NAFCU Compliance Blog

Last Call Before the TRID Overhaul: Disclosing Lender Credits

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

It is almost upon us. On Saturday, the CFPB’s long-looming TRID rules actually go into effect. As credit unions prepare to use the new forms in actual transactions, the practical complexities and ambiguities of the rules are crystalizing before us. Your NAFCU Regulatory Compliance Team is fielding all your last-minute TRID clarifications, and one that keeps popping up again and again is lender credits. Below is a summary of the language in the comments and Preamble to clarify how to disclose lender credits.

Lender Credits and the Loan Estimate

Section 1026.37(g)(6)(ii) requires that the amount of lender credits be disclosed as a negative number, but the details of disclosing lender credits are largely described in the Preamble and the Official Interpretations. In order to determine what might be considered a “lender credit” the commentary to 1026.37 points you to the commentary to 1026.19. Specifically, comment 1026.19(e)(3)(i)-5 describes that lender credits come in two forms: general and specific:

 “Lender credits,” as identified in § 1026.37(g)(6)(ii), represents the sum of non-specific lender credits and specific lender credits. Non-specific lender credits are generalized payments from the creditor to the consumer that do not pay for a particular fee on the disclosures provided pursuant to § 1026.19(e)(1). Specific lender credits are specific payments, such as a credit, rebate, or reimbursement, from a creditor to the consumer to pay for a specific fee.

With that clarifying detour out of the way, we can return to section 1026.37(g)(6)(ii) on how to complete the form. Comment 1026.37(g)(6)(ii)-1 confusingly describes all lender credits disclosed in the form as general credits, but then Comment 1026.37(g)(6)(ii)-2 clarifies that specific credits should be disclosed in the same box as well:

For loans where a portion or all of the closing costs are offset by a credit or rebate provided by the creditor (sometimes referred to as “no-cost” loans), whether all or a defined portion of the closing costs disclosed under § 1026.37(f) or (g) will be paid by a credit or rebate from the creditor, the creditor discloses such credit or rebate as a lender credit under § 1026.37(g)(6)(ii).

The lender credits disclosed under section 1026.37(g)(6)(ii) are disclosed in Box J of the Loan Estimate.

Lender Credits and the Closing Disclosure

 So, after some circumnavigation through the commentary, we have determined the general credits and the specific credits are combined in your Loan Estimate. But what to do in the Closing Disclosure? Lender credits must be included in the Closing Disclosure under section 1026.38(h)(3). Comment 1026.38(h)(3)-1 clarifies what to do with specific credits:

When the consumer receives a generalized credit from the creditor for closing costs, the amount of the credit must be disclosed under § 1026.38(h)(3). However, if such credit is attributable to a specific loan cost or other cost listed in the Closing Cost Details tables, pursuant to § 1026.38(f) or (g), that amount should be reflected in the Paid by Others column in the Closing Cost Details tables under § 1026.38(f) or (g). For a description of lender credits from the creditor, see comment 17(c)(1)-19. For a discussion of general lender credits and lender credits for specific charges, see comment 19(e)(3)(i)-5.

So while both specific and general lender credits are entered into Box J on the Loan Estimate, only general lender credits are entered into Box J on the Closing Disclosure. Specific lender credits are itemized in the Closing Disclosure in the “Paid by Others” column. Of course removing specific credits from the lender credits will reduce the total in Box J as compared to the Loan Estimate. Regarding a good faith analysis, Comment 1026.19(e)(3)(i)-6 gives the following guidance:

For purposes of conducting the good faith analysis required under § 1026.19(e)(3)(i) for lender credits, the total amount of lender credits, whether specific or non-specific, actually provided to the consumer is compared to the amount of the “lender credits” identified in § 1026.37(g)(6)(ii). The total amount of lender credits actually provided to the consumer is determined by aggregating the amount of the “lender credits” identified in § 1026.38(h)(3) with the amounts paid by the creditor that are attributable to a specific loan cost or other cost, disclosed pursuant to § 1026.38(f) and (g).

Lender Credits and Revisions

Lender credits get zero tolerance for decreases under section 1026.19(e)(3) because both general and specific lender credits are negative charges to the consumer. Comment 1026.19(e)(3)(i)-5 states that decreasing the lender credit is the equivalent of increasing a charge to the consumer. Comment 5 also makes it clear that a lender can increase lender credits to compensate for higher fees as much as they desire, but they cannot lower it.

If a specific lender credit is given in a Loan Estimate, and the cost it is intended to compensate comes in lower than expected, the Commentary and Preamble, page 349 makes it clear that the borrower still must receive that credit somehow:

Under current Regulation X, the loan originator may only apply the amount of the excess lender credits to additional closing costs previously not anticipated to be included in the loan, apply the excess to a principal reduction to the outstanding balance of the loan, pay the consumer the excess in cash, or reduce the interest rate and the credit accordingly. Creditors will be able to take the same actions with respect to lender credits in streamlined refinancing programs under this final rule.

The inability to decrease a lender credit isn’t absolute though. Section 1026.19(e)(iv)(D) clearly contemplates revising a loan estimate with decreased lender credits which result from a rate lock. Further, the Preamble on page 348 states: “With respect to whether a changed circumstance or borrower-requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower-requested change can decrease such credits, provided that all of the requirements of §1026.19(e)(3)(iv), discussed below, are satisfied.” As long as the decrease in lender credits is related to a valid reason for a revised Loan Estimate under section 1026.19(e)(3)(iv), nothing indicates that loan credits cannot be decreased.

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Do not forget NAFCU members, your NAFCU Regulatory Compliance team is here to help you hash out the last minute details as you implement these rules. Don't hesitate to email us at [email protected].

