NAFCU Compliance Blog

June 2013 NCUA Report

Written by Michael Coleman, Regulatory Compliance Counsel

NCUA Report. The June 2013 NCUA Report is now available, you can find it here. This month's issue covers: 

• Board Proposes Limited Derivatives Authority to Manage Interest-Rate Risk
  
• Chairman's Corner: A Surprising Success Story
  
• Board Actions: Board Approves Amendments to Agency Regulations and Issues Proposed Rule on Derivatives 
• Board Perspective: It's Time for Congress to Act
  
• Office of Consumer Protection Report: Hurricane And Disaster Preparedness for Credit Unions
  
• Office of the Chief Economist Report: First-Quarter 2013 State Data Show Growth in Loans, Assets and Membership
• Region V Report: Loan Servicing Discrepancies
• Office of Small Credit Union Initiatives Report: 2013 Grant Initiative Application Period Begins June 17
  
• Office of Consumer Protection Report: Help Your Members Become Prepared Financially for Hurricane And Severe Weather Season
• Fastest First-Quarter Loan Growth in 5 Years

As always, the report includes some interesting articles and information. In this issue's "Board Perspective" section, NCUA Board Member Michael Fryzel calls on Congress to act on pending legislation concerning raising the member business lending cap, as well as legislation concerning supplemental capital. Here are a couple excerpts from the article: 

"The Credit Union Small Business Job Creation Act of 2013 (H.R. 688) introduced in the House Representatives in February, and the Small Business Lending Enhancement Act of 2013 (S. 968) introduced in the Senate in May, would provide the much needed increase in the member business lending cap. In addition, the proposed legislation spells out strong criteria that credit unions, who are aggressive member business lending participants, must meet. With the passage of this legislation in its current form and with proper regulations in place, credit unions will be able to provide the much needed funding for small business expansion and improved economic growth. It’s time for Congress to act.

There is also proposed legislation on alternative capital sources. The Capital Access for Small Business and Jobs Act (H.R. 719), introduced in February, would permit credit unions to utilize uninsured, non-share accounts to supplement capital. In addition, the bill would stop an unfortunate practice that has become all too common—credit unions turning away deposits to protect their net worth ratios."

NAFCU supports H.R. 688 and S. 968, as well as H.R. 719. Check out NAFCU's issue brief on member business lending (scroll down to see NAFCU's numerous comment letters on the issue), and our issue brief on supplemental capital (including this support letter for H.R. 719). We hope that Congress heeds Board Member Fryzel's call to action! 

NCUA Webinar on Credit Union Collaboration; Town Hall Webinar

Written by Bernadette Clair, Regulatory Compliance Counsel

NCUA Webinar on Credit Union Collaboration. NCUA’s Office of Small Credit Union Initiatives (OSCUI), is hosting a free webinar featuring OSCUI Director Bill Myers, Guy Messick and Jack Antonini of the National Association of Credit Union Service Organizations, Ben Rogers of the Filene Research Institute and Crissy Ortiz of Optimal Talent Solutions.

The webinar will focus on how collaboration, especially among small and low-income designated credit unions, can be used to:

• Reduce operating expenses and encourage growth in membership and products and services;

• Access financial resources through OSCUI’s grant programs;

• Assist with succession planning and find new managerial talent;

• Develop performance metrics and establish benchmarks for success; and

• Maintain a credit union’s viability in a rapidly evolving financial services industry.

This free webinar will be held on Tuesday, June 25, at 2 p.m. EDT. Register here.

Participants may submit questions in advance at WebinarQuestions@ncua.gov. The subject line of the email should read “Credit Union Collaboration.”

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NCUA Town Hall Webinar. NCUA will also be hosting a town hall webinar featuring NCUA Chariman Debbie Matz on Thursday, July 18, at 3 p.m. EDT.   Registration is free and available here.

