NAFCU Compliance Blog

June 2015 Issue of The NCUA Report Now Available

Written by Shari R. Pogach, Regulatory Paralegal 

NCUA has released its June 2015 issue of The NCUA Report.  The articles in this month’s edition include:

DDoS Attacks Increasing on Financial Institutions

Chairman’s Corner: Listening Leads to Results

Don’t Forget the Most Important Part of Your EMV Conversion: Your Members

Vice Chairman Metsger’s Perspective: Redesigning the Regulatory Highway with E-ZPass

Board Member McWatters’ Perspective: Bridging the Divide

Board Actions: Corporate Stabilization Fund’s Net Position Stays in the Black

Food and Fuel: How to Manage Lending to Two Volatile Sectors

Understanding IT Lingo

In the article on distributed denial-of-service (DDoS), NCUA’s Office of National Examinations and Supervision warns credit unions that such attacks have not slowed, rather, there is data indicating the number of such attacks have increased nearly 117 percent during first quarter 2015 in comparison to first quarter 2014.  And, financial institutions accounted for almost 8.4 percent of these types of attacks.  DDoS attacks are also increasing in intensity with the average lasting more than 24.82 hours. 

DDoS attackers are using botnets or a zombie army along with crimeware toolkits to go after and overwhelm a network.  These toolkits take advantage of services allowing computers to talk to one another and are susceptible to spoofing, thus making it more difficult to locate the source of the DDoS attack or the attacker. 

Credit unions are advised to know the signs of a DDoS attack and to improve on defenses against such attacks.  Examples and resources are provided to assist with both.

Are you confused by some of the terms I’ve used in this discussion?  NCUA has also handily provided a cheat sheet on understanding the lingo to help you better understand what your IT folks are talking about when discussing DDoS attacks.

NAFCU Opens Membership to State Chartered Credit Unions; CFPB Proposes To Delay TRID Effective Date; NAFCU/CBANC Alliance

Written by JiJi Bahhur, Director of Regulatory Compliance

Bonjour!

The compliance blog has gone international and I am writing to you from NAFCU’s 48^th Annual Conference in Montréal! As many of you may have heard, this has been an exciting week for the entire credit union industry. On Tuesday, NAFCU’s Board of Directors officially announced that NAFCU will be expanding its membership to include federally insured, state-chartered credit unions. This change, effective immediately, is a historic step but rest assured that NAFCU’s staff will continue to provide you the best in federal advocacy, education and compliance assistance. 

Evidently, Washington has been equally exciting as the CFPB has filed a proposal to delay the effective date of the TILA-RESPA Integrated Disclosure (TRID) Rule. The TRID Rule was initially scheduled to become effective on August 1, 2015, but the CFPB is proposing to move the implementation date to Saturday, October 3, 2015. The CFPB faults a failure to comply with the Congressional Review Act, which required the Bureau to submit the rule report to Congress in a timely manner. The proposal, which is scheduled to be published in the Federal Register today, includes a request for public comment on the October 3 extension as well as alternative dates.  Comments are due to the Bureau on July 7.

While the CFPB’s proposed extension of the TRID effective date is a positive development, the Bureau is merely moving the date that credit unions are expected to “flip a switch” as early compliance is not permitted under this proposal.  It is disappointing that the CFPB is not taking this opportunity to display flexibility and ease the transition by allowing for an early compliance period. In addition, credit unions have already begun to inquire whether or not the revised servicing transfer notice and new escrow cancellation notice are included within the scope of the proposed extension. See, revised section 1026.39(d)(5) and section 1026.20(e). Both of these notices are scheduled to become effective on August 1, 2015. While NAFCU has reached out to the CFPB for clarification, the proposal makes no reference to these post-consummation notice requirements so a formal statement from the CFPB is necessary to provide clarity. This issue will be raised in NAFCU’s official comment letter.

Yesterday, in response to the CFPB’s proposal, NCUA Chairman Debbie Matz confirmed that NCUA is still committed to looking at reasonable and good faith efforts of compliance with the TRID rule. Specifically, Matz stated “When the rule becomes effective, NCUA examiners will look for reasonable and good-faith efforts by credit unions towards substantial compliance with the final rule.” Earlier this month, CFPB Director Richard Cordray announced in a letter to congress that the Bureau also intends to consider “good faith efforts” to comply with this complex rule.

NAFCU will continue to urge the CFPB to reconsider its position on early compliance, which will provide valuable time for credit unions to test their systems prior to the implementation date and seek explicit confirmation as to the scope of the delay.

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NAFCU, CBANC Network Form Strategic Alliance. NAFCU and CBANC Network have partnered to help credit unions share policies, procedures, agreements, and best practices in real time. CBANC’s content is community-driven, with thousands of policy and procedure documents, vendor and product reviews, and Q&A forums. Click here to join and access this helpful compliance resource! CBANC content is peer-to-peer and not reviewed for accuracy by NAFCU; it does not constitute legal advice.

