NAFCU Compliance Blog

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.)

***

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.

This and That...

Posted by Anthony Demangone

Here are a few items of interest.

The Fed.  You may have heard that the Federal Reserve has announced that it doesn't expect to complete three Regulation Z rulemaking initiatives before the CFPB assumes rulemaking authority for Regulation Z.  The rulemakings would have addressed mortgage disclosures (including HELOCs), the right of rescission, credit protection products (such as disability insurance), and reverse mortgages and modifications. You can read more about their decision via the link above.  Is the news good or bad?  Yes.  On one hand, this calms things down on the Reg Z front - at least for a little bit.  The CFPB takes hold of Reg Z in July, so these rules aren't going to be finalized before then.  But on the other hand, these issues can be picked up by the CFPB.  So the story isn't over.  How the CFPB will choose to proceed is a major unknown.  Stay tuned. 

Healthcare.  You may recall that we wrote about a certain provision of heath care reform that affected 1099s - greatly expanding their reach and increasing burdens for American businesses.  President Obama alluded to this provision in his State of the Union address, noting it was one provision that could change.  Yesterday, the U.S. Senate overwhelmingly voted to add language to an existing bill that, if enacted, would repeal that 1099 provision.  (Washingtonpost.com).  In other health care reform news, you may have seen that a judge struck down  (Washington Post) the entire health care reform law.  What does that mean? Ezra Klein provides a nice analysis.  (Washington Post.)

HMDA.  Bankersonline.com does a nice job of gathering civil money penalty information.  A number of FDIC-regulated entities have been hit with civil money penalties for HMDA violations.  A large number.   This underscores the importance of understanding HMDA, which is why I love the FFIEC's HMDA compliance guide. 

Regulation Z.  The FFIEC has announced (via the Fed) that the interagency Regulation Z examination guidelines have been updated.   This, folks, is a useful compliance resource. 

This and That...

Posted by Anthony Demangone

Here are some items of interest...

• NCUA has released its agenda for this Thursday's NCUA Board meeting.  The agenda isn't Earth-shattering in terms of compliance.
• Treasury has named Holly Petraeus to head the Office of Servicemember Affairs at the CFPB. I expect that the creation of this office will shine a bit more light on military compliance issues, such as the SCRA.  Regarding Ms. Petraeus, you'd be hard-pressed to find anyone who understands more about military life.  This comes from the Treasury announcement.

Petraeus knows firsthand from her own personal experience as well the strains facing America’s troops and their families. She is the daughter of Army Gen. William A. Knowlton, a previous superintendent of West Point. Her son, brother, grandfather, and great-grandfather all served in our armed forces. Petraeus, a military spouse for more than 35 years, is also the wife of Army Gen. David Petraeus, current Commander of the International Security Assistance Force in Afghanistan and former Commander of the U.S. Central Command.

• FinCEN pushed a lot of paper recently.  First, they released their semi-annual SAR Activity Review - By the Numbers.   This document gives you a TON of statistical data on SAR filings.  If you do BSA training, these statistics can be used to create fancy, colorful charts.  People seem to like those.  FinCEN also released an updated Mortgage Loan Fraud Update.   It looks like SAR filings related to mortgage fraud continue to increase.
• The IRS is looking to increase reporting requirements.  They issued this proposal which would require financial institutions to report interest/dividend payments to nonresident aliens of any foreign country. 
• The NMLS (the SAFE Act Registry) has announced a number of  internet-based workshops to introduce institutions to the registry.  The workshops are not designed for individual mortgage loan originators.  It looks like the workshops cost $50.
• It has begun.  Congressman Michelle Bachman (R-Minn.) introduced her first bill for this Congress.  The bill would repeal the Dodd-Frank financial reform legislation. 

NCUA LOL on compensation and the IRS; A little privacy help from the FDIC

Posted by Anthony Demangone

Yesterday, NCUA released Legal Opinion Letter 10-0919 (September 22, 2010)  via its Express Subscription Service.   The opinion letter addresses NCUA's compensation regulation.

