NAFCU Compliance Blog

Reg Z...Again; What Have Regulators Learned?

OK, maybe I need to start letting people know when Reg Z doesn't change.

On Friday, the Fed approve another batch of final rules that amends Regulation Z.  Read all about it here.

The MDIA requires creditors to give good faith estimates of mortgage loan costs ("early disclosures") within three business days after receiving a consumer's application for a mortgage loan and before any fees are collected from the consumer, other than a reasonable fee for obtaining the consumer's credit history.  These requirements are consistent with the Board's July 2008 final rule, which applied to loans secured by a consumer's principal dwelling.  The MDIA broadens this requirement by also requiring early disclosures for loans secured by dwellings other than the consumer's principal dwelling, such as a second home.

In addition, the rules would implement the MDIA's requirements that:

• Creditors wait seven business days after they provide the early disclosures before closing the loan; and
• Creditors provide new disclosures with a revised annual percentage rate (APR), and wait an additional three business days before closing the loan, if a change occurs that makes the APR in the early disclosures inaccurate beyond a specified tolerance.

The rules would permit a consumer to expedite the closing to address a personal financial emergency, such as a foreclosure.

Effective date: July 30, 2009.

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Fed Chairman Ben Bernanke gave a speech on what regulators have learned during the current crisis.  Read his remarks here.  Here's my condensed version.  "We learned a heck of a lot about the importance of safety and soundness and risk management."   How well does your credit union measure risk?  I bet regulators will lean more on risk management in the years to come.

Are We Worthy?; Corporate Stabilization; Share Insurance

As compliance officers, we work to make sure our credit unions stay out of hot water to the best of our ability.  But we don't make money for our credit unions.  We don't generate revenue.  Basically, we eat up payroll, and we kill a lot of trees when we print out regulatory proposals.

How much are we worth?  It is hard to answer that question with a hard number.  But I did read something very interesting the other day in an issue of the Corporate Counsel.  Access the article here.  In short, the author tries to determine whether compliance departments failed during the current market turmoil.  Here's a paragraph:

Is there a new appreciation for this (compliance, ethics and risk management) these days? A reality check comes from Vincent Kaminski, who hopes it's true but isn't so sure. Kaminski, who was a risk analyst at Enron Corp. and now teaches at Rice University, says that traders tell him risk management has been "elevated" since the crash. But many risk management departments are "Potemkin villages," he says. "They were set up to fail." The problems he perceives apply to compliance and ethics as well. Companies often marginalize them, and the departments are given responsibility but no authority. And sometimes they go begging for resources. At Enron, Kaminski's group didn't control its own budget so they had to find a corporate sponsor. And that permitted executives to limit their inquiries.

The article gives some "lessons" for compliance/ethics departments based on what has happened in the past few years.   I consider this to be good stuff.  Very, very good stuff.

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Our lobbyists are pretty good. 

Yesterday, the U.S. Senate passed S. 896, the Helping Families Save Their Homes Act of 2009, by a vote of 91-5.  The legislation does a few pretty major things. 

• It would allow up to eight years to repay National Credit Union Share Insurance Fund (NCUSIF) premiums.
• It would increase the National Credit Union Administration’s (NCUA’s) borrowing authority to $6 billion (with emergency authority to $30 billion)
• It would create a temporary corporate credit union stabilization fund and provide credit unions seven years to pay off the fund. 
• In addition, it would remove the December 31, 2009 sunset for increased deposit insurance coverage of $250,000 and extend it to the end of 2013.

(Whew - did you get all that?) The action now heads to the House.  If you want to read more, NAFCU put together a very nice news story here.

Social Media - Risk Managment; Fixed Asset Rule

Posted by Steve Van Beek

One of the reoccurring topics on this blog has been risk management, including managing risks associated with your credit union's growth in social media markets (blogs, twitter, facebook, etc.).  The Compliance Guy has brought up this issue in this July 2008 post and this November 2008 post.

This recent article in the ABA's Banking Journal does a wonderful job of pointing out the compliance concerns related to navigating the social media waters.  The article makes a great point - the avenues of reaching out to your members might be new and unique but you must still comply with laws and regulations written before the evolution of these new products.  Along those lines, the article contains a link "Six new-media compliance tips" that might be useful.   

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NCUA recently finalized a rule amending its Regulatory Flexibility Program, Part 742, with regard to NCUA's fixed asset rule.  The amendment allows RegFlex FCUs up to six years to partially occupy unimproved property it has acquired without a waiver (the previous rule had allowed three years without a wavier).  NAFCU's Final Regulation summarizing the changes is here.  (Member log-in required).  The effective date is April 27, 2009. 

Hello, I'd Like to Register a Complaint

For Monty Python fans, there are few funnier pieces of comedy than the "complaint sketch."  The sketch involves a person who bought a parrot that dies soon after the purchase.  He returns to the store (with the dead parrot) to make a complaint, and the skit takes off from there.

