NAFCU Compliance Blog

NCUA’s Flawed Proposed Risk-Based Capital Rule; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

At their January monthly board meeting, the NCUA Board of Directors approved Proposed Rule: Prompt Corrective Action; Risk-Based Capital (Part 702) with a 90-day comment period.  I am going to keep my analysis of the rule at a 30,000 foot level.  That said, the proposed rule goes into extreme detail as to how the risk-based capital ratio would be calculated and the different risk weights that would be used if the proposed rule were to go into effect.  So, some of you that are fascinated by numbers may really enjoy sifting through those sections of the proposed rule.

Let’s start with the most basic change that is being proposed – how a credit union is classified for capitalization purposes.  Under the proposed rule, credit unions would be classified as one of the following:

• Well Capitalized (Net worth ratio of 7% or above and risk-based capital ratio of 10.5% or above);
• Adequately Capitalized (Net worth ratio of 6% - 6.99% and risk-based capital ratio of 8% - 10.49%);
• Undercapitalized (Net worth ratio of 4% - 5.99% or risk-based capital ratio of less than 8% with a net worth ratio of 6% or above);
• Significantly Undercapitalized (Net worth ratio of 2% - 3.99% or net worth ratio of 4% - 4.99% and fails to submit/materially implement an approved net worth restoration plan); or
• Critically Undercapitalized (Net worth ratio of less than 2%).

Credit unions with $50 million or less in assets at the end of the previous quarter would be exempt from the risk-based capital ratio requirements.

So, how will the risk-based ratio be calculated under the new rule?  Under the proposed rule, the risk-based ratio would be determined by the percentage of a credit union’s net worth available to cover losses, divided by the credit union’s defined risk-weighted asset base.  The risk-weighted asset base is determined by subtracting a credit union’s NCUSIF deposit and goodwill/other intangibles from the credit union’s risk-weighted assets.  For a general overview of how to calculate all of those components, view this slideshow prepared by the NCUA’s Office of Examination and Insurance.  For a more detailed explanation of the calculations, see the proposed rule.

Along with these new risk-based capital standards, the NCUA has indicated that individual credit unions may be required to maintain higher levels of risk-based capital if the agency raises additional supervisory concerns.

The NCUA has estimated (based on June 2013 call report data) that in excess of 90% of credit unions that would be affected by the changes would be considered either well or adequately capitalized under the proposed rule.  Unfortunately, an estimated 199 credit unions that are currently considered well capitalized would see their status drop under the proposed rule, with 10 of those credit unions being deemed undercapitalized.  Credit unions that are interested in seeing how the proposed rule’s changes would affect them, can view that information using the NCUA’s On-Line Calculator for Proposed Risk-Based Capital Rule.

The NCUA believes that it needs to make these proposed changes in order for the risk-based capital requirements for natural person credit unions to be more in line with the requirements for FDIC, Federal Reserve, and OCC-regulated institutions, as well as more closely resembling the requirements for corporate credit unions.  That being said, this proposal is just the latest example of how the NCUA (and its other regulatory brethren) is unable to properly address many of the issues facing credit unions under the current, flawed regulatory framework.  NAFCU has called on the NCUA to join in advocating for legislative fixes that will give the agency the proper framework to effectively protect credit union members. 

Furthermore, as NAFCU CEO Dan Berger pointed out in his January 28 letter to the NCUA, “[NAFCU] question[s] whether the risk weighting proposed actually matches real risk in the system.  The proposed rule assigns rigid risk-weights to many investments that when properly examined represent much less risk than the assigned risk-weights.”  Therefore, it will be important for credit unions to take part in the comment process to, hopefully, show the NCUA that some of their preconceived notions regarding risk are not applicable and should be weighted differently or, even better, allow for varying risk-weights based on different programs that individual credit unions have implemented to mitigate risks.

Finally, let me take a moment to express some concern regarding the NCUA’s On-Line Calculator for Proposed Risk-Based Capital Rule.  I understand that the agency is attempting to make it easier for individual credit unions to understand how the proposed rule would affect them, but the NCUA is actually oversimplifying a very complex measure.  Having the calculator publicly available could lead to unfair reputational harm and general misunderstandings of a credit union’s health, especially for those credit unions that would see a drop in their capitalization classification.

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Free Kick. After a 16-year absence, Colombia will be returning to the World Cup this summer.  Los Cafeteros put together an impressive qualifying run, finishing second to Argentina in the South American region.  So impressive was their play that many pundits have tipped them as a team to watch in Brasil.  But could their dream be over before it even begins?

During a Coupe de France match on January 22 against Monts d'Or Azergues of France’s third division, Colombia and AS Monaco’s Radamel Falcao Garcia was stretchered off the field in the 40^th minute with what turned out to be a torn ACL in his left knee.  Following a successful surgery in Portugal on Saturday, doctors have given the Colombian striker a 50-50 chance of being available to play for Colombia at the World Cup.  Falcao, for his part, has said that he will take the recovery day-by-day, and will work his hardest to keep his World Cup dream alive.

