NAFCU Compliance Blog

FOM- The Clock is Almost Up; MLA Database Deadline on Monday

Written by Alicia Nealon, Director of Regulatory Affairs

With just over a week before the February 8^th comment deadline for NCUA’s Field of Membership (FOM) proposal, NAFCU wanted to remind you that we have put together Talking Points  to assist as you put your comment letters together.

The bankers continue their campaign against NCUA’s proposal. While NAFCU is busy in Washington disproving the bankers’ misinformed attacks, it's vital that credit unions continue to weigh in on this proposal to ensure that NCUA knows how important this relief will be to our industry and the millions of consumers who want safe and sound credit union services.

NAFCU believes NCUA’s proposal will help many credit unions reach more potential members who want and need affordable financial services, and I encourage you to write a comment letter to NCUA explaining how the proposal will provide much needed relief to your credit union and membership.

NAFCU has drafted individual templates for Community, Multiple Common Bond and TIP Charters. While the Talking Points should be colored with the views and opinions of your credit union, NAFCU has listed a number of helpful arguments broken down by topic.  For example, the Talking Points detail how the proposal will help Community Charters expand into adjacent areas within the confines of the Federal Credit Union Act. We have also blogged about various aspects of the proposal, including posts individual to Community, Multiple Common Bond and TIP Charters.

Thank you to all who have written comment letters to NCUA. For those that are still thinking about sending comments to the agency, NAFCU cannot stress enough that it is pivotal that the entire credit union industry weigh-in.  Your insight is valuable to the agency.  The thoughts and input you express will ultimately lead to better FOM requirements for credit unions.

As you consider writing an FOM comment letter, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-20, our Field of Membership Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your thoughts.

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Another reminder - Monday, February 1 is the deadline to let the Defense Manpower Database Center (DMDC) know that your credit union is interested in directly connecting with their Military Lending Act database (discussed in this earlier blog post). NAFCU did join in a letter to DMDC asking to extend this deadline until March 1. Keep in mind that even without a direct connection, the database will allow credit unions to submit up to 50 large batch queries a day of up to 250,000 individual checks, but with a 24 hour turn around. However, the direct connection will allow some credit unions to connect directly to this database which may be particularly helpful to those credit unions expecting to run a high volume of covered borrower checks and/or require responses on large batches in less than 24 hours.  If your credit union wants to express interest, the email address to reach out to DoD is [email protected]. Feel free to reach out directly to Brandy Bruyere, NAFCU's Director of Regulatory Compliance ([email protected]) with questions.

One last note for today - the clock is ticking for you or someone else in your credit union to attend NAFCU’s 2016 Regulatory Compliance School. There are only 27 seats left! Attending School is not only a great chance to learn the rules of the regulatory road, but it is also a wonderful opportunity to propel your career as a compliance leader in your credit union and community. Because seats are running out, I encourage you to check out the agenda and register today!

NCUA Issues Letter to Credit Unions on GLBA Privacy Amendment; Dog’s First Snow Fall, Cat Doesn’t Care

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Regular readers of the NAFCU compliance blog will note that we have been covering the recent change to annual privacy notices since the enactment of the “Fixing America’s Surface Transportation Act,” or the “FAST Act.”  As noted in our December 30^th  and December 23^rd blogs NAFCU was pleased that the Gramm-Leach-Bliley Act (GLBA) was amended, as NAFCU had long advocated for regulatory relief  because our members have consistently communicated that their members find these disclosures more confusing than helpful.  Upon the enactment of the FAST Act, NAFCU President and CEO Dan Berger wrote Director Cordray urging the Bureau to “act swiftly to implement these statutory changes and clarify the controlling law.”  The CFPB responded a few days later by stating that financial institutions are not expected to comply with the regulatory requirements that were superseded by the FAST Act.

On Monday, NCUA chimed in on the recent change by issuing a letter to Federally Insured Credit Unions further clarifying the new expectations under the amended GLBA.  Most notably, the NCUA stated that it has instructed credit union examiners to only expect annual privacy notices to be provided if a credit union does not meet the new annual notice requirements.  Furthermore, the NCUA shared what examiners will be looking for when determining if the credit union is required to send annual privacy notices.  In relevant part, the NCUA letter states:

“Dear Board of Directors and Chief Executive Officer:

If you have not changed your credit union’s privacy policy since your last annual privacy notice, you may not have to send another privacy notice this year—as long as you meet the conditions described in this letter.

 ....

