NAFCU Compliance Blog

Webpages and Webinars: NCUA Launches a Consumer Compliance Resource Page and FFIEC a Cybersecurity page; NCUA Hosts Webinar on Mobile Apps

By Eliott C. Ponte, Law Clerk

 

NCUA Consumer Compliance Regulatory Resources Page

Last week the NCUA launched its Consumer Compliance Regulatory Resources webpage.  The webpage is aimed at assisting credit unions with their compliance needs.  Currently, the webpage provides resources in five areas:

1. Dodd-Frank Act Mortgage Lending Resources,
2. Flood Insurance Resources,
3. Fair Lending Compliance Resources,
4. Consumer Credit Resources, and
5. Deposit Resources. 

In each of these areas, the webpage provides access to a repository of resources that include NCUA regulatory alerts, supervisory letters, webinars, videos, and quick reference guides.  The webpage also combines information from other regulatory bodies, such as the CFPB and FFIEC, thus making it very helpful research tool. 

The NCUA has an additional resource webpage titled Additional Consumer Compliance Resources.  The Additional Consume Compliance Resource webpage is a catchall page that includes resources to a wide range of topics, such as social media compliance issues and consumer protection issues for military consumers.

A link to the Consumer Compliance Regulatory Resourceswebpage can be found here.  NAFCU also has a lot of compliance resources available on our website, which includes a webpage dedicated to the CFPB's Mortgage Rules.

 

FFIEC Launches Cyber Security Page Information Hub

Last week FFIEC also published a webpage on cybersecurity:  www.ffiec.gov/cybersecurity.htm.  The webpage is an information hub that contains FFIEC statements and alerts regarding threats and vulnerabilities, and other FFIEC resources.  According to a press release, “FFIEC members are taking a number of steps to raise awareness of cybersecurity risks at financial institutions and the need to identify, assess, and mitigate these risks in light of the increasing volume and sophistication of cyber threats that pose risks to all industries in our society.”  FFIEC plans to update this webpage regularly, thereby making this a government equivalent convenience store for cyber security policies and alerts. 

 

NCUA Webinar on Mobile Apps

The NCUA will be hosting a webinar on mobile apps on Wednesday, July 9, 2014, at 2 PM EST.  The webinar will discuss how consumers are using mobile technology and mobile applications to meet their financial needs.  In addition, participants will hear success stories from credit unions that have developed and implemented their own mobile apps.

To register for this webinar, click on this link.  Participants may submit questions in advance at [email protected].  The NCUA has requested that any questions submitted contain the phrase “Mobile Applications Webinar” in the subject line. 

NCUA’s Proposed Amendments Regarding Appraisals; NCUA Launches Interest Rate Risk Webpage

Written by Brandy Bruyere, Regulatory Compliance Counsel

Last week, we blogged about the NCUA Board’s June meeting and promised to provide some more in-depth information regarding some of the proposed rules that the Board approved. Today, we will review the proposed changes to NCUA’s rules relating to appraisals, specifically those at 722.3(a)(5), Section 701.31(a)(1) & (c)(5) which are a result of NCUA’s annual review of one-third of its rules for possible regulatory modernization.

Section 722.3(a)(5)—Providing Appraisals for Transactions Involving Existing Extensions of Credit

Under the current version of the rule, a credit union must have an appraisal performed by a State certified or licensed appraiser on transactions involving existing extensions of credit except where two conditions are met:

• There is no advancement of new monies other than those necessary to cover reasonable closing costs; and
• There have been no obvious and material changes in market conditions or the property’s physical attributes which would threaten the property’s adequacy as collateral for the loan.

NCUA received many comments noting that this requirement created a lack of parity between the rules credit unions had to follow as compared analogous provisions that apply to other financial institutions. This is because other financial regulators allow this exception if only one of these conditions is met rather than both. NCUA’s proposal is intended to provide parity between NCUA’s rule by changing the conditions to an “or” rather than a conjunctive requirement. However, Section 722.3(d) would still require that these transactions be supported by a valuation that is a “written estimate of market value.”

Section 701.31(c)(5)—Availability of a Copy of the Appraisal to Requesting Members

Currently, Section 701.31(c)(5) requires credit unions to provide a copy of the appraisal produced in connection with a “real estate-related loan application” upon a member’s request.  However, Section 1002.14 of Regulation B requires credit unions to automatically provide an appraisal developed in connection with an application for a first-lien loan on a dwelling. NCUA’s proposal would amend Section 701.31(c)(5) to remove the requirement to provide an appraisal created in relation to a first-lien loan application as this is now duplicative in light of Regulation B. The proposed rule reads as follows:

“§701.31   Nondiscrimination requirements.

…

(c) Nondiscrimination in appraisals.

…

(5) Each Federal credit union shall make available, to any requesting member/applicant, a copy of the appraisal used in connection with that member’s application for a loan to be secured by a subordinate lien on a dwelling. The appraisal shall be available for a period of 25 months after the applicant has received notice from the Federal credit union of the action taken by the Federal credit union on the application for a loan to be secured by a subordinate lien on a dwelling.” (Emphasis added.)

Finally, as we noted last week, NCUA proposed to amend the definition of “application” in Section 701.31(a)(1) to simply cross-reference the definition in Regulation B.

NCUA Launches Interest Rate Risk Resource Page. Interest rate risk is a high priority at NCUA these days, and this topic is one of NCUA’s 2014 Supervisory Focus for exams. Last week, NCUA announced the creation of a webpage that aggregates the agency’s resources relating to interest rate risk.  This includes a video as well as links to specific rules and Letters to Credit Unions.

 
I Don’t Like Mondays. Actually, I don’t know many people who think Mondays are great, but mine was particularly special! I started off at jury duty, but was not selected and sent home early. I was off to a good start! A large segment of a tree spontaneously fell onto our house this past weekend, so we arranged to have the entire tree removed. The tree removers came on Monday, and for the first time in the owner’s 15+ years of experience, the crane fell onto our house with its brand new roof! Luckily, no one was hurt and the tree remover had my roof repaired, good as new, within 24 hours.

