NAFCU Compliance Blog

Qualified Mortgages; Flood; Compliance Monitor; Fair Lending Webinars

Written by Steve Van Beek

Below are just a few quick items for your Friday - have a great weekend!

Qualified Mortgages.  The Consumer Financial Protection Bureau has reopened the comment period for their Qualified Mortgage rule (also known as the Ability-to-Repay rule).  The new comment period ends on July 9, 2012.  It had been expected that the CFPB would finalize this rule in early 2012 but it kept getting pushed back - with good reason as this rule has the potential to significantly alter the mortgage market - and now looks like it will be late 2012 before a final rule.  Dodd-Frank requires the rule in place by January 2013.  The CFPB's notice regarding the extended comment period is here. 

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Flood.  A 2-month extension was passed and then signed by President Obama.  This extends the National Flood Insurance Program (NFIP) through July.

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NAFCU's Compliance Monitor.  Our June 2012 issue of NAFCU's Compliance Monitor is now available for download by NAFCU members.  This month the articles focus on Reporting Interest Payments to Nonresident Aliens as well as the increased Focus on Fair Lending.

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Fair Lending Webinars.  The Federal Reserve's Consumer Outlook Live series is hosting a June 21st webinar on 2010 Census Data - What it Means for CRA, HMDA and Fair Lending Compliance.  The webinar is free and follows on the heels of their November 2, 2011 - Fair Lending Issues and Hot Topics webinar (archived version available).   

CFPB Disparate Impact Bulletin; IRS Nonresident Alien Interest Requirement

Written By JiJi Bahhur, Regulatory Compliance Counsel

Fair Lending.  The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing the Equal Credit Opportunity Act (ECOA).  As part of this responsibility, the CFPB recently issued CFPB Bulletin 2012-04 (Fair Lending) to provide compliance guidance on the fair lending requirements of the ECOA and its implementing regulation, Regulation B.   

The Bulletin puts lenders on notice that the CFPB will be monitoring for potential fair lending violations, including practices with unlawful discriminatory effects.  The CFPB reaffirmed its commitment to enforcing the ECOA, by recognizing the “disparate impact doctrine” as one of three recognized methods of proving lending discrimination under the ECOA.  The Bulletin further puts lenders on notice that lending policies with disproportionate, negative effects on a protected class (“disparate impact”) are illegal and will be pursued by the CFPB. 

For a background on Fair Lending and Reg B issues, take a peek at NAFCU's on-demand webcast (live broadcast was April 11th).  

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IRS Reporting.  The IRS finalized a rule requiring financial institutions to report interest paid on or after January 1, 2013, to non-U.S. citizens of certain countries.  Alternatively, credit unions may report interest paid to all nonresident aliens.  The interest (the aggregate of $10 or more) paid to a nonresident alien should be reported on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” for the calendar year in which the interest was paid. 

For a full reading of the rule, go here.  Revenue Proceeding 2012-24 is here - listing the countries covered by this new requirement.  

NAFCU Members:  Our Regulatory Affairs team has provided a Final Regulation on this issue (12-EF-04) that is available for download.    

Credit Unions & The Vow to Hire Heroes Act

Written by Quincy Enoch, Associate Director of Legislative Affairs & Military Liason

As you may know, last week, President Obama signed into law The Vow to Hire Heroes Act of 2011 (Heroes Act), which generally provides tax incentives for businesses to hire veterans. 

While federal credit unions are exempt from income taxation, the Heroes Act contains provisions that would enable a FCU to claim tax credits on certain payroll taxes.  Generally, the tax credit is a work opportunity credit.   FCUs, and other qualified tax exempt organizations, may claim:

• 26% (or 16.25% if the employee worked more than 120 hours and less than 400 hours) of the qualified first-year wages with a cap of:
  • $6,000 for veterans unemployed for more than 4 weeks but less than 6 months – Maximum credit of $1,560
  • $14,000 for veterans unemployed for more than 6 months – Maximum credit of $3,640
  • $24,000 for veterans with a service connect disability and unemployed for more than 6 months – Maximum credit of $6,240

The IRS tax form for claiming the credit is IRS Form 5884, but the current form will need to be updated to conform to the Heroes Act. 