Based on the amendment, your credit union need not provide an annual privacy notice if:

• Your policies and practices have not changed since your credit union provided its most recent privacy notice to consumers; and
• You share nonpublic personal information with nonaffiliated third parties only in accordance with requirements for certain existing GLBA exceptions, including those related to:
  • Performing services for, or functions on behalf of, the credit union, pursuant to a joint marketing agreement;
  • Administering, servicing, or processing a transaction a consumer requests or authorizes; maintaining or servicing certain consumer accounts; or performing securitizations, secondary market sales, or similar transactions; or
  • Other specified operational and legal purposes, including disclosure with the consumer’s consent or at the consumer’s direction and disclosure to protect the confidentiality and security of records related to the consumer, service, product, or transaction.

NCUA examiners have been notified that if your credit union meets the applicable requirements, you need not send annual privacy notices unless and until your credit union no longer meets those requirements. NCUA examiners will only expect annual privacy notices to be provided if your credit union does not meet the new requirements described in this letter.

NCUA staff will consult with Consumer Financial Protection Bureau staff as CFPB works to implement the FAST Act’s amendment to GLBA and address interactions with other laws, such as the Fair Credit Reporting Act.”

16-CU-03 (emphasis added).  As consistent with our prior blog posts, credit unions that meet the outlined criteria can take advantage of the newly amended GLBA exception and not provide annual privacy statements to their members.  Credit unions that plan on taking advantage of the newly amended GLBA should review the FAST Act to ensure their credit union qualifies for the exception. 

The full letter can be found on the NCUA’s website.

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Dog Meets Snow; Cat Doesn’t Care About Snow

This weekend was a very exciting time for my puppy, Macie,  She experience snow for the first time.  It was an exciting experience for her.  I share her experience with you in the video below (if you cannot see the embedded video, click here):

 

 I thought she would miss the warm weather of Puerto Rico after the blizzard hit, but it looks like she found bliss in our cold climate.

Miles, my youngest cat, didn't care about snow or the blizzard.  In fact, the only thing my cat cares about is hot radiators.  

 In my house, once we turn on the heat, Miles glues himself to our radiators.

 

 This is him after we removed all of our holiday cards.  I am really not sure he moves. Oh to be a cat!

 

More MLA FAQs; Snowzilla Comes to DC

Written by Brandy Bruyere, Director of Regulatory Compliance

Good morning from snow-buried DC! We hope to fully dig out soon, and while NAFCU's offices are closed, the compliance team is working remotely so we'll still be providing direct compliance assistance to our members. I wanted to start the week off with some more frequently asked questions on one of 2016’s compliance challenges – the Military Lending Act. Here are a couple more questions members have been asking about open-end credit products.

Our credit union is reviewing its open-end credit products that are covered by the MLA to see if any products exceed the 36% Military Annual Percentage Rate (MAPR) cap. How do we calculate the MAPR?

Section 232.4(c) explains how to calculate the MAPR from a technical standpoint. Generally, the rule requires credit unions to follow Regulation Z’s calculation method for computing the MAPR, as addressed by section 1026.14(c), here’s an excerpt from the MLA rule:

"(ii) Open-end credit—

(A) In general. Except as provided in paragraph (c)(2)(ii)(B) of this section, for open-end credit, the MAPR shall be calculated following the rules for calculating the effective annual percentage rate for a billing cycle as set forth in § 1026.14(c) and (d) of Regulation Z (as if a creditor must comply with that section) based on the charges set forth in paragraph (c)(1) of this section. Notwithstanding § 1026.14(c) and (d) of Regulation Z, the amount of charges related to opening, renewing, or continuing an account must be included in the calculation of the MAPR to the extent those charges are set forth in paragraph (c)(1) of this section."

Remember that the MAPR includes items that Regulation Z does not, but Regulation Z’s technical approach to accurately calculating the APR is applied for also calculating the MAPR.

We understand that the MAPR includes certain “ancillary” credit products. For an open-end product, what happens if the member chooses to purchase one of these ancillary products after consummation?

While the rule does not clearly address this question, the rule text is written quite broadly:

“(c) Calculation of the MAPR.—

(1) Charges included in the MAPR. The charges for the MAPR shall include, as applicable to the extension of consumer credit:

(i) Any credit insurance premium or fee, any charge for single premium credit insurance, any fee for a debt cancellation contract, or any fee for a debt suspension agreement;

(ii) Any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or an account for open-end credit…”

(Emphasis added.)

