NAFCU Compliance Blog

NCUA Report: What Makes a Sound Member Business Lending Program?

Written by Steve Van Beek

I wanted to highlight an article from the December NCUA Report (the CFPB threw a wrench (or forest) into my reading pile) from Region IV on What Makes a Sound Member Business Lending Program?

If your credit union does member business lending, this is a great article to read and pass along to others at your credit union.  The article discusses four critical elements to a MBL program: (1) capital adequacy and planning, (2) policies and procedures, (3) staffing, and (4) systems.

For example, the article includes this on policies and procedures:

"Comprehensive policies and procedures tailored to the types of MBL products targeted in the strategic plan should drive MBL programs.  This includes underwriting guidelines consistent with the desired risk profile.  Policies and procedures should provide loan officers and underwriters flexibility while holding them to the standard dictated by the board's tolerance for risk."

And, this for staffing: 

"MBL personnel should have experience specific to the loan and collateral types booked to the portfolio.  In addition, an MBL department should have the appropriate mix between business development and loan underwriting personnel.  The proper balance ensures adequate controls between loan sales, underwriting and administration." (emphasis in original).

The article concludes with this summary:

"Credit unions are proven small business lenders. When building an effective MBL program, a credit union needs to acquire the systems necessary to service a portfolio, prepare marketing and strategic plans prior to implementation, and develop policies and procedures commensurate with the size and complexity of the program. Putting in place the infrastructure necessary for a successful and safe and sound MBL program takes commitment and can be expensive, but credit unions have shown a ready willingness to provide the critical resources their members need to start and grow a small business."

Again - if your credit union offers member business loans (or is thinking of doing so in the future), be sure to read the article.  

NCUA Issues Guidance on Obtaining Member Business Loan Waivers

Written by Steve Van Beek

On Friday evening, NCUA issued Letter to Credit Unions 13-CU-02 and Supervisory Letter 13-01 on Member Business Loan Waivers.  NAFCU has requested clarification and guidance in this area for the past couple of years.  We'd heard from credit unions regarding the confusing MBL waiver process - including which areas could obtain waivers, the scope of the waivers and the fulfillment of requested waivers by NCUA.  In other words, this guidance has been asked for by NAFCU and credit unions for a long time and should help credit unions understand and navigate the waiver process.  And, just as importantly, the guidance explains the process to both credit unions and NCUA examiners to ensure everyone is on the same page.

Below is information from the Letter to Credit Unions and the Supervisory Letter.  We'll get into additional details in future blog posts.  The full Supervisory Letter sent to NCUA examiners is here.

The Letter to Credit Unions states:

"I am providing you with a copy of this Supervisory Letter so you can understand how NCUA approaches waivers of the various regulatory requirements for MBLs.

The Supervisory Letter incorporates feedback NCUA received during my Listening Sessions last year, as well as various requests for clarifications regarding when waivers are needed.  In particular, the Supervisory Letter will help you better understand the following:

• What types of waivers are available under Part 723 of NCUA's Rules and Regulations.

• When and how you can obtain a "blanket " waiver applicable to a broader range of member business lending conducted by your credit union.

• Under what circumstance waivers are not needed for actions related to managing existing loans.  In particular, the letter clarifies waivers are not needed for activities not meeting the generally accepted accounting principles (GAAP) definition of a "new loan."

• Which of the borrower's principals are required to provide a personal guarantee and the type of guarantee required based on different ownership structures for the business.  The letter also clarifies what constitutes an associated borrower.

• The documentation you will need to submit and standards you will need to meet to request and qualify for a waiver.

• New NCUA procedures intended to streamline the process for obtaining waivers for credit unions buying a participation interest in an MBL.

...

If your credit union makes or plans to make MBLs, I encourage you to review the attached supervisory guidance.  It will not only help you understand the MBL waiver process, it also contains guidance on sound risk management practices that will aid you in maintaining a safe and sound MBL portfolio."

The introduction of the Supervisory Letter also has a good summary:

"The risks associated with each business borrower are unique; therefore the rule allows for waivers of certain regulatory provisions in order to give credit unions the necessary flexibility to meet the needs of the members they serve.