Final Joint Flood Insurance Rule; Free Member Business Lending Rule Webcast

Written by Victoria Daka, Regulatory Compliance Counsel

During its June 18th meeting, the NCUA Board approved the final joint rule on flood insurance, which amends regulations pertaining to loans secured by property located in special flood hazard areas. These regulations implement the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).

More specifically, the final rule establishes requirements for financial institutions with respect to the escrow of flood insurance payments, consistent with changes in the HFIAA.  Additionally, the final rule includes a new exemption no longer requiring separate flood insurance for certain detached structures. Here are some highlights from the final rule.

First, the rule does contain a small lender exemption for many institutions with assets under $1 billion as of December 31 in either of the past two calendar years. However, to qualify for this exemption, the credit union must meet an additional two-part test. As of July 6, 2012, the credit union:

"(A) Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and

(B) Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home." 

The final rule also exempts from the requirements of this rule any structure that is a part of residential property even if it is detached from the primary residential structure of that property and does not serve as a residence. However, although not required, lenders may require flood insurance on these detached structures for the benefit of the borrower.

Escrow Requirement

760.5(a)(1) – Applicability. The final rule requires that regulated lending institutions escrow premiums and fees for flood insurance for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after Jan. 1, 2016, unless the regulated lending institution or a loan qualifies for a statutory exception.

760.5(a)(2) – Exceptions. The final rule provides the following exceptions to the requirements:

• The loan is primarily for business, commercial or agricultural purposes;
• The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage.
• The flood insurance coverage is provided by a policy that meets the requirements of 760.3(a) and is provided by a condominium association, cooperative, homeowners association, or other applicable group as a common expense;
• The loan is a home equity line of credit;
• The loan is a nonperforming loan that is 90 or more days past due; or
• The loan is a term of less than 12 months.

760.5(b) – Notice. The final rule requires the credit union or servicer to mail or deliver written notice to the borrower using language substantially similar to the model clauses. This writing is intended to put borrowers on notice that the credit union or servicer is required to escrow all the premiums and fees for the required flood insurance.

760.5(c)(2) – Change In Status. This section of the final rule points out that if a credit union previously qualified under the small lender exception (under 760.5(c) of the final rule, credit unions with assets of less than $1 billion as of December 31^st of either of the two previous calendar years) but now has assets that exceed this threshold for two consecutive years, the credit union would have to comply with this rule’s requirements on or after July 1^st of the following year.

760.5(d) – Option to Escrow. This section informs credit unions that are not exempt from this rule to offer, make available and provide notice to borrowers about the option to escrow all premiums and fees for any flood insurance required for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016.

§ 760.6 Required Use of Standard Flood Hazard Determination Form

The final rule requires credit unions to use the standard flood hazard determination form when determining whether the property used as collateral is located in a flood hazard area.

Note that the HFIAA does not affect the other provisions of the Biggert-Waters Act relating to private flood insurance and force-placed flood insurance.  Those issues are expected to be addressed in a different rule at a later date. 

The Final Joint Flood Insurance Rule can be viewed in its entirety here. NAFCU’s Regulatory Affairs team will also prepare a Final Regulation Alert for our members in the coming weeks which can be found here. 

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Free Webcast! NCUA’s New Member Business Lending Rule, with Larry Fazio

Live: Wednesday, July 1 | 2:00 p.m. – 3:30 p.m. ET

NCUA’s proposed Member Business Lending (MBL) rule will eliminate the rule’s waiver process, allowing credit unions to decide for themselves whether or not a borrower should be exempt from a personal guarantee. Find out how the proposed rule will impact your credit union straight from the rule’s architect, Director of NCUA’s Office of Examination and Insurance Larry Fazio, along with a Q&A session. Click here for more information.

 

NCUA Proposes to Eliminate MBL Waiver Process

Written by Brandy Bruyere, Regulatory Compliance Counsel

During its Thursday, June 18^th meeting, the NCUA Board issued a proposal to amend the Member Business Loan (MBL) rule which aims to provide regulatory relief from some of the more prescriptive underwriting requirements in the rule. This marks the first time in twelve years that NCUA is considering comprehensive changes to this rule, and could have a significant impact on credit unions’ ability to make MBLs. Today I’ll just provide a high-level overview of the proposal, and NAFCU’s Regulatory Affairs team will blog on some of the finer details of this proposal in a series of blogs once the proposal is formally published in the Federal Register.