 

CFPB Issues Consent Order against Bank for Deceptive Marketing of Credit Card Add-On Products and Discriminatory Credit Card Practices

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Last week, the CFPB ordered Synchrony Bank, formerly known as GE Capital Retail Bank (“Bank”), to pay an estimated $225 million to consumers harmed by deceptive marketing of credit card add-on products and borrowers excluded from credit card debt relief offers because of their national origin. Of that amount, $56 million goes to approximately 638,000 consumers who were subjected to deceptive marketing practices, and the remaining $169 million goes to approximately 108,000 borrowers who were excluded from debt relief offers as part of a joint enforcement action by the CFPB and Department of Justice. The CFPB also assessed a civil money penalty of $3.5 million for the deceptive marketing practices. The CFPB’s press release is available here.

Deceptive Marketing. Similar to a CFPB order that we blogged about a couple of months ago against Bank of America, N.A. and FIA Card Services, N.A., the marketing practices cited in this order focus on credit card add-on products, specifically debt-cancellation products.  From the press release:

“The Bureau found that GE Capital’s telemarketers misrepresented these products to consumers in four main ways:

• Marketed the product as free of charge: Telemarketers led consumers to believe they would not have to pay for these products as long as they paid off the balance on their billing statement. In fact, consumers could only avoid the fee in very specific circumstances, such as if the account was not in use or if the customer had paid off the balance prior to GE Capital issuing its monthly billing statement.

 

• Failed to disclose consumers’ ineligibility: In calls with telemarketers, many consumers mentioned that they were retired or disabled, which would mean that they were not eligible for key benefits of the products. Even after hearing this, the telemarketers neglected to tell the consumers that they would not be eligible for key debt cancellation benefits, and the consumers bought the products without this important information.

 

• Failed to disclose that consumers were making a purchase: In many cases, the telemarketers did not make it clear that consumers were purchasing a product. Rather, they made it seem like the consumers were receiving a benefit, updating their accounts, or that the telemarketers were handling other administrative tasks. In these conversations, it was not obvious to consumers that they were buying something and would be charged a fee.

 

• Marketed products as a limited time offer: Many customer service representatives falsely told consumers that these debt cancellation products were a “limited time offer.” In reality, nothing about the availability      of these products was limited. However, leading consumers to believe they had a short timeframe to sign up may have created a false sense of pressure and pushed them to enroll in the products.”

Under the order, the Bank is required to submit a compliance plan to prevent future violations to its CFPB Regional Director before marketing, soliciting, or selling credit card add-on products by phone.  The order also requires the Bank to strengthen oversight over any third-party vendors used in connection with marketing or selling add-on products.  These requirements are similar to those contained in the order issued against Bank of America, N.A. and FIA Card Services, N.A. for deceptive marketing practices.

***

Discriminatory Credit Card Practices. The CFPB also found that the Bank engaged in discriminatory practices related to credit card debt relief offers.  According to the order, the Bank offered two promotions to credit card customers with delinquent accounts that allowed the customers to settle their balance by paying off a portion of their debt. However, this offer was not extended to customers who indicated a preference to communicate in Spanish or who had a mailing address in Puerto Rico, even if the customers otherwise met the criteria for the offer. 

Pursuant to the order, the Bank must provide remediation of at least $169 million to affected consumers in the form of monetary payments, credits, and waivers on accounts, representing the value of the excluded offer, lost interest, and indirect damages.  Additionally, the Bank is required to work with credit reporting agencies to remove any negative information in consumers’ credit histories as a result of these violations. 

Although the CFPB assessed a civil money penalty for the deceptive marketing practices, it did not assess a civil money penalty for the discriminatory debt relief offer exclusions – the CFPB indicated that this was based on a totality of the circumstances, including the Bank’s self-policing, prompt reporting to the CFPB, self-initiated consumer remediation, and cooperation with the CFPB’s investigation.

For complete details, the CFPB’s order is available in its entirety here.

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Free Compliance Training. Another great perk of being a NAFCU member! Now you can access six full compliance webcasts and self-paced modules free, and experience the convenient benefits of NAFCU’s Compliance Webcast & Online Training Subscription firsthand. Log in now and select NAFCU Member Online Sampler (you may have to click the blue plus sign in the lower right corner first). If you don't have a login, you can sign up for a username and password. Let the new Compliance Webcast & Online Training Subscription make your compliance training easy now.

SBA Announces New Business Credit Score Model; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

SBA Announces New Business Credit Score Model.  The Small Business Administration (SBA) is currently in the final phases of preparation before launching a new predictive business credit scoring model.  SBA Administrator Maria Contreras Sweet made this announcement as part of a speech on June 10, at the Center for American Progress in Washington, D.C.  The new model will produce a score based upon a combination of an entrepreneur’s personal and business credit scores, and it will be made available to all SBA lending partners for loans of $350,000 or less starting in July.

The SBA has been working on this initiative for over a decade, and the agency believes that transitioning over to this new model will “make it easier and less time-intensive for banks to do business with the SBA.”  One of the reasons that the SBA is touting the new model’s time savings is because under the new model a lender will no longer need to run an analysis of the borrowing company’s cash flow.  According to the agency, this step was a cumbersome one that delayed many loan decisions.  Furthermore, according to the SBA, the new model “ensures that risk characteristics – not socio-economic factors – determine who is deemed creditworthy.”