There is a section of the preamble that clarifies that the inclusion of credit ancillary products in the MAPR is not limited only to those products the member purchases at consummation:

“Upon review of the comments submitted on the Proposed Rule and in light of its experience administering the existing rule, the Department has elected to exercise its discretion by generally requiring any fees for credit insurance products or for credit-related ancillary products to be included in the MAPR…

[…]

The Department has determined to modify § 232.4(c)(1)(ii)…to require a creditor to include in the MAPR “fees for credit-related ancillary products sold in connection with and either at or before consummation of the [consumer credit].” …nothing in the MLA necessarily limits the inclusion in the MAPR of these charges only to those that are sold at the outset of the credit transaction. Particularly insofar as consumer credit now encompasses open-end credit products, the Department has concluded that the MLA should be interpreted to require a creditor to include in the MAPR the fee for any ancillary product “sold with any extension of credit to a [covered borrower]” so long as that ancillary product is “associated with the extension of credit”—which could arise at any time in an ongoing, open-end account for consumer credit. Accordingly, the Department has determined to amend § 232.4(c)(1)(ii) so as to require the inclusion in the MAPR of any fee for a credit-related ancillary product sold in connection with the credit transaction for closed-end credit or (at any time in connection with) an account for open-end credit, so long as the consumer was a covered borrower at the time the account was established.”

This seems to indicate that not only are credit ancillary products sold after consummation included in the MAPR, but that even if the member ceases to be a covered borrower at a later date, the MAPR limitation would continue to apply. However, the definition of "covered borrower" states that the term "does not mean a consumer who (though a covered borrower at the time he or she became obligated on a consumer credit transaction or established an account for consumer credit) no longer is a covered member...or a dependent...of a covered member." 

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Snowzilla. A few news outlets were taking polls about what we should call this snow storm. I know one mainstream weather service selected “Winter Storm Jonas” but all I can think of is that early 2000s boy band and that does not make me think “serious weather event.”  One of our local forecasting teams chose Snowzilla and this seems more appropriate (fun fact: “Make Winter Great Again” actually won the poll, but forecasters’ prerogative made second-place Snowzilla the winner). Final (unofficial) measurement in Silver Spring, Maryland - 27 inches.

Anyway, Lemmy was thoroughly offended by the snow and had to be coaxed to go outside. Nolan smashed snow with some enthusiasm, and found it so interesting he would not look at the camera!

 

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DoD Military Lending Act Interpretive Guidance Released

The DoD published its interpretative guidance on August 26, 2016 in the Federal Register that may have changed our analysis. NAFCU's Regulatory Compliance team will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.

A Little BSA, A Little OFAC; January BSA Blast; Programming Note

Written by Shari R. Pogach, Regulatory Paralegal

Compliance with Bank Secrecy Act (BSA) and the Office of Foreign Assets Control (OFAC) requirements continues to be an issue for some financial institutions. Towards the end of 2015, the Board of Governors of the Federal Reserve System posted enforcement actions against three banks: The Bank of Nova Scotia of Toronto, Canada; East West Bank of Pasadena, California; and Habib Bank Limited of Karachi, Pakistan. Each bank had varying degrees of problems with its BSA and anti-money laundering (AML) compliance programs as well as OFAC compliance. All are now subject to monitoring, reporting and transaction lookback review as a result of the deficiencies. It is sometimes helpful to review what someone else has or is doing wrong to ensure your own compliance program is up to snuff.

Cuba and Iran Sanctions

We all know there have been significant changes announced to U.S. policy concerning Cuba and Iran. As a result, there have also been some changes to the OFAC requirements for both countries. I thought it might be help to post the following FAQs from OFAC on the changes:

Changes to the Cuba Sanctions - Frequently Asked Questions, and

Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day.

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BSA Blast: The January 2016 quarterly issue of the BSA Blast is now available (a NAFCU login required). This issue takes a look at the enforcement actions against Deutsche Bank AG for U.S. sanctions violations and reviews recent speeches made by the Financial Crimes Enforcement Network Director Jennifer Shasky Calvery. The issue also includes a new BSA quiz for staff training on OFAC reporting and record keeping requirements.
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NAFCU Webcast: Register for this live webcast, Bank Bribery Issues from a Board Member’s Perspective, on Wednesday, January 27, from 2-3:30pm EST. The role of a credit union board member is more significant than ever. And, a director has the ultimate decision making authority and responsibility for controlling the direct operations of the credit union, which also means understanding the internal and external entities that affect decision making. Join us for an in-depth look at rules, regulations and best practices regarding bank bribery issues that every director needs to know. During the webcast, we will review examples and case studies of Bank Secrecy Act (BSA) violations, explore ethics rules and required policies for internal dealings, and more
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Programming Note: Winter Storm Jonas is coming so NAFCU is closing at 12 noon today to ensure folks get home safely. But never fear, for those not impacted by Jonas, the Regulatory Compliance team will still be available to answer your questions remotely.

FASB Delays CECL Finalization; NCUA’s January Board Meeting Agenda

Written by Alexander Monterrubio, Regulatory Affairs Counsel

Last week, the Financial Accounting Standards Board (FASB) announced in its quarterly “FASB Outlook” that it plans to issue a final Accounting Standards Update (ASU) governing the measurement of credit losses towards the end of the second quarter of 2016. For those of you following along at home, the FASB initially expected the Current Expected Credit Loss (CECL) accounting standard to be issued during the... third quarter of 2015.