In short, NCUA regulations contain a general prohibition against compensating directors and other volunteer officials, not including the one paid director position as allowed by the Federal Credit Union Act. General rules often contain exceptions, as does this one.  For example, under NCUA's compensation rule, you can pay for a director's health insurance (subject to the rule's limitations), and this insurance benefit does not violate NCUA's general ban on compensation.  The same goes for training expenses.  

The exceptions, though, only pertain to NCUA's rule.  As NCUA indicates in its legal opinion:

The use of the term “compensation” in §701.33 is only for the purpose of describing the kind and amount of payment or reimbursement an FCU is permitted to provide to a board officer. NCUA’s use of that term does not in any way affect an FCU’s obligation to issue a Form 1099 to an individual when the IRC requires it.

So, there really is a two-step process.  First, when conferring a benefit or reimbursing expenses for a volunteer, the payment or benefit first must be able to pass through NCUA's compensation regulation.  If the payment can pass through the rule's requirements, a credit union must then determine if it must issue an appropriate 1099, in the name of the director. 

***

The FDIC issued FIL-60-2010 to help supervised banks comply with the new model privacy notice requirements.  The guidance does a nice job of framing the issue.  While the guidance applies to banks, I believe credit unions will find it to be a useful overview.

IRA Periodic Statements; Shameless Plug

Posted by Anthony Demangone

Because it is Friday, and because I love all of you, I thought I would try to save you some money.  Here's a regulatory wrinkle that might save your credit union a few dollars.

IRA periodic statements.  If your credit union offers IRA accounts, you may be shocked to learn this little fact. You are under no legal obligation to deliver IRA periodic statements.  IRAs are exempt from Regulation E, as the regulation considers them to be "trusts." Trusts, are not subject to Regulation E, per the regulation's definition of "account."  In addition, Truth in Savings does not mandate that you send a periodic statement.  It only creates certain requirements if you do.  For the "Doubting Thomas" in you, here's the regulatory language from Regulation E.

(b)(1) Account means a demand deposit (checking), savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes.

(2) The term includes a “payroll card account” which is an account that is directly or indirectly established through an employer and to which electronic fund transfers of the consumer's wages, salary, or other employee compensation (such as commissions), are made on a recurring basis, whether the account is operated or managed by the employer, a third-party payroll processor, a depository institution or any other person. For rules governing payroll card accounts, see §205.18.

(3) The term does not include an account held by a financial institution under a bona fide trust agreement.

And from the Staff Commentary of Regulation E:

Custodial agreements. An account held under a custodial agreement that qualifies as a trust under the Internal Revenue Code, such as an individual retirement account, is considered to be held under a trust agreement for purposes of Regulation E.

If you add the two together, you'll find that IRAs are not subject to Regulation E.  Therefore, they are not subject to Regulation E's periodic statement requirements. Even if the IRA gets an electronic deposit. Now, let's look at NCUA's Truth in Savings regulation. 

• The staff commentary to NCUA's Truth in Savings regulation point blank states that the regulation does not require that you send a periodic statement.  It simply states that if you do so, you must follow its requirements.
  
• Note that the definition of "periodic statement" also excludes "share certificates."  Therefore, even TIS's requirements do not apply to share certificates. So, if you have an IRA account that only holds a share certificate, you are completely off the radar. NCUA only requires if you voluntarily disclose information, that the information be accurate and not misleading. 

So, let's summarize.

•  IRAs (and HSAs for that matter) are not "accounts" for the purposes of Reg E.  For that reason, they are not subject to Reg E's periodic statement requirements - even if the member deposits funds electronically into the account on a regular basis.
• Truth in savings does not mandate that you send periodic statements. Its requirements only kick in if you decide to send one.  And its requirements do not apply to share certificate accounts.    

So, how can this save you money?  Let's see.