Along with announcing this new predictive business credit scoring model, SBA Administrator Contreras Sweet also spoke about the SBA One initiative during her speech that was largely focused on how the SBA and its programs need to continue becoming more inclusive of minorities and women.  SBA One, when launched, will be an interactive and user-friendly SBA lending platform that aims to save credit unions and other lenders processing time on the agency’s 7(a) loan program by replacing fax machines and paperwork with automated uploads of  documents, generation of forms and allows electronic signatures.  Contreras Sweet said, “[b]y making the process quicker, cheaper and more intuitive, these reforms will help existing lenders do more small-dollar lending.”  There is no launch date yet available for SBA One.

Along with announcing these two initiatives, Contreras Sweet talked about the agency’s focus on getting more loans to qualified business owners.  She highlighted three areas that the SBA will be focusing on in this effort.  First, the agency is planning to modernize and implement smart systems, so that the SBA is in a position to keep pace with technological advances.  Second, the SBA wants to create a more inclusive agency by tailoring programs that embrace the U.S.’s changing demographics and are more responsive to future demographic shifts.  Lastly, the agency wants to serve as a market maker for small companies by opening new business channels within the federal government, corporate supply chains, and international commerce.

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Free Kick.  The group stage is now two-thirds of the way done, and there is not much more than can be said about the quality of play other than - wow!  This World Cup has had it all so far: amazing goals (another one); heroic individual efforts; incredible upsets; and uplifting performances.  Here is a short primer on where we stand (from my perspective).

Most Impressive teams: Colombia, France, and Germany

Biggest surprise: Costa Rica

Biggest disappointments: Argentina and Spain

Top performers: Guillermo Ochoa, Thomas Muller, and Luis Suarez

In terms of my rooting interests, I am still on a high after Colombia booked its place in the Round of 16 last Thursday.  This is the first time that they have made it out of the group stage since 1990, and I think that Los Cafeteros can win a few more games during this tournament.  James Rodriguez has been excellent, the defense has been solid, Juan Cuadrado has been an unending creative spark in the midfield, and Jose Pekerman has been expertly pulling the strings both in terms of tactics and personnel.  VAMOS COLOMBIA!

Turning to the U.S. squad, I think that all of our collective hearts dropped when Portugal scored that equalizer at the last possible second.  That it came from a Cristiano Ronaldo cross after he had been forced into irrelevancy for 94 minutes was even more deflating.  So, where does that leave the U.S. in terms of qualifying for the business end of the tournament?  They have four points (tied with Germany atop the group, but in second place due to goal differential) entering the last pair of group matches.  Here are the qualifying scenarios facing the U.S. for Thursday’s game (12:00 pm EDT) against Germany:

• The U.S. wins the group if they beat Germany.
• The U.S. advances to the Round of 16 as the second place team in the group if:
  • They draw against Germany;
  • They lose against Germany and the Ghana-Portugal game ends in a draw;
  • They lose against Germany, Portugal beats Ghana, and Portugal’s goal differential in the final game is greater than the U.S.’s by four or less;
  • They lose against Germany by one goal, Ghana beats Portugal by one goal, and Ghana scores an equal number or less goals than the U.S. in their last games; or
  • They lose against Germany by a score of 3-0, Portugal beats Ghana by a score of 2-0, and the U.S. wins the drawing of lots against Portugal.

LET'S GO USA!

NCUA Tackles Packed Agenda at June Board Meeting

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

1. Final Rule, Part 710 of NCUA’s Rules and Regulations, Voluntary Liquidations;
2. Proposed Rule, Part 721 of NCUA’s Rules and Regulations, Asset Securitization;
3. Proposed Rule, Part 709 of NCUA’s Rules and Regulations, Safe Harbor;
4. Proposed Rule, Parts 701 and 722 of NCUA’s Rules and Regulations, Appraisals;
5. Request to Convert Charter, Mainstreet Credit Union (Lenexa, Kansas).

Final Rule on Voluntary Liquidations. The Board approved a final rule which, through some technical changes, aims to “reduc[e] administrative burdens on voluntarily liquidating federal credit unions (FCUs) and recognizes technical advances…” Specifically, the final rule will allow those FCUs who voluntarily liquidate to publish required notices to creditors using electronic media instead of only “newspapers of general circulation.” The rule also increases the asset-size thresholds that dictate the number of notices a liquidating credit union must publish under 12 C.F.R. 710.5(a)(1)-(3). Finally, this rule limits preliminary partial distributions to members to the amount the share account is covered by share insurance and allows credit unions the flexibility to make these distributions by wire or electronically.

Proposed Rule on Asset Securitization. The Board also approved the issue of a proposed rule which would allow credit unions to securitize their own loans “as an activity incidental to the business for which an FCU is chartered…” The proposed rule includes multiple requirements credit unions would have to meet to be eligible for such asset securitizations:

• The FCU must have originated the loans;
• The FCU must create a “special purpose vehicle” or “special purpose entity” to hold the assets that serve as the collateral backing the security. The special purpose vehicle/entity must be structured such that its assets cannot be reached by the FCU’s creditors in the case of bankruptcy;
• The FCU must comply with all federal and state laws relating to securitizing transactions;
• The FCU must establish independent risk management and controls related to its asset securitizations;
• The FCU must audit its securitization transactions annually;
• The FCU’s board must have a general understanding of the asset securitization activities and their relation to the credit union’s overall business plan and strategy;
• The FCU’s senior management that oversees the asset securitization program must have expertise in these kinds of transactions and facilitate oversight of third-parties involved in the program;
• The FCU’s board must approve the policy using particularized information and criteria;
• The FCU must utilize effective internal controls to detect errors and ensure compliance with contractual obligations.

The proposal imposes a limit on carried residual interests and retained interests to 25 percent of the credit union's net worth. The Board also approved a proposed rule on Part 709 of NCUA’s Rules and Regulations, Safe Harbor. This directly relates to the asset securitization proposal and addresses the treatment of securitized assets that are transferred to NCUA in the case of the Board acting as liquidating agent or conservator of a FCU.