If only all complaints were so enjoyable...

Consumers are not afraid of complaining.  The FTC, it seems, gets quite a bit of them.  In 2008, they received more than 1.2 million!  The top 10? Here they are....

1. Identity Theft. 313,982 complaints.
2. Third Party and Creditor Debt Collection.104,642 complaints.
3. Shop-at-Home and Catalog Sales.52,615  complaints.
4. Internet Services.52,102 complaints.
5. Foreign Money Offers and Counterfeit Check Scams.38,505 complaints.
6. Credit Bureaus, Information Furnishers and Report Users.34,940 complaints.)
7. Prizes, Sweepstakes and Lotteries.33,340 complaints.
8. Television and Electronic Media.25,930 complaints.
9. Banks and Lenders.22,890 complaints.
10. Telecom Equipment and Mobile Services. 22,387 complaints.

Go here for the official list from the FTC.

Do members complain about credit unions?  You bet they do.  In fact, we get quite a few of them here.  (Consumers tend to confuse us with NCUA for some reason.)  In addition, NCUA has a consumer complaint hotline/website set up right here. NCUA outlines the complaint process for federal credit unions here. 

In short, NCUA urges members to work things out with their credit union.  If that doesn't work, they ask that members forward the information to them.  NCUA will log it, and then forward the complaint to your supervisory committee.  Of note, NCUA states the following:

NCUA cannot represent consumers in settling claims or recovering damages. However, if your complaint brings a violation to our attention, we will take steps to ensure the federal credit union complies with applicable laws and regulations. (Emphasis added.)

In addition, I've always seen complaints as a source of reputation risk.  You'll always get some complaints, but at someone point the complaints will start to affect your reputation - especially if you do not handle them well.  How do you manage this risk?

• Understand your complaints process.  Where might complaints come from? How do you handle them now?  When does something rise to the level of "complaint" at your credit union?
• Determine whether you need to create a policy and procedure to address complaints. 
• Track them.  Are complaints increasing or decreasing?  Where are they coming from?  What are people complaining about? With this data, you'll be able to distribute resources more effectively.

Finally, NCUA's Supervisory Committee Guide has a ton of information on the complaint resolution process. Access the guide here.

Loan Participations

Happy 2009 everyone!  (The over/under on how many times I will mistakenly write 2008 on a check or time card is 15.)

Last week, NCUA issued guidance on loan participations.  Access the guidance, Letter to Credit Unions 08-CU-26, here.  Access the letter's attachment here.  (If I were King of the World, I would combine both of these documents into one.  This would eliminated the need to use two different links.  Alas, I am not King, so for now, two links are needed.)  NCUA also issued an Aires Questionnaire on this.

The letter makes this point: loan participations are nice ways to manage a number of risks.  But credit unions must use effective due diligence efforts to identify, measure, control and monitor the risk of loan participations.  The letter's attachment provides a blueprint about how to go about that process.

Here are my take-aways.

1. If your credit union does loan participations or may do them in the near future, this is an absolute "must read."
2. This letter to credit unions is nothing more than NCUA giving you what it gave to its examiners.  The attachment is a supervisory letter that NCUA distributed to its field staff.  So, if your credit union uses loan participations, your examiner probably will read this before they examine your program.   For that reason, you should know what is in there.

3. This guidance is just the latest example of how NCUA wants you to incorporate risk management into your day-to-day operations.  If I see a trend coming, it is risk management.

Overdraft Programs; Shock Testing

The FDIC recently released a detailed report concerning overdraft protection programs, commonly referred to as "bounce protection." Here's a link to the study.  Here's a link to the 5-page executive summary.  If you want a good summary of the product or want to benchmark yourself (fees and characteristics of the ODP program) against other financial institutions, this is a good read.  Remember, the regulation and guidance for these programs for credit unions currently is in Truth in Savings, and Letters to Credit Union 05-CU-03, 05-CU-21.

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Speaking of overdraft protection programs, I'd like to chat with you about compliance shock testing.  The Democrats made gains in the House and Senate.  And President-Elect Obama will soon sit in the Oval Office.  Democrats will have a good opportunity to move consumer-oriented bills more easily than before.  With that in mind, here are some thoughts.

• Overdraft protection.  What if your income from overdraft protection programs went away?  And I don't mean down by 50%.  I mean - gone. Completely.  There were bills in this session of Congress that would have done that by making such fees finance charges.  Such bills could resurface again.
• Interchange fees.  What if your income from interchange fees went down by 25 percent?   50 percent?  In this session of Congress, there was talk of regulating these fees.  Such talks could resurface next year.
• What if bankruptcy judges could "cram down" mortgages filed under Chapter 13 of the Bankruptcy Code.  There's talk of giving judges that power via new legislation.

A new Congress brings new ideas and new challenges. Some potential bills could have major effects on the bottom line of credit unions.  Again, I'm not saying that aspects overdraft services and interchange fees will be changed in the next few years. 