The webinar will feature updates on:

• Credit union industry performance;

• NCUA’s Regulatory Modernization Initiative and efforts to provide regulatory relief;

• NCUA’s proposed rule on derivatives;

• Emerging industry risks;

• Low-income credit unions;

• Emergency liquidity and the Central Liquidity Facility; and

• Guidance on credit ratings and risk management.

Participants will be able to ask questions during the webinar, but can also submit questions in advance at WebinarQuestions@ncua.gov, using the email subject line “NCUA Town Hall.”

NCUA Finalizes Technical Amendments on Privacy; SAFE Act & Share Insurance

Written by Steve Van Beek

Last Thursday, NCUA issued a final rule which made numerous technical corrections to NCUA's regulations. Of note are three that had caused continued confusion for compliance officers of credit unions:

• NCUA's Privacy Regulation - 12 CFR 716

• NCUA's SAFE Act Regulation - 12 CFR 761

• Share Insurance Coverage of Noninterest-bearing Transaction Accounts - 12 CFR 745.14

Privacy & SAFE Act. NCUA lost authority for both privacy and the SAFE Act on July 21, 2011 when regulatory authority transferred to the CFPB and the technical amendments add cross-references to the CFPB's regulations which credit unions must follow. Here is from the final rule:

"In 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act substantially changed the federal legal framework with respect to consumer financial protection regulation. Among the many changes, title X of the Dodd-Frank Act transferred to the CFPB NCUA’s rulemaking authority under the Gramm-Leach-Bliley Act and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.

…

To assist federally insured credit unions, the rescinded parts of NCUA’s regulations will retain their original heading and be amended to include a cross citation to the CFPB’s republished version of the regulation."

NCUA's regulations will be updated with the cross-reference after the final rule is published in the Federal Register. The CFPB’s privacy regulation is 12 CFR 1016 and the SAFE Act regulation is 12 CFR 1007.

Share Insurance. The third amendment I wanted to highlight - the amendment to NCUA's Share Insurance regulation - was one that NAFCU had asked for numerous times since December 31, 2012 (including our "Update the Regulations, Please!" blog post). Here is NCUA's summary of their amendment:

"Section 343 of the Dodd-Frank Act provided that, on a temporary basis, NCUA would fully insure the net amount that any member or depositor at an insured credit union maintained in a noninterest-bearing transaction account. NCUA amended part 745 of its regulations to implement these temporary statutory changes through a final rule that became effective on June 24, 2011. Consistent with the sunset provisions in Dodd-Frank Act section 343(b)(3) and §745.14 of NCUA’s regulations, NCUA is rescinding its regulations implementing the temporary expanded insurance coverage granted under Dodd-Frank Act section 343(b)(1). In particular, the rule removes the definition of “noninterest-bearing transaction account” in §745.1(f), and removes §745.14 governing noninterest-bearing transaction accounts. The Board notes, however, that these accounts continue to be insured under other provisions of part 745."

The unlimited share insurance coverage for noninterest-bearing transactions accounts expired on midnight on December 31, 2012. This change should also be reflected in the Electronic Code of Federal Regulations after the final rule is published in the Federal Register.

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Programming Note: NAFCU's offices will be closing early today and we'll also be closed on Monday for the holiday. 

We'll be back blogging on Tuesday - have a great weekend!

NCUA's Derivatives Proposal; Can't Help Myself

Written By JiJi Bahhur, Regulatory Compliance Counsel

Today, the NCUA Board issued a proposed rule to provide qualified credit unions limited authority to engage in derivatives activities for purposes of mitigating against interest rate risk (IRR). But, the proposal establishes a “pay-to-play” regulatory scheme for credit unions that are permitted to engage in derivatives activities. I’ll get into that in a moment. 

First, I should probably give some background on what derivatives are and what NCUA is proposing. NCUA has created a Q&A document addressing this, among other things.  From the Q&A document:

“Q.1: What are derivatives? What kinds of derivatives is NCUA proposing to allow for credit unions?