Proposed Rule on Appraisals. The Board also approved a proposed rule amending three of NCUA’s appraisal provisions. First, the proposal would make a “technical amendment” to 12 C.F.R. 701.31(a)(1) by changing the definition of the term “application.” The rule currently cross-references and quotes the definitions section of Regulation B. The proposal would amend the quotation to reflect the current Regulation B definition.

The proposed rule would also eliminate the requirement at 12 C.F.R. 701.31(c)(5) to give members a copy of an appraisal upon request for first lien loans secured by a dwelling. The reasoning is that this provision is now duplicative given Regulation B’s appraisal requirements. However, members may still request a copy of the appraisal for subordinate loans secured by real estate. Finally, the proposed rule would amend 12 C.F.R. 722.3(a)(5), which relates to appraiser independence, by expanding an exemption. Specifically, the amendment would allow credit unions to refinance or modify existing loans without obtaining a new appraisal, “if there is no advancement of new monies or if there is adequate collateral protection, even with the advancement of new monies.”

Overall, the final and proposed rules are positive for credit unions as the changes either reduce regulatory burden or provide credit unions with additional flexibility in managing their assets. In addition to more detailed blogs, NAFCU’s Regulatory Affairs team will also issue Regulatory Alerts and a Final Regulation on these issues for NAFCU members which will provide particular details on these items.

Still Works for Treats. While we’re sharing positive news, my husband and I discovered this weekend that Lemmy does not like balloons when we used him to help announce some news of our own! We are expecting a baby boy in October, and while Lemmy does appear concerned about this new development, it’s really just the balloons. He was heavily rewarded with his favorite treats for his patience and modeling skills!

Funnel Accounts and Trade-Based Money Laundering Used to “Clean” Drug Proceeds

Written by Shari R. Pogach, Regulatory Paralegal

Late in May, the Financial Crimes Enforcement Network (FinCEN) issued FIN-2014-A005 advising credit unions that funnel accounts in conjunction with trade-based money laundering are increasingly being used as a way around the restrictions on U.S. cash transactions in Mexico.

 You may ask, what’s a funnel account? 

 “Funnel Account:  An individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals.”

How is the funnel account used with trade-based money laundering (TBML)?

FinCEN’s advisory outlines how this typically works:

1. In collusion with a criminal organization, such as a drug trafficking entity, a U.S. or foreign business owner or other individual opens an account at a credit union where cash deposits can easily be received in multiple states, either through the credit union’s branches or shared branches.
2. Acting on behalf of the drug traffickers, multiple individuals deposit the cash proceeds of drug sales into the account at different branches, often in states or locations far distant from the branch where the account was opened.  Deposits are kept below the currency transaction reporting threshold trigger of $10,000.
3. After the account has built up a number of deposits, an intermediary will initiate wire transfers (or issue checks) from the funnel account to a U.S. or foreign-based business to buy goods that are then shipped to other foreign countries for sale.
4. The goods are then sold and the proceeds, in the destination country’s currency, are transferred to the drug trafficking organization with funds that have been laundered through TBML.

When such goods are sold in Mexico, a drug trafficking organization or its intermediary called a “money broker” or “peso broker” will contract with a U.S. or Mexican business owner to open a funnel account.  The peso broker directs the drug operations proceeds into the funnel account.  Payments from this account go to purchasing U.S. and foreign goods.  The goods are then shipped to Mexico and sold for pesos. 

So there you have it.  The drug trafficker has exchanged its U.S. dollar cash proceeds in the United States for Mexican pesos in Mexico through the use of the funnel account and TBML.  The criminal funds have been repatriated with apparently plausible, legitimate business transactions.

 

The CFPB Begins Its Journey Into Mobile Banking

Written by Eliott C. Ponte, Law Clerk

Mobile technology in banking is new to federal regulators.  Within the last year, several federal regulators have become interested in mobile banking due to its popularity among consumers.  Most recently, Director Richard Cordray, while making a statement on mobile banking in Louisiana, stated that “in this modern age where people can manage their money on the go, there is great potential to provide access to more consumers and allow them to take greater control of their financial lives.  At the same time, using mobile devices for all sorts of banking services can make some transactions cheaper or faster or both.”  While hailing the benefits of the melding of technology and banking, Director Corday also advocated caution and concern:  “we need to make sure that the legal and regulatory framework can keep up effectively, so that all consumers can remain protected whether they are opening their wallet or scanning the screen on their smartphone.”

These remarks from Director Cordray come after both the Federal Reserve and the Federal Deposit Insurance Corporation announced the completion of their own studies on mobile banking.  The Federal Reserve’s study on mobile banking, which was released in March of 2014, looked the trends in adoption and use of mobile banking and payments, and the emergence of mobile financial services affect how consumers interact with financial institutions.  The Federal Reserve concluded that mobile phones are changing the way consumers access financial services and make payments.  Specifically, the Federal Reserve noted that in the last 12 months:  more than half of all consumers with smartphones used mobile banking, 93% of mobile banking users used mobile banking is to check account balances or recent transactions, and about 20% of all mobile phone users (smartphone and non-smartphone users) have made mobile payments.  

Shortly after the publication of the Federal Reserve Survey, the FDIC released a white paper on mobile banking using the data from its 2011 National Survey of Unbanked and Underbanked.  According to the FDIC, the key finding from their white paper is that mobile banking “is best positioned to have an economic inclusion impact through its ability to meet day‐to‐day financial services needs of underbanked consumers as well as consumers at risk of account closure” in the short run.  Moreover, the white paper concluded that the significant gap in banking services to the underserved could be bridged by the use of mobile banking. 