...

In particular, the guidance:

• Defines the two general types of MBL waivers; an individual loan waiver and a blanket waiver.

• Establishes the specific financial attributes a credit union should exhibit along with the risk management processes a credit union needs to have to qualify for a waiver.

• Streamlines the procedure for processing a waiver request for participated loans.

• Addresses specific issues associated with waiver requests for LTV, personal guarantees and associated borrower.

• Adds clarity to determining the principals and associated borrowers in an MBL relationship.

• Reinforces expectations and best practices related to business lending."

If your credit union makes MBLs, be sure to review the full 15-page Enclosed Supervisory Letter. 

NAFCU's Regulatory Compliance School Just Got Better - Regulatory Update Day

Written by Steve Van Beek

We've heard you!  For the past couple of years, we've received the following feedback about NAFCU's Regulatory Compliance School (paraphrased, of course):

"School is great and provided a solid foundation for understanding the regulatory requirements credit unions face on a daily basis.  BUT, the rules are changing so fast that it would be great to receive updates on what has just changed and what is changing next."

With this in mind, we've created Regulatory Update Day at NAFCU's 2013 Regulatory Compliance School (March 18-23 in National Harbor, Maryland).  

Regulatory Update Day (Thursday, March 21st) will provide:

• A clear understanding of what changes NCUA has in store for 2013 – including their Exam Focus

• An overview of the scope and applicability of the CFPB’s seven new mortgage regulations*

• A detailed look at the CFPB’s Qualified Mortgage/Ability-to-Repay requirements*

• Answers to Frequently Asked Questions on the mortgage rules from NAFCU’s compliance team*

• Insight from credit union attorneys and practitioners on how best to set up your implementation strategy

You can find more information on Regulatory Update Day here.  The three sessions with the "*" are sessions that are also part of NAFCU's Mortgage Reform Webcast Series.

The other 4 days of Compliance School will remain the same as will the opportunity to take the NAFCU Certified Compliance Officer (NCCO) exams.  Good luck!  

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And, all attendees at NAFCU's 2013 Regulatory Compliance School will receive NAFCU's 2013 GPS (coming soon!) as well as NAFCU's Scope & Applicability Charts.

Remember:  You do not need to be a NAFCU member credit union to attend NAFCU's conferences or webcasts.  In fact, you don't even need to work at a credit union.  Each School usually features a handful of consultants, vendors and other credit union "peeps" who support credit unions - in one way or another - on a daily basis.      

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Updated Q&A on "Fleets"; Feedback on NAFCU's Book of Answers

Written by Steve Van Beek

Yesterday's blog post stated it would be great if NCUA updated their legal opinion letters when they were superseded.  Well, we had an eagle-eyed reader who was searching NAFCU's Book of Answers (member-only) and asked if we were going to update our Q&A.  We sure are - it is below (and will be updated in the Book of Answers soon):

Question: One of my credit union's members has done plumbing work on the side over the years. Recently, her "side" business has taken off, and she'd like to expand. She approached us for a loan to purchase three vans to help the expansion. We are aware of NCUA's Member Business Loans Regulation, and the loan-to-value (LTV) requirements found at 12 C.F.R. §723.7. That regulation, however, exempts the LTV requirements for vans - as long as the van is not part of a fleet. We'd like to avoid the LTV requirements if we can, but our commercial lending department cannot agree on what constitutes a "fleet." Has NCUA issued guidance in this area?

Answer: Yes. NCUA has defined “fleet” in Legal Opinion Letter 12-0764 which superseded NCUA’s prior guidance from Legal Opinion Letter 05-1038.  As you noted, NCUA's Member Business Loans (MBL) Regulation contains LTV requirements for secured loans. Subject to certain exceptions or an NCUA waiver, the maximum LTV for secured MBLs is 80 percent. The LTV requirement, however, does not apply to cars, vans, SUVs, or pick-up trucks - as long as the vehicle is not part of a "fleet." 12 C.F.R. § 723.7(e). The regulation does not define "fleet," however, the 2012 opinion letter defines “fleet” as “five or more vehicles that are centrally controlled and used for a business purpose, including for the purpose of transporting persons or property for commission or hire.  In the letter, NCUA emphasized that the “fleet” definition is composed of the numerical component – five – as well as the central control and used for a business purpose component.  Both components are required before the vehicles would be deemed to be part of a fleet.  In your question, the member has three vans and would be below the numerical component.  Thus, the vans would not be part of a “fleet” and the credit union would not be bound by the LTV requirements of 12 C.F.R. § 723.7.