1. Technically, you could simply do away with periodic statements for IRAs.  You would still have to send the IRS-mandated disclosures, so members would still get some information.  This choice, however, may not be feasible from a "member expectation" point of view. 
2. If you are going to send periodic statements, there's certainly no regulatory need to send them on a monthly basis.  Quarterly certainly is OK.  And I don't see a regulatory hurdle to an annual periodic statement.  You just have to meet NCUA's Truth in Savings requirements if the IRA account holds a  non share-certificate, account. 

***

Shameless plug. Next Wednesday, I'll take part in a 2-hour long webcast that will cover the August 22 Reg Z changes and the changes found within the 2010 BSA/AML Examination Manual.  I've reviewed the slides so far, I'm convinced that the content will be worth your time.  I'll take roughly 20 slides and 30-40 minutes to hit the BSA portion, and then Steve and Sarah will address the remainder.  We've allotted an extra 30 minutes to answer any extra questions and answers, as we'll hit on so many topics. And yes, I do note the irony.  I tried to save you money above.  And now I'm asking for it.  Such is life.

Have a great weekend, everyone!

IRS Backup Withholding; BSA Civil Money Penalty; Fiduciary Duties; Seminar Snapshot

Posted by Anthony Demangone

Happy Friday, everyone!  Here's some info to help start the weekend.

Backup Witholding.  The IRS has issued Announcement 2010-41  regarding new procedures for backup withholding.  The announcement applies only when a credit union receives a second notice from the IRS that a member has provided an incorrect taxpayer identification number (TIN) or name.  Under IRS rules, when the second notice is received the credit union must obtain validation of the TIN from the Social Security Administration (SSA) or the IRS, but to do that, the member must authorize the SSA to send the now discontinued Form SSA-7028 to the credit union.  The announcement outlines how the credit union needs to notify the member on providing the credit union with validation of the SSN.

BSA Civil Money Penalty.  Yesterday, FinCEN announced a $1 million civil money penalty against Pamrapo Savings.

Pamrapo’s lack of internal controls combined with unqualified BSA compliance personnel, relatively non-existent training and deficient independent testing resulted in a wholly ineffective BSA compliance program which, in turn, resulted in the failure to file a substantial number of currency transaction and suspicious activity reports in an accurate and timely manner. Pamrapo Savings Bank, without admitting or denying the allegations, consented to payment of the civil money penalty.

So, yes, BSA is still an issue for regulators.  Did I mention that NAFCU will host a BSA-related webcast on July 14th?  (Shameless, shameless plug, I know.)

Fiduciary Duties.   NAFCU recently sent this comment letter to NCUA on the fiduciary duties proposal.  I like reading comment letters, because they can highlight issues that you may have missed when reading a proposal.   If you look at NCUA's proposal rules homepage, they have links where you can read the comments.

Speaking of fiduciary duties, many folks have been asking if NAFCU's online training program satisfies the proposal's requirements on board training.  Since I created the training program, I tend to get those questions. Here's my take:

1. First, the proposal is just a proposal. We won't know what the final rule requires until it is issued.
2. Assuming that the final rule will mirror the proposal (which is a huge assumption), there appears to be two major areas where directors may need training.  First, the proposal appears to require that, within 90 days of joining the board, directors need to have training on financial issues so that they can read a financial statement and raise appropriate questions.  Second, directors have to be able to ensure that the credit union runs its affairs within all applicable laws and regulations.  Both of these areas likely will need training.

Does our training meet these requirements?  That's a tough call, because I'm not the final judge.  We do have an ALM session that addresses some aspects of financial reports.  We do talk about how credit unions are regulated and examined.  And we address BSA.  But ultimately, you'll have to ensure that the training program you select meets your needs.  In other words, do your due diligence.  With that in mind, take a look of the outline of our training program for directors and officials.  And here is the training homepage, which includes a demo.

