NAFCU Compliance Blog

Some Thoughts on Regulations; Give Them What They Want

Posted by Anthony Demangone

Yogi Berra is a smart man.  This is one of his best observations.

Baseball is 90 percent mental.  And the other half is physical.

That is actually true, for anyone who has played the game.  I think Professor Berra was on to something. A similar calculation could be used for regulations. 

Ninety-percent of regulatory burden is made up of all the rules and regulations.  The other half is how those rules are written.

One of these days, someone is going to reinvent how regulations are drafted and presented.  If they get it right, I think it will be a win-win.  The regulations will be easier to read and understand.  And that will lead to greater compliance.  Usually, the goal of a regulation is to solve a simple problem.  If regulators can come up with simple, creative ways to solve that problem, everyone will be better off. 

Here are two examples off what I mean. 

1.  The CARD Act and Regulation Z. When the CARD Act became law, it mandated that the Fed issue a number of credit card-related regulations.  Those were issued in three waves.  The first proposal totaled more than 800 pages (ultimately 241 in the federal register) of dense regulatory language.  We spent a lot of resources helping our member figure out how to break the rule down into readable portions. (When someone can add value by helping someone else figure out how to read a regulation you've written, you may have a problem.) Over the course of the next year, additional proposals and clarifications were issued.  

And it continues.  Just last month, the Fed issued another "clarification" to clear up a hand-full of CARD Act-related issues.  The length of that clarification totaled more than 300 pages.  
 

2.  Unnecessary complexity.   MDIA has created an interesting discussion that has reached the level of complexity needed to launch a rocket into space.  What is that issue? If you overstate the loan's APR in your dwelling-secured loan's disclosures, must you re-disclose your MDIA disclosures under Regulation Z?  You'd think this would be a simple question.  But it is not.  I won't bore you with the bloody details.  But if you want to see the complexity - read this article issued by the Fed.   

To paraphrase Allen Iverson, we're talking about an overstated APR.  An overstated APR. A creditor in this situation has disclosed an APR to the member that ends up being higher than what the member will get.  The member will get a lower APR when the loan is consummated. In many cases, the member is no better or worse off - they pay the same amount. But in some cases, the lender must halt the process, re-disclose, and then wait for the necessary time before the loan can move to closing.

This could have been regulated a different way.  How about this general rule? If you overstate the APR, no harm, no foul. No need to re-disclose.  Just let the member know at closing what the new APR is.  If the member proceeds to closing, they surely didn't mind the higher APR.  And for those who think that this creates a perverse incentive to inflate costs to err on the side of overstating the APR, thereby erasing the need for re-disclosure, Adam Smith is rolling over in his grave.   Market pressures will demand that they get that as close as possible.  If it is too high, they'll lose mortgages at the margins to other lenders.

These were just two examples of how the regulatory system seems to be breaking down.  When it takes hundreds of pages to explain one provision of a rule, be it a provision of the CARD Act or MDIA, it may be time to come up with a different rule altogether. 

Here's a thought.  

What if financial organizations could create their consumer disclosures using a risk-based system that is based on their products and services.  The regulation could come up with certain over-arching goals, such as clarity of disclosures, and certain prohibited practices.  But beyond those basic requirements, each organization would have to defend its disclosures and advertisements against basic principles: Is this disclosure or advertisement easy to understand? Does it accurately describe the features and costs of the account or service? Can we say (with a straight face) that it would not mislead or confuse the average consumer. 

What do you guys think?

*** 

Give them what they want?  Well, during compliance school, more than a few of you approached me and said something like this

Yes, we like the compliance stuff...but we really like pictures of your kids.

I understand completely. And with that in mind...

They just had their 2-year check up.  Kate is now 3 foot, one inch tall.  Briggs is a clean three feet.  They both weigh just under 26 pounds.  Kate is in the 99th percentile for height.  Briggs is in the 86th percentile.  Come on, growth!  The Demangone side of the gene pool never saw 6 feet, to the best of my knowledge.  I look forward to when my kids can look down on me.