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NAFCU's Book of Answers.  We are working on an update to our Book of Answers and we want your feedback.  If you are a current user of the Book of Answers - we look forward to any feedback you have on how to improve this NAFCU member benefit.  What would make the Book of Answers better?  Is it too big and bulky?  Should the Book of Answers be split up by sections (i.e., all lending questions on one PDF)?  

If you are a NAFCU member and haven't used the Book of Answers, take a look (log-in required) and let us know what you think. 

As always, any and all feedback is appreciated.  Feel free to leave a comment on this blog post or email us: compliance@nafcu.org.

NCUA Amends Definition of Fleet for Member Business Loans; Outdated Guidance

Written by Steve Van Beek

Yesterday, NCUA issued Legal Opinion Letter 12-0764 which amends the definition of "fleet" for purposes of NCUA's Member Business Lending regulation - specifically the LTV ratio requirement under 12 CFR 723.7(e).  This is a welcomed change and one that NAFCU has advocated for in the past - including our 2011 Regulatory Review comment letter.

The amended definition of "fleet" applies when there are more than five vehicles:

"We found a wide variety in the number of vehicles that constitutes a fleet.  Among those many descriptions, however, we found that a range from five to ten vehicles was not uncommon.  We were particularly persuaded by Internal Revenue Service (IRS) publications on this topic and treatment of fleets by auto industry fleet programs.  The IRS, in addressing mileage rate deductions, refers to five or more vehicles as being a fleet operation.  In addition, a number of auto manufacturers generally use five as a base number for providing fleet discounts.  We believe this similar treatment by government and industry provides a reasonable basis to conclude that a minimum of five vehicles constitutes a fleet.  Also, we believe that increasing the number to five provides regulatory relief to most credit unions making vehicle MBLs without diminishing necessary safety and soundness precautions.  Accordingly, we believe five or more vehicles is an appropriate number to define a fleet for our purposes."

NCUA also went on to clarify and update the "business purpose" component of the "fleet" definition to require central control of business use for the purpose of transporting persons or property for commission or hire.  Thus, the updated definition of "fleet" is:

"Accordingly, we amend the definition of “fleet” as follows:  A fleet is five or more vehicles that are centrally controlled and used for a business purpose, including for the purpose of transporting persons or property for commission or hire."

As always, the full legal opinion letter is the best source for a full discussion and analysis.  

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Piles of Outdated Guidance.  We've blogged in the past about the regulatory burden caused by outdated guidance from regulators - including NCUA.  Yesterday's announcement gives NCUA a great opportunity to change their existing practice and further reduce the regulatory burden for credit unions.  How?  By going back to their 2005 legal opinion letter and clearly indicating it has been superseded by the 2012 legal opinion letter.  

Two years from now, if a credit union searches for "fleet" on NCUA's website - which legal opinion letter will come up first?  If it is the 2005 letter, will that letter clearly indicate that it has been superseded?  If not, a credit union may stop their research after finding the 2005 letter.  After all, the 2005 letter directly addresses the issue of what is considered a "fleet."  

Look to Other Regulators.  As we mentioned in our prior blog post, the OCC and the Federal Reserve already have procedures in place to clarify superseded guidance documents.  Or, check out this example from a past OTS guidance document.  

Hopefully NCUA takes these simple steps to prevent unnecessary regulatory burden in the future.  Credit union compliance officers work very, very hard to analyze and interpret current NCUA's regulations and guidance.  NCUA should work just as hard to help clarify which guidance and rules are applicable (the 2012 letter) and which are outdated (the 2005 letter).  