To receive the credit, the employer must request and be issued a certification for each employee by a State employment security agency or execute and submit to the IRS a pre-screening notice.  The employer must receive the certification by the day the individual begins work or complete IRS Form 8850, the Pre-Screening Notice and Certification Request for the Work Opportunity Credit.  The IRS Form 8850 can be filled out and submitted up to 28 calendar days after the hire date.

A veteran will be treated as certified if: (1) such veteran is certified by a State employment security agency as being in receipt of unemployment compensation under State or Federal law for not less than 6 months during the 1-year period ending on the hiring date; or (2) the veteran is certified by such agency as being in receipt of unemployment compensation under State or Federal law for not less than 4 weeks (but less than 6 months) during the 1-year period ending on the hiring date.  The time period will determine the tax credit.  The legislation gives Treasury/IRS the authority to provide alternative methods for certification of a veteran. 

In calculating the tax credit, a tax exempt organization may only take into account wages paid to a qualified veteran for services in the furtherance of the activities related to the purpose or function constituting the basis of the organization's exemption.  In addition, the newly hired employee must work for at least 120 hours for any eligibility and 400 hours for full eligibility.  The potential employee must be a first time hire and cannot have been employed by the employer at any time in the past.  

If you have any questions, please feel free to contact Quincy Enoch at qenoch@nafcu.org

Health Care Tax Credit

Written by Carrie Hunt, General Counsel and VP of Regulatory Affairs

Normally when I see the word “tax” I try not to read any further, but I wanted to take a moment and make sure credit unions have investigated whether  they may be eligible for a small business heath care tax credit.  Credit unions can verify their eligibility on the IRS website.  The website details the following:

In general businesses are eligible for the credit if they meet the provisions below:

• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.

 The amount of credit a business can receive:

• Maximum Amount. The credit is worth up to 35 percent of a small business' premium costs in 2010 (25% for tax-exempt employers). On January 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). 
• Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Word of warning:

For the past two years some credit unions have appeared on an IRS list of tax-exempt institutions that had lost their tax exemption.  The credit unions could have appeared on that list for a number of reasons, but most of the issues were related to poor recordkeeping or administrative mistakes.  In order to claim the heath care tax credit, credit unions will have to file a form 990-T.  Since federal credit unions do not have to file a form 990 under normal circumstances, apparently there was a problem last year with federal credit unions filing the form and getting inadvertently put on a list of institutions who had lost their exemption since the IRS did not have the credit unions “on file” for having filed a 990 in any other year.  This problem is supposed to have been rectified for the 2011 filing year, by the addition of a new line item to the 990-T, but please take this into account if you decide to file for the tax credit.

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Finally, I will close with a solution to a little conundrum that has been bothering me for years:  what to do with leftover Chinese food takeout rice.  I did not invent this recipe but will gladly take responsibility for foisting it on the credit union community.  Take 1 ½ cups rice, one egg and smash it all together with a generous pinch or two of salt.  Heat up a few tablespoons of butter over medium high heat, drop decent sized spoonfuls of the rice stuff into the butter and flatten down a bit to make pancakes.  Cook 3-4 minutes a side until golden.  Easy and good.  And cheap.  Three of my favorite qualities.   

CFPB; 1099; FDIC Complaints and Risk Management

Editor's Note.  Some of you had a difficult time opening certain links in yesterday's blog post. Here's my guess regarding what happened.  Many of you receive the blog post via email, and many email systems make it difficult to click on hyperlinks for security reasons.  If you had those problems yesterday, here's what I'd do.  Go to the actual blog post on the internet, which is here, and try the links again. Compliance peeps who had problems with the links in the email indicated to me that they were able to open the documents from the blog's web site. 

Posted by Anthony Demangone

Here are a few items of note...

The CFPB. Stories about President Obama appointing Elizabeth Warren to head the CFPB via a recess appointment seem to be gaining traction. (WSJ.com).   Also, the CFPB has issued what appears to be its first guidance document.   The guidance clarifies that the Dodd-Frank requirements found in section 1071 will not go into effect until the CFPB issues regulations.  And what did Section 1071 do?  It amended the Equal Credit Opportunity Act to require financial institutions to collect and report information concerning credit applications made by women or minority-owned businesses and by small businesses.

1099.  Ding-dong, this witch is dead.  (NAFCU Today.) For months, we chronicled how a small provision in the recent health care reform law amended 1099-MISC requirements in a way that would have placed a huge new burden on businesses – including credit unions.  Luckily, reasonable minds came to the rescue. President Obama recently signed legislation into law that repeals that provision.