As evident by Director Cordray’s remarks, the CFPB is seeking to pick up where the Federal Reserve and the FDIC left off.  “Our colleagues at the Federal Deposit Insurance Corporation and the Federal Reserve have already done laudable work in this area.  Both have taken important steps to address the subject of mobile banking.  Today the Consumer Bureau is issuing a formal Request for Information that touches on a wide array of issues related to mobile banking and financial management services.  We want to know more about how emerging technologies are affecting the opportunities and challenges that consumers are facing.  The inquiry also specifically addresses how the use of mobile payment products can be used to improve the financial lives of underserved consumers.” 

It is unclear what the CFPB will do with the information it receives and if/how the CFPB seeks to regulate mobile banking.  Usually, statements by the Director Corday foreshadow new regulations and compliance burden.  I am hoping that this study is solely aimed at check cashing services, as some check cashing companies have also moved into remote capture services to expand their reach to more consumers.  Regardless of the CFPB’s intentions, however, credit unions are very aware that the CFPB does not take into account how their regulations affect smaller institutions (or it appears that they do not).  Thus, credit union compliance officers should be aware that regulations on mobile banking may follow in the near future.

For more information regarding the CFPB’s request or to respond to the CFPB’s request, click on this link.  Submissions and responses to the CFPB’s request must be received on or before September 10, 2014, either electronically or by mail.

 

NCUA Officially Clarifies CUSO Confusion; First Vacation with the Family

Written by JiJi Bahhur, Director of Regulatory Compliance

Over the last several months, NAFCU’s compliance team has received a number of questions from our members who have experienced some confusion with the CUSO rule.  Today, I’d like to share a real-life question we’ve received over a dozen of times, the response we’ve been providing to our members, and the clarification provided late last week by the National Credit Union Administration (NCUA).  The purpose of sharing our members’ question is to illustrate why the confusion arose.  I’ve also provided the response from NAFCU’s compliance team to our members, and although it is accurate, you’ll want to use and rely on NCUA’s clarification which is located in NCUA Letter to Credit Unions 14-CU-07 (discussed further below).

Real-Life Question:

We do not invest in or lend to a CUSO, but we do have a CUSO that we do other business with.  Do we have to amend our written agreement with this CUSO?  NCUA Letter to Credit Unions 13-CU-13 states that credit unions are required “to ensure that the CUSOs with which they do business agree to provide certain information directly to NCUA and the state supervisory authority, as applicable, on an annual basis.”  This statement seems to include all CUSOs with which a credit union does business and not just those that the credit union invests in or lends to.

NAFCU’s Response (Prior to 14-CU-07):

NCUA’s Letter to Credit Unions 13-CU-13 appears to have caused confusion amongst credit unions by including language that is broader than that required by the regulatory text.  NAFCU has received a number of inquiries from our members on this issue and we are looking into it. 

In the meantime, although 13-CU-13 seems to indicate broader coverage of the requirement to amend written agreements between credit unions and CUSOs, the regulatory text of the CUSO rule is limited to those CUSOs with which the credit union lends to or invests in.  Usually, the regulatory text prevails which would mean that the requirement to amend agreements applies only to those CUSOs the credit union invests in or lends to; however, we hope to see further clarification from NCUA in the near future to clear up some of this confusion.

NCUA’s Clarification:

Late last week, the NCUA released 14-CU-07 which clarifies whether a credit union must amend written agreements with all CUSOs it does business with or just those with which it lends to or invests in.  From the Letter:

“[T]here has been some confusion as to which credit unions must enter into a written agreement requiring a CUSO to submit annual reports. This letter clarifies that only those FICUs investing in or lending to a CUSO are subject to this part of the CUSO rule.

A FICU that only receives products or services from a CUSO—but does not have an investment in or a loan outstanding to a CUSO—is not subject to the requirement.“

NCUA further clarifies this issue in Legal Opinion Letter 14-0502. 

“You have asked for clarification of a provision in NCUA’s newly amended credit union service organization (CUSO) regulation. Specifically, you have asked if a federally insured credit union (FICU) receiving products or services from a CUSO must enter into a written agreement in which the CUSO is obligated to submit an annual report to NCUA even if the FICU does not have an investment in or loan outstanding to the CUSO. The answer is no. The amended CUSO rule requires only those FICUs investing in or lending to a CUSO to obtain a written agreement requiring the CUSO to submit annual reports.

The NCUA Board amended the CUSO rule on November 21, 2013. The new rule requires, among other things, a FICU to contractually bind a CUSO to submit an annual report to NCUA. Specifically, new §712.3(d)(4) states: “A FICU must obtain a written agreement from a CUSO before investing in or lending to the CUSO” that the CUSO will “annually submit . . . a report directly to NCUA and the appropriate state supervisory authority, if applicable.” (Emphasis added).

Accordingly, it is clear that a FICU that invests in or lends to a CUSO must comply with the new §712.3(d)(4) annual reporting requirement. However, §712.3(d)(3) of the CUSO rule, which addresses access to CUSO books and records, makes reference to FISCUs with an investment in, loan to, or “contractual agreement for products or services with the CUSO.” You have asked if the contractual agreement language in §712.3(d)(3) infers that FICUs with only a service contract with a CUSO must also obtain a written agreement for the CUSO to submit an annual report under new §712.3(d)(4). No, it does not.” 

In short, the confusion (regarding the above question) has come to an end.  A credit union does not need to amend written agreements with all CUSOs with which it does business; rather, it must amend written agreements with those CUSOs it invests in or lends to. 

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First Vacation with the Family.  Last weekend, my husband, children and I took our first vacation together as a family.  We went to Virginia Beach and had a fabulous time.  Here are some photos of the fun we had!

NACHA Issues Resource on Evaluating Higher-Risk ACH Originators

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NACHA recently issued a new resource entitled Sound Business Practices for Evaluating Customer Risk which is generally designed to help financial institutions assess and monitor the risks associated with ACH originators for which they open or maintain accounts.