Evans Bancorp Recap, and Another Bank is Accused of Redlining

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Yes, I said another redlining case.  Regular readers of the NAFCU blog will remember that Brandy Bruyere first wrote about redlining almost one year ago today.  As Brandy’s blog explained, New York’s Attorney General filed an action against Evans Bancorp “for unlawful discrimination on the basis of race in violation of the Fair Housing Act.”  Specifically, New York’s Attorney General alleged Evans Bank limited its branching and lending activities of credit products to a particular geographic area in the highly-segregated Buffalo, New York metropolitan area.  Recently, it was announced that Evans Bancorp agreed to pay nearly $1 million to end the lawsuit.

 On Thursday, the CFPB and the Department of Justice (DOJ) announced a proposed consent order with Hudson City Savings Bank to settle similar allegations of violating the Fair Housing Act and Equal Credit Opportunity Act.  In a joint complaint filed in New Jersey District Court, the CFBP and DOJ alleged that Hudson City Savings Bank intentionally engaged “in a pattern or practice of unlawful redlining by structuring its business so as to avoid the credit needs of majority-Black-and-Hispanic neighborhoods in its residential mortgage lending, and thereby engaging in acts or practices directed at prospective applicants that discouraged applicants in these neighborhoods from applying for credit.”  Phew, that was a long sentence.  Essentially, the complaint states that Hudson City Savings Bank discouraged minorities from applying for loans by (1) placing its branches outside of densely populated Black-and-Hispanic areas, and (2) not accepting first-lien mortgage loans at branches proximate to a majority of the Black-and-Hispanic areas. 

 Specifically, the complaint alleges that from 2004 to 2010, Hudson City Savings Bank sought to expand its presence through branch expansion and acquisition.  Bank management provided direction to explore markets in Staten Island, Long Island, Connecticut, and parts of New York.  As alleged in the complaint, “these areas exclude and form a semi-circle around the four counties in New York State with the highest proportions of majority-Black-and-Hispanic neighborhoods: Queens, Kings [A.K.A. Brooklyn], Bronx, and New York Counties.”  Moreover, during the relevant time period, Hudson City Savings Bank only accepted first-lien mortgage loans at select branches, which were only located in census tracts with relatively low Black and Hispanic populations.  Thus, the complaint alleges, Hudson City Savings Bank concentrated its lending network to avoid lending in Black-and-Hispanic areas.  To boot, the complaint alleges Hudson City Savings Bank failed to exercise adequate oversight or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance.

 So what is Hudson City Savings Bank’s penance?  If the proposed consent order is approved by the court, Hudson City Savings Bank will pay more than $30 million in fines and restitution, which include opening or acquiring at least two new full-service first-lien mortgage accepting branches proximate to a majority of the Black-and-Hispanic areas.  In addition, Hudson City Savings Bank will need to hire a consultant to assess the credit needs of the Black-and-Hispanic communities within the affected metropolitan statistical areas, and administer Fair Lending Training to ensure that their activities are conducted in a nondiscriminatory manner.  Moreover, the order stipulates that this training will be conducted annually.

 Both complaints indicate that regulators are looking for financial institutions that may be discriminating against certain classes of borrowers.  While credit unions are generally not the type of financial institution that engages in discriminatory practices, under the disparate impact theory, a credit union may have a policy or practice that disproportionately has a negative effect on a prohibited basis—even though the credit union has no intent to discriminate.  Thus, credit unions may want to periodically review its policies and practices to ensure its lending program does not have an unintentional discriminatory impact on its members.  To help credit unions comply with fair lending, below is a summary of several key resources to review before assessing a lending program:

• NCUA Fair Lending Guide:  NCUA’s Office of Consumer Protection issued a Fair Lending Guide in March of 2013.  The guide gives a great overview of fair lending.
• NCUA Fair Lending FAQs
• NCUA Fair Lending Compliance Best Practices
• ARIES Exam Questions:  NCUA Examiners use the ARIES Questionnaire to examine credit unions.  The AIRES Questionnaire has a section on Fair Lending, which may be helpful to credit unions.
• NCUA Examination Guide:  Appendix 19B contains an overview of Equal Credit Opportunity Act objectives.
• NCUA Fair Lending Website:  The NCUA complied several resources to help credit unions comply with the various laws and regulations that apply to fair lending.
• DOJ Fair Lending Website:  The DOJ’s Fair Lending Website contains several resources related to fair lending, including its annual report to congress that contains detailed information on recent fair lending litigation.
• FFIEC Fair Lending Examination Procedures:  FFIEC issued interagency Fair Lending Examination Procedures, which will give you additional insight into the objectives of a fair lending examination. 
• Federal Reserve Consumer Outlook:  The Philadelphia Federal Reserve complied an impressive amount of fair lending resources for depository institutions of all types.  This resource is an excellent resource page.
• Fair Lending Webinar:  Another good fair lending resource is the Federal Reserve Bank of San Francisco interagency Outlook Live webinar on Fair Lending, which is scheduled to take place on place on Thursday, October 15, 2015 (register here).  The webinar will be 90 minutes long and cover CFPB mortgage updates, use of data in evaluating fair lending risk, compliance management, pricing, maternity leave discrimination, post-origination risks, auto lending settlements and others. Participating agencies include the DOJ, CFPB, FDIC, OCC, FRB, HUD and NCUA. 

CFPB Issues Regulation Z Annual Threshold Adjustments; Fed Adopts Same-Day ACH Processing; A Penny for Your Thoughts

Written by Victoria Daka, Regulatory Compliance Counsel

The CFPB is required to annually adjust certain threshold amounts within various provisions of Regulation Z based on inflation. While it’s not the most exciting task, it has to be done. That said, on September 21, 2015, the bureau published a final rule implementing a few of these adjustments under the CARD Act, HOEPA, TILA, and the Dodd-Frank Act. The rule modifies the credit card penalty fee safe harbor, the HOEPA total loan amount and fee trigger thresholds, and the loan amounts for specific points and fees limits under Regulation Z’s qualified mortgage rule. These amounts are adjusted, where appropriate, based on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2015. The following will outline the adjustments of several provisions in Regulation Z, effective January 1, 2016. However, the minimum interest charge disclosure thresholds will remain unchanged in 2016.