Have a great weekend, everyone!

Mortgage Loan Origination Compensation Rule Delayed; Interchange; MDIA; CREF?

 Posted by Anthony Demangone

Happy Monday, folks.  Thanks for the wonderful emails about baseball, and I apologize for any of you who took my April Fool's Day joke too seriously.  In any event, I welcome any and all feedback from y'all.  Don't hesitate to reach out.

Here's a few nuggets to start your week. 

Mortgage Loan Origination Compensation Rule Delayed.  Reportedly, the National Association of Mortgage Brokers (NAMB) was successful in having the Federal Reserve's mortgage loan originator compensation rules delayed. In short, the U.S. Court of Appeals for the District of Columbia granted a stay that delays the implementation of this rule.  I wouldn't read more into this than what it is.  The court has basically said that NAMB has met enough of a burden for the court to hear additional details.  The government will have a chance to reply, as well NAMB.  The rule is not thrown out or invalidated.  The court is just buying a bit of time to gather additional information before it makes a final decision.  I wouldn't go dancing in the streets.  Stay tuned.

Interchange. You may want to share this website with your members: www.saveyourdebitcard.com.  The website makes it very, very easy for folks that are concerned with the Durbin Amendment to contact their Members of Congress about the issue.  And just in case you missed it, Mr. Bernanke indicated that the Fed will miss the April 21 deadline by which it had to get out a final debit interchange rule. 

Consumer Compliance Outlook.  The newest issue is out.  There's on article I'd like you to read, especially if your credit union does mortgage lending.  Under MDIA, when might you have to give corrected disclosures for an overstated APR?  Read this article. 

Commercial Real Estate Fraud.  FinCEN has released this advisory which alerts readers to possible signs of commercial real estate fraud.   The advisory also gives tips on SAR filings related to this.  The new acronym of the day? CREF. If your credit union does commercial real estate lending, you simply must read this.

***

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Mortgages; Happy Birthday Kate and Briggs!

Posted by Anthony Demangone

A few of us were chatting around the office the other day, and the subject of mortgages came up.  We quickly began shaking our heads.  On one hand, many people are chewing out financial institutions for not making enough loans.  And the government has spent the last few years doing what it can to prop up the U.S. housing market.  All the while, credit unions and other mortgage lenders are getting pounded from every conceivable direction.  Just think about the following.

Regulation Z.  MDIA disclosures were put in place.  Then there was the mortgage loan sale or transfer notice regulation..  In case that wasn't enough, along came a rule on mortgage loan originator compensation.  Those MDIA disclosures?  They were amended. Requirements regarding higher-priced mortgage loans were put in place.  And then new HPML loan requirements for jumbo mortgages were announced.  In that same announcement, the Fed issued a proposal that would amend the first set of HPML requirements. And don't tell me that they tweaked that MDIA disclosure again?  Oh, and the entire system of disclosures for closed end mortgages and HELOCs are in the process of being amended.  The CFPB will pick that process up sometime in the future. 

SAFE Act.  Need I say more? 

RESPA.  The GFE and HUD-1 were completely overhauled.  And the CFPB announced that they want to rework the disclosures as soon as they gain their official powers.

Appraisals.  First, a state Attorney General from New York manages to ink a deal with Fannie and Freddie that practically changed appraisal requirements for the entire country.  Then regulators, including NCUA, issued their interagency appraisal and evaluation guidelines, which completely overhauled just about every aspect of the appraisal process.  And the Fed has issued its appraisal regulation.  All of these requirements have mortgage lenders jumping through hoops - many of which appear to complicate the process without ensuring any benefit to the housing system. 

GSEs.  The future of GSEs are on the line. Congress and the Obama administration are trying to craft solutions to deal with these entities, all the while, leaving a great deal of uncertainty for credit unions that need access to some sort of secondary market for liquidity and interest rate risk management. 

