NAFCU Compliance Blog

A Whole Lot of FYIs

Written By JiJi Bahhur, Regulatory Compliance Counsel

 

I thought I’d keep it simple today with a couple…okay, a whole lot of…FYIs that you may (or may not) find interesting.

  

CFPB “Sweepstakes” Scam

The CFPB has issued a notice stating that if you receive a call from the “CFPB” in regards to a “sweepstakes” offer, it is a scam. Be careful not to provide any personal, consumer, or commercial information.

 

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FinCEN SAR Activity Review – By The Numbers Issue 17

FinCEN has released its seventeenth issue of The SAR Activity Review – By the Numbers (BTN). The report is only published once a year and provides numerical data on SAR filings from the last 12 months. It is available here.

 

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NCUA’s Office of Minority and Women Inclusion

In April, NCUA filed its first report to Congress on its Office of Minority and Women Inclusion (OMWI) and is expected to issue a proposal for comment in the future on standards for assessing credit unions' diversity policies. NAFCU wrote a letter to NCUA addressing OMWI’s assessment of credit unions’ diversity policy. March 29, 2012 - OMWI Assessment of CU's Diversity Practices.

 

NCUA’s OMWI was created in accordance with the Dodd-Frank Act. Its focus is diversity, civil rights and the promotion of minority and women hiring and contracting practices throughout the credit union industry. 

 

NCUA’s 2011 annual report notes actions taken thus far toward developing standards for assessing the diversity policies and practices of entities it regulates. It also looks at steps taken within the agency to promote diversity in its own hiring and procurement practices.

 

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NCUA’s Plain Writing Act.

If you remember from Steve’s blog post on April 30^th, we were waiting to see NCUA’s Annual Report on the Plain Writing Act. That report is now available on NCUA’s webpage dedicated to the Plain Writing Act.

 

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I could keep going, but I think I’ll stop right there for now. Okay, wait…one more...FYI: I’m having twins (a boy and a girl)!

 

 

Thanks for Everything

Posted by Anthony Demangone

I love my job.  I always have.  But I love NAFCU.  Always have.  Ever since I joined this organization in 2004.  So it is with mixed emotions that I have to tell you that my days as NAFCU's head compliance geek are at their end.  In a few short days, I'll transition into the role of NAFCU's Senior Vice President and Chief Operating Officer.  I'll be replacing Pat Morris, who is moving on to be CEO at the ACA.  That's very good news for a very good guy, and I can safely speak on behalf of NAFCU when I say that we wish him nothing but the best.   

It has been a sincere pleasure working with all of you, and I thank you for allowing me to barge into your office each morning through this blog.  Credit union compliance officers are my kind of people. You stand for the rule of law.  You respect process and procedures.  You bow to internal controls.  You understand that just because you can do something doesn't necessarily mean you may do it, or should.  Your role within an organization should be treasured, nurtured, and respected.  

In my new role at NAFCU, I'll be removed from NAFCU's compliance program.  I'll be in charge of helping my colleagues at NAFCU get what they need so they can do their jobs - which is to serve NAFCU's members.  I'll take with me the respect of risk management, internal controls, and critical analysis that I gained alongside you these past 6-plus years.  I'm humbled and excited at the challenge.

NAFCU's compliance services will still be here, and they'll continue to be great.  And the blog will live on as well.  No one person is indispensable, and that certainly extends to me.  Our compliance services will be headed up by someone else, and that's fine.  NAFCU is busy finding my replacement, but until then Sarah, Steve and Shari are here to help.  

Change is good, and learning new things and challenging yourself is great. Thanks again for humoring me with this blog, and I wish you all the best.

PS: And since I know what you really will miss most, here are a final few pics of Kate and Briggs.

 

NCUA Board Meeting; The Chairman on Comment Letters; Mortgage Doc Prototypes Near?

Posted by Anthony Demangone

Happy Friday, everyone.  We somehow made it through another week as compliance officers!

NCUA. Yesterday, NCUA held its monthly board meeting.  You can access the meeting materials here. It wasn't a huge compliance day, although NCUA did issue rules regarding corporates and they finalized a proposed IRPS that tweaks NCUA's Supervisory Review Committee.  NAFCU Today will provide overview of the meeting here.