Card Act                                                                                                                                                                              Under section 1026.52(b), fees on credit card accounts must generally be based on costs, but the rule contains safe harbor amounts that are considered compliant. The new safe harbor for a member’s first late payment will be $27 and $37 for subsequent late payments within the same six month period. Credit unions should note that while the first late payment fee remains unchanged, subsequent payments within the six month period decreased by $1 dollar to $37.

HOEPA                                                                                                                                                                       Under section 1026.32(a), for purposes of determining the total loan amount threshold that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percentis $20,350. This is an decrease from the current $20,391 figure. Additionally, for purposes of determining whether a consumer credit transaction that is secured by a consumer's principal dwelling and is not otherwise exempt is covered by § 1026.32 a loan is covered if the points and fees exceed $1,017 or 8 percent of the total loan amount, whichever is lower. This is a decrease from the current $1,020 figure.

TILA                                                                                                                                                                                    Under section 1026.43(e)(3), for purposes of determining whether a covered transaction is a qualified mortgage, a covered transaction is qualified when: the transaction's total points and fees do not exceed 3 percent of the total loan amount for a loan amount greater than or equal to $101,749; $3,052 for a loan amount greater than or equal to $61,050 but less than $101,749;  5 percent of the total loan amount for loans greater than or equal to $20,350 but less than $61,050; $1,017 for a loan amount greater than or equal to $12,719 but less than $20,350, and 8 percent of the total loan amount for loans less than $12,719. Credit unions should note that these are all increases from the current figures.

The CFPB’s final rule can be found here.

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Fed Adopts Same-Day ACH Processing                                                                                                                         

On September 23, 2015, the Federal Reserve Board approved the NACHA mandatory same-day automated clearinghouse processing rules adopted in May. Same day transactions will begin to phase in starting September 2016. The new rule “requires receiving depository financial institutions (RDFIs) to participate in the service and originating depository financial institutions (ODFIs) to pay a fee to RDFIs for each same-day ACH forward transaction,”

The Board's Federal Register notice can be viewed here. For more information on NACHA’s same-day ACH, check out this blog post.

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A Penny for Your Thoughts

Back when I was new to compliance, I wish there had been a “compliance officer 101” type of resource. There are so many regulations that compliance officers need to be aware of, including -- TILA/RESPA Integrated Disclosures, Regulation B, Regulation CC, Regulation D, Regulation DD, Regulation E, Regulation J, Regulation P, Regulation V, Regulation X, Regulation Z, and UDAAP -- just to name a few. Oh yea, and then there is the E-SIGN Act, too! You can’t forget about those electronic disclosures.  With all of these regulations, how do they all work in tandem? And then there are policies, which ones require board approval?

Whether you’re new to compliance and share my rookie-days sentiments, or are a seasoned compliance officer, we’re working on a new electronic resource to help you navigate your way through the regulatory-compliance land of credit unions.

My question to you – what did you use when you were brand new to compliance? Or are you still looking for that perfect resource to help you with your day-to-day compliance needs?

CFPB Finalizes Changes to Small Creditor, Rural or Underserved Areas Definitions

Written by Brandy Bruyere, Director of Regulatory Compliance

On Monday, the CFPB finalized amendments to its definition of small creditors and rural or underserved areas under Regulation Z. The final rule goes into effect on January 1, 2016 and while the rule may provide some credit unions with regulatory relief, there are some concerns relating to the rule’s treatment of affiliate assets (i.e. CUSOs). Here is a high-level overview of the rule.

Small Creditors. First, keep in mind that there are three provisions in Regulation Z which contain exemptions for small creditors:

1. the higher-priced mortgage loan (HPML) escrow requirement which contains an exemption for small creditors. This rule also houses the definition of “small creditor;” and
2. the high-cost mortgage rule, which exempts small creditors from a prohibition against balloon payment features on these kinds of loans;
3. the ability to repay/qualified mortgage (ATR/QM) rule which permits small creditors to make certain portfolio and balloon payment QMs.

Currently, under section 1026.35(b), to qualify for “small creditor” status, a credit union must meet a four-part test. The final rule amends the first three parts, here is a summary of the amended test:

1. Total Annual Mortgage Originations: A credit union and its affiliates that “regularly extended” first lien mortgage loans (CUSOs, for example) must have originated 2,000 or fewer first lien mortgage loans in the preceding calendar year. However, portfolio loans will now be excluded (increased from 500 first lien mortgage loans with no exclusion for portfolio loans);
2. Asset Size Threshold: The credit union and its “affiliates that regularly extended” first lien mortgage loans must have a combined asset size that is less than $2.060 billion (note this figure adjusts annually) at the end of the preceding calendar year (the existing rule does not include affiliates’ assets in this calculation);
3. Predominately in Rural or Underserved Areas: In the preceding year (or preceding two years for applications received before April 1) must have originated more than 50 percent of its first lien mortgages in counties that are determined to be "rural" or "underserved." This is not technically changing, but the definition of “rural or underserved” will be more granular, as discussed below;
4. Do Not Currently Escrow for Mortgage Loans: Even if a credit union meets these three requirements, the credit union (or its CUSO) will not qualify for the HPML escrow rule's small creditor exemption where the credit union regularly establishes escrow accounts for its mortgage loans (this provision is not changing).