But I can't say that they won't change, either.

Appraisals; Web 2.0 and your Reputation

FFIEC regulators, including NCUA, have issued proposed guidelines to address appraisals.  Read a NAFCU Today article about the proposal here.  (The article also contains a link to the actual proposal.)  If your credit union does real estate lending, make sure someone is aware of the proposal. 

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Earlier, I posted about "Web 2.0" and your reputation.  In short, many consumers have blogs, use Twitter and post videos about...well, whatever they want.  The earlier post showed how Bank of America was taking a beating over some overdraft protection fees.

Well, be sure to read this post by Tim McAlpine of Currency Marketing.  He does a great job of showing how Motrin managed to anger many, many mothers.  And how their anger is surging through the Internet. 

My thoughts are this: to properly manage your credit union's reputation, you have to understand today's environment.  If you do something to anger a member, that member has many ways of venting their frustration on the World Wide Web.  Does your credit union have a mechanism to monitor what is being said about you in blogs, on Twitter or in Pod-casts?

NCUSIF Help; Bounce Protection; BSA Simplification

NCUA recently announced that its Share Insurance 101 Webinar is available on its website.  Read all about it here.  And here is the buried link to the Webinar's FAQ document.  You know how I love FAQs.

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In the past, I've spoken a bit about reputation risk.  Here's a good example. There's a new documentary about bounce protection, reportedly created by a consumer who was charged $160 in fees for $65 in purchases.  Read about the movie here.  Read a news article about it here.  The decision on whether to offers such services is a business decision, but I just wanted to make folks aware of this movie.

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FinCEN recently announced plans to simply BSA-related regulations.  Read about it here.

Risk Management Guidance Issued; Tis The Season

Yesterday, NCUA released Letter to Credit Unions 08-CU-20 to alert credit unions to a Supervisory Letter that it delivered to its field staff in August.  You can access the Supervisory Letter here.   Together, this guidance hammers away at the importance of risk management in today's environment.

In the Supervisory Letter, NCUA touches upon the following subjects:

• The changing credit union business model and balance sheet composition and the challenges it creates
• Present mortgage and real estate market and the related expectations for credit unions and examiners
• The Risk Focused Examination (RFE) supervision program with an emphasis on district management and off-site monitoring.

NCUA, in the Letter to Credit Union, picked a few things to highlight from the Supervisory Letter:

1. Credit union balance sheets and operational strategies have changed over the past decade. There is presently much higher reliance on long-term loans which are funded by more volatile sources. New delivery channels and increased use of outsourcing have allowed for rapid changes to the structure of the balance sheet and the risk profile of credit unions.
2. Recent high profile credit union failures resulted from rapidly changing balance sheet structures arising from third-party relationships, combined with a lack of prudent risk management policies and practices. Several of the lessons learned from these failures are included throughout the Supervisory Letter.
3. Declining real estate values result in the potential for elevated levels of credit risk on credit union balance sheets. While credit unions do not widely offer non-traditional mortgage products or participate in subprime lending, the declines in real estate value and accompanying increase in foreclosures affect credit unions across the country.
4. The issues impacting the mortgage market are spreading to other lending products. While the Supervisory Letter primarily addresses the potential risks in real estate lending, many of the principles discussed can be applied to other loan products.

The guidance is a must read for those responsible for risk management at your credit union.  And remember: Supervisory Letters are sent to all field staff.  So your examiners will be reading this.  That's all the more reason why you should as well.

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The nights are cooler.  The days are shorter.  Yes, football is back. 

Just to give you a glimpse of NAFCU on a Monday in the fall, your team at NAFCU includes graduates or fans of:  Michigan, Ohio State, Virginia, the Naval Academy, Wisconsin, Kentucky, Nebraska, Florida State, Penn State, Notre Dame, Pitt, Michigan State, Oregon, Marshall and Maryland. 

If you call NAFCU on a Monday, you may talk with someone who seems overly gloomy or giddy.  Don't worry.  It isn't you.  It's just the season for such things.  And if you reach someone who is gloomy, just call back on Thursday or Friday. 

As hope springs eternal.

Mortgage Brokers and Correspondents

NCUA recently released NCUA Letter to Credit Union 08-CU-19 to make credit unions aware of risk management issues surrounding mortgage brokers and mortgage correspondents.  You can access the guidance here.  This guidance not only builds on NCUA's recent guidance on third party relationships; it puts it in action. 

As you may recall, last year NCUA issued a major piece of guidance in the form of a letter to credit union regarding the management of third party relationships.  (Letter to Credit Unions 07-CU-13) 

The mortgage broker and mortgage correspondent guidance literally walks you through the third party relationship guidance in relation to mortgage brokers and correspondents.  It is a must read for credit unions that use mortgage brokers and correspondents, but it also serves as an example of how to apply the third party relationship guidance to a given relationship.

And it is the latest example of how important risk management is becoming in the day-to-day affairs of federal credit unions.