NAFCU Compliance Blog

DoD’s Interpretive Guidance on MLA: Part II – Oral Disclosures Can Be Generic

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

On August 26, 2016, the U.S. Department of Defense (DoD) issued an Interpretive Rule clarifying some, but not all, issues with the MLA. As Ben discussed on Monday, the Interpretive Rule clarifies that the MLA does not prohibit a credit union from exercising its statutory lien. Another clarification that deserve to be highlighted is guidance on making the oral disclosures under section 232.6(d) and the clarification that these can be made in a variety of ways, including generically.

The MLA’s Requirement

Section 232.6(d)(2)(i) requires credit unions to provide oral disclosures, in addition to written disclosures. The oral disclosures must include “the information required by paragraphs (a)(1) and (3)” of section 232.6. Section 232.6(a)(1) and (3) read as follows:

Ҥ232.6 Mandatory loan disclosures.

(a) Required information. With respect to any extension of consumer credit (including any consumer credit originated or extended through the internet) to a covered borrower, a creditor shall provide to the covered borrower the following information before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit:

(1) A statement of the MAPR applicable to the extension of consumer credit;

(2) Any disclosure required by Regulation Z, which shall be provided only in accordance with the requirements of Regulation Z that apply to that disclosure; and

(3) A clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or account-opening disclosure (in the case of open-end credit) provided pursuant to paragraph (a)(2) of this section satisfies this requirement.” 32 C.F.R. § 232.6(a). (Emphasis added.)

While the preamble to the final rule provided clear guidance on how to provide the “statement of the MAPR,” it has been less clear how to provide a “clear description of the payment obligation,” especially with regard to open-end credit. For open-end credit, the regulation states to provide an “account-opening disclosure…provided pursuant to paragraph (a)(2),” i.e., provided pursuant to Regulation Z. Unlike with closed-end credit, where section 1026.18(g) contains a specific requirement for disclosing the “payment schedule,” there is no specific disclosure in section 1026.6 that pertains to “payment obligation” or “payment schedule” with regard to open-end credit. Without a specific citation or provision of the “account-opening disclosure” provided under Regulation Z, credit unions were facing the daunting task of reading aloud all the disclosures required under section 1026.6 of Regulation Z.

Clarification from the DoD

Question 12 in the DoD’s recently released Interpretive Rule clarifies that reading all of the member’s account-opening disclosure does satisfy the rule, but it is not the only way to comply with section 232.6(d)(2).

“12. How may a creditor orally provide the payment obligation disclosure required under 32 CFR 232.6(a)(3) to meet the requirements of 32 CFR 232.6(d)(2)?

Answer: Section 232.6(a)(3) requires a creditor to provide to a covered borrower, before or at the time the borrower becomes obligated on the transaction or establishes an account for the consumer credit, a clear description of the payment obligation of the covered borrower, as applicable. A payment schedule (in the case of closed-end credit) or an account-opening disclosure (in the case of open-end credit) provided pursuant to the requirement to provide Regulation Z disclosures satisfies this obligation. Therefore, a creditor may orally provide the information in a payment schedule or an account-opening disclosure to a covered borrower. However, an oral recitation of the payment schedule or the account-opening disclosure is not the only way a creditor may comply with § 232.6(a)(3). A creditor may also orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower's payment obligation would be based on an estimate of the amount the borrower may borrow. For example, a creditor could generally describe how minimum payments are calculated on open-end credit plans issued by the creditor and then refer the covered borrower to the written materials the borrower will receive in connection with opening the plan. Alternatively, a creditor could choose to generally describe borrowers' obligations to make a monthly, bi-monthly, or weekly payment as the case may be under the borrowers' agreements.

Neither the MLA nor the MLA regulation specifies particular content or format for the requirement of a clear, oral description of the payment obligation. Also, nothing in the MLA or the MLA regulation requires that the clear description of the payment obligation provided in writing must be the same as the oral disclosure, provided that both disclosures are clear and accurate. As explained in the supplementary information to the Department's July 2015 Final Rule, the Department's approach has been to interpret the MLA's oral disclosure requirement in a manner that provides creditors “straightforward mechanisms” that afford “latitude to develop the same (or consistent) systems to orally provide the required disclosures—regardless of the particular context . . .” [80 FR 43588].The requirement of a clear, oral payment obligation disclosure has sufficient breadth that creditors may choose a variety of acceptable oral disclosure compliance strategies. Thus, under the Department's approach, a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.” 81 Fed. Reg. 58846, 58843. (Emphasis added.)