Many have written that the loss of Falcao would be a crushing blow to Colombia’s hopes.  I disagree.  Call me a homer (I was born in Cartagena, Colombia), but I believe that Colombia has many quality attacking options should Falcao be unavailable to play in Brasil.  This current generation of Colombian football has been blessed by many quality (though young or unproven) attacking players.  From F.C. Porto’s Jackson Martinez and Juan Quintero to Udinese’s Luis Muriel and River Plate’s Teofilo Gutierrez, Jose Pekerman (Colombia’s manager) should have several options to fill Falcao’s role up front, should the AS Monaco forward not recover in time for the tournament.  A bigger problem for Colombia would be a loss in the midfield or center-back positions, as they do not have as much depth in those roles.

That said, it would be a shame if Falcao did end up missing the tournament because he is one of the most exciting strikers in today’s game and is a large part of the reason for Colombia’s return to the World Cup.  Such a talent deserves the chance to show off his skills on the world’s biggest stage.  FUERZA TIGRE!!!

DOJ’s “Operation Choke Point” Targets Banks’ Indirect Relationships with Payday Lenders

Written by Brandy Bruyere, Regulatory Compliance Counsel

In a move aimed at cracking down on payday lenders, the Department of Justice (DOJ) launched an investigation last year called “Operation Choke Point.” DOJ is probing whether banks allowed third-party payment processors working on behalf of payday lenders to illegally access billions of dollars from consumer checking accounts.

In essence, Operation Choke Point is an attempt to cut off some payday lenders’ “back door” entrance to traditional banking services. Like many merchants, payday lenders often use third-party payment processors to debit their customers’ checking accounts. The third-party payment processors, in turn, establish relationships with financial institutions. This allows payday lenders to indirectly access the Automated Clearing House (ACH) network to receive payments.

So what happens when a bank has an agreement with a third-party payment processor, but that third-party does business on behalf of a payday lender who is breaking the law? As it turns out, without proper due diligence, these agreements could be quite expensive for targeted financial institutions.

In its first Operation Choke Point action, DOJ filed a lawsuit against Four Oaks Bank (Four Oaks) of North Carolina. The various allegations included violations of Customer Identification Program requirements under the Bank Secrecy Act and allowing improper access to the ACH network. According to the complaint, Four Oaks worked with a third-party payment processor called TPPP-TX, which primarily represented payday lenders. Some of these payday lenders had rates of returned transactions that exceeded 30%, over 21 times higher than the national average of 1.38%. DOJ claimed that the Bank went so far as to design its internal policy for third-party payment providers to accommodate TPPP-TX despite these “extraordinarily high” return rates. Four Oaks was also accused of failing to properly identity foreign payday lenders accessing customer accounts via TPPP-TX.

Reports indicate that DOJ and Four Oaks already reached a tentative $1.2 million settlement in this case. Two members of Congress sent a letter to Attorney General Eric Holder expressing concerns about the investigation’s impact on legitimate payday lending business operations. While many credit unions do not work with third-party payment processors, this is a good reminder that third-party relationships come with additional compliance concerns. Here are some resources about managing risks stemming from relationships with third-parties including payment processors:

• NCUA Letter to Credit Unions, “Evaluating Third Party Relationships,” 07-CU-13
• NCUA's Third Party Relationships Questionnaire
• FFIEC’s BSA/AML Examination Manual, “Third-Party Payment Processors Overview”
• FinCen Advisory, “Risk Associated with Third-Party Payment Processors,” FIN-2012-A010
• FDIC Financial Institution Letter, “Payment Processor Relationships,” FIL-3-2012

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Eye on the Olympics. Speaking of choking, I don’t know about the rest of you, but I’m a bit of a sucker for the Olympics. Maybe it’s the combination of patriotism and pageantry. Or maybe it’s that I experience a strange sense of joy watching people careen down a mountain headfirst on a tiny sled. Anyway, while figure skating is not normally my personal favorite, 19-year-old Jason Brown is an athlete to watch. Here is Jason’s impressive performance that helped earn him a trip to Sochi.

January 2014 NCUA Report; Private Student Lending

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Last week, the NCUA released its January 2014 report. Featured articles include:

• Office of Examination and Insurance Report: Supervision to be Forward-Looking, Targeted in 2014
• Chairman’s Corner: It’s Time to Flip the Calendar – from 1934
• Filing Your Call Reports Late Could be Costly
• Board Perspectives: Bursting Bubbles; ETA on EMV is Still TBA
• Board Actions: NCUA Board Approves New Charitable Accounts for Federal Credit Unions
• Understanding Loan Participation Waivers
• Region II Report: Private Student Lending – Looking Beyond Default Insurance
• Low-Income Credit Unions Can Apply for First Grant Round Starting Feb. 3
• Get Ready. Military and America Saves Week is Feb. 24 – March 1

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Private Student Lending. Earlier this month, we blogged about NCUA Letter to Credit Unions 14-CU-02, which lays out NCUA’s supervisory focus for 2014. Private student lending is on the list and NCUA states in the letter that field staff “will evaluate each credit union’s student lending plans, policies, controls, and third-party due diligence.”  In December 2013, NCUA also issued Letter to Credit Unions 13-CU-15, specifically on the topic of private student loans, and the enclosed Supervisory Letter No. 13-13 provides guidance to field staff on examining credit unions’ private student lending practices.