The Commodities Futures Trading Commission (CFTC) broadly defines a derivative as: “A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., “derived from”) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They can be used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps.”

While the term “derivatives” covers a broad spectrum of financial instruments in today’s market, NCUA is only recommending authorizing the use of plain-vanilla, US Dollar-denominated (USD) interest rate swaps and purchased-only interest rate caps. These instruments are widely transacted in today’s capital markets, have deep and transparent pricing and afford end users with strong liquidity and execution. The Bank for International Settlements reports that interest rate swaps are the largest component of the global over-the-counter (OTC) derivatives market.

With regard to interest rate swaps, the NCUA Board is proposing to authorize only standard “pay-fixed/receive-floating” and “pay-floating/receive-fixed” interest rate swaps. It is currently anticipated that most interest rate swaps users would enter into “pay-fixed/receive-floating” transactions to hedge against rising interest rates. This “plain vanilla” interest rate swap affords some protection against the most common interest rate exposure experienced by credit unions with material interest-rate risk (IRR) sensitivity—namely, a balance sheet with an asset portfolio that does not reset to external rate changes as quickly as its liabilities. Most credit unions use non-maturity and other short-term shares to fund longer duration assets, creating an inherent re-pricing mismatch for which pay-fixed/receive-floating interest rate swaps can provide some effective mitigation.”

Eligible credit unions seeking derivatives authority must submit an application for one of two levels of authority.  Level I authority contains more stringent limits, including limits to the notional value of interest rate swaps, aggregate book value of interest rate caps, combined limit of interest rate swaps and caps, and the maximum weighted average life of all derivatives transactions cannot exceed 5 years.  Level II authority has fewer limits, but credit unions that seek Level II authority must show why the Level I limits are not adequate to meet their IRR mitigation needs.

So what’s the catch? You have to “pay-to-play.”  The proposed rule calls for application fees and pretty hefty ones at that.  Level I application processing costs would range from $25,000 to $50,000 and Level II applications would range from $75,000 to $125,000.  If that’s not bad enough, there is an associated fee for every year after that. 

NAFCU has long advocated for expanded investment authorities for credit unions, but the "pay-to-play" proposal raises concerns as this would be the first time “pay-to-play” will be required in the credit union industry. 

The proposal can be accessed here.  NCUA’s Q&A document – which provides an understanding of the rule’s intent and the main contents – can be accessed here.  Also, NAFCU’s Regulatory Affairs team is in the process of drafting a Regulatory Alert (NAFCU Member Log-In required) on this proposal so keep your eyes peeled for that. 

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I just had to share these pictures with you all.  Have a great weekend.

NCUA Report: Electronic Banking Threats and Security

Written by Bernadette Clair, Regulatory Compliance Counsel

One of the articles in NCUA's May 2013 Report, takes a look at Electronic Banking Threats and Security. The article reminds credit unions to be diligent in safeguarding member information and ensuring proper security and controls when offering E-banking services, such as internet banking, phone banking, mobile banking, etc. (Exam Tip: According to the article, NCUA examiners have received updated training on E-banking security and have been instructed to review these areas in more detail during exams.)

The article highlights guidance from the regulators related to E-banking. From the article:

"In October 2005, the Federal Financial Institution Examination Council (FFIEC) issued guidance entitled Authentication in an Internet Banking Environment. The guidance provided minimum supervisory expectations for effective authentication controls related to high-risk online transactions involving access to customer information or the movement of funds to other parties.

In 2006, NCUA issued a Letter to Credit Unions, No. 06-CU-13, to aid in the implementation of the authentication guidance and provided answers to frequently asked questions. The letter reinforced the risk-management framework specified in the FFIEC’s earlier letter and updated supervisory expectations for effective member authentication mechanisms, layered security and other controls to combat identity theft, cyber attacks and online transaction fraud.

