NAFCU Compliance Blog

The Role of Comment Letters

Written by Steve Van Beek

I hope everyone had a great holiday weekend and the chance to spend time with family and friends while remembering those who made the ultimate sacrifice for our country.  

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Unfortunately, the summer regulatory season is about to heat up.  The pace and scope of potential new regulations is frightening.  Another variable coming into play is the July 21, 2011 transfer of powers to the Consumer Financial Protection Bureau (CFPB).  

Comment Letters.  One of the greatest tools that credit unions have is the ability to comment on proposed regulations.  Regulatory agencies must follow "notice and comment" rulemaking for the majority of their new requirements (as opposed to guidance documents which can simply be released by the agencies as they do not carry the force of law).

NCUA Chairman Matz recently released a press release and video on the importance of credit union comment letters.  Chairman Matz also gave advice on how to write an effective comment letter.

Now, you may be thinking:  We cannot even keep up with the existing final regulations, how can we keep track of proposals and find the time to write comment letters?

Valid point.  This is an understandable concern for most credit unions - especially small credit unions.  However, I would argue that input during the rulemaking process can help ease the compliance burden of final regulations.  Before a rule is finalized is the best time for credit unions to ask for clarifications and ask the regulatory agencies to elaborate on their expectations.  

NAFCU Members:  Our Regulatory Affaris team releases Regulatory Alerts on proposed regulations and you can submit your comments directly to NAFCU in addition to (or in lieu of) sending your comments directly to the agency. 

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We will have more on comment letters in the future as their role will be crucial in communications with the CFPB which will have broad powers to regulate numerous industries - including credit unions - at the same time.   

The Second Disclosure for Noninterest-bearing Transaction Accounts

Written by Steve Van Beek

We have had quite a few questions related to the final rule for noninterest-bearing transaction accounts.  I wanted to highlight one - when the second disclosure would be required - because the final rule doesn't provide a good example.  My Tuesday blog post also did not fully discuss this issue (that post has been updated).  

The language in 12 C.F.R. 745.14(c)(2) is as follows:

"(2) If an insured credit union uses sweep arrangements, modifies the terms of an account, or takes other actions that result in funds no longer being eligible for full coverage under this section, the insured credit union must notify affected members and clearly advise them, in writing, that such actions will affect their share insurance coverage." (emphasis added).

Thus, if the credit union takes an action that would result in certain accounts no longer being fully insured - the credit union would need to notify these members.  The notice would need to inform the members that their accounts will no longer qualify for unlimited share insurance coverage.  NCUA addresses this in preamble to the final rule:

"The second notice requires insured credit unions to notify members individually of any action they take to affect the share insurance coverage of funds held in noninterest-bearing transaction accounts. Although this second notice requirement continues to be mandatory in the final rule, it is noteworthy that NCUA does not impose specific requirements regarding the form of the notice. Rather, NCUA expects insured credit unions to act in a commercially reasonable manner and to comply with applicable state and federal laws and regulations in informing members of changes to their account agreements."

This notification is different than the Section 745.14(c)(1) notice that must be posted on the credit union's website and in its branches.  This second notice needs to be sent when the credit union takes an action.  What kind of action?

The proposal to the new regulation includes the best example I've found:

"Under the proposed notice requirements, if an insured credit union modifies the terms of its account agreement so that the account may pay dividends, the insured credit union must notify affected members that the account no longer will be eligible for full share insurance coverage as a noninterest-bearing transaction account. Though such notifications would be mandatory, the proposed rule does not impose specific requirements regarding the form of the notice. Rather, NCUA would expect insured credit unions to act in a commercially reasonable manner and to comply with applicable State and Federal laws and regulations in informing members of changes to their account agreements." (emphasis added). 

In this example, the credit union beginning to pay dividends on the account means the account no longer meets the definition of "noninterest-bearing transaction account" and would no longer be fully insured.