So, the guidance indicates two, non-exclusive examples of how a credit union can make disclosures more briefly:

• [A] creditor could generally describe how minimum payments are calculated on open-end credit plans issued by the creditor and then refer the covered borrower to the written materials the borrower will receive in connection with opening the plan.
• [A] creditor could choose to generally describe borrowers' obligations to make a monthly, bi-monthly, or weekly payment as the case may be under the borrowers' agreements.

Prerecorded Disclosures May Be Possible

Importantly, the guidance also indicates that these disclosures can be made generically, with the same information being provided for borrowers with a variety of consumer credit transactions or accounts. Many credit unions have contacted NAFCU’s Regulatory Compliance team about whether it is possible to provide MLA oral disclosures via a 1-800 number and completely pre-recorded messages.

Now that the DoD has clarified that generic messages that do not address a covered borrower’s specific loan terms are permissible, this could open the door to prerecorded disclosures, which may relieve some of the burden of MLA compliance. A credit union may wish to have an attorney review any prerecorded oral disclosure to ensure the language provides a sufficient clear description of the covered borrower’s payment obligation under the guidance provided by the DoD.

NAFCU’s Regulatory Compliance Team is continuing to review the guidance to understand its full impact on credit unions and will make necessary updates to our Military Lending Act Guide in the coming weeks. Currently available resources can be found here at our MLA Compliance landing page.

 

U.S. Department of Defense Issues Interpretive Guidance on MLA – Share Secured Loans and Statutory Liens Revisited

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. Last Monday, Brandy blogged about issues surrounding offering share secured loans to covered borrowers and the ability of credit unions to enforce statutory liens on funds held on deposit to satisfy the obligations of active duty members of the Armed Forces and their dependents. Brandy highlighted that Section 232.8(e) of the Military Lending Act Rule (MLA Rule) contains some problematic language that, if interpreted broadly, could prohibit credit unions from exercising statutory liens and create workability issues for share secured products.

On August 26, 2016, the U.S. Department of Defense issued a rule interpreting some provisions of the MLA Rule. Among other issues addressed in the interpretive rule, the Department clarifies that the prohibition in Section 232.8(e) neither prohibits credit unions from exercising statutory lien rights nor prohibits share secured loans. Instead, the guidance indicates that despite its broad language, Section 232.8(e) is intended to prevent creditors from creating remotely created checks or remotely created payment orders in order to collect payments from a covered borrower. This interpretation harmonizes this section of the regulation with the text of the Military Lending Act itself which merely prohibits creditors from using “a check or other method of access to a deposit, savings, or other financial account maintained by the borrower, or the title of a vehicle as security for the obligation.” 10 U.S.C. § 987(e)(5).

The interpretive rule is presented in question and answer format with questions 16, 17, and 18 addressing various ambiguities in Section 232.8(e):

16.  Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from repaying a credit transaction by check or electronic fund transfer?

Answer:   No. As a general proposition the prohibition of a creditor's use of a check or other method of access in § 232.8(e) does not in any way imply that a creditor cannot be paid. In no case does paragraph (e) prevent covered borrowers from tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor. Section 232.8(e) also does not prohibit a covered borrower from authorizing automatically recurring payments, provided that such recurring payments comply with other laws, such as the Electronic Fund Transfer Act and its implementing regulations, including 12 CFR 1005.10, as applicable.

In contrast, § 232.8(e) prohibits a creditor from using the borrower's account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower. Similarly, a creditor may not use a post-dated check provided at or around the time credit is extended that deprives the borrower of control over payment decisions, as is common in certain payday lending transactions.

Section 232.8(e)(1) and (2) further clarify that covered borrowers may tender checks and authorize electronic fund transfers by specifying permissible actions creditors may take to secure repayment by covered borrowers. The exceptions address cases where a creditor requires a covered borrower to provide repayment in a certain way. Specifically, under § 232.8(e)(1), a creditor may require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law. The Department notes that 12 CFR 1005.10(e)(1) prohibits anyone from conditioning an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers (except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account). However, a preauthorized electronic fund transfer is defined under 12 CFR 1005.2(k) as an electronic fund transfer authorized in advance to recur at substantially regular intervals.