Just as a brief reminder, the MBL rule (Part 723) contains specific requirements and is not nearly as flexible as NCUA’s general lending rule (section 701.21) in terms of underwriting standards. Here are a few of the current MBL requirements:

• Collateral and security requirements including limits on the loan-to-value ratio, a general requirement that the business’ principals provide a personal guarantee, and limits on unsecured business loans
• Concentration limits on lending to any one member or group of associated members;
• Limits on construction and development lending including a concentration limit and minimum equity interests

NCUA does have a waiver process for the prescriptive regulatory underwriting requirements, although many of the provisions in the MBL rule are statutory, such as the aggregate cap, and are thus not part of the waiver process or this proposed rulemaking.

Rather than setting underwriting standards by regulation, NCUA’s proposal would allow a credit union’s board of directors to establish its MBL program’s standards with generalized safety and soundness requirements. Most notably, proposed section 723.4 sets forth NCUA’s expectations for an appropriate commercial loan policy. Here is a very high-level overview of some of the proposal’s key elements, keep in mind that the actual rule text is rather technical:

• Proposed section 723.4—Commercial loan policy—requires credit unions to adopt a “comprehensive written commercial loan policy” that will “ensure the [credit union’s] commercial lending activities are performed in a safe and sound manner…” See p. 88-90 of the draft proposal (Emphasis added). Here is a bird’s eye view of the proposed rule’s minimum requirements:
  
  • Type of loans permitted;
  • Trade area;
  • Maximum amount of assets in relation to net worth allowed in secured, unsecured, and unguaranteed commercial loans and in any given category or type of commercial loan;
  • Qualifications and experience requirements for commercial lending personnel;
  • A loan approval process;
  • Underwriting standards “commensurate with the size, scope, and complexity of the commercial lending activities and borrowing relationships contemplated”; and
  • Risk management processes “commensurate with the size, scope and complexity of the [credit union’s] commercial lending activities and borrowing relationships.”
• Proposed section 723.5—Collateral and security—while the proposal would remove the current requirement to obtain the personal guarantee of the business’ principals, credit unions’ MBL programs would still need to “require collateral commensurate with the level of risk associated with the size and type of any commercial loan.” Unsecured loans and loans without the personal guarantee of the person with “controlling interest” in the business would require documentation of “mitigating factors” which offset “relevant risk.”  See p. 91 of the draft proposal.
• Proposed section 723.6—Construction and development loans—this provision is quite detailed, but generally the proposal would require careful consideration of the construction project’s costs versus the projected value. For more information, see p. 92-95 of the draft proposal.

Again this blog is just a summary, there are many more technicalities to this proposal that we will delve into in the near future. NCUA also issued a table summarizing the proposed changes which may be another helpful starting point. NAFCU’s Regulatory Affairs team will also prepare a Regulatory Alert for our members in the coming weeks. 

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Must Have Spinach! At 8 months, Nolan has been eating veggies for a while. When we tried to get him to eat spinach for the first time, I was cautiously optimistic since he's a pretty agreeable baby. It went really well...until I ran out of spinach. Then I got this:

 

CFPB TILA/RESPA Implementation Delay; NCUA Board Meetings Results

Written by JiJi Bahhur, Director of Regulatory Compliance

The Consumer Financial Protection Bureau (CFPB) and National Credit Union Administration (NCUA) have been busy bees this week with announcements and issuances that credit union professionals will definitely want to know and hear more about.

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Delayed Implementation of TILA/RESPA.  On Wednesday, Director Richard Cordray of the CFPB announced that the bureau will be issuing a proposed amendment to delay the implementation deadline for the Truth in Lending Act and Real Estate Settlement Procedures Act (TILA/RESPA) Integrated Mortgage Disclosure requirements until October 1.  This delay would provide credit unions two more months to comply with the rules, which are currently scheduled to go into effect on August 1, 2015.

“The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015,” CFPB Director Richard Cordray said in a prepared statement. “We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks.”

While this delay is a step in the right direction, and one that NAFCU welcomes, a two-month delay may still not be enough to meet credit unions’ needs. Credit unions have been gearing up and working diligently with vendors to ensure timely compliance with the TILA/RESPA Integrated Mortgage Disclosure rule, but there are still a number of ambiguities in the rule that need to be addressed by the CFPB. 

At this point, it’s hard to tell what this will mean or how this will affect credit unions, but once the CFPB releases its proposal on delayed implementation of TILA/RESPA, NAFCU will provide greater detail on what it entails on our compliance blog. 

As an aside, what I would love to see the CFPB do between now and the new October 1 effective date is issue an FAQ detailing answers to questions and ambiguities the bureau has been made aware of. 