In short, this second disclosure would be required when the credit union takes an action which results in an account losing its unlimited share insurance coverage.  In those situations - such as when the credit union starts to pay dividends on the account - the credit union would need to notify those account holders in writing that their accounts are no longer fully insured.  Those accounts would then be insured under NCUA's regular share insurance rules because they would no longer be "noninterest-bearing transaction accounts." 

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Have a wonderful, long holiday weekend!  See you Tuesday.  

NonInterest Disclosure Deadline; NCUA Webinars; Consumer Compliance Outlook

Written by Steve Van Beek

On Tuesday, I blogged about the new regulation on noninterest-bearing transaction accounts.  Yesterday, the final rule was published in the Federal Register which starts the clock on the "30-day window" before the rule becomes effective.  Compliance with the new rule is required by June 24, 2011 (30 days after notice in the Federal Register). 

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NCUA Webinars.  In addition to NCUA's webinar today (May 26) on Voluntary Prepaid Assessments, NCUA will be hosting a separate webinar on Allowance for Loan and Lease Losses (ALLL).  The ALLL webinar begins today (May 26) at 2 p.m. EST and will be followed at 4 p.m. by the Voluntary Prepaid Assessment's webinar.

NCUA does archive their webcasts, so if you are looking for additional Troubled Debt Restructing (TDR) information you may want to review NCUA's January 6, 2011 webinar on TDRs.      

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Consumer Compliance Outlook.  Today is also the day of the Philadelphia Federal Reserve's free webinar on the Fed's Regulation Z Proposal on Ability to Repay for Mortgages.  The webinar starts at 2 p.m EST.  These webinars are usually archived so you can still catch the webinar at a later date.  The slide deck for today's webinar is here.

The Consumer Compliance Outlook also provides a quarterly newsletter that focuses on issues related to Federal Reserve regulations.  The First Quarter 2011 Newsletter is here and includes a Regulatory Calendar of proposed and finalized rules by the Federal Reserve.  They also have a handy "Index by Topic" which lists past articles they have written.    

NAFCU Members:  Our Regulatory Alert on the Ability to Repay proposed rule is now available.

Adverse Action Notices; Fiduciary Duties Policy; NCUA Webinar

Posted by Sarah Loats Zimmermann

Adverse Action Forms. Confusion abounds surrounding the proposed adverse action forms under Reg B. The confusion probably stems from the fact that the change required by the Dodd-Frank Act (to include credit scores and other information in an adverse action notice) is a change to the FCRA adverse action notice requirements. Changes are not being made to the ECOA/Reg B adverse action requirements at this time.

However, very often a credit union needs to send both adverse action notices at the same time. Therefore, the Federal Reserve created model forms that combine the Reg B and FCRA adverse action notice requirements. These model forms are housed in Appendix C to Reg B, and because there are changes to the FCRA notice requirements the Federal Reserve needs to change those model forms that purport to satisfy both the Reg B and FCRA adverse action notice requirements.

The proposed model forms were published in the Federal Register in March. The FCRA notice requirements kick-in July 21, 2011 per the Dodd-Frank Act. Final forms have not yet been issued, but keep an eye out for them because July 21 is just around the corner. If you are itching for a more detailed discussion of this issue, please see the Background section of the proposed rule. If that link doesn't work for you, go to the Fed's press release announcement. You can access the proposed rule from there as well.


Fiduciary Duties Policy.  NAFCU members, another very generous member has offered a sample Fiduciary Duties policy for the policy exchange library. If you'd like to review it, you can go to the library and peruse the Miscellaneous section. It is aptly named Fiduciary Duties. And when that generous nature strikes you, please consider offering a sample policy of your own.

 

NCUA Webinar.  NCUA will be holding a free webinar Thursday May 26 (tomorrow) at 4 pm. The topic is the proposed voluntary prepaid Corporate Stabilization Fund assessments program that NCUA announced at its May 19 Board meeting. NCUA's press release about the webinar contains a link to register.