The resource is divided into the following broad sections:

Enterprise-Level Policies, Procedures and Assessments

General Policies

Regulatory References

Line of Business-Based Policies

ACH Client Policies, Procedures and Assessments

General Policies

Line of Business-Based Policies

Activity Policies

Regulation-Related Policies

Additional Investigation and Recordkeeping

NACHA indicates that the “sound business practices in this document are not intended to be prescriptive; instead, they provide Originating Depository Financial Institutions (ODFIs) with approaches that may be useful in developing, assessing and tailoring an appropriate and comprehensive due diligence process.”

In addition to providing general practices related to evaluating the credit, operational, regulatory and reputational risk of ACH originators, the document includes practices aimed at evaluating the risk posed by an ACH originator as a result of its line of business.  For an example of the recommended practices, here’s an excerpt from pages 6-7 on the evaluation of specific risks posed by ACH originators based on their line of business.

"ACH Line of Business-Based Policies

• Identify classifications of businesses and transactions that are of specific concern to ACH:

− Identify concerns for business types defined as more likely to pose an elevated level of risk and determine what actions should be taken to address those concerns

− Understand the products or services that the Originator is selling and its target audience

− Ensure that authorizations for such products or services comply with NACHA Operating Rules

− Determine if the Originator is selling online. If so, review authorization verbiage as well as the product satisfaction guarantee

• Assess Standard Entry Class (SEC) Codes to be used (for example, PPD, WEB, or ARC) along with specific types of payments (for example, mortgage payments; online bill payment; recurring bill payment)

• Consider the varying risk of different kinds of payments even within classes, for example, routine bill payments typically pose little risk but some types of online purchases may be riskier than others

• Ensure that the nature of originated transactions fits with the nature of the customer’s business"

The document contains numerous other recommended practices and is a must read for any ODFI.  It may be found in its entirety here. 

Fed to Host TILA/RESPA Integrated Disclosure Webinar; NCUA Listening Sessions Right Around the Corner; Free Kick; Save $100 on Regulatory Compliance Seminar Registration

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Fed to Host TILA/RESPA Integrated Disclosure Webinar.  As part of their “Outlook Live” series and in conjunction with their quarterly Consumer Compliance Outlook, the Federal Reserve Board of Governors will be a hosting a webinar regarding the TILA/RESPA Integrated Disclosure Rule on Tuesday, June 17.  The webinar will take place from 2:00 to 3:00 pm EDT, and will be presented by staff members from the CFPB.  This webinar will be the first of a recurring series of webinars to address the new rule, and it will provide an overview of the final rule and the new disclosures, plus address a few basic compliance questions.  Subsequent webinars will address specific implementation and interpretive questions about the rule.  Credit unions interested in viewing the webinar may register for free.

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NCUA Listening Sessions Right Around the Corner.  NCUA Chairman Debbie Matz will be beginning her listening session tour at the end of the month.  The listening sessions will provide credit unions an opportunity to engage in a dialogue with Chairman Matz, other board members, senior NCUA staff, and Regional staff regarding the agency’s initiatives and proposals.  Furthermore, the agency representatives will be taking suggestions for how they can improve their operations and regulations in order to better help credit unions.  There will be three stops on the tour, as follows:

• June 26 in Los Angeles at the Westin Bonaventure (404 South Figueroa Street, Los Angeles, CA 90071);
• July 10 in Chicago at the InterContinental Chicago Magnificent Mile (505 North Michigan Avenue, Chicago, IL 60611); and
• July 17 in Alexandria, Virginia, at the Hilton Alexandria Mark Center (5000 Seminary Road, Alexandria, VA 22311)

Registration for all three stops is free, but spaces are limited.  Therefore, if your credit union is interested in attending one of the sessions, please be sure to register as soon as possible in order to assure your entrance to the event (the links above will take you to the individual registration webpages for each session).

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Free Kick.  We are now just three days away from Brasil and Croatia kicking off in Sao Paulo to begin the World Cup festivities.  Over the last two months, I have been providing previews on each of the groups in this year’s tournament.  Today, my group previews come to an end with a look at Groups C and G.  Here are links to the previous previews: Groups A & B; Groups D & E; and Groups F & H.

Group C: This group is likely the most evenly matched group out of all of the groups in this year’s tournament.  When the draw occurred back in December, I saw Colombia as the clear favorite.  Now that Radamel Falcao Garcia and Luis Amaranto Perea have been ruled out for the Colombians due to injury, I could see any of the four teams advancing to the knock-out stages.  That said, I am going with my heart on this one and I will still give a slight edge to Los Cafeteros.  They have an extremely creative midfield and attacking options that should still be able to find ways to score goals without Falcao up front.  The Colombians will need to tighten up their defensive play, though, and they will need a strong showing from their captain Mario Alberto Yepes in order to accomplish that.  The other squad that I believe is just slightly strong than the rest is the Ivory Coast.  The window for Ivory Coast’s golden generation is coming to a close, but I think that they have one good showing left in them, and after two straight appearances of being drawn into a difficult group, they finally have a group where I believe they can shine and move into the Round of 16.  Greece, as usual, will be solid defensively, but I don’t think that they can score enough goals to keep up with the top two sides in this group.  Japan is a bit of an enigma.  They have some very talented and creative players in the midfield, but their results have been quite inconsistent.  Ultimately, I believe that this group will be decided by which two teams can shake off the nerves the quickest and get off to a strong start in their opening match.

Key matches: Colombia v. Greece, June 14 (12:00 pm EDT) and Ivory Coast v. Japan, June 14 (9:00 pm EDT).

