying to prevent customers from understanding the taxes and fees that comprise approximately 20 percent of the average airline ticket." (Emphasis added).

I'm not trying to get political - but I found it very interesting that airlines face regulations which tell them their tax and fee disclosures cannot be displayed prominently. 

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I wonder what the CFPB would say about such a regulation......Have a great weekend!

H.R. 1077, the Consumer Mortgage Choice Act; QM Points and Fees Caps - Part 3

Written by Michael Coleman, Regulatory Compliance Counsel

Last week we blogged about the CFPB’s Small entity compliance Guide for the Ability to Repay/Qualified Mortgage final rule, as well as some NAFCU resources on the CFPB’s final mortgage rules, specifically about the points and fees caps contained in the qualified mortgage final rule.

Today we’d like take a look at H.R. 1077, the Consumer Mortgage Choice Act, introduced by Representative Bill Huizenga on March 12, 2013. If you have ever talked with me on the phone (particularly about some kind of a violation/non-compliance with a regulation), you might have heard me utter one of my favorite sayings: “you can’t unscramble those eggs.” Well, we mere-mortal compliance officers might not be able to unscramble those eggs, but Congress sure can.

The final rule on ability to repay and qualified mortgages section 1026.43(e)(3) contains restrictions on points and fees for qualified mortgages. H.R. 1077 would amend the Truth in Lending Act (TILA) definition of “points and fees.”

On May 3rd, Dan Berger, NAFCU’s Executive Vice President of Government Affairs, sent a letter on H.R. 1077 to Rep. Jeb Hensarling, the Chairman of the House Financial Services Committee, and Rep. Maxine Waters, the ranking member of the House Financial Services Committee, here’s an excerpt:

“As currently defined, “points and fees” include, among other charges, fees paid to affiliated title companies, salaries paid to loan originators, amounts of insurance and taxes held in escrow, loan level price adjustments, and payments by lenders to correspondent banks, credit unions and mortgage brokers in wholesale transactions.  As a result of this troublesome definition, many affiliated loans, particularly those made to low- and moderate-income borrowers, would not qualify as Qualified Mortgages (QMs) and would be unlikely to be made or would only be available at higher rates due to heightened liability risks.  Consumers would lose the ability to choose to take advantage of the convenience and market efficiencies offered by one-stop shopping.

The Consumer Mortgage Choice Act would make important changes that would:

- Exclude title charges from “points and fees” definition. 

- Prevent double-counting of loan officer compensation.  

- Clarify that escrow charges should be excluded from any calculation of “points and fees.”

- Exclude loan level pricing adjustments (LLPAs).     

- Exclude lender-paid compensation to mortgage brokers. 

 Taken together, these changes would make important improvements to the definition of “points and fees” used to determine whether a loan meets the QM test.” 

 Contact your members of Congress. My colleague Katie Marisic – NAFCU’s Director of Political Affairs- wrote a great guest blog a while back about the importance of reaching out to your members of Congress on important issues that affect credit unions.  As Katie pointed out, legislative advocacy is an important means by which credit unions (and their members) can help stem the tide of regulatory burden. And every now and then, a bill is introduced that will do just that – help credit unions by directly reducing regulatory burden. Or as I like to say: “unscrambling those eggs.” Check out NAFCU's Legislative Resource Center, it has links to help you find your Representative, as well as other great resources such as NAFCU’s Grassroots Action Network. 

I don’t know about you, but I would much rather be spending my free time watching the Capitals playoffs than worrying about the points and fees calculations for qualified mortgages.