NonInterest-Bearing Transaction Accounts; Dodd-Frank Webcast

Written by Steve Van Beek

Last Thursday, NCUA finalized a rule to fully insure, until December 31, 2012, noninterest-bearing transaction accounts.  The underlying requirement for this rulemaking comes from Section 343 of Dodd-Frank.  The actual insurance coverage is already effective but NCUA's rule defines "noninterest-bearing transaction account" and requires credit unions to provide notice of the temporary insurance.

Insurance is Separate.  NCUA clarified this unlimited insurance for noninterest-bearing transaction accounts (or nondividend-bearing transaction accounts for FCUs) is separate from, and in addition to, the member's share insurance coverage for other accounts.  NCUA included this example:

"[I]f a member has a $225,000 share certificate and a no-dividend share draft account with a balance of $300,000, both held in a single ownership capacity, he or she would be fully insured for $525,000 (plus dividends accrued on the share certificate), assuming the member has no other single-ownership funds at the same credit union." 

This result occurs because the $225,000 share certificate is insured under NCUA's normal share insurance rules (insured up to $250,000 in total for all individual accounts).  The $300,000 no-dividend share draft account is also fully insured - even though it is an individual account - because the unlimited share insurance for these accounts is separate from, and in addition to, other accounts at the same credit union.  This unlimited coverage for these accounts will expire after December 31, 2012, unless extended by Congress.    

Disclosure and Notice Requirement.  Credit unions that offer noninterest-bearing transaction accounts need to provide a disclosure in the lobby of its main office, in each branch and on their websites.  The language of the notice will be located in 12 C.F.R. 745.14(c)(1).  Until the rule is published in the Federal Register (and subsequently included in the Code of Federal Regulations), you can see the disclosure requirements here (page 15-16).

There is a second notice required if the credit union uses sweep arrangements.  If your credit union offers these types of arrangements, the second notice would need to be provided to any members utilizing those types of products.  Pages 5-6 of the rule describe and define these arrangements.

Update on 05/26:  This second notice would also be triggered if the credit union takes action that changes the account in a way that impacts the share insurance coverage.  An example would be if the credit union started to pay dividends on the account - which would remove the account from the unlimited share insurance coverage because it would no longer be "noninterest-bearing." 

Effective Date.  This rule will become effective 30 days after it is published in the Federal Register.  We will update you with that final date, but credit unions that offer noninterest-bearing transaction accounts should begin to prepare for their disclosures right away.    

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Shameless plug alert:

Dodd-Frank Webcast.  On June 2, NAFCU will have a webcast highlighting the provisions of Dodd-Frank that will impact credit unions.  Ted Dreyer of Wolters Kluwer will provide an update on implementation of Dodd-Frank regulations and upcoming deadlines.  And, of course, no discussion of Dodd-Frank would be complete without analyzing how the CFPB will impact credit unions.  You can save $100 by signing up by Thursday, May 26.         

Garnishment FAQ

Posted by Sarah Loats Zimmermann

Happy Monday - hopefully you all enjoyed your weekend! I think Steve and I bombarded you with enough sports rivalry banter last week so I'll just dive into it on Monday morning...

The garnishment interim final rule has been in place for a couple of weeks now and in light of some of the questions that have come up, the Treasury Dept. has issued a set of FAQs. As a refresher, this rule provides procedures credit unions must take when they receive a garnishment order against a member who receives certain Federal benefit payments by direct deposit.

It is a short document but it does address one of the more common questions we've received. Below is Q&A #2 from the document.

2.Are tax levies subject to the rule? Currently, the requirements of the rule are
triggered by the receipt of a “garnishment order,” which is defined as an order
issued by a court or a state child support enforcement agency.  Accordingly,
Federal or State tax levies issued directly by a taxing authority are not
subject to the rule. Treasury is seeking public comment on all aspects of
the rule, including whether levies should be included in the definition of
"garnishment order.”  The comment period for the rule extends through
May 24, 2011. 

As part of the Greenbook the Treasury Dept. has also issued Guidelines and a Quick Reference Guide.


If you are wondering what this Greenbook thing is, it is a guide for Federal ACH Payments and Collections. It is a useful guide if you receive payments from, and send payments to, the Federal government (it even devotes and entire chapter to reclamations, a topic which can cause confusion).