This month’s NCUA report also addresses private student lending in the Region II Report: Private Student Lending – Looking Beyond Default Insurance, highlighting issues examiners observed in 2013. These include reliance on default insurance, effective credit analysis of borrowers’ ability to repay their loans and effective due diligence of third party participants. Here’s an excerpt from the article that caught my eye related to default insurance:

“NCUA expects credit union management to establish appropriate policies and controls that are independent of default insurance protections. This includes concentration limits, exit strategies, liquidity impact and interest-rate risk management within the private student loan portfolio.

Default Insurance

Many credit unions make use of default insurance to protect the credit union against loss if a private student loan is not repaid according to contract terms. The use of default insurance can be an effective way to mitigate credit risk, assuming the credit union:

• Performs proper due diligence of the default insurers;
• Understands the terms of the insurance contract;
• Is aware of the conditions required of the lender, servicer or both, to keep the insurance in force; and
• Properly assesses the financial capacity of the insurer.

Credit unions need to ensure the private student loan program they participate in fits their lending policies and underwriting requirements. Credit unions must perform adequate credit analysis consistent with their credit union’s individual risk tolerances. NCUA examiners will verify whether a credit union has the appropriate expertise and risk-mitigation controls for private student lending, regardless of default insurance.”

Be sure to give NCUA Letter to Credit Unions 13-CU-15, Supervisory Letter No. 13-13, and the article in this month’s NCUA Report a read if your credit union makes private student loans.

NCUA January Board Meeting Results; 18 Percent Interest Rate Cap to Continue through September 2015; NAFCU Webcast – Advertising and Regulation Z.

Written by JiJi Bahhur, Director of Regulatory Compliance

NCUA January Board Meeting Results. Yesterday, the NCUA Board held its January Board meeting. The agenda for the open meeting included the following action items:

1. NCUA’s      Strategic Plan for 2014 through 2017, and Annual      Plan for 2014 and 2015.
2. Federal      Credit Union Loan Interest Rate Ceiling.
3. Final      Rule, Parts 703, 715 and 741, Financial Derivative Transactions to      Mitigate Interest Rate Risk.
4. Proposed      Rule, Part 702, Prompt Corrective Action and Risk-Based Capital Measures.

By a unanimous vote, all actions presented at the open meeting were approved.  Since it’s Friday, I won’t go into the nitty and the gritty of every action item above, but you can get those details here in this message from NAFCU’s President and CEO, Dan Berger.  Also, you can find the details here in NCUA’s Board Action Bulletin.  And keep a lookout for future blog posts on the final derivatives rule and the proposed risk-based capital rule. 

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18 Percent Interest Rate Cap to Continue.  During yesterday's NCUA Board meeting, the NCUA Board voted to extend the current interest rate cap of 18 percent for most federal credit union loans through September 10, 2015. Had this action not been approved, the cap would have reverted to 15 percent on March 11, 2014.

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Webcast: Advertising and Regulation Z: Are You Covered? As your credit union creates fresh ideas to advertise loan products, make sure you know the latest Reg Z rules regarding social media, print, web and other marketing vehicles. Register by Feb. 12 to save $100 and learn important information to stay in compliance.

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TGIF!  Last weekend, I came to the realization that my children really don't like to share.  Unlike the kiddos, I love to share and below I have shared two pictures that get me giggling each time I see them.  The first is a photo of Ava - she's taking Kyse's car for a spin.  The second photo was snapped right after Kyse hijacked the car back from Ava.

 

Have a great weekend!

NCUA Reveals Regulatory Review Report; NAFCU's 2014 Technology and Security Conference; BSA Blast

Written by Alicia Nealon, Regulatory Compliance Counsel

Last week, NCUA’s Office of General Counsel released  its 2013 Regulatory Review report, concluding its annual review of one-third of  NCUA’s rules and regulations, which this year included CUSOs, appraisals, member business lending and the Central Liquidity Facility. The report confirms that NCUA will be addressing a number of issues that NAFCU continues to fight for to ease regulatory burden on credit unions. Particularly, the Office of General Counsel recommended that the NCUA Board consider eliminating or amending several of the regulations raised in NAFCU’s “Dirty Dozen.” 

For those of you who haven’t had a chance to see it, NAFCU prepared a list of twelve regulations- the “dirty dozen”-  that regulators need to eliminate or amend because they are unnecessary, outdated, or overly burdensome on credit unions. This Regulatory Review report affirms that NCUA is considering a number of recommendations included on the "dirty dozen" list as it reviews possible changes in rules on incidental powers, member business lending and appraisals.

The first of NAFCU’s “Dirty Dozen” is a call to expand credit union investment authority to include permissible investments in derivatives, securitization and mortgage servicing rights. The review notes that the NCUA Board may look into expanding credit unions’ incidental powers in allowing them to securitize their own loans. The agency is also expected to issue a rule on derivatives at the board meeting on Jan. 23.

The report mentions possible updates to the agency’s MBL rule, a change NAFCU pushed for as the fifth of its “Dirty Dozen.” These proposed updates would “reflect the current business climate” and address issues such as calculating market value in construction-related business loans and valuation-related issues. The report also raised the prospect of changes to the MBL rule’s personal guarantee requirement and its two-year direct experience requirement.