In addition, § 232.8(e)(2) clarifies that a creditor is permitted to require direct deposit of the consumer's salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law. While § 232.8(g) prohibits a creditor from requiring as a condition for the extension of consumer credit that the covered borrower establish an allotment to repay an obligation, the regulation does not apply this restriction to a “military welfare society” or a “service relief society” as defined in 37 U.S.C. 1007(h)(4).

17.  Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit the borrower from granting a security interest to a creditor in the covered borrower's checking, savings or other financial account?

Answer:   No. The prohibition in § 232.8(e) does not prohibit covered borrowers from granting a security interest to a creditor in the covered borrower's checking, savings, or other financial account, provided that it is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation including the limitation on the MAPR to 36 percent. As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) prohibits a creditor from using the borrower's account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a post-dated check provided at or around the time credit is extended.

Section 232.8(e)(3) further clarifies that covered borrowers may convey security interests in checking, savings, or other financial accounts by describing a permissible security interest granted by covered borrowers. Thus, for example, a covered borrower may grant a security interest in funds deposited in a checking, savings, or other financial account after the extension of credit in an account established in connection with the consumer credit transaction.

18.  Does the limitation in § 232.8(e) on a creditor using a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower prohibit a creditor from exercising a statutory right to take a security interest in funds deposited within a covered borrower's account?

Answer:   No. Under certain circumstances federal or state statutes may grant creditors statutory liens on funds deposited within covered borrowers' asset accounts. For example, under 12 U.S.C. 1757(11) federal credit unions may “enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him.” As discussed in Question and Answer #16 of these Interpretations, § 232.8(e) serves to prohibit a creditor from using the borrower's account information to create a remotely created check or remotely created payment order in order to collect payments on consumer credit from a covered borrower or using a post-dated check provided at or around the time credit is extended. Section 232.8(e)(3) describes a permissible activity under § 232.8(e). However, the fact that § 232.8(e)(3) specifies a particular time when a creditor may take a security interest in funds deposited in an account does not change the general effect of the prohibition in § 232.8(e). Therefore, § 232.8(e) does not impede a creditor from exercising a statutory right to take a security interest in funds deposited in an account at any time, provided that the security interest is not otherwise prohibited by applicable law and the creditor complies with the MLA regulation, including the limitation on the MAPR to 36 percent.

81 Fed. Reg. 58840, 58844-5 (Aug. 26, 2016) (emphasis added). Taken together, questions 16, 17, and 18 clarify that Section 232.8(e) largely addresses the use of a check or remotely created payment order as security for a covered loan rather than prohibiting share secured products or the exercise of a statutory lien. Furthermore, instead of only permitting share secured products secured by funds deposited after the extension of credit into an account established in connection with the covered loan, the guidance seems to indicate that Section 232.8(e)(3) merely provides an example of one type of permitted security interest rather than specifying a time when a credit union may take a security interest in funds held on deposit by the covered borrower.

NAFCU’s Regulatory Compliance Team is continuing to review the guidance to understand its full impact on credit unions and will make necessary updates to our Military Lending Act Guide in the coming weeks. Currently available resources can be found here at our MLA Compliance landing page.

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Upcoming NAFCU Webcast

Avoiding Truth in Savings Compliance Pitfalls

Wednesday, September 7 | 2:00 – 3:30 p.m. EST

Can your TISA compliance program meet the standards of the federal regulators? This webcast is designed to give you the tools needed to review your TISA program, and steer clear of UDAAP violations.

CFPB Issues Mortgage Servicing Rules – Part Three: Loss Mitigation; DoD Military Lending Act Interpretive Guidance out Today

Written by Shereefat Balogun, Regulatory Compliance Counsel

As many of you know, the CFPB recently issued its final amendments to the mortgage servicing rules contained in Regulation X and Z.  Now we all know that compliance folks work hard, and we’re use to reading through voluminous pages of regulatory text.  However, ending our short summer with 900+ pages of mortgage servicing rules (or any rule!) is a bummer.  In an effort to make this more manageable and “pleasant”, we’re breaking this up a bit.  The changes can be grouped in broad topics including: Successors in Interest; Requests for Information; Force-Placed Insurance; Early Intervention; Loss Mitigation; Prompt Payment Crediting; Periodic Statements; and Small Servicer Exemption.  We have already covered the changes relating to “Successors in Interest” and “Force-Placed Insurance”.  This post will focus on the changes made to the loss mitigation requirements.    