NCUA Finalizes Changes to Its Advertising Rules; Dallas

Written by Steve Van Beek

Yesterday, NCUA held their monthly Board meeting.  One of the final rules will impact every credit union.  NCUA finalized an amendment to change its requirements for the "official advertising statement."  In 2008, NCUA amended the "official advertising statement" to allow credit unions three options.

Those three options are:

1. The full text version.  "This credit union is federally insured by the National Credit Union Administration."
2. The short title.  "Federally insured by NCUA."
3. Use of the official NCUA share insurance logo.  

This latest amendment changes when the "official advertisement statement" is required.  

Part 740 - Accuracy of Advertising and Notice of Insured Status

Exemptions.  NCUA had proposed to remove three exemptions to its requirement to disclose the "official advertising statement."  After reviewing the comments, NCUA ended up eliminating one of the exemptions and limiting (rather than removing) the two other exemptions.  

Currently, section 740.5(c) of NCUA's regulations include these three exemptions (among others):

(c) The following advertisements need not include the official advertising statement:

(1) Statements of condition and reports of condition of an insured credit union which are required to be published by state or federal law or regulation;

.................

(8) Advertisements by radio that do not exceed thirty (30) seconds in time;

(9) Advertisements by television, other than display advertisements, that do not exceed thirty (30) seconds in time;"

NCUA completely removed the exemption for "Statements of condition and reports of condition."  After January 1, 2012, these statements need to include the "official advertising statement" in "a prominent position on the front cover of the document or on the first page readers see if there is no cover page."

After reviewing the comments to the proposal, NCUA decided not to completely eliminate the radio and TV exemptions.  Instead, NCUA reduced the exemptions to 15 seconds.  Thus, radio and TV advertisements longer than 15 seconds need to include the "official advertising statement."

Definition of Advertisement.  NCUA also defined the term "advertisement" for the purposes of Part 740.  The finalized definition is:  "(b) Advertisement as used in this part means a commercial message, in any medium, that is designed to attract public attention or patronage to a product or business."  12 C.F.R. 740.1(b).  This definition is identical to the FDIC's definition.  

However, keep in mind that Part 740 relates to member accounts and when the "official advertising statement" is required.  One of the current exemptions (which was not changed in this final rule) indicates that loan advertisements do not fall within the realm of this rule.  

"(c) The following advertisements need not include the official advertising statement:

.......

(12) Advertisements that do not relate to member accounts, including but not limited to advertisements relating to loans by the credit union, safekeeping box business or services, traveler's checks on which the credit union is not primarily liable, and credit life or disability insurance." 

And, this makes sense as these products are not federally-insured.  

Font Size for Print Advertisements.  NCUA's rule also attempted to clarify its requirement that the "official advertising statement" be clearly legible.  The new standard after January 1, 2012 is that the official advertising statement (whether it be the text in the NCUA logo or the "Federally insured by NCUA" text) must be "in a size and print that is clearly legible and may be no smaller than the smallest font size used in other portions of the advertisement...."  

The good news is NCUA did not mandate a font size requirement.  The bad news is the credit union will need to review its advertisements to make sure the "official advertising statement" is not smaller than other language used.

Mandatory Compliance Date.  Compliance with these changes will be required by January 1, 2012.  However, if you want your advertising campaign to be able to extend into 2012 you would need to review your ads for compliance at an earlier date as NCUA declined to "grandfather" existing advertising campaigns.  

The full language of the rule is here.  Cover letter is here.  

Pro Tip:  If you are new to compliance or want to improve your understanding of the rulemaking process, this is a great rule to read.  NCUA does a very good job explaining its proposal, the comments submitted and the rationale for their final decision.    

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My fiance, my (future) in-laws and I are headed to downtown Dallas for a short 3-day trip.  If you have any must-sees, must-dos or especially must-eats in or around Dallas - don't be shy!  We are open to ideas.  