A 2011 Letter to Credit Unions, No. 11-CU-09, reflects a more layered approach to risk-management, and includes annual risk assessments for E-banking services. It discusses minimum monitoring requirements at initial login and for funds transfers, as well as additional guidance on challenge question authentication techniques. The letter also has valuable information about new expectations for customer awareness programs, as well as, recommendations for increased scrutiny of commercial accounts.

In February 2013, NCUA issued additional guidance in the form of a Risk Alert, 13-Risk-0[1]. The Alert encourages risk mitigation strategies, against DDoS attacks such as: 

• performing risk assessments aimed at identifying risks associated with DDoS attacks;
• ensuring incident response programs include DDoS attack scenarios during testing; and
• performing ongoing third-party due diligence of Internet and web-hosting service providers to identify risks and implement appropriate traffic management policies and controls."

Here are links to the guidance documents referenced  in the excerpt above:

FFIEC’s Authentication in an Internet Banking Environment

NCUA Letter to Credit Unions, No. 06- CU-13

NCUA Letter to Credit Unions, No. 11-CU-09

NCUA Risk Alert, 13-Risk-01

See the article for additional details and guidance resources.

NCUA Report; FinCEN SAR Activity Review

Written by Bernadette Clair, Regulatory Compliance Counsel

The May issue of the NCUA Report is now available. This issue includes the following:

• Office of Examination and Insurance Report: Demystifying Capital Requirements for Credit Unions – Part 2

• Chairman’s Corner: Secure Liquidity Sources While the Sun is Shining

• Board Actions: Share Insurance And Stabilization Funds Remain on Sound Footing

• Board Perspective: Everyone Comes Out a Winner

• Electronic Banking Threats and Security

• Mobile Banking Offers Credit Unions New Ways to Attract Members, Offer Value

• Deadline for Consulting Service Nominations is May 31

• FFIEC Appraisal Complaint Hotline Opens

• NCUA Discontinues Mailing Regulatory Letters to Credit Unions; Will Send by Email Instead

There are a few good reads in this issue, and we’ll take a closer look at Electronic Banking Threats and Security tomorrow.

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FinCEN SAR Activity Review.  FinCEN has released its 23^rd Issue of the SAR Activity Review – Trends, Tips & Issues, as well as the 18^th Issue of the SAR Activity Review – By the Numbers. These two reports are an excellent source of information on the latest trends and numbers in suspicious activity reporting.

NCUA Report: Q&A with Director of NCUA's Office of Consumer Protection; Free NAFCU Webcast

Written by Steve Van Beek

Last Friday, I blogged about the 2013 HMDA Getting it Right! Guide. The importance of accurate HMDA data was also emphasized in the April 2013 NCUA Report. The newsletter includes a Q&A with Gail Laster, Director of NCUA's Office of Consumer Protection - including these two Q&As:

"Q: What are some of the major fair lending compliance issues you are seeing?

A: One major fair lending compliance issue that we're seeing involves the quality of Home Mortgage Disclosure Act (HMDA) reports. HMDA data serves an important purpose for [NCUA's] fair lending examiners and the public. It lets us confirm that all Americans are getting equal access to credit to help them fulfill one of our fundamental rights - the right to own property.

To address the data quality issue, we hosted a webinar in January that explained the process for submitting HMDA data and reviewed some of the most common errors credit unions make when completing the HMDA reports. [The webinar is available here]. 

Q: Can these kinds of data errors raise red flags?

A: Although we find most data reporting errors are unintentional, there are cases where the errors are symptoms of other weaknesses in lending processes or internal controls. Poor HMDA reporting can raise concerns about compliance with disclosure requirements associated with mortgage loan applications. It also makes it difficult to evaluate whether a financial institution is complying with fair lending laws.

Poor HMDA data is also an indicator of a lack of due diligence or a need for more training on the collection of mortgage loan application data or reporting procedures."

You can view the full Q&A here.