FDIC Complaint.  Here's another great blog post from the Bank Lawyer's Blog.  This post analyzes claims made by the FDIC against the former directors and officials of failed banks.  Here's one portion of the post that caught my eye:

In the case of Corn Belt Bank, which failed in 2009, the FDIC found five loans that caused losses to the bank ("Loss Loans"), alleged that the former directors and officers were negligent or grossly negligent in making the loans because they were improperly underwritten, and that the officers and directors breached their fiduciary duties to the bank. The former officers and directors failed to adequately inform themselves of the relevant risks and acted recklessly in approving them. In addition, the FDIC alleges undue loan concentration, out-of-area lending, high loan-to-value ratios, and overall weak loan administration. Finally, the FDIC alleges that regulatory examiners "repeatedly warned" the bank of these risks and the bank chose to ignore these warnings.

I really do see a sea change when it comes to boards, corporate governance and risk management.  When a financial institution's risk management program fails or is non-existent, directors won't be able to point their fingers at management and say, "That was their responsibility." When it comes to risk management and boards, it is becoming increasing clear that there is no "they" or "their."  

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I wanted to key you all in to a NAFCU promotion.  Here's an ad you may have seen recently. 

We're urging non-members who are eligible to join NAFCU to consider trying us on for size with a free, no obligation 6 month trial.   If you enjoy the blog, I think you'd enjoy membership with NAFCU.  Take a look at what we offer and consider kicking the tires.  As I always like to say, free is good.  

 

My In-Box Runneth Over

Posted by Anthony Demangone

While I know how many of you prefer that the title of the blog should reference the subject matter, that probably wouldn't work so well today.  I plan to hit a bunch of topics, so the title would have resembled the name of a certain village in Wales.

Interchange.  Representative Barney Frank (D-Mass.) now supports passing legislation (C.U Times) to delay implementation of debit interchange restrictions. 

1099.  Remember that pesky provision in the health care reform bill that tweaked the 1099-MISC?  Well, the Senate passed HR 4, which would repeal the controversial change.   The legislation now goes to President Obama for his signature.

CFPB.  NAFCU was pleased to take part in a hearing yesterday on how the CFPB will affect credit unions.  Lynette Smith, CEO of Washington Gas Light FCU, testified at the hearing on our behalf. 

“We believe that if a CFPB is to exist, its primary focus should be on regulating the unregulated in the financial services arena, and not adding new regulatory burdens to those entities that already fall under a functional regulator,” according to Smith’s written testimony prepared for today’s hearing. The authority to regulate all credit unions, she states, should be returned to NCUA.

Stay lifted.  The short-lived stay on the Regulation Z mortgage loan originator compensation rule has been lifted.  (National Mortgage Professional.com)  It was a long-shot at best. The rule is now effective. Carry on...

Mortgage servicing.  This post from the Bank Lawyer's Blog notes now some of the nation's largest servicers are entering into consent agreements with their primary regulators.  The agreements reportedly demand better internal controls over the servicing areas, including the foreclosure process and communications with borrowers who are in default.  One thing caught my eye - the agreements reportedly demand board involvement in the servicing oversight area.  This is just another example of how regulators are placing a greater focus on boards and corporate governance.  We'll see if these orders find their way into regulation or guidance documents.  If I were a betting man, I expect to see some sort of servicing rule or guidance document in the next two years that applies to credit unions.  But I'm not a betting man.  In Vegas, I once placed a $20 wager that the Nationals would win the World Series.  

Speaking of servicing.  Is the CFPB interested in these servicing agreements/negotiations/discussions?  Yes. Very much so.   (ABA Dodd-Frank Tracker)This is one of the reasons I expect some formal rule or guidance document that addresses servicing. 

Interchange lawsuit. The lawsuit that attempted to invalidate the Fed's debit interchange rulemaking process?  It failed.   But much like my $20 wager on the Nationals, I didn't expect all that much success.

FFIEC.  NCUA is now chairing the FFIEC.  This is a great reminder of an important fact: When you see an FFIEC guidance document, such as an IT Booklet for the BSA Manual, remember that NCUA is part of the FFIEC.  Treat that guidance document as if it were created by NCUA itself.

