NAFCU Compliance Blog

When It Rains, It Pours............Regulations

Written by Steve Van Beek

The DC area has had some unseasonably warm weather the past couple of weeks - but the flood of regulations coming from the regulators make it seem like we need to have our galoshes with us at all times.  The past couple of weeks have been a good example of regulatory onslaught from multiple angles - making the lives of compliance officers everywhere very difficult.

Given the fast-paced nature of the recent proposals and finalized regulations, I thought a quick blog post highlighting where to find the new rules was a good start up this mountain I like to call "regulatory change."  As an aside, I'm very interested to see Chairman Matz discuss NCUA's efforts to ease the regulatory burden on credit unions during NCUA's February 8th webinar (which also features CFPB Director Richard Cordray).

Interest Rate Risk Policy - Final Rule.  Recently NCUA issued a final rule on interest rate risk policies.  That rule will be published in the Federal Register this morning.  This final rule becomes effective September 30, 2012.    

Loan Workouts, Nonaccrual Policy & TDRs - Proposed Rule.  At its January Board meeting, NCUA also proposed a new rule that would require all federally-insured credit unions to have a written loan workout/modification policy.  The proposal also contains an Interpretive Ruling & Policy Statement discussing nonaccrual status and troubled debt restructuring reporting.  This proposal was published in the Federal Register yesterday and includes a short, 30-day comment period.

Derivatives - Advanced Notice of Proposed Rulemaking (ANPR).  NCUA also issued a ANPR on derivatives that would provide opportunities for credit unions to use derivatives to manage interest rate risk.  This proposal has not been published yet, but it will have a 60-day comment period (from the date it is published in the Federal Register).

Regulation E (Remittances) - Final Rule.  We discussed this final rule yesterday and I'm fairly certain we'll all become good friends with this rule over the next year.  The final rule will become effective February 7, 2013.

Regulation E (Remittances) - Proposed Rule.  Quite possibly a new record - proposing a rule to amend a final rule that was published on the same day.  Bravo!  The CFPB issue a proposed rule that would tweak the recent final rule.  Rest assured (warning - you may need to adjust your snark meter), the CFPB has indicated they will finalize this proposed rule before the finalized rule that it amends becomes effective.

Junior Lien Loan Loss Allowances - Guidance.  On Tuesday, NCUA along with the other regulators who make up the Federal Financial Institutions Examination Council (FFIEC) announced new guidance for junior lien loan loss allowances.  The Interagency Guidance is here and NCUA also issued Accounting Bulletin 12-1.

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On a happier note, all this talk about raining, pouring and galoshes got me thinking about a wonderful trip with my (now) wife in Seattle.  Good times!  

Letter to Credit Unions on Debt Downgrade; Still Learning

Written by Steve Van Beek

NCUA issued a Letter to Credit Unions yesterday on how the debt downgrade could impact NCUA, credit unions and members.  The Letter can be found here.

The LCU discusses the follow issues:

• Credit Union Investments;
• NCUA Guaranteed Notes;
• Corporate Credit Union Liquidity Guarantee Program;
• Money Market Funds;
• Consumer Confidence; and
• Communications with Members.

The full Letter to Credit Unions is here.  The previous guidance from last Friday is here.  Additional details can also be found in the NAFCU Today.

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I had a wonderful compliance officer quiz me on the number of days until the wedding.  Failed again.  Luckily, I have a trip to Ohio (Wooster) this weekend.  I have a feeling by the end of the trip I will have a much better internal countdown clock.  Currently:  72 days and counting.   

Derivatives

Written by Carrie Hunt

NCUA has announced its agenda for Friday's NCUA Board meeting and front and center is an ANPR on derivatives.  Derivatives are one of those topics of cocktail hour conversations that no one wants to admit that they have no idea what one is.  "So Bob, how about those derivatives traders?  Can you believe they made those swaps?"  "No, I can’t, Carol.  Those deals were crazy."

Hedging.  Counterparties.  Third party transactions.  The fun never stops.

So what does Derivative mean?  Investopedia tells us that it is a "security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage."


Currently, NCUA has a pilot program relative to derivatives and almost all of the derivative action that credit unions participate in is relative to interest rate swaps.  NCUA discussed derivatives in a February 2011 NCUA Report:

"What are swaps and caps, and why use them? Depository institutions rely on both instruments to hedge interest-rate risk - the risk a change in rates will materially impair earnings. In a "vanilla" swap - the type credit unions use - one party makes a fixed payment (equal to an unchanging rate times notional value) and receives a floating payment (equal to a varying short-term rate times notional value). Suppose, for example, the floating rate is one-month LIBOR - currently 30 basis points (or bps, three-tenths of a percentage point) - and the fixed rate is 20 bps.  Further, suppose notional value is $10,000,000; payments are annual; and settlement is due. A credit union committed to receive floating/pay fixed will collect the net amount - $10,000 (the difference in rates, 0.001, x $10,000,000) - from the counterparty. In an interest-rate cap, the buyer pays an upfront premium to receive compensation when a floating short-term rate exceeds a fixed rate (say, a payment if one-month LIBOR exceeds 20 basis points on a certain date, equal to notional value times the spread). Note in both cases receipts rise with LIBOR."

With NCUA reconsidering their entire investment rule, derivatives may be an issue that credit unions will not be able to ignore.  As always, NAFCU will prepare a Regulatory Alert on NCUA’s ANPR, so stay tuned on this issue.