Projected finish: (1) Colombia; (2) Ivory Coast; (3) Japan; and (4) Greece

 

Group G: Let’s just dispense with the obvious – Germany is the class of this group, and I fully expect them to win the group.  The Germans are coming in with some injury and chemistry question marks, but I have no doubt that they will overcome both.  That leaves us with three teams fighting for one last spot in the knock-out round.  When the groups were drawn, I immediately thought that Portugal would be that team because Cristiano Ronaldo is just too good.  In the past week, though, there have been reports that Ronaldo’s leg injury may impact his fitness level during the tournament.  Furthermore, a witch doctor in Ghana has stated that he put a curse on Ronaldo.  Without a relatively healthy Ronaldo, I think that Portugal, the U.S., and Ghana are about even in terms of quality.  The United States will be without Landon Donovan at this World Cup, and I think that’s addition by subtraction, so I will give Jurgen Klinsmann’s squad the slight nod to join Germany in advancing out of the group.

Key matches: United States v. Ghana, June 16 (6:00 pm EDT) and United States v. Portugal, June 22 (6:00 pm EDT)

Projected finish: (1) Germany; (2) United States; (3) Portugal; (4) Ghana

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Recent CFPB Action on RESPA Prohibition on Kickbacks; CUSO Rule Reminder; Free NCUA Webinar

Written by Brandy Bruyere, Regulatory Compliance Counsel

Last week, the CFPB announced an enforcement action against RealtySouth, Alabama’s largest real estate firm, for violation of RESPA’s prohibition against kickbacks for referrals. These kinds of questions come up with some frequency from our members. In light of this reminder that compliance with both new and old rules is important, today we will focus on RESPA kickbacks and affiliated business relationships.

Under Section 8 of RESPA, implemented by 12 CFR 1024.14, has a broad prohibition against receiving “any fee, kickback, or other thing of value” in exchange for referrals for “business incident to or part of a settlement service involving a federally related mortgage.” Meanwhile, the definitions of some of these terms only further broaden the scope of the prohibition.  RESPA defines a “thing of value” in an extremely broad manner as “any payment, advance, funds, loan, service, or other consideration.” The definition of “settlement service” is also expansive, including things like title insurance, credit reports, pest inspections, the services of a realtor, and loan origination activities.

However, RESPA does permit referrals as part of affiliated business relationships, so long as certain requirements are met. First, credit union must provide proper disclosures which notify the member of the affiliated relationship and provide an estimate of the affiliated provider’s charges. Second, the credit union cannot require the member to use the affiliate’s services. Finally, the only “thing of value” the credit union can receive is the return on investment that results from having ownership interest in the affiliate. This provision does not bar the affiliate from receiving payments for services actually provided to the member.

In the case of RealtySouth, the company did not meet these requirements. RealtySouth used standard contract language that required home buyers to use title and closing services provided by its affiliate, TitleSouth. RealtySouth even at times advised their agents that home buyers were required to use its affiliates for services relating to the transaction. Meanwhile RealtySouth was also not using compliant disclosures for the affiliated business relationship. While RESPA does not prohibit referrals to affiliates for settlement-related services, the particular disclosures are required to avoid violating Section 8. If your credit union refers members to certain affiliates for settlement services,  Appendix D to Part 1024 includes a model Affiliated Business Arrangement Disclosure which credit unions can use to ensure that these kinds of referrals are properly disclosed to members.

CUSO Rule Deadline Approaching. Speaking of affiliates, we would just like to remind everyone that NCUA’s new CUSO reporting requirements go into effect on June 30^th, 2014. For more information on the rule, check out this NCUA Letter to Credit Unions and its enclosures.

Upcoming NCUA Webinar. On June 25^th, 2014 at 2:00 PM, NCUA will host a free webinar, How to be in Compliance with OFAC and FinCEN (Part 2). This is the second of two sessions on this topic, the first of which took place on May 21^st. For those who are interested, here is the registration page for this webinar.

Will Work for Food. Lemmy is in constant need of training from distractions while on walks. One tool we like to use is his backpack, especially since during the summer, this means he can carry his own water on long walks! In case you can't tell, he's rather begrudging about the backpack. However, by keeping him a bit more occupied, it does lead to less leash-pulling which is important when your dog weighs over 130 lbs!

 

CFPB Updates Regulatory Agenda, Compliance Officers Get A Preview Of What Is To Come

Written by Eliott C. Ponte, Law Clerk

I believe the job of a compliance officer is a difficult job: compliance officers must have a working understanding of the vast regulatory landscape, and in addition, be aware of how the various regulators plan to shape the regulatory landscape in the near future.  To make your difficult jobs easier, I have blogged about five areas that the CFPB is planning to change in the near future after reading the CFPB’s recent blog post that highlights its new regulatory agenda.  To save you time, I have copied the relevant portion of the CFPB’s blog in the post below, and put my comments following their post. 

 

Payday Loans and Overdrafts

The CFPB stated the following on its blog:

“We’re researching and considering whether rulemaking is warranted in the areas of payday and deposit advance products, as well as consumer overdraft products. We held a field hearing in March 2014 in Nashville, Tennessee, and  also released a report that analyzed payday lending and found that four out of five payday loans are rolled over or renewed within 14 days. We’re also expecting to build on an Advance Notice of Proposed Rulemaking that we published in 2012 concerning prepaid cards by issuing a proposed rule to strengthen federal consumer protections for these products. We’ve been testing potential disclosures that we may propose to be used on the packaging of prepaid cards.

Payday regulations is not surprising because Director Cordray foreshadowed regulations during his remarks that accompanied a report on payday loans on March 25^th of this year.  The only notable difference is that the CFPB is now “officially” considering whether regulations governing payday loans are possible under its legal authority.  Unfortunately, it is not clear what the CFPB will do at the moment, but Payday regulations might include disclosures to payday borrowers, and/or lending practices in connection with payday loans.

In regards to overdrafts, the CFPB is also considering regulating (1) how consumers opt in to overdraft coverage for ATM and one-time debit card transactions, (2) overdraft coverage limits, (3) transaction posting order, (4) overdraft and insufficient funds fee structure, and (5) involuntary account closures.  This comes after a June 2013 CFPB whitepaper that summarized initial findings form an analysis of overdraft policies from supervisory data from nine large banks.  Unfortunately, it is not clear if the CFPB is interested in prohibiting specific acts or practices, or will be issuing sweeping regulation that affects everyone in the industry.