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NCUA Board Meeting Results. On Thursday, the NCUA Board held an open meeting to discuss the following items, all of which were unanimously approved:

1. Final Interagency Rule, Part 760 of NCUA’s Rules and Regulations, Loans in Areas Having Special Flood Hazards.
2. Board Briefing, Final Interagency Policy Statement Establishing Joint Diversity Assessment Standards.
3. Final IRPS 13-1, Minority Depository Institution Preservation Program.
4. Notice and Request for Comment, Regulatory Review in Accordance with the Economic Growth and Regulatory Paperwork Reduction Act.
5. Federal Credit Union Loan Interest Rate Ceiling.
6. Proposed Rule, Part 723 of NCUA’s Rules and Regulations, Member Business Lending.

While it would bring me great pleasure to go into all the details surrounding each of these agenda items, I’ll save you from having to read a 5-page blog on a Friday morning.  That being said, we plan to cover some of these items in detail on the blog next week.  If you would like to get a head start on your reading, take a look at NCUA’s Board Action Bulletin, available here. 

FinCEN’s Customer Due Diligence Rule May Be Finalized Later This Summer; National Money Laundering Risk Assessment and National Terrorist Financing Risk Assessment

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

FinCEN’s Customer Due Diligence Rule May Be Finalized Later This Summer. According to the Spring 2015 Semiannual Unified Regulatory Agenda (Agenda), FinCEN may be releasing a final Customer Due Diligence (CDD) rule later this summer. Dates listed in the Agenda are tentative, and may change, but final action on this rule is currently noted for August 2015.  This CDD rule has been in the works for some time, and if finalized as proposed, would amend existing rules to include explicit CDD requirements, including a requirement to identify beneficial owners of legal entity customers, subject to certain exemptions. For additional details on the proposed rule, check out our previous blog post.

Another item of note from FinCEN on the Agenda that caught my eye –

There is a potential proposal in the works regarding reporting requirements for cross-border electronic transmittals of funds. Back in 2010, there was a proposal to require certain financial institutions to report transmittal orders associated with certain cross-border electronic transmittals of funds to FinCEN. That proposal generated a lot of feedback and was not finalized, however it looks like FinCEN may be issuing another notice of proposed rulemaking in August.

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National Money Laundering Risk Assessment and National Terrorist Financing Risk Assessment.  Last week, Treasury released the National Money Laundering Risk Assessment and National Terrorist Financing Risk Assessment.  Intended to help the public and private sectors more effectively detect and combat illicit finance, these assessments provide a review of money laundering and terrorist financing methods used in the U.S., the risks these activities pose to the U.S. financial system and national security, and an update on current efforts to combat illicit finance.

Here’s a snippet from page 3 of the National Money Laundering Risk Assessment, discussing vulnerabilities:

“The size and sophistication of the U.S. financial system accommodates the financial needs of individuals and industries globally. The breadth of products and services offered by U.S. financial institutions, and the range of customers served and technology deployed, creates a complex, dynamic environment in which legitimate and illegitimate actors are continuously seeking opportunities.

This assessment finds that the underlying money laundering vulnerabilities remain largely the same as those identified in the 2005 United States Money Laundering Threat Assessment. The money laundering methods identified in this assessment exploit one or more of the following vulnerabilities:

• Use of cash and monetary instruments in amounts under regulatory recordkeeping and reporting  thresholds;

• Opening bank and brokerage accounts using nominees to disguise the identity of the individuals who control the accounts;

• Creating legal entities without accurate information about the identity of the beneficial owner;

• Misuse of products and services resulting from deficient compliance with anti-money laundering obligations; and

• Merchants and financial institutions wittingly facilitating illicit activity.”

Both reports are well worth a read for anyone with Bank Secrecy Act program management responsibilities.

CFPB Says Mortgage Company’s Loan Originators Rewarded For Directing Customers To More Costly Mortgages

Written by Shari R. Pogach, Regulatory Paralegal

Last week, the Consumer Financial Protection Bureau (CFPB) filed a complaint in federal district court against RPM Mortgage, Inc. (RPM), a residential-mortgage lender headquartered in California, and its CEO, Erwin Robert Hirt for violations of the Loan Originator Compensation Rule and the Consumer Financial Protection Act (CFPA).  According to the complaint, in April 2011, RPM instituted a compensation plan that gave loan officers financial incentives to steer consumers into higher-rate mortgage loans. RPM’s loan officers were given different forms of compensation that were derived in part from the interest rates of the loans they closed.

The interest-rate-based compensation was filtered through “employee-expense accounts.” RPM deposited profits that were directly tied to an originator’s closed loans interest rates into an expense account set up for the originator. RPM then used the expense accounts to pay bonuses and higher commissions. From April 2011 through December 2013, the company also allowed loan officers to use their employee expense accounts to offset interest-rate reductions or credits for RESPA-tolerance cures or appraisal costs they sometimes granted to avoid losing loans to a competitor. This “point bank” arrangement allowed loan originators to “bank” profits extracted from certain consumers that enabled them to close on and receive additional compensation from loans to future consumers. In 2011, RPM paid millions of dollars in periodic bonuses to its loan officers from their employee-expense accounts.  All told, RPM paid or financed millions of dollars in unlawful bonuses, pricing concessions and supplemental commissions.