While the CFPB acknowledged concerns relating to CUSOs with regard to the asset size threshold calculation, the bureau declined to adopt any carve out that acknowledges that credit unions and CUSOs are distinct from the kinds of affiliate and subsidiary relationships that other kinds of financial institutions utilize. Here’s an excerpt from page 34 of the rule’s Preamble:

“While credit unions in their comments expressed concern about the impact of the proposal on credit unions affiliated with CUSOs, under the proposal only the assets of affiliates that regularly extended covered transactions are counted toward the creditor’s asset limit. As adopted under the Bureau’s final rule, therefore, only the assets of CUSOs that meet the definition of affiliate in Regulation Z (meeting the “control” test under the Bank Holding Company Act) and that regularly extend covered transactions during the applicable period will be counted toward the asset limit. The Bureau is not excluding CUSOs from possible treatment as affiliates because it remains concerned that a credit union could, under the current asset limit calculation, enter into a relationship with a CUSO or CUSOs to create a large entity that would be eligible for the special provisions and exemptions accorded small creditor status. The Bureau also notes that § 1026.32(b)(5) and its definition of “affiliate” references the Bank Holding Company Act only for the purposes of how control is determined under that Act, which is applicable to the determination of affiliate under Regulation Z regardless of the applicability of the Act to credit unions.”

To which I thought:

Rural or Underserved Areas. For a credit union to be deemed a small creditor, in the preceding calendar year, the credit union must have originated more than 50 percent of its first lien mortgages in counties that are determined to be "rural" or "underserved." The final rule, among other things, amends the rural definition by substituting the word "area" for "counties" in the current rule. This change would include all census blocks in order to account for additional communities that are rural by Census standards. To put this into perspective, there are only about 3,000 counties in the US, but 11 million different census blocks that are designated as either “urban” or “rural.” The final rule takes a more granular approach than the existing standard.  It is also worth noting that the final rule changes the current three year look back period used to determine whether the rural and underserved test is met to a one year look back.

Again, this is a high-level summary, there are more nuances to these changes that are worth reviewing in full. For more details on this final rule, NAFCU will provide members with a Final Regulation summarizing the changes in the next couple of weeks.

NCUA’s September Edition of the NCUA Report Goes Live!

Written by Eliott C. Ponte, Regulatory Compliance Counsel

The September Edition of the NCUA Report

Last week, the NCUA released its September 2015 report.  Featured articles include: 

• Preparing for an Active Shooter Situation
• Chairman’s Corner:  The Power of Partnerships
• Small Steps by Members Can Prevent Big Losses
• Board Perspectives: Building a Better Playbook
• Board Perspectives:  Out Membership Rules Can Be Better with Your Help
• Understanding the Purchase and Assumption Process
• Flood Insurance Requirements Expanded for Lenders and Servicers
• Credit Union Locator Gets New Look, Search Functions, and Map Features

 

One article I want to highlight is Preparing for an Active Shooter Situation.  Unfortunately, active shooter situations have become more prevalent over the recent years.  While these events are still rare, the article states credit unions may want to consider preparing for an active shooter situation at or near their credit union.  Credit unions should note that this article does not impose any new regulatory requirements and whether to implement such training is a business decision for the credit union.  If the credit union is interested in conducting active shooter training, the article offers a three–step model to help train employees—run, hide, or fight.

The article also highlights two training resources that are available to the credit union at no cost.  First, the article highlights a training video produced and published by the Federal Bureau of Investigation.  The introduction to the video is slightly graphic—no more than a typical action movie—but the video demonstrates the run, hide, or fight model in action.  Second, FEMA has an interactive web based course on active shooters.  The course also has a final exam, which may be helpful for credit unions that are interested in have a self-paced active shooter training program.  FEMA’s course is one hour long, but is very helpful for credit unions who wish to offer this type of training to their employees at no cost.

Another article that is worth reading is the Flood Insurance Requirements Expanded for Lenders and Servicers.  While NAFCU’s Victoria Daka published a detailed article on the new flood insurance requirements in the September Compliance Monitor, the NCUA article provides a high-level summary of the major changes to the flood rule. 

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Advanced Topics in BSA

Live Webcast: Tuesday, September 29 | 2:00 p.m. – 3:30 p.m. EST

An old dog can provide new tricks—and that is exactly the case with the BSA.  Despite existing for half a century, the act is constantly evolving, and you need to ensure you are keeping up with the changes.  Join us and cover hot BSA topics regarding OFAC penalties and enforcement actions, due diligence requirements, human trafficking, and more.  For more information, click here.

Post-Caucus Regulatory Round-Up: NCUA Board Takes Action on Regulatory Flexibility Act and Aggregate Lending Limits; CFPB Releases Updated TRID Examination Procedures; FRB Announces 2015 Fair Lending Webinar

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Caucus is over and what a week it was! Meeting our members face-to-face and helping you make direct connections with your representatives here in Washington, D.C. has been fantastically rewarding. Thanks to all who attended! While credit unions were on the Hill, the regulators have been busy. Here are some highlights from the regulators this week.

NCUA Board Takes Action on Regulatory Flexibility Act and Aggregate Lending Limits

Today at NCUA’s Board meeting, the board voted on final rules regarding the Regulatory Flexibility Act and the aggregate lending limit for corporate credit unions. The Board increased the asset threshold for ‘small entity’ designation from $50 million to $100 million, and committed to reevaluating the threshold every three years. That will give some credit unions special consideration for regulatory relief. The Board also voted to exclude Central Liquidity Facility-related bridge loans from the aggregate unsecured lending cap on loans to one borrower by corporate credit unions. 

Also, at the board meeting, NCUA Chairman Debbie Matz recommended a policy change that would authorize the Office of Consumer Protection to approve community charter expansion requests that are currently reserved for board consideration. Earlier this year, NCUA began an internal review of its Field of Membership regulations in order to streamline procedural and regulatory hurdles that unnecessarily burden credit union growth.