 

Mortgages

The CFPB stated the following on its blog:

“Our agenda includes a number of rulemakings mandated by the Dodd-Frank Act.  For example, we recently convened a small business review (SBREFA) panel to discuss potential amendments to the Home Mortgage Disclosure Act, some of which were mandated by Section 1094 of the Dodd-Frank Act.  We’re also focusing intensely on supporting the implementation process for our recent rulemaking to implement a Dodd-Frank Act directive to consolidate and streamline federal mortgage disclosures required under the Truth in Lending Act and Real Estate Settlement Procedures Act.  We’re also continuing work with stakeholders to address questions that have arisen with regard to the 2013 mortgage rules, including issuing additional clarifications and amendments as warranted.”

In its blog, the CFPB forgot to include the specific information required by Section 1094 of Dodd-Frank, which expands the scope of information required to be complied by the Home Mortgage Disclosure Act (HMDA).  The CFPB claims Dodd-Frank act requires the following additional information be collected:

1. the ages of loan applicants and mortgagors,
2. information relating to the points and fees payable at origination,
3. the difference between the annual percentage rate associated with the loan and benchmark rates for all loans,
4. the term of any prepayment penalty,
5. the value of the property to be pledged as collateral,
6. the term of the loan and of any introductory interest rate for the loan,
7. the presence of contract terms allowing non-amortizing payments,
8. the application channel, and
9. the credit scores of applicants and mortgagors.

In addition to these additional HMDA requirements, the CFPB is considering adding three additional information categories: (1) identifiers for loans, (2) parcels, and (3) loan originators.  As of now, it is not certain the CFPB will include these three additional reporting requirements in its notice of proposed rulemaking, but it seems more than likely it will.

 

Defining Larger Participants

The CFPB stated the following on its blog:

“We’re also continuing rulemakings to implement our supervisory program for certain nonbank entities by defining “larger participants” in various markets for consumer financial products and services. For example, we’re developing a proposal to identify “larger participants” in the market for auto lending. We’ve previously defined larger participants in the consumer debt collection, credit reporting, and student loan servicing markets and are now in the process of finalizing a rule defining larger participants in the international money transfer market.”

The CFPB is developing a proposal that would identify a market for auto lending and define "larger participants" of that market that would be subject to the CFPB's supervisory authority.  In doing so, the CFPB will seek to amend the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for auto lending.

 

Debt Collection

The CFPB stated the following on its blog:

“We’ve been doing research and outreach to assess issues in various other markets for consumer financial products and services over many months. In November 2013, we issued an advance notice of proposed rulemaking seeking comment, data, and information from the public about debt collection, which is the single biggest source of complaints to the federal government. We received more than 23,000 comments in response to the notice, and in our 2014 annual report on Fair Debt Collection Practices Act, reported that we received more than 30,000 consumer complaints in this area.”

According to the CFPB, the Federal government has received more consumer complaints about debt collectors than about any other industry.  The CFPB has already issued an advance notice of public rule making last year on this topic, and is now considering whether rules governing the collection of debts are warranted under the Fair Debt Collection Practices Act or other CFPB authorities. 

 

The Start of a Series: TILA/RESPA Integrated Mortgage Disclosures Rule - Scope and Applicability

Written by JiJi Bahhur, Director of Regulatory Compliance

As many of you already know (we’ve blogged about it here, here, and here), the Consumer Financial Protection Bureau (CFPB) finalized the Truth in Lending Act/ Real Estate Settlement Procedures Act (TILA/RESPA) Integrated Mortgage Disclosures rule in November of last year.  The final rule is a biggie – nearly 2,000 pages in length – and because of that, I’d like to start a series of blogs on the subject (which will post intermittently between other hot credit union topics).  These blogs will not fully cover any particular part of the TILA/RESPA rule but rather will serve to point out certain aspects of the rule or to put something on your credit union’s radar. 

Today, I’d like to focus on the scope and applicability of the TILA/RESPA rule.

Which Credit Unions are Covered?

The TILA/RESPA Integrated Mortgage Disclosures rule applies to most closed-end mortgage loans, regardless of the credit union’s asset size or pricing of the mortgage (i.e., Higher Priced Mortgage Loans).  Because there is no small creditor exemption under this rule, all credit unions who originate closed-end mortgage loans must comply with these new mortgage disclosure regulations.

What Mortgage Loans are Covered?

Closed-end mortgage loans are consumer credit transactions secured by real property, including transactions such as: purchases, refinances and loans for second homes or vacation homes. Of note, the disclosures are also required for construction-only loans, for loans secured by vacant land and for loans secured by 25 acres or more. Currently, those three types of loans are not within the scope of RESPA, but are subject to the new TILA/RESPA rule.

While the final mortgage disclosures rule applies to most mortgage loans that credit unions make, it does not apply to the following:

• Home-equity lines of credit (HELOCs);
• Reverse mortgages;
• Mortgages secured by a mobile home or dwelling that is not attached to real property; and
• Mortgage loans made by persons that are not “creditors” under Regulation Z.

The new Integrated Disclosures must be provided by a credit union that receives an application from a consumer on or after August 1, 2015.  The credit union may not use the new disclosures for applications received prior to August 1, 2015 because TILA/RESPA did not provide a provision for early compliance.  Early use of the new disclosures would result in violation of the current TILA and RESPA rules.

If you’d like to track other / future TILA/RESPA blogs in the series, click here.  Also, check out NAFCU’s Mortgage Resources Page.  We’ve updated it to include a section of resources on TILA/RESPA including NAFCU’s Scope and Applicability Chart (NAFCU log-in required).