According to the CFPB, RPM’s CEO Erwin Robert Hirt was responsible for managing the design and implementation of this illegal compensation plan.  From April 2011 through December 2013, Mr. Hirt managed the design and implementation of RPM’s expense-account plan that allowed the company’s loan officers to withdraw expense-account funds derived from the interest rates those loan officers charged consumers. Further, from January 2012 through December 2013, he managed the design and implementation of the company’s expense-account plan that allowed its loan officers to reset their commission rates on future loans and withdraw funds from their expense accounts to cover resulting deficiencies.  

If entered by the court, the CFPB’s proposed consent order would require RPM and Mr. Hirt to comply with the Loan Originator Compensation Rule and the CFPA and to the following: 1) RPM will pay $18 million in redress to consumers affected by its unlawful compensation practices; 2) RPM and Mr. Hirt will each pay $1 million to the CFPB’s Civil Penalty Fund; and 3) RPM and Mr. Hirt will submit to five-year reporting requirements and to compliance monitoring.

Financial Regulators Issue Interagency Policy Establishing Standards for Assessing the Diversity Policies and Practices of the Entities They Regulate

 Written by: Eliott C. Ponte, Regulatory Compliance Counsel

Last week, the NCUA and other financial regulators issued a final interagency policy statement establishing joint standards for assessing the diversity policies and practices of the entities they regulate.  It is important to note that these interagency standards for diversity policies are voluntary.  The NCUA and other financial regulators are issuing this interagency policy statement to comply with Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which requires financial regulators to develop standards for assessing the diversity policies and practices of the agencies’ regulated entities. 

According to the interagency press release, these standards “provide a framework for regulated entities to create and strengthen their diversity policies and practices—including their organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of organizational diversity and inclusion within the entities’ U.S. operations.”  The interagency policy, which was drafted with an institution of 100 or more employees in mind, lists and explains five detailed standards.  The policy also explains that the unique characteristics of the institution will determine the appropriate application of the standards to that particular institution.  The standards that are discussed include:

1. Organizational Commitment to Diversity and Inclusion
2. Workforce Profile and Employment Practices
3. Procurement and Business Practices—Supplier Diversity
4. Practices to Promote Transparency of Organizational Diversity and Inclusion, and
5. Entities' Self-Assessment

To view the policy statement in its entirety, click this link.  Compliance officers should note that the NCUA “will not use their examination or supervisory processes in connection with these Standards.”  80 Fed. Reg. 330223.  The Dodd-Frank Act does NOT grant NCUA enforcement power to require credit unions to self-assess or implement these diversity standards.  Instead, these standards are only best practices, and the NCUA “encourage[s] each entity to use these Standards in a manner appropriate to its unique characteristics.”  80 Fed. Reg. 330223. 

CFPB Mortgage Closing Fact Sheet; Revised Written List of Service Providers

Written by Brandy Bruyere, Regulatory Compliance Counsel

Closing Disclosure Fact Sheet. On Friday, JiJi blogged about the CFPB’s Letter to Congress stating that the Bureau will consider “good-faith efforts” when examining for TILA/RESPA compliance.  The Bureau also released a fact sheet and blog assuring consumers that the new disclosures will not delay mortgage closings. Here is an excerpt:

“Only THREE changes require a new 3–day review:

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans. A decrease in APR will not require a new 3-day review if it is based on changes to interest rate or other fees.

2. A prepayment penalty is added, making it expensive to refinance or sell.

3. The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.”

Section 1026.19(f)(2)(ii) describes changes before consummation requiring a new waiting period, including  “[t]he annual percentage rate disclosed under §1026.38(o)(4) becomes inaccurate, as defined in §1026.22.” (Emphasis added). Those familiar with section 1026.22 of Regulation Z will notice that in an attempt to simplify a technical provision, the first item is not accurate. In fact, section 1026.22 states that a rate is inaccurate if it either increases or decreases, here is an excerpt from the CFPB staff commentary to this rule:

“Paragraph 22(a)(2)

1. Regular transactions. The annual percentage rate for a regular transaction is considered accurate if it varies in either direction by not more than ¹⁄₈ of 1 percentage point from the actual annual percentage rate…

Paragraph 22(a)(3)

1. Irregular transactions. The annual percentage rate for an irregular transaction is considered accurate if it varies in either direction by not more than ¹⁄₄ of 1 percentage point from the actual annual percentage rate. This tolerance is intended for more complex transactions that do not call for a single advance and a regular series of equal payments at equal intervals…”

(Emphasis added)

The fact sheet also conflates “regular transaction” with “fixed rate,” and “irregular transaction” with “adjustable rate” another oversimplification of section 1026.22. Keep in mind that this fact sheet was issued with consumers in mind rather than as guidance for financial institutions. Still, for consumers who do discover this fact sheet, it seems likely to cause some confusion regarding when a new three-day waiting period is actually required.