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CFPB Releases Updated TRID Examination Procedures

On Tuesday, the CFPB updated its Supervision and Examination Manual sections on Mortgage Origination Exam Procedures and TRID Examination Procedures for examinations after the October 2015 effective date. The updated examination procedures can be accessed here. While most credit unions will not be examined for consumer compliance by the CFPB, any guidance is helpful in trying to find one’s way out of the dreaded TRID labyrinth.

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FRB Announces 2015 Fair Lending Webinar

Also, on Tuesday, the Federal Reserve Bank of San Francisco has announced an interagency Outlook Live webinar on Fair Lending Hot Topics. The webinar will be 90 minutes long and cover CFPB mortgage updates, use of data in evaluating fair lending risk, compliance management, pricing, maternity leave discrimination, post-origination risks, auto lending settlements and others. Participating agencies include the DOJ, CFPB, FDIC, OCC, FRB, HUD and NCUA. The webinar takes place on Thursday, October 15, 2015 and requires registration which can be done here. 

IRS Resource - Money Laundering Case Investigations

Written by Shari R. Pogach, Regulatory Paralegal

I always like to come across useful information that can be used for training purposes.  For instance I just discovered that the Internal Revenue Service (IRS) has a nifty listing of examples of money laundering investigations on its website.  These listings come from public record documents filed in the courts where the cases were prosecuted.  The cases involve the standard drug trafficking, elder abuse, fraud, Ponzi schemes, etc.  But under the fiscal year 2015 investigations, I found two that I’d like to highlight as they both directly involve financial institutions: 1) an example of structuring to avoid currency transaction reporting and 2) ATM theft by the company servicer.

Case Example #1:

“North Carolina Man Sentenced for Structuring Financial Transactions

On April 27, 2015, in Raleigh, North Carolina, James Dino Wills, of Wilson, North Carolina, was sentenced to 102 months in prison, three years of supervised release and ordered to forfeit $733,882. Wills also agreed to file amended federal income tax returns for the tax years 2008 through 2013 and to pay any taxes owed. Wills pleaded guilty on May 7, 2014 to structuring financial transactions to evade the filing of currency transaction reports (CTRs). Federal law requires banks and other financial institutions to file CTRs with the U.S. Treasury Department for all cash transactions exceeding $10,000. According to court documents, Wills operated a business in the Rocky Mount and Wilson, North Carolina areas from 2008 to 2013 and received payments for services primarily in the form of checks. These checks were deposited into his business accounts at two financial institutions. Wills then structured cash withdrawals from these accounts in order to avoid the filing of CTRs. From 2008 to 2013, he structured $755,764 in cash transactions. Wills was prosecuted for the same offense in 1998.” (Emphasis added.)

Case Example #2:

“Missouri Man Sentenced for Stealing Money from ATMs

On Nov. 18, 2014, in Kansas City, Missouri, Anthony T. Civella, Jr., was sentenced to 24 months in prison and ordered to pay $70,000 in restitution, in addition to the restitution that has already been paid. On Feb. 27, 2014, Civella pleaded guilty to bank larceny and money laundering. According to court documents, from 2011 through 2013, Civella owned and operated a company called C Management Group, LLC, which serviced 35 ATMs in the Kansas City, Missouri, metropolitan area. Civella stole $330,040 from the ATMs by obtaining a maintenance code to access the machines. Civella moved money between the ATM machines in order to conceal the theft from the bank. He then comingled the stolen money from the ATMs by depositing most of the cash into his personal checking account at a credit union.”  (Emphasis added.) 

Hopefully these IRS money laundering real world examples of criminal activity can enhance your existing training tools for Bank Secrecy Act education for your staff.  

NCUA Makes Technological Updates to Complaints Portal; NCUA Applies Broader Reading of Loan Participation Rule

Written by Victoria Daka, Regulatory Compliance Counsel

On September 10, 2015 the NCUA launched its improved online Consumer Assistance Center portal which creates a more streamlined process for complaint management. With the technological improvements in the portal, consumers are able to submit inquiries, complaints and additional documentation online through a secure portal. Additionally, they will also be able to check the status of their complaints online. NCUA indicates that in the upcoming weeks, credit unions will also be able to use the new Consumer Assistance Center portal to submit complaint response information securely and check the status and number of complaints concerning their institutions. However, the NCUA notes that the portal use is voluntary.

The technological ammendments in the complaints portal follow NCUA’s Letter to Federally Insured Credit Unions issued in June of this year, indicating improvements to the complaint handling procedures. 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 in house. For more information on NCUA’s improved complaint handling process, see NAFCU’s Compliance blog here.

To assist credit unions, NCUA intends to release a video explaining how to use the Consumer Assistance Center portal and the new resolution process. In addition, NCUA plans to host a webinar about the portal and other federal consumer financial protection matters in October.

The online Consumer Assistance Center portal is located on NCUA’s consumer website, MyCreditUnion.gov.

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NCUA Applies Broader Reading of Loan Participation Rule

In a recent Legal Opinion Letter, NCUA applies a broader reading of the loan participation rule with respect to the “originating lender” definition. NCUA indicates in the Letter that a federally insured credit union (FICU) or other “eligible organization” that is the seller of a participation, may be considered the “originating lender” where the seller has generated the loan by an indirect lending arrangement with a retailer.  Furthermore, NCUA ultimately indicates that a FICU is permitted under its loan participation rule to purchase a participation in a loan generated by an indirect lending arrangement. However, this is only permissible under limited circumstances.

NCUA specifies the limiting circumstances in two prongs. First, the retailer must be acting as an agent of the FICU or other eligible organization, and is simply performing as an administrative functionary processing a loan for an FICU or other eligible organization. Second, the retailer’s activities must be part of, and an extension of, the FICU or other eligible organization’s lending operations. In other words, the retailer is not acting like a separate lender generating loans for itself.  Instead, the retailer is the facilitator of the FICU or other eligible organization’s loan processing mechanism, and the FICU or other eligible organization is the de facto originating lender, and, therefore the originating lender for purposes of the loan participation rule.