Comment letters. NCUA Chairman Debbie Matz gives some great advice on how to write comment letters.  Via this link, you can read a quick overview of the four major areas where she gives advice, as well as watch a 5-minute video on the art of writing comment letters. This clearly is on the Chairman's mind right now, as she covered the same topic in this month's NCUA Report. 

The Mortgage Forms Are Coming.  Reportedly, the CFPB is close to releasing prototype model mortgage disclosure forms.  This will be our first chance to see how they'll handle model forms. 

***

As you can see, Kate and Briggs would rather be outside, enjoying springtime.  I hope you follow their lead, and enjoy your weekend!  If you are travelling, be safe.  

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!

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. 

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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. 

 

 

Tuesday This and That; Time Flies

Posted by Anthony Demangone

Happy Tuesday, everyone.  I survived and thoroughly enjoyed my weekend alone with the Dynamic Duo.  But let me say this: if you hear anyone utter words to the effect that stay-at-home parents have a cushy existence, feel free to give them the evil-eye on my behalf.

Maybe when things slow down a bit (say, in 2015), I can write more blog postings on single issues. But my in-box says otherwise. I hope you don't mind these "This and That" posts. 

MERS.  By now, I'm sure you've read one of a number of stories regarding MERS.  According to its website:

MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.

Most of the recent stories about MERS are stories about foreclosures challenges based on the use of the MERS system. Here's just one example. The quote below was made about BOA and other major mortgage lenders.

“They're recognizing the writing on the wall, that there are serious problems associated with the basic business model and legal theories of the MERS system,” Christopher L. Peterson, a law professor at the University of Utah in Salt Lake City who has written articles on Reston, Virginia-based MERS, said yesterday.

Now, not every court appears to be coming to the same conclusions about mortgages perfected via the MERS system, so I won't try to generalize.  But if your credit union is relying on the MERS system for its mortgages, just be aware of the current situation. 

More compliance.  Here's a blog post that talks about the current state of compliance for banks. (BankNews.) (And a hat tip to C. Bruen.)  The author argues that more compliance is rolling down the hill at financial institutions, arguing that institutions might want to attack the burden more proactively.

To manage the upcoming regulations as well as the ones already in place, Michael Brauneis, managing director in the regulatory risk practice for Protiviti, an industry consulting firm, believes banks will have to change the way they manage compliance. No longer will an informal committee of management team members be able to keep up.

Brauneis also believes many banks need to shift away from the whack-a-mole game — where one mole (or compliance problem) pops up in one particular area so the bank focuses on that one, meanwhile other problems are popping up in other areas.

“I think a lot of community bankers feel today like that’s the game they’re playing continuously, and they can’t get ahead of problems the regulators keep finding and can’t get ahead of new regulatory changes because they keep coming out,” said Brauneis.

The more banks can do to shift from that type of reactive firing model to a more proactive model that focuses on risk assessment, the better. A risk-based approach, for example, identifies the business environment, the risks associated with that environment and the requirements to comply. It then looks at the controls in place to manage that compliance and allocates resources for automating compliance controls to the areas of highest risk.

I wonder how many credit unions use a risk assessment for their entire compliance program? 

Speaking of Compliance.  Read this CFPB blog post about how Ms. Warren hopes to improve consumer protections. Here's a portion of the post:

The CFPB is working to change that. When prices and risks are clear up front, consumers can make the choices that are best for themselves and their families. In other words, we want a credit market that works for consumers.

During this week, we will be listening directly to American families, and we’ll outline our vision for protecting consumers. Richard Cordray, Assistant Director for Enforcement and the former Attorney General of Ohio, will discuss how we can partner with the states to ensure consistent enforcement of consumer financial protections across the nation. Holly Petraeus, the Director of the CFPB’s Office of Servicemember Affairs, will talk about the unique challenges facing the men and women in the armed services. And I will travel to the Anacostia neighborhood of Washington, DC, to hear directly from families who are turning their finances around in the wake of the economic crisis.

I raise two points.  Ms. Warren has consistently talked about clear, up-front pricing.  To me, that signals that she'd love to see costs for products incorporated in the APR or in fees that are clearly disclosed "up front." Anything that a reasonable person could view as "rope a dope" in nature - a product that lures people in with what looks like a low cost only to be followed by "hidden" fees - is subject to "regulatory risk."  You may want to scan your products and services to see if any "rope-a-dopes" are there.  You've been warned.