Apparently, the large number of substantive projects currently awaiting approval by the Board has caused a bottle neck in the FASB’s agenda. Despite this delay, the FASB has been inching toward the finalization of CECL for months now and credit unions should make sure they are adequately prepared. 

 

 

As a reminder, under the CECL standard, the allowance for loan and lease losses (ALLL) would reflect the credit union’s current estimate of the contractual cash flows that it doesn’t expect to collect. This estimate would be based on management’s expectations after considering past events, current conditions, and reasonable and supportable forecasts.

In November 2015, the FASB voted to adopt a staggered implementation of CECL based on the type of entity. For credit unions and other non-public business organizations, the implementation dates are fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

NAFCU will continue to monitor this issue and raise credit unions concerns at every available opportunity.

Stay tuned… again.

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NCUA January Board Meeting Agenda

During NCUA’s Board meeting tomorrow, the Board will consider the following matters: 1) Final Rule, Part 790.2(b), Office of Minority and Women Inclusion Reporting Structure; 2) NCUA’s 2017 – 2021 Strategic Plan; 3) Overhead Transfer Rate Methodology; and 4) Federal Credit Union Operating Fee Methodology. NCUA’s agenda can be found here.

NAFCU’s compliance team will be sure to more thoroughly blog about these issues and more in the near future.

Consumer Compliance Outlook – New Flood Insurance Requirements; CFPB Assists with Application of TRID to Construction Loans; Regulatory Affairs Webcast: Update from Washington; Programming Note

Written by Shereefat Balogun, Regulatory Compliance Counsel

Consumer Compliance Outlook. The Third/Fourth Quarter 2015 issue of the Federal Reserve’s Consumer Compliance Outlook is now available. Articles in this issue, which focuses on flood insurance compliance, include:

• Agencies Issue Final Rule for New Flood Insurance Requirements
• Flood Insurance Compliance Requirements

The Editors noted that the issue is devoted to flood insurance compliance because flood insurance requirements regularly appear among the top-cited violations by examiners.

As a reminder, on July 21, 2015 NCUA, along with several other regulators, jointly published a final rule to implement new flood insurance requirements enacted by the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA). We previously blogged about the topic earlier here.

Generally, the rule requires that credit unions 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 January 1, 2016, unless the credit union or a loan qualifies for a statutory exception.

We receive a lot of compliance questions relating to the statutory exceptions. Generally, our members want to know which loans and which lenders are exempted from the new flood insurance requirements. The rule provides the following exceptions to the escrow 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.

Moreover, the rule includes a “small lender” exception. The rule exempts any credit union with total assets of less than $1 billion (as of December 31^st of either of the two previous calendar years) that, as of July 6, 2012,:

• 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

• 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 loans secured by residential improved real estate or a mobile home.

The article on Agencies Issue Final Rule for New Flood Insurance Requirements provides an excellent summary of the flood insurance escrow requirements. The issue also contains a resource page with helpful flood insurance links.

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CFPB Assists with Application of TRID to Construction Loans. Earlier this week, the CFPB published a fact sheet on how construction loans are affected by TILA/RESPA Integrated Disclosure (TRID) rules. The fact sheet notes that construction loans are:

• covered by the “know before your owe” mortgage disclosures unless the loans are open-end transactions or are for a commercial purpose, and
• covered by existing provisions under Regulation Z, including the Loan Estimate and Closing Disclosure rule.

The fact sheet also covers how to disclose a construction loan with permanent financing as either one transaction or more than one transaction.

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NAFCU Regulatory Affairs Department: Update from Washington

Live Webcast: Thursday, January 28 | 2:00 p.m. – 3:30 p.m. EST

Part of the CFPB/NCUA Webcast Series

The industry’s best Regulatory Affairs team is your direct connection to credit union regulatory updates and rulemakings brought by the CFPB, NCUA and other regulators. Through this webcast you’ll receive an update on what’s new coming out of Washington, and how it could affect your most vulnerable departments. Learn about overdraft, field of membership, the future of payments and other essential topics.

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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 long weekend!

 

MLA DOD Database in the Works; NCUA Supervisory Focus for 2016; Last Chance On Early Bird Savings

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

MLA DOD Database in the Works

On a short call this afternoon, the Defense Manpower Data Center (DMDC) informed NAFCU that it is working on establishing the two methods for identifying covered borrowers which are considered safe harbors under the MLA rule.

First, it is working with the nationwide consumer reporting agencies to report on covered borrow status for persons over the age of 18.

Second, it is working on a web interface which will allow financial institutions direct access for running covered borrower checks. Direct connection is expected to be broadly available in summer of this year.