The Legal Opinion Letter can be viewed in its entirety here.

Friday FinCEN Update

Written by Brandy Bruyere, Director of Regulatory Compliance

It’s been a bit of a slow week, but when you work in compliance sometimes no news is good news. After all, that means no new rules to learn this week, right? Today I’d like to highlight two items that recently came out of FinCEN—a proposed rule that would require “investment advisers” to adopt formal Anti-money laundering (AML) programs and report suspicious activity, and a FinCEN consent order involving Caesar’s Palace.

FinCEN Proposal. A few of our members have asked about this proposed rule so here’s a very brief overview. On Tuesday, September 1st, FinCEN published a proposed rule that would extend particular Bank Secrecy Act (BSA) requirements to investment advisers. Specifically, under this proposal, an investment advisor would be required to establish written AML programs, report suspicious activity to FinCEN and follow recordkeeping requirements. 

Keep in mind that federal credit unions cannot directly offer products like securities, but there are some FCUs that have relationships with CUSOs which sell products like securities. Thus, this proposal may impact a credit union more tangentially, such as through due diligence obligations with regards to third-party relationships. However, the proposal defines “investment adviser” as “[a]ny person who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940…” Thus, whether this rule impacts a particular credit union’s relationships will depend in large part on if any of a credit union’s CUSOs have obligations to register with the Securities Exchange Commission under this cross-referenced statute. This is not the first time FinCEN has issued such a proposal, so time will tell if or when this could be finalized.

FinCEN and Caesars Palace Reach Settlement. While not specific to credit unions, this story caught my eye given some of the facts surrounding the case. Caesars Place, which earlier this year filed for Chapter 11 bankruptcy, agreed to pay an $8 million civil money penalty and implement changes to its BSA/AML program. The case involves allegations that the casino had “systemic and severe AML compliance deficiencies” particularly with its private gaming salons reserved for the wealthiest of gamblers who provided a minimum “front money deposit” of $300,000. According to the consent order, it was not uncommon for this high-end clientele to gamble “millions of dollars in a single visit.” Must be nice, right? I have a hard enough time purchasing a lottery ticket! But back to FinCEN…

The casino permitted wealthy patrons to gamble anonymously without “appropriate [AML] scrutiny” that would “meet these heightened risks” and “failed to file over 100 SARs” for a variety of suspicious activities including potential money laundering. As part of the consent order, Caesars agreed to several conditions:

• undertake improvements to its BSA/AML program, including “fostering a culture of compliance;”
• retain a qualified external auditor to perform independent reviews of its program;
• properly train staff;
• perform a “SAR lookback” and file as necessary after reviewing the deficient time period; and
• report to FinCEN annually for three years.

While this case involves a casino, sometimes these kinds of conditions from a consent order can be useful as illustrations of regulatory expectations.

Enjoy Friday and have a great weekend!

The Federal Reserve Presents a Framework for Managing Product Risk

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Welcome back to your regularly scheduled NAFCU Compliance Blog programming! I hope everyone had a wonderful, relaxing Labor Day weekend. When a long weekend is upcoming, it feels like there is always a mad rush on Friday to take care of business―to get all your ducks in a row so that you can spend the holiday actually relaxing. I know there was for me, and it seems like maybe there was for the Federal Reserve too.

In the waning, twilight hours of the Friday afternoon before the long weekend, as most of us were packing up and heading out, the Federal Reserve quietly released the 7th Anniversary Issue of the Consumer Compliance Outlook. With a September release date, it is a little late―this is only the second quarter issue. It is also a little thin―it contains only one article. The article is entitled Managing Risk Throughout the Product Life Cycle and it describes a product-focused risk management framework largely through a UDAAP lens, which may be especially useful for financial institutions considering the introduction of new products and services. As UDAAP enforcement actions by the CFPB continue to materialize, the Fed is suggesting a risk management framework that may help manage some of the uncertainty.

NCUA examination of risk management for all credit unions includes a risk-based review of the type of products and services offered by the credit union, and the depth and breadth of potential exposures created by those offerings. This framework is one way that a credit union can gauge and mitigate that risk, though certainly not the only way. The particular framework suggested by the Fed divides up a product life cycle into seven stages, and sets out a list of recommendations, risk factors, compliance considerations, and self-check questions for each stage. The seven stages of a product life cycle include strategic considerations, product design, marketing, product delivery, origination or consummation, product use and duration, and termination.

Strategic considerations includes the initial analysis of a potential product, including the determination of the product’s fit with the credit union, the product’s benefit to its members, and the identification of various components tied to product development. During this stage, a credit union would want to involve the board, management, compliance staff and appropriate business line staff to determine the strategic goals of the product and how it fits into the credit union’s strategic plans and risk appetite; the full scope of any compliance and regulatory issues; and what changes to processes, procedures, and system capabilities may be necessary.

Product design is the second stage, and one in which compliance personnel are critical. The Fed indicates some institutions make the mistake of not involving compliance in product design until final review. The Fed recommends that product design be conducted with not only regulatory compliance in mind, but also with ongoing consideration of the complexity of the product and of the fairness to consumers. With continued regulatory focus on fairness and consumer harm, a credit union might try to address any possible UDAAP implications when designing a product. This could include simplifying a product to ensure a consumer can understand it and that the credit union can fully deliver on its terms.

Marketing of a product also presents openings for possible UDAAP violations, for example, if products and services are targeted to potentially vulnerable populations. To avoid this risk, as well as the compliance risk involved in creating advertisements, the Fed recommends that compliance staff and marketing staff collaborate in the development of marketing plans and strategies. Bringing compliance into the marketing process early can result in time and cost savings to credit unions, in addition to supporting an overall culture of compliance.