CFPB Consumer Complaint Database Continued; Hearing on SBA; BSA Webcast

Written by Michael Coleman, Regulatory Compliance Counsel

Yesterday, the Consumer Financial Protection Bureau (CFPB) launched its new Consumer Complaints Database for credit cards, you can read about the details of the Complaint Database in our blog post from yesterday. Note that the database will only contain information of credit unions directly supervised by the CFPB, those with over $10 billion in assets.

Regarding the purpose of the database, the CFPB stated that: "Our goal is to improve the transparency and efficiency of the credit card market to further empower American consumers." You can take a look at their policy statement for more details. The CFPB has proposed adding complaints to the database about other financial products and services in the near future. 

At the top of the Complaint Database site there is the following disclosure: 

"This contains data from the consumer credit card complaints received by the Consumer Financial Protection Bureau. We do not verify the accuracy of these complaints, but we do take steps to confirm a commercial relationship between the consumer and the identified company."

The purpose of the disclaimer is to let people know that what is listed in the database are complaints, but more importantly, that the CFPB is not asserting the validity of the complaint. You may be asking yourself "Well, isn't this like trying to unscramble an egg?" A good question. The disclosure of unfounded compliants could impact a financial institution's reputation - an issue that NAFCU strenuously raised in our comment letter to the CFPB. 

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Testimony on the Hill. Thursday June 21, 2012, Robert Marquette, president and CEO of Members 1st FCU in Mechanicsburg, Pa., and a NAFCU Board Member, will testify before the House Subcommittee on Investigations, Oversight and Regulations concerning credit unions' work with the Small Business Administration (SBA). You can read more about the upcoming testimony in this NAFCU Today article.  

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NAFCU's BSA Webcast.  Now is the perfect time to get your annual BSA training.  Check out NAFCU's June 27th webcast: BSA for Compliance Experts.  Sign up by TODAY, June 20, to Save $100!

Overdraft Extension; NLRB Notice Delay; MBL Appraisal Opinion Letter

Written by Steve Van Beek

A pretty eventful Spring so far as the CFPB seems to be hitting their stride.  Apologies for politely asking the CFPB to start issuing guidance - who knew they'd begin blasting out Bulletins left and right?  I guess that does show how complex and confusing the existing regulatory environment has become.

Below are a couple of quick items.  Additionally, if you didn't catch yesterday's free webcast with CFPB Director Cordray you can still view the on-demand version (just register first and then view).  

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Overdraft Comment Period Extended.  The CFPB issued a notice in today's Federal Register that it would be extending the comment period for its Overdraft Inquiry until June 29, 2012.  If your CU hasn't submitted comments yet, be sure to take this additional time to do so.  NAFCU's Regulatory Alert is here (12-EA-07) but feel free to send your comments directly to the CFPB as well.  

NLRB Notice.  The deadline for the National Labor Relations Board (NLRB) poster was scheduled for April 30th, 2012.  However, a recent court decision has delayed this requirement until further notice.  Here is from the NLRB's website:

"Important note: The DC Circuit Court of Appeals has temporarily enjoined the NLRB’s rule requiring the posting of employee rights under the National Labor Relations Act. The rule, which had been scheduled to take effect on April 30, 2012, will not take effect until the legal issues are resolved. There is no new deadline for the posting requirement at this time."   

Prior blog postings on this issue can be found here and here.  

NCUA Opinion Letter.  NCUA recently issued their third opinion letter of 2012 - this one on appraisals when selling a participation interest in a member business loan.  If your CU is involved in these types of issues it is best to review the full letter - 11-1126.    

Ask CFPB; Reg School; New MBL Bill; 5 Months

Written by Steve Van Beek

A couple of items for Monday morning.

Ask CFPB.  The CFPB announced a new initiative - Ask CFPB - which includes answers to over 350 common questions from consumers (mostly on credit cards and mortgages for now).  The CFPB's blog post is here and the press release is here.

For a split second I thought the CFPB might have taken a step to help regulated entities understand the confusing regulatory requirements.  Alas, we'll keep plowing through piles of cross-references and staff commentary to find the actual requirements. 

Regulatory Compliance School.  We had a great crowd at Reg School with over 150 attendees and 90 of those taking their NAFCU Certified Compliance Officer (NCCO) exams.  Here are a couple of NAFCU Today stories on School:  March 20 (with photo) and March 26.

