NAFCU Compliance Blog

FDIC on the MDIA; ODP; Online Training

Posted by Anthony Demangone

On Friday, Sarah wrote a nice post on the changing mortgage requirements brought about by the Mortgage Disclosure Improvements Act. (MDIA).  As she pointed out, back in 2008, the Fed issued changes to Regulation Z that amended some disclosure requirements for closed-end mortgages.  In 2009, as mandated by the MDIA, the Fed had to issue additional changes and move up compliance deadlines. 

On Monday, the FDIC issued a Financial Institution Letter that does a GREAT job of highlighting all of these changes.  Access the guidance here.   And this supplement provides a side-by-side comparison of the 2008 and 2009 Reg Z amendments to closed-end mortgage disclosures. 

If only someone would create such a chart that compares the Reg Z changes with the credit card bill.

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Representatives Carolyn Maloney, Barney Frank and Luis Gutierrez issued a strongly-worded letter to the Federal Reserve asking that the agency implement strong controls on overdraft protection programs.  Specifically, they are seeking an opt-in requirement for consumers and a rule that prohibits issuers to order transactions in a way that maximize ODP fees.  Access the letter here.

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NAFCU's Online Training for volunteers and new employees is now available for purchase.  Read all about it here.  If you've seen me lead a training session, you'll have a good idea regarding the quality and substance of the sessions.   Let me know if you have any questions about the new product, which is available to all credit unions - even those who do not belong to NAFCU. 

Mortgage Fraud; NCUA BOD Legal Opinion Letter

Posted by Steve Van Beek

As the Compliance Guy mentioned in this post, FinCEN has been actively studying the issue of mortgage loan fraud and recently issued a Mortgage Fraud Report which detailed SAR filing trends of mortgage loan fraud from July 1, 2007 to June 30, 2008 for depository institutions.

On Tuesday, FinCEN released another report on Mortgage Fraud.  This report highlights the connections between mortgage fraud and other financial crimes.  As the press release indicates, the report:

"shows subjects reported for suspected mortgage loan fraud may also be involved in other financial crimes such as check fraud, money laundering, stock manipulation, structuring to avoid currency transaction reporting requirements and others. From depository institution Suspicious Activity Reports (SARs), FinCEN identified approximately 156,000 mortgage fraud subjects, and found that 2,360 were reported for suspicious activity in 3,680 of the other SAR types.

“This study analyzes the possible interrelationship of illicit activity occurring across different financial sectors. Criminal actors may attempt to exploit any vulnerability to commit fraud and launder money through a range of financial institutions,” said FinCEN Director James H. Freis, Jr. “The interconnected nature of suspicious activity across multiple financial sectors covered by FinCEN’s Bank Secrecy Act regulations underscores the immense value of combining insights from the different sectors for the purpose of detecting and thwarting criminal activity.”

FinCEN identified mortgage loan fraud subjects ("MLF subjects") from the depository institutions SARs and analyzed these MLF subjects financial transactions with non-depository institutions.  FinCEN summarizes its process here:

"To better understand how mortgage loan fraud may relate to other financial crime, FinCEN identified subjects reported in depository institution SARs (SAR-DIs) for suspected mortgage loan fraud and evaluated activities of these MLF subjects reported in non-depository financial institution SARs1: those filed by money services businesses (SAR-MSBs); securities brokers, securities dealers, or insurance companies (SAR-SFs); and casinos or card clubs (SAR-Cs)."

The report provides insight on how SARs filed by depository institutions are interrelated with SARs filed by other institutions regulated by BSA.  In other words, mortgage loan fraudsters are using multiple channels to conduct their operations and their activity at depository institutions is just one piece of the pie.  This NAFCU Today article provides a good summary of the report's findings.    

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Last week, NCUA released Legal Opinion Letter 09-0238 (March 6, 2009).  The letter addresses two different issues.  First, it discusses conflict of interest issues for credit unions boards.  Second, it clarifies that two-thirds of authorized board members must vote for charter amendments.

You have asked if the disqualification of two directors from a vote on a proposed FCU charter amendment was appropriate, and if so, whether a two-thirds vote by the remaining directors was sufficient to approve the charter amendment. Disqualification from a board vote is necessary only if the director has a conflict of interest in the matter before the board. Based on the facts you describe, it does not appear that a prohibited conflict of interest exists. Additionally, a charter amendment requires an affirmative vote of two-thirds of the total authorized number of members of the board, not merely two-thirds of the qualified directors eligible to vote.

Access the letter here.  It is a good read, especially if you work on board issues at your credit union.

NCUA LOLs; Yoga

Yesterday, NCUA released two legal opinion letters.