Credit unions who want to directly access the DMDC data for running covered borrower checks must declare that by February 1, 2016 – NAFCU will provide details on that process as soon as we have more information.

NCUA Supervisory Priorities for 2016

Earlier this week, NCUA released Letter to Credit Unions 16-CU-01, detailing the agency’s supervisory priorities for 2016. The top areas of supervisory focus include cybersecurity assessment, response programs for unauthorized access to member information, BSA compliance, interest rate risk, TRID compliance and CUSO reporting.

Cybersecurity Assessment      

Cybersecurity threats have appeared on the last four supervisory focus letters, and it is clear that won’t change in the near term. In the letter, NCUA encouraged credit unions to use the FFIEC’s Cybersecurity Assessment Tool released last year. It went further to say that the tool would be incorporated into the examination process in the second half of 2016, but did not explain how, precisely, it will be used.

Response Programs for Unauthorized Access to Member Information

The letter also indicated that NCUA examiners will be reviewing credit unions’ incident response programs. This is the first year that response programs have been highlighted separately from cybersecurity threats, but the change is not surprising in light of last year’s reports of massive information breaches and high-profile litigation surrounding breaches from previous years. NCUA directed credit unions to Appendix B to Part 748 of NCUA rules and regulations for guidance on the minimum components of an incident response program.

BSA Compliance

As with previous years, compliance with the BSA will continue to be a focus. Specifically, NCUA indicated that its examiners will be focusing on credit unions’ relationships with money services businesses (MSBs). NCUA directed credit unions to its guidance, Identifying and Mitigating Risks of Money Service Businesses, issued to examiners and credit unions in 2014.

Interest Rate Risk

Interest rates were raised this year, and NCUA indicated that it will be paying attention to interest rate risk. NCUA is in the process of updating the supervisory guidance on interest rate risk management, and we should expect to see that guidance published this year. Examiners will be transitioning to new exam procedures regarding IRR over the course of the year, receiving training in April. Credit unions should be prepared to provide field staff with documentation supporting the credit union’s ability to successfully manage their IRR through changing market conditions, including rising rate environments.

TRID

How is your TRID compliance going? NCUA has highlighted TRID compliance as a priority this year, but regarding examination the letter merely says that “Field staff will be reviewing credit unions’ compliance with relevant provisions.”    

CUSO Reporting

CUSOs will start reporting in 2016, and NCUA will be checking for registration and reporting once that process starts. The CUSO Registry is not yet live on NCUA’s website, but it is expected to be available beginning February 1, 2016. NCUA states a Letter to Federally Insured Credit Unions on the topic is forthcoming.

Last Chance on Early Bird Savings

For those of you who are considering attending NAFCU’s popular Regulatory Compliance School, our early bird savings code is about to expire this Friday, January 15th. With one full day dedicated to regulatory updates and the option to take the exams needed to become a NAFCU Certified Compliance Officer (NCCO), you won’t want to miss this event. Use code SCHOOLSAVINGS to save $100.00.

IOLTA Accounts and Other Similar Escrows – A Quick Synopsis of NCUA’s Share Insurance Parity Rule

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans! With the January 27, 2016 effective date of NCUA’s IOLTA rule quickly approaching, many of you may be wondering what accounts will receive pass-through share insurance coverage. Some of you may even be wondering how NCUA will determine the insurable amounts owed to members in the unfortunate event that an insured credit union is placed into liquidation. For all this and more, I present this blog to you! (What better way to start a Monday morning than a rousing discussion of share insurance?)

IOLTAs

IOLTAs (or, interest on lawyers trust accounts) are considered member accounts and eligible for pass-through share insurance if the attorney administering the IOLTA is a member of the insured credit union. Share insurance is provided on a pass-through basis for these accounts regardless of whether the client is a member of the credit union. This means, that as long as the attorney is a member of the credit union, he or she may set up an IOLTA and the funds will be insured up to the SMSIA for each client, separately.

Other Similar Escrow Accounts

Escrow accounts that are similar in nature to IOLTAs are also eligible for pass-through share insurance if the escrow agent administering the escrow program is a member of the insured credit union. NCUA defines an “other similar escrow account” to mean:

"…an account where a licensed professional or other individual serving in a fiduciary capacity holds funds for the benefit of a client or principal as part of a transaction or business  relationship. Examples of such accounts include, but are not limited to, real estate escrow accounts and prepaid funeral accounts."

12 C.F.R. § 745.14(c)(1)(ii). In the final rule, the NCUA Board noted that the lack of uniformity in language, function, and organizational structure make it difficult to identify by name the escrows eligible for pass-through coverage. Instead, the Board will provide pass-through overage on a case-by-case basis, provided that the escrow account meets the definition in the rule. Like IOLTAs, the membership status of the client is irrelevant to whether the accounts are insured on a pass-through basis.

