Posted by Anthony Demangone
You know that saying about how the road to a certain locale is paved with good intentions? That's been on my mind a lot lately. Let me just give you two examples.
Fixed Assets. NCUA decided to remove a number of RegFlex "exemptions" recently. One of those exemptions dealt with fixed assets. To make a long story short, federal credit unions may not accumulate fixed assets (think premises, furniture, fixtures and equipment) to the point where those fixed assets are more than five percent of the credit union's shares and retained earnings. Here's the rule. But for years, if a credit union qualified under the RegFlex program, they did not have to abide by the fixed asset rule limitation. So, many credit unions legally went far beyond the five percent.
Fast forward to today. Since NCUA removed that exemption, credit unions over the five percent mark are grandfathered where they are. But, if their fixed assets drop, so does their "grandfathered" fixed assets level. So, if a credit union is at 10 percent now, that's fine. But if their fixed assets drops to 9, they are then stuck at 9. Keep in mind that a credit union is always free to request a waiver if they think they need to go beyond their allowable fixed asset limit.
On the surface, if one didn't understand how credit unions work, that seems reasonable. But there was no guidance issued on how NCUA will examine this, nor how a credit union is supposed to manage it. A fixed assets ratio will go up and down based on a number of factors, including purchases of fixed assets, the amount of shares at the credit union, and the credit union's retained earnings. If a credit union wants to purchase a new ATM to deal with the new ADA requirements, and that puts it just over its grandfathered level, must the credit union seek a waiver? Or will NCUA allow minor variances below or above its fixed assets ceiling? I don't know. There's no clear guidance. Should credit unions monitor their fixed assets to ensure that they do not go above their allowable limit on a daily, monthly, quarterly or annual basis? I don't know. There's no clear guidance.
We've written to NCUA to voice our concerns on this issue. I know my opinion isn't worth the price of a cup of coffee, but here's how I would allow credit unions to manage this.
I would require credit unions to maintain a policy and procedures regarding fixed assets. The fixed assets policy would state what level the credit union plans to maintain, taking into account the credit union's strategic plan. The fixed assets procedure would simply spell out how the credit union is going to stay within its fixed assets limitations. I think it's fair for NCUA to require credit unions to measure this quarterly, to coincide with the filing of the 5300. Credit unions should be able to use an average of their last three fixed assets ratios as reported on their 5300s. This would balance out seasonal ups and downs. NCUA should also allow for seasonal variances by giving credit unions a safe harbor of, say 50 basis points, above and below its allowable limit. Once a credit union goes outside of its limit (higher or lower), NCUA would then be able to require the credit union to show them concrete plans on how they'd return to a proper level. If that plan is not executed, the credit union could face administrative action or have their grandfathered fixed assets limit reduced.
The Fed's Recent Rule on Appraisals. The Fed recently issued an interim final rule that addresses real estate appraisals. There are certain provisions that are giving mortgage lenders fits. Not because they don't want to comply. They simply can't come up with a way to comply that doesn't also open up multiple cans of worms. Here's the provision:
(2) Employees and affiliates of creditors with assets of more than $250 million for both of the past two calendar years. For any covered transaction in which the creditor had assets of more than $250 million as of December 31st for both of the past two calendar years, a person subject to paragraph (d)(1)(i) of this section who is employed by or affiliated with the creditor does not have a conflict of interest in violation of paragraph (d)(1)(i) of this section based on the person's employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or performing valuation management functions is not based on the value arrived at in any valuation;
(ii) The person preparing a valuation or performing valuation management functions reports to a person who is not part of the creditor's loan production function, as defined in paragraph (d)(5)(i) of this section, and whose compensation is not based on the closing of the transaction to which the valuation relates; and
(iii) No employee, officer or director in the creditor's loan production function, as defined in paragraph (d)(5)(i) of this section, is directly or indirectly involved in selecting, retaining, recommending or influencing the selection of the person to prepare a valuation or perform valuation management functions, or to be included in or excluded from a list of approved persons who prepare valuations or perform valuation management functions.
So, the rule states that if you are over $250 million assets, a person will not have a conflict of interest if they meet those requirements. It creates a "safe harbor." But it is a very, very costly one. Here's why. The person who prepares an appraisal or performs "valuation management functions" cannot report to someone who, more or less, works in the credit union's loan production area. (The general prohibition does have some minor carve-outs, such as when a person is only an underwriter or only closes loans. But this person could not be supervised by anyone within the loan production area. Ugh.) The appraisal part is not the end of the world. Credit unions can simply work with outside vendors who manage the appraisal process, or work with independent appraisals as long as people in the loan production area are not involved in their selection. The problem is the second part. In order to qualify for that safe harbor, no person directly or indirectly involved with valuation management functions can work in the loan production staff either. That may sound OK to someone not familiar with the mortgage process, but not to anyone working in mortgages. Here's why.
First, you have to understand how the process works. When a credit union obtains an appraisal, they just don't run over and punch in the numbers from the report. Someone has to take a look at the appraisal to make sure there aren't errors or problems. The definition of "valuation management functions" includes appraisal reviews.
So, here's the new problem. In order to qualify for the safe harbor for institutions with more than $250 million in assets, the person who reviews appraisals can't work in the loan production area, or report to anyone who does as outlined in the rule. So, the credit union has to assign this review process to someone in, say, internal audit. But here's the rub: that person may know nothing about appraisals. So, the credit union has to send them off for training. But it gets better. Who can review the reviewer's work? Remember - this person cannot report to anyone in the loan production area. So the credit union may have to select someone else to review the work of the reviewer, and train that person. All the while, a number of people which in-depth knowledge of appraisals are sitting in the loan production area, waiting for "approved" appraisals to come over.
Keep in mind that credit unions in excess of $250 million can move outside of the the safe harbor and put together a plan that they think works. But that increases compliance risk and gives folks like me heartburn. It really is putting mortgage lenders between a rock and a hard place.
Some folks think I'm anti-CFPB. That's not a true statement. I just know how this game works. Every rule, no matter how artfully crafted, has unintended consequences. Interchange. Overdraft protection. RESPA. RegFlex. So when I see a huge new regulator with sharpened pencils and a long list of projects, I get the heartburn I mentioned above. I understand good intentions, but I spend my day dealing with the confusion and uncertainty of new rules and regulations. Just think about this: these two rules I discussed today are not making national headlines. But I can tell you this, many credit unions are struggling with them as you read this. If two "minor" rules can do this, I cringe when I think of the new few years of Dodd-Frank implementation and CFPB rulemaking. What can we do?
- Read proposals and comment whenever you see a problem.
- When you meet with NCUA officials, or your elected officials, talk to them about compliance burdens.
- Stay vigilant. No one will look out for your interests better than you.