Revised Written List of Service Providers. On May 26, the CFPB held its fifth and final webcast on TILA/RESPA. The Bureau addressed many miscellaneous questions such as calculating cash to close, issuing disclosures for both single and two-phase construction loans, and owner’s title insurance. The webcast also addressed a question that has come up a few times, but had no clear answer. Sometimes, a “changed circumstances” permits the credit union to issue a revised Loan Estimate, but what happens if that changed circumstance also triggers a new required service? I wanted to share an unofficial transcription of this question and the CFPB’s answer:

“Question:  If there is a valid changed circumstance or borrower requested change that triggers another third-party service that the creditor permits the consumer to shop for, should the list of service providers be updated and redisclosed, or is the written list of service providers required to be provided only once upon providing the initial Loan Estimate?
 
Answer: A creditor may update and redisclose the written list of service providers to reflect a new service that is added as the result of a changed circumstance or borrower requested change. This question deals with the requirement under section 1026.19(e)1(vi)(C) which requires the creditor to provide a written list of providers to accompany the Loan Estimate for any settlement services that the consumer is permitted to shop for. When an event that would permit resetting of tolerances or variations under section 1026.19(e)(3)(iv) occurs and an additional settlement service is required, the creditor may disclose service providers of that additional service on the written list at the same time as issuing the revised Loan Estimate. Although the regulation does not expressly address this scenario, we recognize that a creditor may want to permit the consumer to shop for this new service. There are two ways that a creditor may approach adding this new service to the written list. First, the creditor may include the additional service and provide an updated written list. Or second, because the rule does not require the written list to be updated and accompany a revised Loan Estimate, the creditor may provide a written list showing only the service providers of the additional service. Either method would comply with the rule. Note however that if the creditor intends to allow the consumer to shop for the additional service but fails to provide an updated or revised written list of service providers, that service would be subject to zero tolerance.”

(Emphasis added)

For more information on revised Loan Estimates and making the good faith determination, check out some of our past blog entries here.

TRID Implementation. If your credit union is a member of NAFCU and experiencing difficulties with its vendors in terms of implementing TILA/RESPA including issues resulting from ambiguity in the rules, we would love to hear from you. I can be reached by email [email protected] 

NCUA’s Letter on Consumer Complaint Process

Written By Victoria Daka, Regulatory Compliance Specialist

The National Credit Union Administration (NCUA) recently posted a Letter to Federally Insured Credit Unions regarding improving the process for consumer complaints. This Letter encompasses two distinct changes to the consumer complaint process, the appeals process and recommendations for credit unions to maintain effective procedures to process consumer complaints within their compliance programs.

For background, NCUA’s Consumer Assistance Center (CAC) is tasked with addressing the consumer complaints of federal credit unions (FCU) and in certain instances, federally insured state charters.  NCUA’s Office of Consumer Protection, Division of Consumer Affairs administers CAC. CAC may receive complaints via online, email, fax and regular mail. The complaint forms can be found on MyCreditUnion.gov here.

To assist both consumers and FCU’s in the consumer complaint process, CAC is making improvements to its intake process in two distinct phases. In the first phase, the FCU is given 60 days to attempt to resolve the issue. In the second phase, CAC formally investigates the matter.

Phase One: Attempted Resolution by the Credit Union

In this phase, the goal is for the FCU to resolve the matter without a CAC formal investigation. Once the complaint is received by CAC, it assigns the complaint a case number. After a case number is attached to the complaint, the complaint, along with all the documentation the consumer provided is forwarded to the consumer’s FCU’s supervisory committee and CEO. The FCU’s supervisory committee has 60 calendar days from receipt of the compliant to review and, if possible, resolve the matter. Additionally, CAC sends an acknowledgement letter to the consumer indicating that the complaint was received and forwarded to the FCU to resolve the issue.

During this 60-day period, CAC recommends that FCU’s take the following steps in resolving complaints:

• “Review the complaint in accordance with the suggestions detailed in the attached OCP guide, Responding to Consumer Complaints;

• Communicate directly with the consumer as needed and appropriate; and

• Respond in writing to the consumer, with a copy to the Consumer Assistance Center, referencing the case number and indicating whether the credit union has been able to resolve the matter.”