Servicers.  Add to all of this a recent development.  State Attorney Generals crafted an agreement/settlement offer sheet for the largest mortgage lenders in America.  While this on the surface doesn't directly affect credit unions, many of the agreement's requirements may find their way into regulations and guidance documents or become industry servicing standards.  Some of those provisions are quite onerous, such as one that raises the issue of cram downs. 

Dodd-Frank. Provisions in Dodd-Frank will likely increase downpayment requirements for many mortgage loans. 

CFPB.  As noted above, Elizabeth Warren has indicated that one of the CFPB's first priorities will be to overhaul mortgage disclosures.  Combining TILA and RESPA disclosures is not necessarily a bad thing, but given everything we've gone through already, a break might be nice. 

Market Forces.  Oh, lest we forget.  Mortgage values are down, there is talk about a partial elimination of the mortgage interest deduction, and mortgage rates will likely increase in the not too distant future.

So, if you work with mortgages and someone wants to know how "work is going," feel free to send them this post. The pace and amount of change in this area has been practically unmanageable.  There is so much risk and uncertainty, I wonder if some lenders will simply decide to exit the mortgage market altogether.  All of this uncertainty and change also creates another problem - it tends to favor large organizations who can throw oodles of compliance and legal resources at the problem. Smaller shops may eventually leave the market or merge themselves out of existence.  Wasn't there a cry about ending "too big too fail?" 

Oh, and feel free to share this with your Congressman if he or she wants an example of regulatory burdens faced by credit unions. 

***

Speaking of the rapid pace of change, Kate and Briggs turned two today. Looking back on these two years, well, the words just escape me. It is hard to describe the effect they've had on my life. 

 

 

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.

There's No Substitute for Reading; This and That

Posted by Anthony Demangone

As we look toward 2011, here's another thought. Read.  

A good compliance officer has to devote some time each day for reading.  The reading list might include new regulations, guidance documents, blog postings, newsletters, and the like.  Background reading is a must.  If you ignore it long enough, you'll eventually say things such as..."When did NCUA issue that?"  Hopefully not last year. 

Here are some thoughts along those lines:

• Turn off the phone, and shut your door.  Give yourself the right reading environment, or the time you spend reading may end up being time wasted.
• Perhaps one day a week, come in early.  I've found that I can accomplish more between the hours of 6 and 9 a.m. than I can the rest of the day. 
• If something is interesting, but not time sensitive, add it to a reading list or pile.  When time presents itself, which may be in 2014, pick up the pile and start digging through it. 

I don't think you'll ever have enough hours in the day to read everything that you want, but the more time and effort you can devote to this task, the better off you'll be. 

***

Here are some other items of interest:

OFAC.  They recently issued civil money penalties against two financial institutions. 

Regulation Z.  Last week the Fed issued an interim final rule to clarify a few issues regarding another recent interim final rule regarding MDIA requirements. 

Interchange.  Hey NAFCU members, we've created an overview of the Fed's recent proposal concerning debit card interchange fees.  

Credit cards?!?; Fiduciary Duties

Posted by Anthony Demangone

Imagine you are setting up the CFPB.  Your The Agency has the ability to regulate virtually any financial product or service.  Finally, a federal regulator can address the practices of payday lenders or check cashers. You can "level the playing field" by taking a close look at all of the entities that offer financial products and services that were once off the radar.  Elizabeth Warren is now busy setting up her the CFPB, and she gets to make that choice.  So what will be the CFPB's first priority? 

According the American Banker (subscription required), she'll focus on (wait for it...wait for it) credit cards. You have to be kidding me.