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Also, considering it appears to be an early "rivalry week" for Michigan-Ohio State on the blog - I had to share this photo of my soon-to-be Divided House.  

 That photo was obviously taken before last November's meeting. 

RESPA/TILA Combined; Liar Liar

Posted by Sarah Loats

Know Before You Owe. Yesterday, the CFPB released two prototype forms it developed to consolidate the disclosures required under RESPA and TILA. The agency is calling it the Know Before You Owe project. The Dodd-Frank Act directed the CFPB to take on this task, and these two forms are the agency's initial attempts at streamlining the disclosures. NAFCU was able to attend a meeting with the CFPB and other industry reps on Tuesday to view the forms before they were released yesterday. Evaluation and revision is expected to go through this fall.  Below is a snippet from the press release.

“Buying a home is one of the biggest financial decisions most Americans will ever make. The Know Before You Owe project is about giving consumers upfront, easy-to-understand information that helps them compare different mortgage offers and find the one that’s best for them,” said Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB.  “The current forms can be complicated and difficult for consumers to use.  They are also redundant and can be costly for lenders to fill out.  With a clear, simple form, consumers will be in a better position to answer two basic questions: Can I afford this mortgage and can I get a better deal somewhere else?”

Of course her emphasis is on consumers, but Professor Warren does throw a bone to credit unions and other lenders. Count me as part of the camp that hopes they can improve the process. With that in mind, if you follow this link, you can provide your own feedback (there is a consumer tool and an industry tool). There are two forms right now - the content is identical but the information is presented differently. Credit unions are encouraged to review the forms and provide feedback.

NAFCU members: Please consider providing your feedback to our colleague Dillon Shea. NAFCU will be in contact with the CFPB about these forms and the more feedback we get, the better information we can pass on to the CFPB.

 

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Liar Liar. From the responses we received from yesterday's blog post, it seems many of you aren't fans of my Buckeyes. Well, this one's for you.

P.S. What is part of Jim Tressel's punishment? Compliance School!

The Blog Must Go On; Reg CC Notices

Written by Steve Van Beek

Fear not, the blog will go on.  Sarah and I will do our best to keep everyone up-to-date on the latest compliance issues. 

You will notice a few changes in the daily blog posts.  There will be less Penn State, Steelers, Pirates and Nationals references.  But, there will be an uptick in Michigan, Detroit Tigers, Lions and Red Wings mentions as well as Sarah's Ohio State Buckeyes and Cincinnati Reds and Bengals.

In case you were wondering, Anthony's shoes have indeed been sent to Seattle for display.  

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We have been getting quite a few questions about the upcoming change to $200 under Reg CC.  A while back, Anthony hit on the underlying requirement in Section 229.18(e) to provide notice within 30 days of the change (since the change is beneficial to members).  But how detailed does the notice need to be and what format does it need to be in?

The staff commentary to 229.18(e) provides some insight:

"E. 229.18(e)  Changes in Policy

1. This paragraph requires banks to send notices to their customers when the banks change their availability policies with regard to consumer accounts. A notice may be given in any form as long as it is clear and conspicuous. If the bank gives notice of a change by sending the customer a complete new availability disclosure, the bank must direct the customer to the changed terms in the disclosure by use of a letter or insert, or by highlighting the changed terms in the disclosure.

2. Generally, a bank must send a notice at least 30 calendar days before implementing any change in its availability policy. If the change results in faster availability of deposits—for example, if the bank changes its availability for nonlocal checks from the fifth business day after deposit to the fourth business day after deposit—the bank need not send advance notice. The bank must, however, send notice of the change no later than 30 calendar days after the change is implemented. A bank is not required to give a notice when there is a change in appendix B (reduction of schedules for certain nonlocal checks)."

Credit unions have flexibility when providing the notice - provided the disclosure is clear and provided within 30 days of the change (i.e. by August 21, 2011).  The Fed does not require special language to be used in the notice.  Rather, the notice should simply describe the change in the credit union's policy.  