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Free NAFCU Webcast.  On May 8th, NAFCU will be hosting a free webcast on NCUA's Office of Consumer Protection: Function, Role and Objectives. NCUA's Director of the Office of Consumer Protection, Gail Laster will be presenting alongside Tonya Sweat, Director of Consumer Compliance Policy & Outreach in NCUA's Office of Consumer Protection. By viewing the webcast, you'll:

• Learn about the OCP initiatives in consumer compliance and fair lending;
• Understand the office’s vision and objectives; and
• Get an analysis of the interagency activities designed to help credit unions implement the regulations issued by the CFPB.

And, best of all - the webcast is free to ALL CREDIT UNIONS.  You can sign up here.

CFPB Report on Payday Loans and Deposit Advance Products; NCUA STS/PAL Loans

Written by Michael Coleman, Regulatory Compliance Counsel

Yesterday, the CFPB issued a white paper on payday loan and deposit advance loans products. The CFPB issued a press release on the report which provides a nice summary of the conclusions drawn in the white paper, as well as a fact sheet which contains some interesting information and statistics. Here are some interesting stats from the fact sheet regarding payday loans and deposit advance loans: 

"PAYDAY LOANS BY THE NUMBERS

•  $15 per $100 borrowed: Median fees on a typical 14-day loan
•  $350: Median size of a payday loan
•  391 percent: Annual percentage rate (APR) yields on typical $15 per $100, 14-day payday loans
•  199 days: Median number of days borrowers are indebted annually
•  10: Median number of transactions by borrowers over 12 months
• $458: Median fees incurred by a payday loan consumer

DEPOSIT ADVANCE LOANS BY THE NUMBERS

•  $10 per $100 borrowed: Typical fees on a loan
•  $180: Median size of individual advance
•  $343: Median outstanding balance of deposit advance loans
•  304 percent: APR yield using the average outstanding balance period of 12 days, assuming a fee of $10 per $100
• $3,000: Total amount that more than half (52 percent) of all deposit advance borrowers end up taking out in a year
• 149 or more: The number of days that customers with more than $3,000 in advances tend to be indebted
• 12 or less: The number of days that customers with more than $3,000 in advances tend to go between paying an old balance and taking out a new advance
• 65 percent: Percentage of consumers using deposit advances who also accrued overdraft or nonsufficient funds fees" (Emphasis in the original.)

CFPB Director Richard Cordray also issued prepared remarks on the release of the payday loans study, here is an excerpt:

“In January 2012, the Consumer Bureau added payday lenders to its supervision program on top of its existing efforts to supervise the depository institutions that offer deposit advance products. We also held a field hearing in Birmingham, Alabama, to hear directly from consumers. And we began our study on these issues, which has come to fruition with today’s white paper. The purpose of all our outreach, research, and analysis on these issues is to help us figure out the right approach to protect consumers and ensure that they will have access to a small loan market that is fair, transparent, and competitive.

As we look to next steps, we will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit. There is a clear demand for small-dollar credit products, which can be helpful at times for consumers who use them on an occasional basis and can manage to repay them. We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. Debt traps should not be part of their financial futures.” (Emphasis added)

It is clear that payday lending is a priority for the CFPB, we can and should expect future actions in this area. Also, if your credit union has a deposit advance loan product, make sure to take a close look at this report. 

A CFPB blog post also features an interesting infographic on consumer use of payday loans - I know I wouldn't want to pay for a taxi to go across the country!.

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STS/PAL Loans. NCUA Rules and Regulations section 701.21(c)(7)(iii) contains the current requirements for a short term, small amount loans (STS loans), which are alternatives to payday loans. Loans made pursuant to these requirements can have a rate no higher than 1,000 basis points above the agency-set loan interest rate cap, now 18 percent. Keep in mind, even with this higher interest rate, these STS loans are still much less costly than traditional payday loans.