Product Delivery focuses on the sales and applications processes and can take place in a variety of channels. Each delivery channel contains its own risks and a credit union would want to consider the appropriateness and fairness of using each channel for a particular product. Risks may be regulatory in nature, but they may also be reputational in nature. The Fed uses the delivery of a product across social media as an example. While Twitter and Facebook offer exciting new ways to connect with members and potential members, they also have the potential to allow a dissatisfied member’s comment to echo and escalate across the internet and traditional media.

Origination and Consummation describes the stage where the consumer has decided on a product or service. A credit union must determine adequate pricing controls and appropriate limitations on discretion so as to avoid any UDAAP risk. Well-documented qualification standards and pricing guidelines help mitigate this risk. The Fed also stresses that technical satisfaction of regulations, such as initial disclosures, may not be enough―a credit union must consider the fairness, consistency, and clarity of the method and form of disclosures to ensure a consumer was not otherwise misled about a product.

Product Use and Duration describes the stage where the product itself is in use and can vary widely, depending on the type of the product. Whereas a remittance transfer is a one-time transaction that is completed quickly, a mortgage may be in active repayment for thirty years. The nature of the compliance risk associated with a product must be determined individually, depending on the life of the product, the amount of service that product requires, and the amount of regulation surrounding service of the product. Additionally, the Fed recommends monitoring and evaluating member complaints as a tool to pinpoint compliance risks associated with the use of a product.

Termination describes both the end of a product in its natural course, such as a product reaching maturity or voluntary account closures, as well as early termination of a product or service by the credit union. Early termination by a credit union could be the discontinuation of a product or service or the termination of an individual product or service due to non-performance by a member. While any termination of a product or service may trigger regulatory requirements, termination initiated by a credit union may pose significant reputational risk, and should be carefully considered and planned.

The article contains a number of additional examples and recommendations for each stage of a product life cycle, and a number of useful questions a credit union should be able to answer as it makes the changes to its products and services. The article is practical and worth a read, especially to any credit union considering making new offerings to its members. But don't take my word for it...

DoD Final Rule: Treatment of fees under MLA & Regulation Z; Programming Note; NAFCU Webcast.

Written by Alexander Monterrubio, Regulatory Affairs Counsel

Happy Friday to all! My name is Alexander Monterrubio and I am part of NAFCU's Regulatory Affairs team. Before you start your Labor Day weekend, let’s take a second to talk about an increasingly popular subject among lending circles… the recently finalized Military Lending Act (MLA) regulation. [Director's editorial note--what Alex is trying to say is, sorry for the really long blog post leading into a holiday weekend! ~Brandy]

This post is going to primarily focus on the charges included in calculating the Military Annual Percentage Rate (MAPR) as compared to the charges included in Regulation Z’s Annual Percentage Rate (APR).

Regulation Z contains the rules for determining which fees are included in the finance charge to be used when calculating the APR for a consumer credit transaction. In particular, 12 C.F.R. § 1026.4 and its Official Interpretations provide examples of charges that are always included, charges that are included unless conditions are met, and charges that are always excluded. Meanwhile, the Department of Defense’s (DoD’s) final rule modified the MLA to reflect an “all-inclusive” MAPR that is more expansive than Regulation Z. This different approach taken by the MLA causes a stark contrast between how a particular type of fee is treated under the respective rules.

Application Fees

Generally, Regulation Z excludes application fees if charged to all applicants for credit. See, 12 C.F.R. § 1026.4(c)(1). The Official Interpretation defines an application fee as a charge to recover the costs associated with processing applications for credit, such as credit reports, credit investigations, and appraisals. However, if the fee is only charged to applicants who are approved or who actually receive credit, then the application fee may not be excluded from the finance charge.

Under the MLA, “any application fee charged to a covered borrower who applies for consumer credit” is included in the MAPR, except for a bona fide fee charged to a credit card account. See, 32 C.F.R. § 232.4(c)(1)(iii)(B). While there is not a broad exemption like in Regulation Z, the final rule does contain an important caveat:  a federal credit union or an insured depository institution may now exclude from the MAPR an application fee charged to a covered borrower when making a short-term, small amount loan (STS loan). However, this exemption is limited to one application fee charged in a rolling 12-month period.

Participation Fees

Under Regulation Z, a participation fee is generally excluded from the finance charge. See, 12 C.F.R. § 1026.4(c)(4). However, keep in mind that a one-time, non-recurring fee charged during the opening of the account is not a fee that is charged on a periodic basis and may not be excluded from the finance charge as a participation fee. Regulation Z’s participation fee exemption also does not apply to minimum monthly charges, credit card non-use charges, or other fees based on account activity or the amount of available credit.

Under the MLA, “any fee imposed for participation in any plan for consumer credit” is included in the MAPR, except for a bona fide fee charged to a credit card account. See, 32 C.F.R. § 232.4(c)(1)(iii)(C).  The final rule explains that the bona fide fee for participating in a credit card account may be “reasonable” if the fee amount corresponds to either the credit limit in effect or the credit made available when the fee is imposed, the services offered under the credit card account, or other factors relating to the credit card account. See, 32 C.F.R. § 232.4(d)(3)(iv)  For example, even if other creditors typically charge $100 per year participation fee for credit card accounts, a $400 per year participation fee may still be reasonable if (relative to the other accounts) the credit made available to the covered borrower is significantly higher or additional services and benefits are provided under that account.

Insurance Premiums/Debt Cancellation or Suspension Fees

Regulation Z excludes premiums for credit life, accident, health, or loss-of-income insurance from the finance charge so long as certain conditions are met:

(1) The insurance coverage is not required by the creditor, and this fact is disclosed in writing;

(2) The premium for the initial term of insurance coverage is disclosed; and

(3) The consumer signs or initials an affirmative written request for the insurance after receiving the required disclosures. See, 12 C.F.R. § 1026.4(d)(1).