As for format, a message on a periodic statement would suffice.  Similarly, a notice in the credit union's newsletter should work, provided it is sent to all impacted members.  A website message alone would be insufficient as it would not be provided to all members (only those who went to the CU's website would see the notice).  Of course, a credit union could provide a notice on its website in addition to a notice sent to all members. 

NCUA Board Meeting; ALLL Webinar; Term Limits?

Posted by Anthony Demangone

OK, this really is my last blog post!

Good morning, folks.  I hope everyone had a great weekend.  Das Twins, Mandy and I ventured to the Baltimore Zoo this weekend with friends.  I always love any visit to "Charm City," and the zoo was fantastic. 

Now, back to our regulatory zoo.

NCUA.  They released the agenda for this Thursday's NCUA Board Meeting.  I was expecting to see a CUSO rule, but it was nowhere to be seen.  Here are the items of interest:

1. Final Rule - Part 740 of NCUA's Rules and Regulations, Accuracy of Advertising and Notice of Insured Status.
2. Final Rule - Part 745 of NCUA's Rules and Regulations, Share Insurance and Appendix.
3. Final Rule - Part 750 of NCUA's Rules and Regulations, Golden Parachute and Indemnification Payments.
4. Proposed Rule - Part 705 of NCUA's Rules and Regulations, Community Development Revolving Loan Fund.
5. Voluntary Prepayment of Stabilization Fund Assessment.
6. Insurance Fund Report.

ALLL.  NCUA has released the agenda for an "Allowance for Loan and Lease Losses" webinar that will be held on May 26.   In NCUA's words:

The webinar will facilitate credit unions’ understanding of the 2006 Interagency Policy Statement on the topic. Credit unions have worked to understand how qualitative and environmental (Q&E) adjustments can better inform their estimates of inherent losses existing in the loan portfolio. The NCUA presenters will benchmark best practices in this area. The webinar will be interactive with opportunities for two-way communication.

I've said this before, and I'll say it again.  Regulators don't offer these webinars just for kicks.  They must see some problems or confusion in this area.  For that reason, find the person at your credit union responsible for the ALLL process, and make sure they know about this webinar. 

Term limits for directors.  We get quite a few questions each year about term limits for federal credit union directors.  The theory behind a term limit is that it forces turnover on a board.  Proponents of term limits say that such policies bring fresh ideas to a board that may have stagnated.  Opponents say such policies push great directors out the door for no reason.  NCUA's official position on this issue is clearly laid out in this legal opinion.   

It is our long-standing position that the only eligibility requirements for federal credit union board membership are those contained in the Act. That is, as long as an individual is a member of the FCU (Section 111 of the Act, 12 U.S.C. ~1761) and has not been convicted of a crime involving dishonesty or breach of trust (Section 205(d) of the Act, 12 U.S.C. ~1785(d)) (or if he has been convicted of such a crime, the NCUA Board has waived the Section 205(d) prohibition), he is eligible for election to the board of directors. Article VI, Section 7 of the Standard Federal Credit Union Bylaws permits an FCU's board of directors to set a minimum age requirement.

We have consistently rejected proposed nonstandard bylaw amendments or FCU policies that restrict completely any member's eligibility to run for the board of directors. In our view, such proposed bylaws and policies are impermissible because they serve as an absolute bar against an FCU member running for and serving on the board for a particular term, in conflict with the Act.

This does not, however, preclude an FCU's board and nominating committee from having a policy of nominating only individuals who have served less than three consecutive three year terms on the board of directors. Article VI of the Standard Federal Credit Union Bylaws gives the nominating committee discretion to set standards for determining which members it deems worthy of nomination. The FCU board can provide guidance on this policy. Thus, the nominating committee can have a term limit policy. However, all members other than those nominated by the nominating committee may run for the board by submitting the appropriate petition and/or by being nominated from the floor, whichever the FCU's bylaws allow. Individuals who are nominated by petition or from the floor are not subject to the nominating committee's standards, and may not be precluded from running for the board of directors as long as they meet the criteria specified in the Act and the FCU's bylaws.

There you have it.