Addressing the final recommendation of the “Dirty Dozen,” the report recommends that the Board amend Section 722 to eliminate redundant NCUA requirements on credit unions to provide copies of appraisals upon request. 

Finally, the report acknowledges that the Dodd-Frank Act transferred the Fair Credit Reporting regulation to the CFPB and advises that Section 717 should be transferred to the CFPB. It also gives hope that NCUA may tackle other issues including modernizing advertising rules, and rules on notification of credit unions’ insurance status. 

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NAFCU's 2014 Technology and Security Conference.  NAFCU’s 2014 Technology and Security Conference, which will be held February 11-13 in Las Vegas, is a great place to discover the latest credit union security and technology trends. Conference topics include fraud trends, core processing issues, big data and credit union crisis management.  Check out more information about the conference and register here.

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BSA Blast – The January 2014 edition of NAFCU’s BSA Blast is now available (a NAFCU member login is needed).  This issue is all about enforcement – from FinCEN’s enhanced focus on holding financial institutions responsible for Bank Secrecy Act (BSA) violations and its enforcement action against JP Morgan Chase in connection with the Madoff scandal to recent OFAC enforcement actions against three banks. In addition the issue contains a new BSA quiz for use in staff training.

Creating a Safe and Modern 21st Century Payment System; Programming Note; Free Kick; Invaluable Knowledge

Written by Ricardo Piñeres, Regulatory Compliance Counsel

My name is Ricardo Piñeres, and I am the new Regulatory Compliance Counsel here at NAFCU.  I know what you’re thinking: “Did I somehow trip into a time machine and get propelled into the future?  Aren’t Alicia and Brandy the new Regulatory Compliance Counsels?”  Well, things move pretty fast here at NAFCU, and in an effort to better help our members navigate the crazy world of compliance, I have also been added to the team.  I truly look forward to sharing my thoughts on compliance issues on this blog.

While you may not have time traveled, I do want you to spend some time thinking about the future.  What will our payment systems look like as we continue boldly pushing forward into the 21^st Century?  While cash, checks, ACHs, and other forms of payment have served us well for many years, our industry is at an interesting crossroads.  Consumers are demanding more real-time transactions that do not compromise security.  Consumer electronics and the technology that powers them are getting more powerful with every passing second.  It’s only a matter of time before our current payment systems become obsolete.

So, why should you care?  Isn’t this a discussion for the technocrats, market researchers, and product development teams both within and outside of the financial services industry?  While they may be the driving forces behind much of the changes that will inevitably be coming, compliance specialists absolutely need to take an active role in the discussions.  It is you who will be tasked with ensuring that these payment systems and the processes that our institutions use in making them work are fully compliant with both current and future laws.  Therefore, you need to be thinking of what you want these systems to look like and how you think they should be regulated.

Back in September, the Federal Reserve Banks released a white paper that outlined what they preliminarily view as the goals of payment systems evolution and the hurdles that lie ahead.  In this white paper the Federal Reserve Banks have identified five desired outcomes that they want to be accomplished within ten years.  They are:

• Key improvements to the future state of the payment system have been collectively identified and embraced by payment participants, and material progress has been made in implementing them.
• A ubiquitous electronic solution(s) for making retail payments exists that does not require the sender to know the bank account number of the recipient.  Confirmation of good funds will be made at the initiation of the payment.  The sender and receiver will receive timely notification that the payment has been made.  Funds will be debited from the payer and made available in near real time to the payee.
• Over the long run, greater electronification and process improvements have reduced the average end-to-end (societal) costs of payment transactions and resulted in innovative payment services that deliver improved value to consumers, businesses, and governments.
• Consumers and businesses have better choice in making convenient, cost-effective, and timely cross-border payments from and to the United States.
• The Federal Reserve Banks have collaborated, as appropriate, with the industry to promote the security of the payment system from end-to-end amid a rapidly evolving technology and threat environment.  In addition, public confidence in the security of Federal Reserve financial services has remained high.

While it is great that the Federal Reserve Banks are proactively working towards the modernization of the U.S. payment system, it needs to be industry leaders that are the driving force behind any changes to the payment system.  It would be akin to the government having stepped in and mandated a winner in the VHS/BETA Max and Blu-Ray/HD-DVD wars.  The industry standards were set by consumer choice, and the same needs to happen with the evolution of payment systems.  The growth of a modern payment system must happen naturally with tech companies, financial services institutions, payment networks, consumer groups, and other interested parties coming together to see what are the best solutions to this complex puzzle.  The Federal Reserve Banks’ role should be akin to a moderator working to ensure that all interested parties are a part of the developmental process.  That being said, the various industries must be allowed enough autonomy from the Federal Reserve Banks to find real and practical solutions that address the various issues in creating a safe and modern payment system.

NAFCU’s Regulatory Alert (13-EA-31) on the Federal Reserve Banks’ white paper on improving payment systems is available here (NAFCU log-in required).  Also, take a look at this CU Insight post – written by Carrie Hunt: Let Industry Lead the Way for Payment System Reform. 

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Programming Note.  NAFCU’s offices will close today at noon for the Martin Luther King, Jr. holiday and will reopen on Tuesday, January 21.  We will be back to blogging on Wednesday, January 22.