These conditions generally aim at ensuring the consumer voluntarily purchased the coverage before allowing the charge to be excluded from the finance charge.

Similar to insurance premiums, Regulation Z excludes debt cancellation or debt suspension fees so long as specified conditions are met. See, 12 C.F.R. § 1026.4(d)(3). These conditions are similar to the above conditions for insurance premiums with one additional disclosure related to notifying the consumer that interest will continue to accrue during the suspension period even though the obligation to pay is suspended.

Under the MLA, premiums for credit life, accident, health, or loss-of-income insurance and debt cancellation or debt suspension fees are included in the MAPR regardless of the voluntary nature of the purchase by the covered borrower. See, 32 C.F.R. § 232.4(c)(1)(i).The DoD changed this aspect of the regulation under the reasoning that credit insurance and debt suspension products provide coverage for conditions that a covered borrower, as a member of the armed services, is already “substantially insured for, or otherwise substantially provided benefits for, by the military service.” In other words, these products are included in the MAPR because the DoD views them as duplicative, providing no substantial utility to covered borrowers.

Conclusion

It is safe to say that the DoD’s intention was to cast as wide a net as possible when capturing fees to be included in the MAPR and a charge that is included in the definition of a finance charge under Regulation Z would likely also be included in MAPR calculations. However, it is important to emphasize that a charge excluded from the definition of finance charge under Regulation Z is not necessarily excluded from the MAPR.

For more information about the MLA final rule, check out the September issue of NAFCU’s Compliance Monitor.

The following chart is intended to be a helpful quick reference guide to assist you in identifying how charges are treated under each regulation. This is not intended to be a comprehensive list.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Monday for the long holiday weekend. We will be back to blogging on Wednesday. Have a great Labor Day weekend!

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NAFCU Webcast. Join us on Wednesday, September 16 from 2PM until 3:30 PM EST for Credit Union Mergers: Pros, Cons, Do's and Dont's. A merger can be considered an opportunity or challenge for your credit union. As a top executive and decision maker, it’s important to understand the best practices for a successful merger. Whether you’re the merging or surviving credit union, you have to consider important aspects that may make or break your final decision to merge. Learn the pros and cons and prepare yourself and your team with this webcast.

CFPB August Complaint Report; OIG Complaint Database Audit; Cute Overload

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

CFPB Monthly Complaint Report for August, 2015            

 Beginning last month, the CFPB is releasing a monthly ‘snapshot’ Complaint Report that will report the volume of complaint data received by the bureau, highlight any identified trends, spotlight data from a certain geographic location, and name the “most-complained-about-companies.”

The Monthly Complaint Report for August indicated that the CFPB handled 26,700 complaints in the month of July, bringing the total number to approximately 677,200 as of August 1, 2015.

The good news is that complaints about bank accounts and services represent the greatest decrease in the report: complaints are down 2% from the previous month and 4% from the previous year. Complaints surrounding debt collection remain the highest in terms of volume, with the CFPB receiving 8,224 in the month of July. The second highest in terms of volume and the highest increase over the previous month was related to credit reporting. Credit reporting complaints increased 56% over the previous month and 45% over the previous year. 97% of these complaints were directed at one of the three major credit reporting agencies.

Company level data is reported on a three-month rolling basis, so the majority of data on any given report is largely repetitive of the data on the previous report. July’s report on complaint volume by company covered data from February – April of 2015, and August’s report covered data from March–May of 2015. Both reports named Equifax and Experian as the first and second most-complained-about-companies, respectively, and TransUnion as the fourth most-complained-about-company.

Between the high increase in complaints about credit reporting and the continued presence of the three major credit reporting agencies in the top four most-complained-about-companies, it is not surprising the CFPB made credit reporting the focus of the monthly report. The report stated that 77% of complaints to the CFPB regarding credit reporting involve incorrect information on reports, including the appearance of paid debts and debt belonging to other persons on consumers’ reports.

If you are the kind of person that reads about credit reporting complaints and immediately becomes nervous about whether your credit union is in compliance with Regulation V, now might be a good time to revisit Subpart E regarding the duties of furnishers of information and Appendix E containing the Interagency Guidelines Concerning the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies.

Recent and Future OIG Reviews of the Complaint Database

In April, this blog discussed concerns about releasing complaint narrative data without any kind of investigation, which raises safety and soundness concerns and unduly places financial institutions’ reputation at risk. Further, we have previously discussed the concern that disclosing narrative information could lead to the inadvertent release of personal information about consumers. In late July, the Office of the Inspector General evaluated the effectiveness of the information securities controls and techniques related to the Complaint Database and reported several control deficiencies. Recommendations were made to protect consumer information, and the OIG reported that the CFPB’s Chief Information Officer is working to implement those changes. A few weeks ago, the Office of the Inspector General released its ongoing Work Plan which announced its intentions to conduct an audit of the Complaint Database in the third quarter of 2015. The audit’s objective will be to assess the effectiveness of the CFPB’s controls over the accuracy and completeness of the public complaint database.

Cute Overload

On a personal note, in addition to being new at NAFCU, I am new to DC. I only just moved from Portland, Maine to DC this summer with my husband and our two dogs: Boomer and Ollie.

 

Moving isn’t always easy for dogs, but our two boys do pretty well with travel.


Boomer (left) is a 6 year-old bichon frisé rescue from Missouri. Luckily for my husband and me, a good attitude comes with the breed. Ollie (right) is a 4 year-old rescue from Pennsylvania. We are not sure of his breed ― we suspect he is a combo of two adorable breeds but it is hard to say which ones. Ollie is a sweet boy who usually takes Boomer’s lead. I’ll let you all know how they get on in the big city.