Flood.  The FDIC recently issued more than $16,000 in civil money penalties against two different banks for alleged flood insurance violations.  This really worries me, because banks get clobbered for flood insurance deficiencies all the time. Don't believe me?  Look at this page at BankersOnline to see the list of flood CMPs.  More than 25 banks have received civil money penalties this year. But for some reason, credit unions do not get these CMPs, even though the requirements are the same.  This keeps me up at night.  With that in mind, we'll have someone at this year's NAFCU Compliance Seminar to address flood insurance issues. Here's a description of the session.

Stemming the Tide of Flood Compliance Issues
This presentation will provide insight into credit unions’ compliance obligations under the federal flood regulations with a focus on changing requirements under recently revised regulatory guidance. You will learn about the regulators’ “Questions and Answers Regarding Flood Insurance”, challenges related to resolving flood determination discrepancies, and NFIP reform and how it impacts credit unions and their members.  Opportunities for asking questions will be provided to allow you to bring your compliance issues to the table. Presented by Scott Giberson, CFM, Compliance Manager, CoreLogic Flood Services.

OK, that's enough for today.  Enjoy your weekend, everyone!

Odds and Ends

Posted by Anthony Demangone

Welcome back, everyone.   I hope everyone is getting over their sunburns and overloaded email inboxes.   Now, on to the post...

Red Flags Delayed...Again.  The FTC has delayed enforcement of its Identity Theft Red Flags rule...again. Enforcement is now delayed until December 31, 2010.

At the request of several Members of Congress, the Federal Trade Commission is further delaying enforcement of the “Red Flags” Rule through December 31, 2010, while Congress considers legislation that would affect the scope of entities covered by the Rule. Today’s announcement and the release of an Enforcement Policy Statement do not affect other federal agencies’ enforcement of the original November 1, 2008 deadline for institutions subject to their oversight to be in compliance.

The delay only benefits state chartered credit unions.  Federally-chartered credit unions have been under NCUA's identity theft regulation for quite some time.

Reg Z's Closed End Final Rule. A little birdie told us that the Fed is nowhere close to releasing the final rule that will amend its closed end lending rules. 

Fraud and insider abuse. OTS has released an updated version of Regulatory Bulletin 37-54.  The bulletin addresses the issue of fraud and insider abuse.  The bulletin discusses virtually every angle of this issue, from filing SARs to risk mitigation techniques.  I'd share this with your security officer.  While the citations flow to OTS requirements, the basic information is sound and worthy of your attention.

1099s.  NAFCU is in no way an expert on tax issues, but we do track IRS-related issues to see how they could affect our members.  You may not have seen this yet, but buried inside the health care reform legislation was language that will change how 1099s are prepared.  The changes will take effect in 2012.  Here's a general article that highlights how those changes may affect American businesses - including credit unions. (CNNMoney.com)

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Taken together, the two seemingly small changes will require millions of additional forms to be sent out.

Shameless plug.  Tomorrow, I'll moderate a NAFCU webcast on Hot Issues at NCUA.  There's still time to sign up! 

IRS Form 990 and FCUs

Posted by Anthony Demangone

There has been a bit of confusion over whether federal credit unions must file an IRS Form 990.  To clear things up, they do not.  But don't take my word.  Back in 1988, NCUA issued Letter to Credit Unions 100 to explain why credit unions are exempt from the requirement. 

The Internal Revenue Service has now informed us that, according to their regulations, organizations that are tax exempt under Section 501(c)(1) of the IRC do not have to file an informational return or make such return available for inspection. (See Section 1.6033-2(g) (vi) of the Income Tax regulations, 26 C.F.R. 1.6033-2(g)(1)(vi).) Since FCU’s are tax exempt under Section 501 (c) (1) of the IRC, FCU’s are not required to file or maintain an informational tax return. Accordingly, NCUA will no longer file a consolidated Form 990.

File this one away, as it is a nice way to show why we don' t need to file the IRS 990 when that question pops up. 

Have a great weekend everyone.  I'm currently in San Antonio at NAFCU's Volunteer's Conference.  Mandy will join me later today.  I see a stroll down River Walk in our future. (As well as Missions' game.)