In September 2012, NCUA issued an advance notice of proposed rulemaking (ANPR) on the agency’s payday-alternative loan (PAL) rule, which was previously referred to as STS loans. NCUA has stated that it is reviewing its regulation in part because there has been limited response from federal credit unions (FCUs), and limited numbers of FCUs issuing these loans. You can read more about the ANPR in this blog post.

NCUA Report: Beware of Three Emerging BSA Risks

Written by Bernadette Clair, Regulatory Compliance Counsel

The April issue of the NCUA Report is now available. This issue includes the following:

• Office of Examination and Insurance Report: Demystifying Capital Requirements for Credit Unions

• Chairman’s Corner: Wearing a Different Hat

• Board Actions: Streamlined Fixed Assets Rule Proposed

• Board Perspective: Derivative Investment

• Economic Scenarios to Prepare for in 2013

• Q&A with the Director of the Office of Consumer Protection

• Beware of Three Emerging BSA Risks

• The User Experience Guides Mycreditunion.gov and Pocket Cents Redesign

• Register Now for NCUA’s CEO Boot Camps

• Take a Trip to Financial Stability with NCUA’s New Personal Finance Game

I want to highlight one of the articles –Region III’s Report Beware of Three Emerging BSA Risks. This article discusses three services increasingly offered by credit unions that can significantly increase BSA risk – money services businesses accounts, reloadable prepaid cards and remote deposit capture.  For example, the article has this to say about the BSA risk related to remote deposit capture (RDC):

“A rapidly growing electronic service that credit unions are offering to business account members (and some individual account holders) is RDC service. RDC is an automated deposit transaction delivery system enabling members to scan items—typically checks—from remote locations and electronically transmit the electronic images or captured digital data to credit unions for posting and clearing. While only 503 federally insured credit unions currently offer RDC service, this figure represents a 42.5 percent increase from the end of 2011.

The potential use of this service as a way to launder money is a risk associated with RDC. In particular, inadequate internal controls necessary to manage the anti-money laundering risk posed by RDC activity and insufficient automated transaction monitoring systems are two common deficiencies identified in recent FinCEN enforcement actions.

Before offering RDC to members, credit union management must assess all of the risks associated with the service, including BSA compliance, and develop and implement policies and procedures to mitigate those risks. Credit unions should ensure that their transaction monitoring systems adequately capture, monitor and report suspicious activities occurring through remote deposit capture.”

The article also serves as a reminder to credit unions that BSA risk should be one of the areas addressed during the development of new products and services.  From the conclusion of the article:

“In Region III, we have noticed that while management often addresses the financial, operational and legal risks in servicing new categories of members and offering new products and services, they may forget to include addressing BSA risks. When developing a new program or service, we recommend including the BSA Compliance Officer at the outset. This will prevent a lot of headaches when examiners come.”  (my emphasis)

 Takeaway: save yourself a headache and make sure evaluating BSA risk is incorporated into your credit union’s product and service development process if it isn’t already!

Read the Playbook - NCUA's Examination Focus for 2013

Written by Steve Van Beek

My colleague Anthony Demangone had a great blog post yesterday on NCUA tipping their hand on their Examination Focus for 2013. Anthony showed two slides from NCUA which highlighted:

• Ten Red Flags for Examiners

• Ten Things Your Examiner Will Like to See

I encourage you to view the slides on Anthony's blog post.

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Those slides are very helpful to credit unions, but don't stop there. NCUA has provided tons of information on what their focus will be in 2013. NCUA has given you the playbook, be sure you read it!

Below are four resources from NCUA that you'll want to review:

• Letter to Credit Unions 13-CU-01 on NCUA's Supervisory Focus for 2013

• Capacity, Clarity and Consistency Guide NCUA Exams in 2013 (from January NCUA Report)

• NCUA's Examination Issues in 2013 Webinar (aired initially on March 27, 2013)

• NAFCU’s May 1^st Webcast on NCUA’s National Supervision Policy Manual

Have a great weekend and Go Blue!