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Free Kick. As you get to better know me, you will learn about my love for football (soccer), and with each one of my blog posts, I’ll be adding a short thought on the world of football.  Today’s thought:

What better way to mentally fight the cold of this winter than by being transported to Brazil through the sounds of Gaby Amarantos and Monobloco’s Todo Mundo, Coca-Cola’s anthem for this year’s World Cup (an English version was recently released by David Correy and a Spanish version has been released by Carlos Vives – my favorite musician).  It’s got a great beat and reminds me that there are only 145 days until the tournament begins!

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Last Day for Early Bird Savings - NAFCU's Regulatory Compliance School.  Before you leave for the weekend, lock in your $100 in early-bird savings for NAFCU’s Regulatory Compliance School March 10-15 in National Harbor, Md. Today is the last day to save!  You’ll get credit union regulatory compliance from A to Z, plus the chance to take the exams to earn the respected title of NAFCU Certified Compliance Officer.

 

NCUA Regulatory Alerts; CFPB Updates Consumer Brochures & Examination Manuals; Upcoming Webcast

Written by Brandy Bruyere, Regulatory Compliance Counsel

We hope everyone successfully survived last Friday’s mortgage rule compliance deadlines! While many of us spent Monday settling into the new regulatory regime, NCUA released two Regulatory Alerts— 14-RA-03 and 14-RA-04 (Alerts). These Alerts provide an overview of the new mortgage servicing rules under Regulation X (RESPA) and Regulation Z (TILA). Most of these rules went into effect on January 10^th and these Alerts are helpful basic summaries of these rules.

Together, these two Alerts address the nine mortgage servicing provisions. The first three are under Regulation Z and the last six are under Regulation X:

• Periodic statements;
• Adjustable Rate Mortgage (ARM) disclosure notices;
• Prompt crediting and payoff statements;
• Force-placed insurance;
• Error resolution and information requests;
• General servicing policies, procedures, and requirements;
• Early intervention with delinquent members;
• Continuity of contact with delinquent members;
• Loss mitigation

Generally, the Alerts address the scope of the regulations as well as the content and timing required for various notices and statements. Also, both Alerts summarize the definition of the small servicer exemption:

“How Does a Credit Union Qualify for the Small Servicer Exemption?

Your credit union is considered a small servicer under both the TILA and RESPA Mortgage Servicing rules if:

• Together with any affiliates, you service 5,000 or fewer mortgages, and you (or an affiliate) are the creditor or assignee for all of them.

An affiliate is defined as any company that controls your credit union, is controlled by your credit union, or is under common control with your credit union.6 For example, a credit union service organization (CUSO) that is owned by a credit union is considered an affiliate.

If you service any mortgages you (or an affiliate) did not originate or do not own, you do not qualify as a small servicer, even if you service 5,000 or fewer loans overall. For example, if you service 2,000 loans—1,999 of which you own or originated and one of which you neither own nor originated but for which you own the servicing rights—you do not qualify as a small servicer because you service a loan for which you (or an affiliate) are not the creditor or assignee.

To determine if you are a small servicer, count “mortgage loans” only. A mortgage loan is a closed-end consumer credit transaction secured by a dwelling. Do not include reverse mortgages, timeshare plans, or loans you voluntarily service for a creditor or an assignee that is not an affiliate and for which you do not receive any compensation or fees.

The small servicer exemption is determined each calendar year based on the loans you and your affiliates service as of January 1 for the remainder of the year.

You can lose the small servicer exemption if you:

• Service more than 5,000 loans; or

• Take on the servicing of a loan you do not own or did not originate.

If you lose the exemption, you have six months from the date you stopped being a small servicer or until the next January 1 (whichever is later) to comply with the RESPA/TILA mortgage servicing requirements from which you were exempt as a small servicer.”

Just remember, the small servicer exemption is only available for a few of the mortgage servicing rules. Here is a past NAFCU blog which clarifies which rules are eligible for this exemption.

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CFPB Updates. Also, on Friday the CFPB released two items that may be of interest. The first details changes to certain consumer information brochures (Sample Letters to Mortgage Servicers to Guide Consumers). The second is a notice regarding updates to its examination manuals for mortgage origination and servicing.

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Shameless Plug Alert—Webcast: On Wednesday, February 5^th, NAFCU will host a webcast titled Getting Complaints – What to Do Next to Safeguard and Improve Your Credit Union. A properly activated complaint management process helps satisfy NCUA requirements for documenting and responding to customer criticisms. Register by Jan. 29 to save $100 and learn the steps your credit union should be implementing.

I’ll end on a palate cleanser, at least for those who love dogs. My husband and I adopted our dog from a local rescue two years ago, and during that time my dog has almost grown as big and robust as mortgage regulations. It’s hard to believe he was ever so “small.”

 

NCUA’s Supervisory Focus for 2014; NCUA Webinar on Exam Modernization

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA’s Supervisory Focus for 2014.  Last Friday, NCUA released Letter 14-CU-02, detailing its 2014 examination focus. For 2014, the emphasis is heavy on risk mitigation. From the letter – “In 2014, NCUA will be working to ensure that credit unions identify and mitigate forward-looking risks before they threaten the viability of credit unions and the stability of the Share Insurance Fund.” (My emphasis.)