For those who took the NCCO exams, we hope to have the results to you by the end of this week.  

MBL in Senate.  The Small Business Lending Enhancement Act was reintroduced in the Senate last week as S. 2331.  The new bill is identical to S. 509 but was reintroduced due to procedural reasons which might allow a vote in a shorter period of time.  The NAFCU Today has news stories from last Thursday and Today.    

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Last Friday marked 5 months since our wedding.  I wanted to put together a "Top 5 Things I've Learned" list but it really just comes down to one thing:  Happy Wife, Happy Life.

NAFCU Today: On the Hill; Derivatives; CFPB Expands Complaint Program

Written by Steve Van Beek

As we mentioned on Friday, the NAFCU Compliance Team will be in and out of the office this week as we'll have nearly 150 compliance officers in town for our Regulatory Compliance School.

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NAFCU Today.  I wanted to pass along a couple of recent stories from the NAFCU Today which is written by NAFCU's Communications Team.  If you or someone at your organization wants to receive this daily news feature, you can subscribe to the NAFCU Today here.

As with the Compliance Blog, the NAFCU Today is open to everyone that is interested in learning more about issues impacting credit unions.

Member Business Lending.  Grassroots efforts initiated to urge support of S. 509 - the Small Business Lending Enhancement Act.  

Exam Bill.  Senate bill S. 2160 has been introduced.  This bill is a companion bill to H.R. 3461 and would bring additional transparency and consistency to bank and credit union examinations.    

CFPB Complaints.  The Consumer Financial Protection Bureau has recently expanded their complaint process and are now accepting complaints on consumer checking accounts and private student loans.  

Note:  All the links below will take you to recent NAFCU Today stories.  To see the March 12 edition of the NAFCU Today, you can go to the NAFCU homepage.  

Regulatory Compliance School; NCUA Board Meeting & NCUA Report; Division 3 Update

Written by Steve Van Beek

Just wanted to provide a short note regarding next week.  

Reg School.  NAFCU's Regulatory Compliance School takes place next week.  Our Compliance Team will be in and out of the office next week giving presentations, so please bear with us as our response times will be a little longer than normal.  The blog will continue as usual.  

Study Guide & GPS.  For those attending school next week, we've put together a handy Study Guide to help if you will be taking the exams to obtain your NAFCU Certified Compliance Officer (NCCO) designation.  Additionally, be sure to download your version of the Updated 2012 NAFCU Credit Union Compliance GPS (you will also receive a hard copy of the GPS at School).

Note:  For those not attending Compliance School, the Updated GPS will be available for purchase very shortly.  Blog readers will be the first to know when the Updated GPS is available.    

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NCUA Board Meeting.  Late yesterday, NCUA announced their agenda for next Thursday's NCUA Board Meeting.  You can find the agenda here.

NCUA Report.  NCUA also released their March 2012 issue of the NCUA Report.  This looks to be a good one to read, here is what is discussed:

• Chairman Matz's Corner: CFPB Director Cordray Answers Key Questions on NCUA Webinar 
• Building Wealth and Deposits: An Opportunity for Credit Unions – Individual Development Accounts, Part II
• Board Perspective: Interest Rate Risk Policy and Program
• Board Perspective: The Rites of Spring
• Understanding Credit Union Indirect Lending Programs
• Elements of an Effective Member Business Lending Program
• Trends in Member Complaints and Consumer Inquiries

Quite a few of those look like good reads.  Be sure to pass those along to others at your credit union who might be interested.  

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A quick update on the potential Division 3 basketball matchup between Hope College (my alma mater) and the College of Wooster (my wife's alma mater).  Wooster held up their end of the bargain but Hope fell in double-overtime.

I was really hoping for this matchup as I thought it would be a lot of fun.  I can't say the same about my wife.  Wooster's game finished a good half hour before Hope finally lost.  She spent the majority of that time on the phone with her Dad - who works at the College of Wooster - discussing the potential matchup and rooting against Hope.  As she so elegantly stated it:  "I want Wooster to win and that means Hope needs to lose, so be it."