• Congratulations, Ms. Warren.  You are directing the CFPB's scarce resources to overhaul the one product that has received the most consumer-related attention in recent memory.  The ink is barely dry on the Credit CARD Act, and you're chomping at the bit to dive back in. Credit unions and banks are still writing checks to outside vendors and computer programmers for all the work that was done to periodic statements and core processors to bring them into compliance with the three sets of regulations needed to implement the Credit CARD Act.  Keep in mind that this process isn't even over yet, as the Fed recently issued another proposal to clarify issues related to credit cards.  
• This latest development must be depressing for credit union compliance officers.  We hear from government officials again and again and again that "we understand that credit unions didn't cause the problem."  That sounds nice, but it doesn't change the following.  Credit unions, you just overhauled credit card disclosures.  Get ready to do it again. Credit unions, you just overhauled mortgage disclosures, specifically related to RESPA and MDIA requirements. Get ready to do it again.  And then again.  The Fed is busy overhauling its mortgage disclosures, and then the CFPB will overhaul them again, creating one set of disclosures where Reg Z and RESPA used to mandate two. 
• For those who thought the CFPB would not create enormous new burdens for credit unions, I hope they take a fresh look at their position.  The decision to focus on credit cards first makes is very disappointing.  It is the one area that was completely overhauled.  Why not first focus on formerly unregulated entities? That would have the “level the playing field” effect of making them operate under the same regulatory requirements which credit unions adhere to already.  Also, Ms. Warren should keep in mind that with the Fed’s recent proposal, the Credit CARD Act’s final requirements are set in stone yet.  Acting to amend the rules so quickly seems premature. This simply reaffirms NAFCU's decision to oppose the CFPB's oversight for credit unions, regardless of asset size. 
• I also find it a bit presumptive for Ms. Warren to indicate what the CFBP will focus on first.  I would let the Senate-confirmed director make such statements. 
• Finally, when Elizabeth Warren talks about consumers getting into trouble with their credit cards, she always points at lenders.  Leave it to Saturday Night Live to highlight the other side of the story. (Video.)

***

We now expect NCUA to finalize its Fiduciary Duties regulation during its December 16th board meeting. 

***

Have a great weekend, everyone. Even you Hoosier fans. 

The Federal Reserve - Busy Beavers

Posted by Anthony Demangone

Just when I thought I was out, they pull me back in. - Michael Corleone, Godfather III. 

As I looked at my calendar, I saw a nice window of relaxation.  The Credit CARD Act madness was about to simmer down, and there was not a major regulatory migraine on the horizon.  Then I checked my e-mail.

Yesterday, the Fed dropped a number of major rulemakings that address mortgage-related compliance issues.  Below, I have a number of bullet points that describe the different rulemakings.  I had thoughts about providing short descriptions of each rule, but then this post would be almost too long to read. Your homework assignment is to click on each link and, at least, read the Fed's description of the rule in question.  Some are proposals, and some are final rules.  We'll get into the details in future blog entries. NAFCU Members: we are working on Regulatory Alerts and Final Regulations for these rulemakings.  For now, here's what they did:

• They issued a new set of proposed changes (930 pages) to Reg Z to enhance consumer protections for closed end mortgages, reverse mortgages and HELOCs. We'll have 90 days to comment once the proposal hits the Federal Register
• They issued an interim final rule (71 pages) to amend Reg Z to implement MDIA provisions.  The rule will require credit unions to disclose how the mortgage payment can change over time.  We'll need to comply with this for applications received on or after January 30, 2011.
• The Fed announced a final rule (63 pages) concerning mortgage sale and transfer notifications.   The Fed has issued interim final rules in this area back in November 2009.  Credit unions can follow the interim final rule guidance until this compliance deadline kicks in - which will be January 1, 2011.
• The Fed also issued a final rule (113 pages) to address mortgage loan originator compensation.   This deadline goes into effect April 1, 2011.
• The Fed also issued a proposal (16 pages) to revise escrow requirements for higher-priced, first-lien "jumbo" mortgage loans. We'll  have 30 days to comment once this hits the Federal Register.

That's 1,193 pages of regulatory text to sift through.  Happy sifting, everyone.

Grab Bag

Posted by Anthony Demangone

Here are a few items of interest.