Also, note that the CFPB will actively work with State Attorney Generals to enforce consumer protection laws. This should push compliance risk up, as cooperation between these two entities will only bring additional attention to state law issues that possibly were unknown or given low priority before.

Advertisements in statements.  This article (MSNBC.com) talks about this growing trend. As I've stated earlier, federal credit unions can do this as well.   Of course, whether one wishes to do this is a business decision. The article and NCUA's opinion do give some important risk-related questions to ask.  

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At some point, your kids stop being babies and become toddlers.  There's nothing that trumpets the arrival of such an event. But then someone takes a photo of your kid, like this one of Kate below just after she got a haircut, and you realize that it already happened. 

 

 

This and That; A Well-Fed Elmo

Posted by Anthony Demangone

Here's a few things to finish off the week.

NCUA.  NCUA held its monthly board meeting yesterday.  There was a minor tweak to its Truth in Savings regulation to bring it into line with Regulation DD.  The also disclosed their priorities for 2011.  You can access the items from the board meeting here.  In addition, we did write an article for today's NAFCU Today on the meeting.   NCUA also issued its most recent edition of the NCUA Report.  This issue tackles some timely issues:

• Financial literacy
• Recent board actions
• Risk management on online banking
• Trends in mortgage delinquencies
• Contingency fund planning

Privacy.  The OTS has issued a compliance guide for the model privacy notice. While this would have been handy dandy three months ago, the guide looks to be written in a clear manner and should be useful if you still have issues in that area. 

MBLs.  Here's a nice historical look at member business lending at credit unions. (Elliot Kashner, at CreditUnions.com)

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Here's how we found Elmo the other day, thanks to Kate.  I'm just glad that Elmo didn't ask for cottage cheese.  I'm off to State College this weekend to visit family and kneel at the shrine. Have a great weekend, everyone!

Thursday's This and That; Baseball Scholarship?

Posted by Anthony Demangone

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

SAFE Act.  The NMLS Federal Registry has posted a good deal of new information to help institutions prepare for the upcoming MLO registration process. Even though the registry is not open yet, this website should help you get started. 

BSA.  So, just how bad could it be to disclose the existence of a SAR to a member?  Pretty bad, it seems. Although, the bank bribery violations didn't help either.  

Dodd-Frank.  If you visit their web-site, it won't take you long to see what the Republican leadership of the House Financial Services Committee thinks of Dodd Frank. Not much.  Not much at all.

ATMs and Class Action Lawsuits.  My friend and fellow credit union attorney Rob Rutkowski pens a very interesting blog post on how one financial institution avoided a class action lawsuit regarding ATM signage. And he used "skullduggery" and "Byzantine" in the same post.  Well done, Rob. 

Risk-Based Pricing Notices.  Yesterday, I was invited to attend a future (February) Consumer Compliance Outlook webinar on Risk-Based Pricing Notices.  Now, you're invited as well. These guys usually put on a good show. 

The Wrong One is Winning.  My son Briggs is in a "chucking" stage.  If he disagrees with my position on an issue, such as, "Can Briggs Play With the TV Remote," he voices his displeasure by locating small objects, picking them up, and chucking them as far as he can. Luckily, that's about four feet at the moment.  My bright idea was to see if I could enlist Kate to help me out.  So when he chucks, I ask Kate to help me pick up.  And I praise her as she does.  There's only one problem...Briggs is far more efficient at chucking than Kate is at helping.    

This and That; When One Door Opens, Another Door Opens?

Posted by Anthony Demangone

My inbox still runneth over.  Here are some items of interest.