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Thoughts on School; Force-Placed Insurance; Policies and Board Involvement; HSAs

Posted by Anthony Demangone

I'm back in the saddle at NAFCU after a fantastic week at our compliance school.  If you want to see what 180 enthused credit union compliance officers look like, well, it looks like this:

I think one attendee summed the week up well in a brief exchange with me on Friday.  He thanked me and NAFCU for the event.  I said I was glad that he enjoyed it.

"Oh, I didn't enjoy it. It was a great event and I learned a ton.  But I wouldn't call it enjoyable!" 

And I know exactly what he meant.  It was a wonderful week, but a very tough week.  

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Now, back to the grind.  

Force-placed insurance.  Here's a fantastic post (Bank Lawyer's Blog) that discusses the AG proposed settlement regarding mortgage servicers and how it would affect force-placed insurance. In short, the settlement agreement would prohibit mortgage loan servicers from earning profit from force-placed insurance policies.  Under the proposal, mortgage servicers would be prohibited from force-placing insurance with an affiliate, and from accepting "kick-backs," referral fees or accepting anything of value related to the force-placement of insurance.  If you want the bloody details, just start reading on page 24.   My takeaway? Any income you receive from force-placed insurance related to mortgage servicing is now clearly subject to increased regulatory risk.  If the proposed AG agreement finds its way into the requirements of the secondary market, or on to the "to-do" list at the CFPB, the agreement may very well affect your bottom line. Stay tuned.

Board fiduciary duties and policies and procedures. Here's a thought that came up a few times at NAFCU's Compliance School.  I see a potential red flag in the following situation. NCUA has indicated that boards should be involved in the formation of many important credit union policies.  The board sets the credit union's appetite for risk, its limitations for concentration, etc.  When a policy is supposed to reflect a board position, how can that policy be written without their involvement at some level?  And how could a credit union adopt a policy created by a third party without having board involvement to tailor it to their credit union's operations? Credit union should consider how this might affect their board members, especially in relation to their duty of care. 

HSAs. Treasury has redesigned and reorganized its web page dedicated to Health Savings Accounts. 

Monday Morning Hodgepodge

Posted by Anthony Demangone

Happy Monday, everyone!  I hope you enjoyed your weekend half as much as I did.  Here are a few items to get yourself rolling.  

Regulatory Compliance School.  We're gearing up for a record crowd at this month's NAFCU Regulatory Compliance School.  NAFCU's attorneys have been busy drafting a new manual for the event.  Here's a sneak peek at the manual's table of contents.  As you can see, we've been pretty busy for the past year or so.  We'll have the manual available for sale later this spring if anyone is interested. 

1099.  We're getting closer to a legislative fix to the 1099-MISC fiasco that came out of last year's health care reform legislation. 

CFPB.  The new agency continues to meet with "smaller" institutions.  The CFPB wrote of a recent visit by community bankers. They recently met with NAFCU staff and a small number of NAFCU member credit union CEOs as well.  The agency is hearing a lot from us, but it will be important to continue a dialogue regarding concerns we have with regulatory burden.  And an open door is much better than the alternative.

Fiduciary duties. NCUA responded to a request from NAFCU to clarify that a federal credit union's board of directors can continue to delegate its ultimate authority over senior management to the chief executive officer of the federal credit union.

In response to Hunt’s specific questions, (Bob) Fenner said this doesn’t change existing NCUA policy. The full board may delegate to its executive committee the authority to hire, fire, determine duties of, set compensation for and discipline senior management, he said. It can also, within limits, delegate to the chief executive officer the authority to hire, fire and compensate subordinate employees, including other management personnel. 

Fenner noted that “if a board determines to delegate to the CEO the authority to hire, fire, fix the compensation of, or discipline other senior managers,” appropriate standards and controls should be put in place.

Mortgages. Reuters reports state attorney generals have sent proposals to America's largest mortgage lenders that recommends principal reductions before resorting to foreclosure. This doesn't appear to directly affect credit unions, but attorney generals can effectively regulate on a national basis if they strike the right agreements with the right parties.  (Think HVCC.)  Stay tuned.