If the FCU’s supervisory committee notifies CAC in writing that it has resolved the complaint, then CAC closes the case, and the complaint does not reach the second phase – formal investigation. However, a formal investigation is necessary in the three following instances: 1) the FCU supervisory committee fails to submit a written response within the 60-day timeframe to CAC of a resolution; 2) the FCU supervisory committee notifies CAC in writing that it was unable to reach a resolution on the matter; and 3) the consumer disputes the resolution reached by the FCU and notifies CAC within 30 calendar days of the FCU’s response.

Phase Two: Consumer Assistance Center Investigation

 In the second phase, CAC formally investigates the matter. CAC sends a letter to the Chairman of the FCU’s supervisory committee with a copy sent to the CEO. This letter includes the original complaint and documents provided. The letter also informs the FCU that the matter is under formal investigation and requests a written response from the FCU within 30 calendar days of receipt of the letter.  Like phase one, CAC sends a letter to the consumer, but in this phase, notifies the consumer that the matter is under formal investigation, at this point.

 Upon receipt of the supervisory committee’s response, CAC reviews the response “to ensure it adequately addresses issues raised in the complaint and that the action(s) taken, if any, are consistent with federal financial consumer protection laws and regulations.” If the review is unsatisfactory, CAC will request additional information and/or clarification from the supervisory committee and will inform the consumer that the investigation continues.

Appeal of Consumer Assistance Center Determination

Both consumers and credit unions may request a review by the Director of the Division of Consumer Affairs of the CAC’s final determination. The Division of Consumer Affairs must receive this formal appeal within 30 calendar days of receipt of the CAC’s determination letter. However, the right to file a complaint with the NCUA Ombudsman remains, although this Letter encourages the process through CAC.

Managing Compliance Risks

The letter goes on to note the importance of managing compliance risk for FCU’s.

“As member-owned financial cooperatives, credit unions have a strong interest in managing compliance and reputational risk. A critical element of a strong compliance management system is establishing written policies and procedures to record, categorize, analyze, investigate, resolve, and respond to complaints in an appropriate and timely manner.”

This Letter to Federally Insured Credit Unions can be viewed in its entirety here. In addition, this Letter includes a helpful one-page enclosure on recommendations for handling consumer complaints that can be found here.

TILA/RESPA: CFPB to Consider Good-Faith Efforts; New Fact Sheet Available

Written by JiJi Bahhur, Director of Regulatory Compliance

TILA/RESPA Good-Faith Efforts.  On Wednesday, the Consumer Financial Protection Bureau (CFPB) announced, in a letter to Members of Congress, that it will consider an institution’s “good-faith efforts” when examining for compliance with the Truth in Lending Act and Real Estate Settlement Procedures Act (TILA/RESPA) Integrated Mortgage Disclosure rule.   From the letter:

“ [T]he Bureau’s work to support the implementation of the Rule does not end on the effective date of August 1, as we continue to work with industry, consumers, and other stakeholders to answer questions, provide guidance, and support a smooth transition for the mortgage market.  As we do so, and in response to considerable input we have received from you and your constituents, I have spoken with our fellow regulators to clarify that our oversight of the implementation of the Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time.  My statement here of this approach is intended to ease some of the concerns we have heard about this transition to new processes in the coming months …”. 

This type of oversight is consistent with the approach used by the CFPB in the implementation of Title XIV mortgage rules.

You may recall from an earlier blog post that the CFPB’s announcement is in line with NCUA Chairman Debbie Matz’s acknowledgement that NCUA examiners will recognize “good faith efforts” by credit unions for the TILA/RESPA rules.  From Chairman Debbie Matz’s letter to NAFCU:

“NCUA examiners will be looking for reasonable and good faith efforts by credit unions toward substantial compliance with the new rule as of the effective date.”

The TILA/RESPA Integrated Mortgage Disclosure rule takes effect on August 1. 

For more information on the TILA/RESPA Integrated Mortgage Disclosure rule, follow our blog series here. 

New TILA/RESPA Fact Sheet.  Also on Wednesday, the CFPB released a fact sheet to “clarify” some questions about delivery of the Closing Disclosure and the limited circumstances when changes to the loan require a new three-day review period.  While it was a kind gesture to provide some much-needed additional guidance on TILA/RESPA, it would have been nicer if the information provided was legally accurate.  More specifically, the fact sheet lays out the three changes that require a new 3-day waiting period.  The first change, quoted below, does not take section 1026.22 of Regulation Z, in its entirety, into account.

“Only THREE changes require a new 3–day review:

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans.  A decrease in APR will not require a new 3-day review if it is based on changes to interest rate or other fees.” (Footnote omitted.)

The full fact sheet can be accessed here.  NAFCU will address these inaccuracies in more detail in a near future blog post. 