A Busy Year

Posted by Anthony Demangone

Not too long ago, I shared my general outlook for 2011.   That post dealt more with general trends.  But we do expect some specific things.  Regarding NCUA, look out for the following in 2011.

• Regulations on interest rate and concentration risks.  If you've been keeping up with the Material Loss Reviews issued by NCUA's Office of Inspector General, you already know that concentration risk has played a huge role in credit union failures.  And that risk affects more than just credit unions.  I was at a meeting recently where an OTS and OCC official both agreed that concentration risks played a role in every major bank failure as well.
• Member business lending. Rather than a major overhaul, look for NCUA to incorporate guidance documents into the regulation.
• CUSOs.  NCUA will ramp up its focus on CUSOs, and they may seek examination authority.
• Examinations.  NCUA will overhaul its examiner's manual.  This is one process to track closely.  In my view, the examiner's manual is a massive guidance document that can affect your operations and NCUA examinations.  For that reason, it is very important to see how they change it. 
• This and That.  NCUA may also overhaul its investment rule (Part 703) and it may direct examiners to review new credit union products/services at each exam. 

Keep in mind that we can't say for certain that NCUA will act on any one of these issues.  But based on our conversations with NCUA officials, these are some of the areas of interest.  Stay tuned!

Permissible Investments for Federal Credit Unions

Posted by Steve Van Beek

Last Thursday, NCUA issued Letter to Federal Credit Unions 09-FCU-01 which details federal credit unions (FCUs) ability to invest in unsecured debt obligations guaranteed under the Temporary Corporate Credit Union Liquidity Guarantee Program (TCCULGP) and senior unsecured debt guaranteed under the FDIC Temporary Liquidity Guarantee Program (TLGP).  The letter indicates FCUs are allowed to invest if certain conditions are met.

The letter provides a brief overview and background of the programs and when FCUs can invest in those programs.  The letter emphasizes that FCUs should confirm the obligations are guaranteed through maturity in order for them to be permissible purposes.

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In case you were wondering, this Letter only applies to federal credit unions.  NCUA, as it did in this case, sometimes analyzes issues solely from the FCU perspective as they are the primary regulator of FCUs.  Whether these investments are permissible for state-chartered credit unions will depend on other factors determined by its state laws and primary regulator. 

A Little of This, A Little of That; Foot-in-Mouth Disease

Here are a few compliance odds and ends:

• FinCEN reminds us again that users of magnetic filing must transition to E-filing by the end of the year.
• Banks continue to get flood-related civil money penalties.  This Bankers Online page details all the fines.
• NCUA issued Legal Opinion Letter 08-0917 regarding the safekeeping of investments. The letter indicates that a wholly-owned subsidiary of a registered bank holding company is eligiblee to act as an investment safekeeper for a federal credit union (FCU).  You may want to pass this along to whomever is in charge of your investments.

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I put my foot in my mouth more than an NFL wide receiver.  Case in point...

The other day, I wandered over to our caffeine station for a late afternoon cup of coffee.  These are always hazardous treks, since more often than not, the coffee available at such an hour is stale and cool to the touch.  Imagine my joy as I see a coworker brewing a fresh pot of coffee.

Imagine my horror as the following words tumble out of my mouth in a volume far too loud for the circumstances:

Compliance Guy: "Thanks for the fresh pot!"

Can a Credit Union Borrow Money to Purchase Investments?; HSA Index Amounts

According to NCUA, the answer is yes, subject to the general rules and limits that apply to borrowing and investing.  Go here to read  NCUA Legal Opinion Letter 08-0139 (April 18, 2008) for all the details.

Under the FCU Act, FCUs have the express power to borrow from any source, limited to 50% of paid-in and unimpaired capital and surplus. 12 U.S.C. §1757(9). The National Credit Union Administration’s (NCUA’s) regulation on maximum borrowing authority implements this provision at 12 C.F.R. §741.2. The statute and the regulation do not restrict how an FCU can use borrowed funds.

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The IRS has issued new Health Savings Account index amounts for 2009.  Read all about it here.

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We have more entries for the flower garden flower contest.  Check out the photos here. (Don't forget to send in your entry!)

Have a great weekend, everyone!

Investment Guidance?

NCUA recently issued its February 2008 newsletter.  The newsletter contains what appears to be guidance for credit unions in the area of investments.  Access the newsletter here. The article indicates that credit unions "should closely monitor" changes in the fair value of privately-issued investments for signs of credit deterioration.

Granted, an NCUA newsletter isn't quite a Risk Alert or Letter to Credit Unions.  But I doubt that NCUA wrote the "column" just for fun.  I bet they expect us all to read it.  Therefore, I'd print it out and pass it along to whomever is in charge of investments for your credit union.

NCUA issues Legal Opinion Letter Regarding FCUs Receiving Stock in Visa, Inc.

Yesterday, NCUA issued Legal Opinion Letter 07-1022, which indicates that federal credit unions (FCUs) may receive and retain Visa stock as a result of Visa's restructuring.  (As of this morning, the letter is not available on NCUA's website.) NAFCU members can access a copy of the letter here.  (Member log-in needed.)  You can read a NAFCU today article that provides a very good overview of the letter here.  State-chartered credit unions should check with their state regulator on this issue.