• Director lawsuits.  The FDIC recently announced, that as of December 14, 2010, it had authorized 109 lawsuits against former employees and officials of failed banks.  The lawsuits total roughly $2.5 billion in claims. It is hard to read too much into these types of things.  Just because the FDIC sues one former bank official, it doesn't mean they're more likely to sue another - or that NCUA is more likely to sue a former credit union director.  But I do think it shows that the FDIC is actively looking at failed institutions to see if there are actionable claims.  And NCUA has not ruled out lawsuits against former directors either.  In addition, these types of announcements are always a good reminder that good corporate governance is important.  A strong board, supervisory committee, and senior management are essential.  And that can take up resources in finding the right people and getting them the tools they need to do their job. 
• SCRA foreclosure provisions.  Certain provisions of the SCRA related to foreclosures were supposed to sunset at the end of 2010.  President Obama's signature extended those provisions for an additional two years.
• White House.  President Obama reportedly is considering bringing in William Daley, a pro-business bank executive (and former Commerce Secretary), as his chief of staff.  (Bloomberg.) Any injection of business and banking knowledge should be a good thing as Daley would be able to counsel the President on how administration actions might affect financial institutions. (Reports were that an announcement was imminent at "press time.")
• Oversight.  Here's another story highlighting GOP plans to closely review financial reform. (Washingtonpost.com) 

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My son Briggs has not been the world's best sleeper.  Over the past 21 months, I've seen quite a few 2 a.m.airings of ESPN's SportsCenter.  The little guy would just get up around 1 or 2 a.m., and stay awake for 90 minutes.  Any attempt to reintroduce him to his crib was met with protests more effective than one can imagine.  My wife and I live in a 3-square foot condo surrounded by neighbors, so the thought of him screaming through the night invariably led to thoughts of my car getting "keyed."  So SportsCenter and I became fast friends.

Over the Holidays, we visited my sister.  Her home has spare rooms, so we put Senor Briggs and his sister down for the night and shut the door.  He hollered.  He screamed.  At one point, he even seemed to yodel.  But we stayed firm, knowing that all offended ears were related to us by blood or marriage.

It worked.  He may have been a bit angry with me, but by the second night, he figured it out.  He was stuck. And he started sleeping through the night. For those of you not familiar with kids and their sleep habits, let me say this.  When a child starts sleeping through the night, you notice an improvement in your life. I put it up there with the invention of fire, indoor plumbing, and televised baseball.

So we got cocky.  Oh, our life is back to normal, we exclaimed.  All the while, the Gods were chuckling.

We put Master Briggs down for the night recently, knowing he was down for the night.  A bottle of wine was opened.  We settled in for the evening.  Then we heard...it.  The door handle was jiggling.  I opened the door, and there was Master Briggs with a big smile. He had figured out how to get out of his crib.  Was it a smile he had?  Perhaps a "sly grin" is more accurate.

As I said in the title, when one door opens...another door...opens. (Sigh.)  Have a great weekend, everyone!

"You do realize, Dad - I'm calling the shots one way or the other."

Citations, Citations, Citations; Happy Holidays

Posted by Anthony Demangone

As we look toward 2011, I thought I'd spend the next week or so discussing some ideas that might help you in the coming year.  Today, I'd like to talk about citations. Not the kind that you get for double-parking.  I mean legal or regulatory citations that point to a specific part of a law, regulation, or guidance document.

If you hire an outside auditor, attorney, or other consultant, I'd demand that they provide a citation for every finding or recommendation.  Each and every one.  (You're paying them, right?) And if they tell you something is a best practice, I'd follow up with this question: A best practice based on what? All too often, we get calls or emails from credit unions that are trying to understand a recommendation from an auditor or consultant who failed to provide a citation.  So we spend 20 minutes or so trying to track down a citation to confirm the auditor's position.  And that assumes the auditor is correct.  An outside consultant should have no problem providing a citation that is the basis for his or her opinion. (The only exception to this is the negative opinion.  Example: NCUA does not regulate the color of your credit union's logo. You can look as long as you want, but you won't find a citation to support that position.)

Oh, and the same goes for examiners.

So, in 2011, ask for citations.  It will help you verify that an auditor, consultant, attorney or examiner is correct.  And it might force them to be a bit more judicious with their recommendations, knowing that they have to provide some legal or regulatory authority each time they tell you to do something. 

***

Happy Holidays, everyone. NAFCU's offices will be closed tomorrow in observation of Christmas.  We'll get back at it on Monday. 

The more I think about it, the next photo is a bit more aligned with the life of a compliance office in 2010.  You hold on for dear life and hope for the best. Here's hoping Santa is good to each and every one of you!