• HUD has issued a number of civil money penalties against financial institutions.  In addition, HUD has settled allegations of non-compliance with several others.   The number of items in this notice makes me wonder whether HUD's enforcement office has been pressed to kick it up a notch.
• Speaking of HUD, NAFCU is hosting a webcast this Thursday.  Barton Shapiro, Deputy Director for RESPA and Interstate Land Sales from HUD will be one of the speakers. If you have concerns with the looming compliance deadline, this might be right up your alley.  Sign up here.
• NAFCU Members: Don't forget about our "Year-End Review," a NAFCU member-only conference call on Thursday, Nov. 19, from 4-5 p.m. EST. NAFCU President Fred Becker and the association's senior staff will report on the latest developments in Washington affecting credit unions. Our Call-In is free, but you must register to participate. Call our Member Service Center at (800) 344-5580 or (703) 522-4770; or you may register online at http://www.nafcu-training.org/callin.
• NCUA has issued Regulatory Alert 09-RA-12 to highlight recent changes to Regulation D regarding reserve requirements.
• NCUA has issued Regulatory Alert 09-RA-11 to remind us about recent changes to Reg Z closed end lending brought about by MDIA.  Old news, right?  Not quite. The Reg Alert also contains the new questionnaire that NCUA examiners will use to measure your compliance.   
• Finally, this caught my eye when reviewing the Reg Z open end proposal.  File this one under: paternalism.

As you may recall, credit card lenders will have to make disclosures regarding the cost if consumers only make the minimum payment on their balance.  If the estimated payoff time is less than two years, it can be disclosed in months.  If it is more than two years it must be disclosed in years AND rounded to the nearest year.  But, here is what caught my eye.

“The Board believes that disclosing the estimated minimum payment repayment period in years (if the estimated payoff period is 2 years or more) allows consumers to better comprehend longer repayment periods without having to convert the repayment periods themselves from months to years.”

There are so many things I want to type right now.  But I won't. (Sigh.)

HOEPA - Sections 226.17 .19; This and that

Posted by Anthony Demangone

I'll handle these two sections rather quickly.  As I mentioned earlier, the Fed first issued their HOEPA regulations in 2008.  But then Congress passed MDIA, which overtook the HOEPA regs in several areas.  Well, the overlapped areas affect the two sections noted above in this post's title.

Sections 226.17 (general disclosure requirements) and .19 (certain mortgage and variable rate transactions) were amended by the Fed in 2008, but were superseded by the MDIA amendments to Reg Z.  When you begin working toward compliance for HOEPA, remember this important distinction.  The FDIC created thisgreat side-by-side chart that details how MDIA widened and strengthened the disclosure requirements.

With all the important compliance work we're going to have to do, I didn't want you heading down alleyways that are no longer relevant.

***

Here are a few things kicking around my in-box.

• Prescreened offers are important.  Just ask this mortgage company that forgot to include the all-important prescreen opt-out notice.   A mistake that cost them $20,000.
• NCUA issued a legal opinion recently offering guidance to a credit union that was trying to offer loan servicing and collection services to a non-profit entity.    It is an interesting read, as it brings up a credit union's charitable donation powers in a way that had not occurred to me.  The letter also offers guidance relating to nonmember services and CUSOs.
• FinCEN issued a ruling to issue guidance on this situation: what do you do when four customers/members get together to have an armored car service to deliver cash to your institution in amounts greater than $10,000?  Well, I won't answer that question, because it is fairly complicated - and the ruling does a good job of walking you through the process.  But here's a great idea for training: ask a group of tellers how they would treat the transaction, and see if the come up with the same answer as FinCEN.  (Just don't tell them that it was my idea.)
• The OCC has issued an updated version of its "Other Consumer Protection Laws and and Regulations.  While not every reg in the massive document apply to federal credit unions, many do.  And there are audit checklists for each one.  Two words for this, my friends.  Good stuff.

Have a great weekend, everyone.