• NCUA released NCUA Legal Opinion Letter 09-0108 (January 26, 2009) to clarify that the Freedom of Information Act (FOIA) does not apply to federal credit unions.  That's nothing new.  But here are a few thoughts.  While members cannot FOIA federal credit unions, they can make formal requests for information pursuant to 12 C.F.R. Part 701.3.  Understand that process, as you have a short timeline to respond.  Also, access NCUA's FOIA page here. 

• NCUA also released NCUA Legal Opinion Letter 08-1024 (January 30, 2009).  This one deals with conflict of interest provisions.  NCUA stated the following:

You have asked if the conflict of interest provision in the National Credit Union Administration’s (NCUA’s) general lending regulation would preclude a credit union from selling loans to a bank in which one of the credit union’s directors owns stock. 12 C.F.R. 701.21(c)(8). We conclude the conflict of interest provisions prohibiting credit union officials from receiving any compensation in connection with making loans does not apply when a credit union sells loans it previously made but, nevertheless, we recommend that, in the circumstances you described, an interested director should recuse himself from deliberating or voting on the transaction.

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After putting together the second bouncy seat yesterday, I decided to get some exercise . (For those who don't know what a bouncy seat is, it seems to be a plastic, colorful child containment system that bounces.  I guess "bouncy seat" sounds nicer than my description.)  My wife suggested that I work through this short yoga booklet that she uses.   This is how it progressed.

Cocky Compliance Guy: This is pretty simple.
Loving Wife:  Just wait.

10 minutes later...

Compliance Guy:  Umm.  This one is pretty hard. 
Laughing, Loving Wife:  Just wait.

Next morning.

Sore Compliance Guy: (Grunts as he gets out of bed.)
I Told You So Wife:  (Giggles.)

Removal of Directors; 5300 Hiccup

NCUA recently released a letter to clarify when a federal credit union can declare a board seat vacant.  As you may recall, NCUA’s model bylaws allow a board of directors to declare a director’s seat vacant if the director regularly fails to attend board meetings or fails to perform the duties of a director. 

But what does "fails to perform the duties" really mean?  In the letter, NCUA clarified that abstaining from board votes or disagreeing with other board members does not constitute "failing to perform" the duties of a director.

Read all about it here.  The letter does a great job of discussing the two different scenarios involving the removal of directors.  Good stuff.

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We've had a few calls from credit unions having problems when trying to submit their December 2008 5300 data.  Many of the problems were due to a glitch in the software.  Read about it here.  NCUA does a good job of explaining the situation and providing a quick fix.

Flood Insurance Q and A Proposal; NAFCU Seeks Comments on NCUA ANPR

Last week, financial regulators, including NCUA, issued proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance.  The goal is to help financial institutions better understand their responsibilities in this arena.  I've paged through them, and personally, I think the new version is better organized.  You can view the proposed Q and A guidance document here.

Comments are due May 20, 2008. 

Here's some food for thought.  Quite a few banks have been hit with civil money penalties for alleged violations of flood insurance requirements in the past few years.  Don't believe me?  Go here (maintained by Banker's Online) to see a running list of banks that have been hit with civil money penalties for flood issues.  The list is fairly long. 

The high number of civil money penalties leads me to believe that there is some basic confusion regarding financial institution responsibilities.  Building on that, one would think that the clarifications/amendments to the Q and A guidance would be designed to eliminate some of that confusion.  (At least that's my take.)  I'd forward the proposed Q and A to the person at your credit union that handles flood insurance issues.   (Keep in mind that it is a proposal.)

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Here ye, here ye.  NAFCU would love to here your comments on NCUA's advance notice of proposed rulemaking on mergers, conversions from credit union charter, and account insurance termination. Comments due to NCUA by April 30.   Here is a link to the NAFCU Regulatory Alert. (Member log-in needed.)

The ANPR covers very important issues.  For example, here are two of the issues on which we'd love to hear your thoughts:

• Currently, NCUA has no rules regarding the merger or conversion of a federally insured credit union (FICU) into a financial institution other than a mutual savings bank (MSB). In your opinion, should NCUA promulgate new regulations for credit union mergers or conversions into financial institutions other than an MSB? If so, please indicate what these regulations should cover.
• While it is clear that a fiduciary duty exists, neither the FCU Act nor NCUA regulations establish a standard of care for credit union boards of directors. Should NCUA establish, by regulation, a uniform federal standard of care for credit union boards of directors who are considering the types of transactions discussed in the ANPR? Please explain your response.

Feel free to contact Pamela Yu at pyu@nafcu.org with your thoughts, concerns and feedback.

NAFCU Book of Answers Updated; March Madness

In support of the idea that one should refrain from reinventing the wheel whenever possible, NAFCU has updated its Book of Answers.  NAFCU members can access it here. (Log-in information needed.)  For you non-NAFCUers, here's a taste of what's inside.

Question: We are aware that credit unions may pay for the travel costs incurred by volunteers and their guest. Is there a limitation on how many trips the credit union may cover in a given year?