Prepaid Cards

The rule does not provide pass-through share insurance coverage for general-purpose reloadable prepaid cards. The Board noted that open loop cards, which allow cardholders to use the card at any retail location including withdrawing funds from an ATM, have too many functional and structural dissimilarities to IOLTAs and escrow accounts. For example, open loop programs are typically administered by a deposit broker that serves as drastically different purpose than an attorney representing a client.

Determining Aggregate Share Insurance Coverage

The final rule treats IOLTAs and other similar escrow accounts as “escrow accounts” for purposes of determining the aggregate share insurance coverage provided to each insured person. See, 12 C.F.R. § 745.14(a)(1), (b). As noted in NCUA Legal Opinion Letter 92-0338 (May 5, 1992), escrow accounts are treated as “agent accounts” and insured according to the rules in Section 745.3. This means that when determining the amount of share insurance due to a particular person, NCUA may aggregate the funds held in the same ownership capacity in the same credit union.

For example, assume an attorney deposits funds into an IOLTA account held at ABC FCU. John Member, the attorney’s client, happens to have a single ownership account at ABC FCU as well. Unfortunately, ABC FCU is deemed insolvent and placed into liquidation by NCUA. When determining the amount owed to John Member, NCUA would likely aggregate the funds held on the IOLTA for John Member with the funds held by John Member to determine the amount of share insurance owed.

Same facts but slightly different – the account held by John Member is a joint ownership account with Jane Member, John’s wife. John is going through a nasty divorce and has hired the attorney to handle this matter for him. Since the funds held in ABC FCU are held as a joint account, they are separately insured under Section 745.8. Therefore, NCUA would not likely aggregate the IOLTA with John’s joint account. They would be separately insured.

There are many different combinations of accounts that we could imagine but the result remains the same – in some circumstances, the member will be stuck with the perverse result of having less funds covered by share insurance than he or she would have thought based on the actions of an escrow agent or attorney. This may seem like a draconian result, since the member does not generally have control over where his or her escrow agent or attorney deposits the funds, but this approach is consistent with how FDIC insures IOLTAs under its deposit insurance rules.

Note – What the Rule Does Not Change

Since NCUA finalized the IOLTA rule, we have received questions regarding some commentary in the preamble discussing escrow and prepaid accounts that may receive share insurance coverage under NCUA’s existing rules independent of the IOLTA rule. These types of accounts involve escrow accounts held at a credit union where the owner of the funds is also a member of the credit union. Similarly, these accounts may involve prepaid cards where the cardholder is a member of the credit union.

As a general rule, the status of the escrow agent is irrelevant for NCUSIF insurance purposes. Instead, NCUA looks to the owner of the funds to determine whether the account is insurable. The IOLTA rule merely changes this general rule for a small, discrete subset of accounts that have distinct characteristics. Similarly, prepaid cards held by cardholders who are members of the credit union would generally qualify as share accounts and be insurable regardless of the IOLTA rule since they are funds held in the credit union by a member.

I hope this blog has answered some of the questions you may have had about NCUA’s IOLTA rule and share insurance generally (or provided you with a decent excuse to drink that extra cup of coffee). Have a good week and...

Changes to the 2016 Form 1098: Mortgage Interest Statement

Written by Victoria Daka, Regulatory Compliance Counsel

While credit unions complete tax reporting requirements for 2015, we thought it would be a good time to note that next year there will be changes to this process. A new law passed in July, 2015 included additional reporting requirements for credit unions that receive mortgage interest. Just to be clear, this will impact next year's reporting, as it applies to mortgage interest received in 2016.

To meet this law's requirements, the Internal Revenue Service added two additional reporting requirements and resized the 2016 version of Form 1098. Credit unions will be required to report mortgage insurance premiums in box 5. This still applies only where a borrower pays a credit union $600 or more in mortgage interest on any one mortgage during the calendar year. Second, credit unions must report the address or description of property securing the mortgage, the outstanding mortgage principal as of January 1, 2016, and the mortgage origination date. Additionally, Form 1098 has increased in size from a 3-to-a-page to a 2-to-a-page format.

Below is a summary from the Form 1098's 2016 instructions on the additional requirements:

“What's New

Mortgage insurance premiums. Report mortgage insurance premiums paid of $600 or more in box 5. Reporting is required under section 6050H(h).

New reporting requirements. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 contains new reporting requirements for recipients of mortgage interest. For forms 1098 issued to payers after December 31, 2016, you must report the address or description of property securing the mortgage, the outstanding mortgage principal as of January 1, 2016, and the mortgage origination date. 