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NAFCU WEBCAST ALERT – Critical Call Report Training

Live Webcast: Wednesday, June 10 | 2:00 p.m. – 3:30 p.m. ET

It’s critical to stay up to date on the most recent Call Report requirement changes, and thoroughly understand how third parties can use your data.  Attend this important webcast to discover how to prepare the quarterly NCUA 5300 in a manner that is timely, effective and appropriate. You’ll gain a greater understanding of the history of the Call Report, learn how to prepare it correctly, cover common mistakes and critical areas, and gain an inside look at how Call Reports are used by examiners and auditors.

CFPB Semiannual Rulemaking Agenda; NAFCU Risk Management Seminar

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

CFPB Semiannual Rulemaking Agenda. As Brandy mentioned last week, the CFPB recently announced its Semiannual Rulemaking Agenda for Spring 2015. The agenda includes a listing of regulations in the various rulemaking stages.  A couple of highlights from those in the final rule stage include:

• Home Mortgage Disclosure Act (HMDA) (Regulation C). The CFPB estimates that it will release a final rule amending Regulation C in August 2015. Under the HMDA proposed rule, depository and non-depository institutions meeting all other criteria under Regulation C, and which had originated 25 or more covered loans in the previous calendar year, would be required to report expanded HMDA data.

 

• Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z). The CFPB also anticipates that it will release a final rule on prepaid products in January 2016. The prepaid accounts proposed rule would establish new consumer protections for the prepaid market that would require market participants to limit consumers’ losses when funds are stolen or cards are lost, investigate and correct errors, provide free access to account information, and follow the practices of credit card protections if a credit product is offered in connection with a prepaid account. The CFPB also proposes new “Know Before You Owe” prepaid disclosures that would provide consumers with clear information about the costs and risks of prepaid products upfront.

The CFPB’s semiannual rulemaking agenda is available in its entirety here.

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NAFCU Risk Management Seminar. Shameless Plug Alert! Join us in the Mile High City this summer, August 3-5, 2015, for critical credit union risk training. Developed in part by a taskforce of peers who are experts in the field, this new conference will give you a 360° view of the internal and external risks facing your credit union, and gain a better understanding of how to properly manage them. From credit and interest rate risk to compliance, strategic and reputation risk, NAFCU's new Risk Management Seminar will give attendees the tools needed to properly navigate the most serious risks threatening their credit union. Save $100 with promo code RISKSAVINGS. Offer ends 6/5/15. Click here to enroll.

Taxi Medallion FAQs Issued by NCUA; Little Big Man

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, the National Credit Union Administration (NCUA) released an FAQ document that provides additional guidance on taxi medallion lending.  This guidance comes about a year after NCUA’s issuance of Letter to Credit Unions 14-CU-06 and Supervisory Letter 14-04 which we blogged about here.  The FAQs do not impose new requirements, but rather are intended to clarify the guidance provided in the 2014 supervisory letter. 

Credit unions that either make taxi medallion secured loans, participate in these loans, or that are contemplating doing so, may find this additional guidance helpful.  The FAQs contain nine questions related to taxi medallion lending and address, among other things, financial reporting of taxi medallion loans, methods for valuing taxi medallions and influences on the value of the medallions as collateral.

Here’s a taste of what you’ll find:

“What is the “speculative” (or market) premium that is mentioned in the guidance?

A taxi medallion is an income-producing asset. Income-producing assets are generally valued by determining the asset’s net operating income (NOI), which is calculated as the gross revenues generated by the asset, minus any operating expenses before depreciation and interest. The NOI is the basis for determining the economic value of the asset, that is, the value of the asset based on its ability to generate income.

However, the value of a taxi medallion is also influenced by the number of medallions made available by the local taxi authority. A limited supply of taxi medallions in a given market can raise the value of the medallions in that market above the economic value relative to a given level of demand. Simply put, the speculative value is the difference between the economic value of a medallion and the price the market is willing to pay for that medallion.

Examiners should understand that the portion of the value that is identified as the speculative premium is less stable than the economic value supported by the ability of the medallion to generate income. Any change in the market (e.g., increased competition, reduced supply of drivers or other market changes) will have a more pronounced impact on medallion values.

In addition, because the speculative portion of the price is not supported by the taxi medallion’s NOI, repayment of the speculative portion will have to be from another source (such as, the borrower’s liquidity or other earnings of the principal).

As communicated in the guidance to examiners, credit unions that perform proper credit analysis (that is, analysis that identifies sources of repayment and the reliability of those sources) should be able to withstand the impact of fluctuations in the value of taxi medallions. When the repayment relies on sources other than a borrower’s own operations, examiners should determine whether those repayment sources have been identified by the credit union and are committed to the loan repayment via guarantees or additional pledged collateral.”

To view the rest of the FAQs, click here. 

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Little Big Man.  I just had to share this photo . . . my little man is getting big way too quickly.