Specific areas of supervisory focus for 2014 include:

• Interest Rate Risk
• Cybersecurity Threats
• Money Services Businesses (MSBs)
• Private Student Lending

In addition to these specific areas of focus, the letter highlights compliance with new rules.  NCUA also says it will be looking to reallocate resources “more efficiently and effectively” and describes several steps NCUA will be taking in 2014, intended to improve and streamline the exam process – let’s hope so!

The information in this letter is invaluable for exam preparation this year, so be sure to give it a read, available here.

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NCUA Webinar on Exam Modernization. This month, NCUA will be hosting a free webinar on its new examination report process. The webinar will provide an overview of the changes NCUA has made to streamline and improve the consistency of the examination report process, and give participants an opportunity to get a better understanding of the new procedures related to Documents of Resolution and the examination report.

This free webinar will be held on Wednesday, January 22, 2014, at 2 p.m. EST. Register here.

Participants may submit questions in advance at [email protected]. The subject line of the email should read “Examination Modernization Webinar.”

NCUA Letter to Credit Unions on QM and Non-QM Loans; Fannie Mae Updates

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, we blogged about NCUA’s Regulatory Alert on Ability-to-Repay (ATR) and Qualified Mortgages (QM), two of several mortgage rules that go into effect as of today.   In the Regulatory Alert, NCUA stated that it would be releasing a Supervisory Letter to its examiners pertaining to the subject matter.  As promised, the Supervisory Letter accompanied NCUA’s Letter to Credit Unions 14-CU-01 as an enclosure. 

The Letter to Credit Unions (Letter) reiterates that “NCUA field staff will take into account a credit union’s good –faith efforts to comply with the new rule.”  Further, the Letter emphasizes that credit unions may originate both QM and non-QM loans, explaining that non-QM lending can be an effective member service if conducted safely and soundly.  NCUA’s field staff will be placing an emphasis on safety and soundness implications which will not be judged solely on the basis of a loan’s status as QM or non-QM.

Addressed to the NCUA Examiners, the enclosed Supervisory Letter provides guidance to credit union mortgage lenders on the expectations for complying with the Consumer Financial Protection Bureau (CFPB)’s final ATR and QM rules.  It describes specific examination procedures and expectations for credit unions and may serve as another handy tool for preparing for your examination.

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Fannie Mae Updates. As a follow-up to our recent blogs (here and here) on FHFA fee increases, FHFA Director Mel Watt announced that his agency is reconsidering guaranteed fee hikes announced last year by Fannie Mae and Freddie Mac.  Watt also stated that any changes in fees will not be implemented for at least 120 days following review.

Other recent Fannie Mae news:  Fannie Mae published a new web page with information about the recently implemented Appraiser Quality Monitoring (AQM) process (described in Lender Letter LL-2013-10). The new AQM page includes FAQs and a link to the AQM list identifying appraisers whose appraisals will be subject to 100% review by Fannie Mae or whose appraisals are no longer accepted by Fannie Mae.  

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I wish you all a happy Friday and a great weekend!

 

Just Here to Help; NAFCU's Compliance Team

Written by JiJi Bahhur, Director of Regulatory Compliance

With several of the new mortgage rules set to go into effect tomorrow, including ability-to-repay and qualified mortgages, the NAFCU compliance team wanted to take a moment to reach out to those that have been tirelessly involved in implementing compliance programs to address the numerously burdensome changes.  It has been a long, hard (and of course expensive) journey, and unfortunately, it’s not over.

We have heard that there are credit unions (or really, in many cases, their vendors) that aren’t going to be ready by tomorrow.  As scary as this can be, the credit union still has a leg to stand on: the CFPB and NCUA have both assured credit unions that good faith efforts of compliance will be acceptable in the early months after the new rules become effective.  

More specifically, CFPB Director Richard Cordray has said that the agency is seeking “good faith efforts of substantial compliance” in the first few months.  Echoing the same sentiment, NCUA wrote, in Letter to Credit Unions 14-CU-01, that “[a]s with any new requirement in its early stages after becoming effective, NCUA field staff will take into account a credit union’s good-faith efforts to comply with the new rule.”

Having this leg to stand on is indeed comforting, but only time will tell how this will pan out with the examiners of each agency.  As many credit unions have encountered in the past, examiners from different agencies, or even individual examiners within the same agency, are not always on the same page, especially where there isn’t a detailed definition of “good faith efforts of substantial compliance” available. 

NAFCU has been here to assist you with these upcoming rules and will continue to do so, both through our advocacy with the agencies and through numerous compliance resources that NAFCU has authored. To help with complying with these mortgage changes, all of NAFCU’s resources on the new mortgage rules, including Scope & Applicability Charts, articles, blog posts, webcasts and consolidated regulatory text can be found on our special mortgage resources webpage.  And, here are links to articles on various aspects of the mortgage rules that appeared in the Compliance Monitor in the last several months (available with NAFCU login):

• Qualified Mortgages Without the 43 Percent Debt-to-Income Ratio Requirement
• Mortgage Servicing: Error Resolution& Information Request Processing,
• Small Creditor Portfolio Exemption for QMs Explained,
• Understanding the Qualified Mortgage Quagmire,
• New Appraisal Requirements: Regulation B and Higher-Priced Mortgage Loans,
• Mortgage Loan Originator Requirements,
• New Homeownership Counseling Disclosure Requirement, and
• Escrow Requirements for Higher-Priced Mortgage Loans.