Form resized. Due to the modification of reporting requirements by P.L. 114-41, sec. 2003, the official IRS Form 1098 has increased in size from a 3-to-a-page to a 2-to-a-page format, beginning with tax year 2016. The revised form can be found at www.irs.gov/form1098.”

The instructions for 2016 Form 1098 are available here. The revised form can be found here. Again, this is not for the 2015 tax year, but for any 1098 forms sent after December 31, 2016.

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Also, as a friendly reminder, NAFCU is currently offering an early registration savings of $200 for NAFCU’s 2016 Regulatory Compliance School—but it ends today! Use code HOLIDAY by today, January 8 to save. Take a look at the agenda.

TRID AND SCRA

Written by: Eliott C. Ponte, Regulatory Compliance Counsel

TRID Technical Corrections

 Twas the night before Christmas, when all through the regs, only one thing was changing, and that was TRID! 

The CFPB issued a final rule containing technical corrections to the final TILA-RESPA Integrated Disclosure Rule (TRID).  The technical corrections became effective on December 24, 2015, which was the date of its publication in the Federal Register. 

According to the final rule, the “publication of the TILA–RESPA Final Rule in the Federal Register resulted in several unintended deletions of existing regulatory text from Regulation Z and the Official Interpretations (commentary) in the Code of Federal Regulations (CFR) and, in one case, the omission of regulatory language in the TILA–RESPA Final Rule from the CFR.”  The CFPB maintains that the technical corrections are non-substantive changes to TRID, and these changes merely correct accidently deleted or omitted text.  Specifically, the final rule makes the following technical corrections to Regulation Z:

• Amends section 1026.22(a)(5) to restore subparagraphs (i) and (ii).
• Amends the commentary to § 1026.17 at paragraph 17(c)(1)-2 to restore subparagraphs i, ii, and iii.
• Amends commentary paragraph 17(c)(1)-4 to restore subparagraphs i.A, and i.B.
• Amends commentary paragraph 17(c)(1)-10 to restore introductory text and subparagraphs iii, iv, and vi.
• Amends commentary paragraph 17(c)(1)-11 to restore subparagraphs i, ii, iii, and iv.
• Amends commentary paragraph 17(c)(1)-12 to restore subparagraphs i, ii, and iii.
• Amends commentary paragraph 17(c)(4)-1 to restore subparagraphs i and ii.
• Amends commentary paragraph 17(g)-1 to restore subparagraphs i and ii.
• Amends the commentary to § 1026.18 at paragraph 18(g)-4 to restore text to subparagraph i.
• Adds commentary paragraph 7 to Appendix D of Regulation Z, as this was included in the TRID Final Rule but was accidently omitted when codified in the CFR. 

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Extension of the SCRA’s Post-Service Mortgage Protections Likely

The Servicemembers Civil Relief Act’s (SCRA’s) post-service mortgage protection ensures servicemembers who are serving in the armed forces are protected against losing their home for one year upon his or her return from active duty, if the mortgage was obtained before the servicemember was an active member of the military. Originally, the extension was for 90-days; however, in 2008 Congress voted to extend this protection to nine months.  In 2012, the protection was extended to one year.  As of December 31, 2015, the one-year extension protection expired, and the period of mortgage protection has now reverted to the original 90-days. 

Currently, the Senate introduced and passed bill S. 2393, which would restore the one-year protection through December 31, 2017.  The House is similar bill (H.R. 189) that would restore the one-year protection through December 31, 2016.  While it is not clear which or when any bill will pass, it is likely that some version of the bill will eventually pass. 

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How to Develop an Enterprise-Wide Risk Management Function

Live Webcast: Wednesday, January 13 | 2:00 p.m. – 3:30 p.m. EST

Learn step-by-step guidelines for creating and executing a best-practice, enterprise-wide risk assessment. This informative webcast will cover essential topics such as: how to develop a risk model, key factors to include in your risk assessment, identifying the potential risks of financial, operational, and IT processes and more. Help ensure you are performing a proper risk assessment for your credit union so you can adequately contain the highest potential risks.

FinCEN Regulatory Impact Assessment on CDD Proposal; CFPB Issues Letter on TRID Enforcement and Liability

Written by Brandy Bruyere, Director of Regulatory Compliance

I hope everyone had a wonderful New Year! After a couple of long holiday weekends, I thought we would start off 2016 with FinCEN/the BSA and a recent development relating to TRID. Remember that time FinCEN proposed explicit customer due diligence requirements for beneficial owners of legal entities? These rules were originally slated to become final this past summer, but so far, FinCEN has not finalized the proposal. According to the Department of Treasury's fall rulemaking agenda, the proposal could be finalized as early as this month but when NAFCU reached out to FinCEN to confirm, an agency spokesperson indicated that they are “still in the comment analysis stage.”