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Board Governance and "Direct Dialing"

Posted by Anthony Demangone

Through the years, I have learned that some read regulations and guidance documents through a lens that serves their interests. For instance, they focus on the one paragraph of a document that seemingly supports their position, while ignoring many provisions that do not.  I've come to believe that one of best qualities a compliance officer can have is the intestinal fortitude to look an executive or board member in the eyes, and say the following with certainty and professionalism:

I'm sorry, but I don't believe the regulation says that.

I had one of those moments recently with a compliance officer from a federal credit union.  It seems that one director from the credit union was calling staff members directly to check in on certain loan applications, certain projects, and the like. The director said that the new NCUA regulation concerning fiduciary duties said that the director could do that, and in fact, encouraged directors to bypass the CEO to deal with staff whenever they wanted. 

Let's say it together.  I'm sorry, but I don't believe the regulation says that.

The director perhaps read a news article that casually talked about the regulation.  Or perhaps the director did skim the new rule.  In any event, the regulation doesn't exactly support the director's argument.

Here's the section of the regulation that the director pointed to:

(2) Federal credit union staff providing services to the board of directors or any committee of the board under paragraph (c)(1) of this section may be required by the board of directors or such committee to report directly to the board or such committee, as appropriate.

I'll just make a few points on this text.  There's no mention of "director" in that paragraph.  Rather, this paragraph talks of the board's right to require staff to report to the board, or a committee of the board, as appropriate.  A director, by himself or herself, has little to no power. It is only as part of a board that the director can vote on matters, assuming a quorum is present.  So, a board, or a committee of a board, would have that right - but, again, this paragraph does not talk about a director's individual right. 

Did NCUA discuss this issue elsewhere? Yes, they did.  When NCUA issues a final rule, they also publish a "discussion" section that goes into detail regarding what they were thinking when they crafted certain provisions of a regulation. Here's what they said about the paragraph that we're discussing today.

Some commenters opposed the provision requiring FCU employees (staff) to report directly to the board of directors or committees of the board, stating this would undermine management’s authority over the employees of the credit union. Another commenter questioned whether committees other than the supervisory committee had the authority to require employees to report directly to the committee. One commenter argued that direct contact between the board of directors and the credit union’s employees would put employees at the beck and call of the board and could interfere with the employees’ regular duties.

The NCUA Board disagrees. An FCU’s board of directors cannot permit the chief executive officer (CEO) to screen all the board’s information sources.  While the board of directors should not attempt to bypass the CEO in giving direction to management and employees, the board is free to ask any manager, employee, or independent contractor to provide the board and its committees information directly and not through the filter of the CEO. The NCUA’s Office of General Counsel has previously opined that board members must be free to gather information from any source in the credit union to perform their board duties. OGC Op. No.03–0763 (Sept. 29, 2003).  (Emphasis added.)

To summarize, a federal credit union's board does have the right to gain direct access to information from credit union employees.  And they have that right, as appropriate, as needed to perform their duties. But NCUA went on to clarify that boards should not bypass the CEO to direct or manage the credit union's employees.  That's the CEO's job. 

Now, I believe that is what the regulation states!  (As always, though, I'm happy to hear comments and feedback, especially on board governance issues.)

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Here are some tasty compliance tid-bits.

• The repeal of a new and controversial 1099-MISC reporting requirement is nearly here.
• Episode 57 of "Current Issues in Credit Unions" is fresh out of the oven.

This and That...Revisited

Posted by Sarah Loats

MDIA. The Federal Reserve's Tuesday press release seems to have caused some confusion - due to docket numbers. As Anthony noted yesterday, the press release indicated the Federal Reserve was not going to finalize three current proposed rulemakings prior to the transfer of rulemaking authority to the CFPB. The docket numbers for these rulemakings were included in this press release and one of the docket numbers (Docket number R-1366) happens to also be the docket number for the MDIA interim final rule. So this question arose yesterday - does this mean that the MDIA rule is killed? No, no it doesn’t. They didn't withdraw the interim final rule - it's still on the books.


Healthcare. We just wanted to clarify yesterday's blog post about the 1099. The Senate did not actually vote to repeal the 1099 provision from the healthcare bill. Rather, they voted to add language to an existing bill, that if enacted would repeal the 1099 provision. That bill currently remains in the Senate. Yesterday's post has been fixed.


CFPB. The Cop on the Beat has launched its website. Since the CFPB is taking over rulemaking authority for most of the consumer protections regs, you’ll want to be familiar with this site.