Also, to help make researching on the blog a little easier, we created blog categories for mortgage reform posts. The categories are:

• Mortgage Reform – Appraisals,
• Mortgage Reform – Escrow,
• Mortgage Reform – HOEPA/High-Cost,
• Mortgage Reform – Loan Originator,
• Mortgage Reform – Qualified Mortgages; and
• Mortgage Reform – Servicing.

Other NAFCU resources available to assist with the mortgage rules include:

• NAFCU’s Regulatory Compliance School
• NAFCU’s Regulatory Compliance Seminar
• NAFCU’s Online Learning options, including its unlimited webcast subscription.

The CFPB also has numerous resources for complying with the mortgage rules, including a central page for their mortgage rule implementation resources. This page includes compliance guides, videos and other resources.  Additionally, NCUA issued a regulatory alert and supervisory letter to examiners that both provide general guidance for credit unions to comply with the CFPB’s ability-to-repay/qualified mortgage rule for all loan applications received on or after Jan. 10.  NCUA also issued a regulatory alert on mortgage servicing and a regulatory alert on homeownership counseling requirements.

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NAFCU’s Compliance Team.  You may have noticed some new names on the blog.  NAFCU’s compliance team has made some additions in an effort to continue to provide our members with valuable, timely compliance information.  We’d like to take this opportunity to say thank you for being dedicated readers of our blog.  We aspire to provide you with materials that will assist you with your day-to-day needs. 

Data Breaches Happen- NAFCU is Reacting, Are You?

Written by Alicia Nealon, Regulatory Compliance Counsel

As the holidays officially come to a close, and we all deal with the mountain of decorations-to-be-taken-down, gifts-to-be-returned, and unwanted-holiday-pounds-to-lose, the credit union community also has to deal with the holiday gift that nobody asked for- the Target data breach.

In late December 2013, Target confirmed that there was a massive data breach at their stores between November 27 and December 15 of credit and debit card information. There are a few things to consider when a breach of information like this occurs.

First, it may be important for a credit union determine the appropriate operational controls that need to be taken, such as monitoring accounts, closing accounts and reissuing cards.  While they will ultimately be a business decision for the credit union, these decisions will depend on what information from the account has been compromised, as that will dictate the risk of fraudulent and unauthorized transactions that could be charged to the card and/or account. Depending on the number of impacted accounts within an individual credit union, the credit union will have to make the business decision whether to reissue the cards, or close the accounts.

Second, it may be appropriate for a credit union to address its liability for unauthorized transactions.  Both Regulation E and Regulation Z limit a member’s liability for unauthorized transactions. 12 CFR 1005.6; 12 CFR 1026.13. Additionally, the agreements between the credit union and VISA and MasterCard typically require a “zero liability” for the member for unauthorized transactions.  Accordingly, the liability often falls onto the credit union.  To mitigate this risk, credit unions may make the business decision to reissue cards or close compromised accounts. 

There is no technical federal regulatory requirement to for a credit union to notify its members or NCUA of a merchant (e.g., Target) data breach. Credit unions are only required to notify members and NCUA when there has been a direct data breach of the credit union’s system maintained by it or its third-party service provider.  However, member notification, in any data breach context, may help to mitigate against the risk of fraudulent or unauthorized transactions, and NCUA generally would want to know about a merchant breach. If a credit union chooses to alert their members, NCUA’s Regulation Appendix B to Part 748 contains a Guidance on Response Programs for Unauthorized Access to Member Information and Member Notice.  

Overall, the Target breach serves as reminder to credit unions who have card accounts (especially credit card accounts) of the usefulness of having established practices for incidents that compromise their member’s financial and personal information.  These practices, which are designed foremost to protect members and also protect the credit union from the effects of data breaches, can help guide a credit union as it determines what operational control actions are required for dealing with fraudulent activity.

While the Target breach may have been as unwanted as the mountain of holiday decorations, returns and pounds cluttering our households, NAFCU has made one of our new year resolutions to encourage Congress to addresse data security, and retailers to protect consumers from breaches that compromise their financial and personal information. 

2014 HMDA Reporting Threshold; CARD Act and HOEPA Annual Adjustments; Asset-Threshold for HPML Escrow Exemption; Early Bird Savings for NAFCU’s Regulatory Compliance School

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

2014 HMDA Asset Threshold. The CFPB has issued a final rule, effective January 1, 2014, adjusting the asset-size exemption threshold for banks, savings associations, and credit unions under Regulation C, which implements the Home Mortgage Disclosure Act (HMDA).

For 2014, the exemption threshold is $43 million (up from $42 million). Banks, savings associations, and credit unions with assets of $43 million or less as of December 31, 2013, are exempt from collecting data in 2014. Note that an institution’s exemption from collecting data in 2014 does not affect its responsibility to report the data it was required to collect in 2013. The CFPB’s press release is available here.

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CARD Act Penalty Fees Safe Harbor. The CFPB also issued a final rule amending the safe harbor threshold amounts for credit card penalty fees in Regulation Z, section 1026.52(b)(1)(ii)(A) and (B).