On December 23, FinCEN released its Regulatory Impact Assessment (RIA) for this proposed rule which highlighted costs of the rule compared to benefits “using an upper bound for costs based on estimated and hypothetical values.” Overall, FinCEN concluded that so long as the CDD proposal would reduce illicit by a minimum of 0.57 percent annually between 2016 and 2025, the rule would “achieve [a] positive net benefit.” Here are some noteworthy items from FinCEN’s costs analysis.

Staff time for completing CDD requirements (page 5) - FinCEN estimates that it would require, on average, 20 minutes to fulfill the beneficial ownership identification, verification and recordkeeping requirements in the proposal.

Annual costs to small institutions (page 6) – FinCEN estimates that the proposal “would result in a cost to a small bank of between approximately $2000 and $4000 per year at account opening”

Training (Page 7) – FinCEN said the following about the costs associated with training staff to implement the proposal: “Assuming that a small financial institution has 125 employees and that the training would take one hour, and applying the wage assumptions used in the RIA, this would result in an estimated cost of between $1250 and $2500, depending on the percentage of employees trained, for the first year that the rule would be in effect…The amount of necessary training would decrease thereafter.” (Emphasis added.)

Here is a table provide on page 10 summarizing FinCEN’s estimates for total costs for training across all institutions, in the millions:

Note, the “client” column represents estimated costs to the member due to increased time to open accounts and similar impacts.

Information Technology costs (page 25, footnote)  – FinCEN included some specifics on reported information technology costs associated with the proposal. One large bank estimated IT costs to be about $20 million, a mid-sized bank estimated these costs to range from $3 million to $5 million, and a small credit union estimated its costs would be between $50,000 and $70,000. 

The RIA goes on to explain how the “benefits” of the CDD proposal were evaluated, noting the difficulty in placing a qualitative dollar amount of benefit to compare to costs.

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CFPB Issues Letter on TRID Enforcement and Liability. In response to a letter from the Mortgage Bankers Association, last week CFPB Director Richard Cordray sent this letter discussing TRID liability. Here are some excerpts with hyperlinks included:

“…As with any change of this scale, despite the best of efforts, there inevitably will be inadvertent errors in the early days. That is why the Bureau and other regulators have made clear that our initial examinations for compliance with the rule will be sensitive to the progress industry has made…All of the regulators have indicated that their examinations for compliance in the first few months of implementing [TRID] will be corrective and diagnostic, rather than punitive…

[…]

In addition to the cure provisions contained in the rule the Truth in Lending Act itself contains provisions for the correction of errors. These provisions continue to apply to the integrated disclosures. For example, TILA has long permitted creditors to cure violations, provided the creditor notifies the borrower of the error and makes appropriate adjustments to the account before the creditor receives notice of the violation from the borrower. 15 U.S.C. 1640(b). Similarly, TILA contains an exception from liability for unintentional errors, subject to certain conditions. 15 U.S.C. 1640(c).

Furthermore, while [TRID] does integrate the TILA disclosures with the disclosures required under [RESPA], it did not change the prior, fundamental principles of liability under either TILA or RESPA. Therefore, for non-high-cost mortgages:

There is no general TILA assignee liability unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary. 15 U.S.C. 1641(e).

By statute, TILA limits statutory damages for mortgage disclosures, in both individual and class actions to failure to provide a closed-set of disclosures. 15 U.S.C. 1640(a).

Formatting errors and the like are unlikely to give rise to private liability unless the formatting interferes with the clear and conspicuous disclosure of one of the TILA disclosures listed as giving rise to statutory and class action damages in 15 U.S.C. 1640(a).

The listed disclosures in 15 U.S.C. 1640(a) that give rise to statutory and class action damages to not include either the RESPA disclosures or the new Dodd-Frank Act disclosures, including the Total Cash to Close and Total Interest Percentage.

[…]

Accordingly, the Bureau believes that if investors were to reject loans on the basis of formatting and other minor errors, as you indicate has been occurring, they would be rejecting loans for reasons unrelated to potential liability associated with [TRID]…”

The full letter is available here:  CFPB response to MBA TRID letter

NAFCU continues to call on the CFPB to provide greater clarity on TRID. While this clarification on the scope of TRID liability is a step in the right direction, NAFCU hopes that the CFPB will follow this course into 2016 by more proactively resolving ambiguities raised by the industry in official guidance.

Palate Cleanser. We took Nolan to Ohio for the holidays, he had a great time. He also got to see first hand how in mommy's hometown, tractors are much more versatile than here in the DC suburbs - they can take you to the local convenience store! In a somewhat related note, my high school alma mater's annual tradition made the local news last spring, when I shared it with some folks here in DC they thought it was an article from The Onion but nope, this is a real news story about "drive your tractor to school" day. Enjoy!