Answer: No. The Federal Credit Union Act allows credit unions to compensate one board official for his or her duties. Credit unions may not compensate any other credit union volunteer. NCUA regulations, however, define "compensation" in a way that allows credit unions to benefit volunteers in certain situations without violating the general prohibition against compensation. See 12 C.F.R. § 701.33. As you noted in your question, the definition of compensation excludes the payment or reimbursement of certain travel expenses incurred by a credit union volunteer and his or her guest. 12 C.F.R. § 701.33(b)(2)(i). The regulatory exclusion covers "reasonable and proper" travel-related costs "incurred by an official in carrying out the responsibilities of the position to which that person has been elected or appointed, if the payment is determined by the board of directors to be necessary or appropriate in order to carry out the official business of the credit union, and is in accordance with written policies and procedures, including documentation requirements, established by the board of directors." Id. The regulation contains no explicit limitations on the number of trips or the dollar amount of travel-related costs that credit unions may cover. Instead, the regulation permits each credit union's board of directors to determine what is reasonable and proper, as outlined above.
(Appeared in the November 2006 NAFCU Regulatory Compliance Newsletter.)

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March Madness has arrived!  I'm sure quite a few folks in your offices caught the flu today.  Well, NAFCU has quite a few tournament connections.  Here's who we're rooting for.

• Dr. Tun Wai, NAFCU's Economics Guru is a graduate of Georgetown.  All other things being equal, and assuming that there are no major injuries, he believes Georgetown should do well.
• The George Mason Mafia (which includes Steve, Tessema, Sarah, Pamela, et moi) is looking for another Cinderella run from the Patriots.
• Our very own Kristina Kennedy is a proud graduate (and former cheerleader) for the Mount Saint Mary's Mountaineers.  They play North Carolina first.  Ouch.
• Brad Thaler has his Michigan State shirts all ironed in preparation for a Spartan run to the final four.
• Many of our lobbyists (Jenn, Amanda and Eddie) all love Da Burgh.  They'll be rooting for Pitt.  I'd make fun of Pitt, but seeing how Penn State seemingly has given up playing men's basketball, I have very little ground to stand on.
• Our Regulatory Intern Josh hails from American University's School of Law.  He's proud, but indicated in a meek voice that they are a 14 seed.  But with a name like American, how can you not root for them?  Rooting against them is almost....un-American.

Board of Director Lawsuit Based on BSA Violations

As you may remember, FinCEN and others hammered AmSouth for an allegedly poor BSA/AML program.  Recently, disgruntled AmSouth shareholders sued its board, alleging that the board violated its fiduciary duties with its lax oversight of BSA-related matters.  The case is Stone v. Ritter.

Here's a link to a very good article from the Metropolitan Corporate Counsel that discusses the case in detail.  Here's a link to the case itself.

The board was ultimately vindicated in this case.  The court held:

With the benefit of hindsight, the plaintiffs’ complaint seeks to equate bad outcome with bad faith. The lacuna in the plaintiffs’ argument is a failure to recognize that the directors’ good faith exercise of oversight responsibility may not invariably prevent employees from violating criminal laws, or from causing the corporation to incur significant financial liability, or both, as occurred in Graham, Caremark and this very case. In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions “to assure a reasonable information and reporting system exists” and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.

This case or the article might be an interesting case study during BSA training for your board of directors.  Just a thought.

A Little ODP, from the BOA

NAFCU has a wonderful service for members.  It is our Book of Answers. (NAFCU Log-in needed.) We took the questions and answers from our monthly Compliance Newsletter and BSA Blast, and we organized them by subject matter.  We have quite a few questions and answers. Fifty-two pages worth, to be exact. The Compliance Guy can't give this stuff away, as it is a NAFCU member benefit.  And their dues help pay my salary, which pretty much all goes for popcorn at Nationals games. But for you non-NAFCU folks, here's a snippet of what the Book of Answers, a.k.a.  BOA.

Question: Does my credit union’s board of directors need to approve our credit union’s overdraft protection (bounce protection) program?

Answer: According to NCUA’s Automated Integrated Regulatory Examination Software (AIRES), yes. NCUA’s regulations permit credit unions to establish bounce protection programs. 12 C.F.R. § 701.21(c)(3). While this regulation does not indicate whether a credit union’s board of directors must approve such programs, NCUA clarified its expectations in this area when it issued Letter to Credit Unions 05-CU-21. The guidance introduced the new AIRES Payment of Overdrafts (Bounce Protection Questionnaire. Cell A-14 directs NCUA examiners to ask the following question: “Has the board of directors established a written policy addressing the payment of overdrafts through bounce protection?” You can access 05-CU-21 at: http://www.ncua.gov/letters/letters.html.
(February 2007.)