Effective January 1, 2014, the adjusted dollar amount for the penalty fees safe harbor is $26. The safe harbor for each subsequent violation within the following six months is $37.

HOEPA Annual Threshold Adjustment. In the same final rule, the CFPB adjusted the statutory fee trigger for HOPEA loans to $632, effective January 1, 2014. Keep in mind that this adjustment applies to loans consummated on or after January 1, 2014, and will apply until the revised HOEPA fee trigger adopted in the CFPB’s 2013 HOEPA final rule takes effect on January 10, 2014. This issue is discussed in the preamble to the final rule:

“The fee trigger being adjusted in this Federal Register notice pursuant to TILA section 103(bb) is used in determining whether a loan is covered by § 1026.32. Such loans have generally been known as “HOEPA loans.” On January 10, 2013, the Bureau issued a final rule pursuant to, inter alia, section 1431 of the Dodd-Frank Act, which revised the statutory fee trigger for HOEPA loans. 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule). The amendments adopted in the 2013 HOEPA Final Rule, including the revised fee trigger, apply to loans for which the creditor received an application on or after January 10, 2014. Id. at 6939. The Bureau is mindful of the need to coordinate implementation of this final rule with the effective date of the January 10th final rule adopting revisions to the HOEPA fee trigger. Accordingly, the adjustment to the fee trigger that is being published today will become effective on January 1, 2014, will apply to loans consummated on or after January 1, 2014, and will apply until the revised HOEPA fee trigger takes effect. Pursuant to section 1431 of the Dodd Frank Act and § 1026.32(a)(1)(ii) as amended by the 2013 HOEPA Final Rule, implementation of the 2013 HOEPA Final Rule will change the HOEPA fee trigger to $1,000, which will be adjusted annually thereafter in accordance with § 1026.32(a)(1)(ii) as amended by the 2013 HOEPA Final Rule. Id. at 6968.” (My emphasis)

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Asset-Threshold for HPML Escrow Exemption.  And the last threshold of mention today: the CFPB issued a final rule effective January 1, 2014 that implements an automatic adjustment to the asset-size exemption for the TILA Higher-Priced Mortgage Loans (HPMLs) escrow account regulation. The rule requires that credit unions maintain an escrow account to cover the costs of property taxes and insurance for HPMLs for a minimum of five years. There is an exemption for certain credit unions that meet the following requirements:

• Operate in a predominantly rural or underserved area;
• The credit union retains its mortgage obligations in portfolio;
• Originated less than 500 first-lien HPMLs during the preceding calendar year; and
• Do not exceed the asset-size threshold set by the CFPB

This final rule will determine which entities qualify for this exemption for 2014. The CFPB is increasing the asset-size threshold by 1.4%, from $2 billion to $2.028 billion. Credit unions that originated fewer than 500 first-lien HMPLs and whose assets were $2.028 billion or below as of December 31, 2013 will be exempt from the TILA escrow requirement for HPMLs. The CFPB’s press release is available here.

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Early Bird Savings for NAFCU’s Regulatory Compliance School. Ready to tackle the new year and get control over compliance issues? Register by January 10 for our Regulatory Compliance School and you’ll save $200 off the registration by using code “HOLIDAY”.  Need a little more time? Register by January 17 and you’ll still save $100 with early bird savings.

NCUA Issues Regulatory Alert on Upcoming Deadline for ATR/QM; NAFCU Regulatory Affairs Team Releases Final Regulation on the TILA/RESPA Final Rule

Written by Brandy Bruyere, Regulatory Compliance Counsel

Yesterday, NCUA released a Regulatory Alert containing an overview of the CFPB’s Ability-to-Repay/Qualified Mortgage (ATR/QM) rule. This rule becomes effective next week and will apply to loan applications received on or after January 10, 2014. Drawing upon several resources including CFPB’s small entity compliance guide and mortgage origination comparison chart, the Regulatory Alert is a helpful summary that simplifies some complex issues. Some of the key topics include:

• The scope of the rule, meaning which loans are covered and which are exempt;
• The eight ATR underwriting factors;
• Explanation of the verification requirements for making its ATR determinations;
• Overview of the record retention requirements;
• Discussion of QMs including the distinction between non-higher priced QMs which receive safe harbor protection and higher-priced QMs which are presumed compliant;
• The four type of QMs (general, temporary, small creditor, and balloon-payment) which NAFCU outlined in this month’s Compliance Monitor (available with login);
• A chart of caps on QM points and fees limits;

The Regulatory Alert notes that NCUA plans to release a Supervisory Letter to examiners prior to the January 10, 2014 deadline. The Alert also includes links to other resources such as the CFPB’s small entity compliance guide, a mortgage origination comparison chart, and a small creditor QM flowchart. Finally, keep in mind that NAFCU has a variety of helpful compliance resources for the upcoming mortgage rules deadlines.

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TILA-RESPA Final Rule. The CFPB’s TILA-RESPA final rule on integrated mortgage disclosures has been published in the Federal Register. We previously blogged about this rule on November 22, 2013. NAFCU’s Regulatory Affairs team has prepared a Final Regulation (13-EF-31) summarizing key aspects of this rule for NAFCU members, available here (with login).