Before getting into the specifics of the loss mitigation requirements, we've broken up the final rule to make it easier to digest:

• Here’s a link to the Final Rule. This final regulation includes the preamble with rulemaking background, and a section-by section analysis with the provisions of the final rule and public comments.
• There’s a 9-page summary of the major changes which gives a high-level discussion of the major provisions of the rule. View the overview here.
• The actual amended rule with model forms and commentary (and 100+ pages), can be found here.

Moving on to the changes made to the loss mitigation requirement.  The final rule makes several significant changes to loss mitigation requirements under the mortgage servicing rules, including:

• Requires servicers to notify borrowers when their loss mitigation applications are complete (§ 1024.41(c)(3)). Under the final rule, a servicer will be required to provide written notice that a borrower’s loss mitigation application is complete within 5 days (excluding legal public holidays, Saturdays, and Sundays) of receiving a complete application.  The notice must set forth certain information including: (i) a statement that the loss mitigation application is complete; (ii) the date the servicer received the completed application; (iii) a statement that the servicer will evaluate the application within 30 days; (iv) a statement that the borrower is entitled to certain foreclosure protections while the application is pending; (v) a statement that the servicer may require and request additional information, and the consequences if the borrower fails to respond to that request; and (vi) that the borrower may be entitled to additional protections under State or Federal Law. 

• Permits servicers to provide short-term loss mitigation options based on evaluation of incomplete applications (§ 1024.41(c)(2)(iii)).  Under the existing rule, a servicer may offer a short-term payment forbearance program to a borrower based upon an evaluation of an incomplete loss mitigation application.  The final rule now adds the ability for a servicer to offer a short-term repayment plan.  The final rule requires that, if accepted by the borrower, the servicer must provide a written notice stating the specific terms and duration of the plan, that other loss mitigation options may be available, and that the borrower may submit a complete application to be evaluated for those options.  Note that the servicer still cannot file for foreclosure if the borrower is performing under the plan.

• Requires servicers to exercise reasonable diligence in obtaining third party information, and prohibits servicers from denying a borrower solely because of the missing information unless efforts have been made for a significant period of time (§ 1024.41(c)(4)). Under the current rule, servicers must use reasonable diligence in obtaining documents or information from third parties, if such information is needed to determine which loss mitigation options it will offer to the borrower.  Moreover, the current rule prohibits servicers from denying an application solely because the servicer lacks the necessary third party information.  The final rule reiterates this point, but provides an exception to this general prohibition.  Under the new rule, a servicer may deny an application if a servicer has exercised reasonable diligence to obtain the required information “for a significant period of time.”  See comment 41(c)(2)(ii) for a discussion of what might be considered a “significant period of time.”

• Modifies an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the action of a superior lienholder (§ 1024.41(f)).  The current exception merely allowed the servicer to join as a subordinate lienholder. 

• Reinforces and clarifies prohibition on “dual tracking” (Commentary to § 1026.41(g)). The current rule prohibits servicers from moving for judgment or order of sale while simultaneously working with borrowers on loss mitigation options. The commentary to the final amended rule clarifies that, if a servicer has already initiated a foreclosure action and subsequently receives a timely complete application, the suit should avoid a foreclosure judgment or order of sale, unless the borrower’ application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement.  It is important to note that, according to the commentary, the responsibility falls on the servicer to ensure that the foreclosure does not move forward while an application is pending.  This is especially key where the servicer has hired outside counsel to handle the foreclosure.  The commentary makes clear that “a servicer is not relieved of its obligations because foreclosure counsel’s actions or inaction caused a violation.”

• Requires servicers to offer borrowers with loss mitigation options throughout the life of the loan (§ 1026.41(i)). The current rule requires servicers to consider loss prevention programs and avoid foreclosure one time during the life of the loan. Thus, if a delinquent borrower became current and subsequently defaulted again, a servicer was not required to consider the borrower for loss mitigation options.  However, this “one bite at the apple” provision is no longer sufficient.  The final amended rule requires a servicer to evaluate a borrower for loss mitigation whenever the borrower becomes delinquent and is otherwise eligible for a loss mitigation program, unless the borrower was delinquent at all times since submitting the prior application.  For example, if the borrower has previously submitted a complete application and fully performed under the plan and becomes current on payments, but then becomes delinquent again, the servicer must evaluate the borrower for loss mitigation options. 

• Clarifies obligations of servicers when a servicing transfer occurs (§ 1026.41(k)). The final amended rule makes clear that when a service transfer occurs while a loss mitigation application is pending, the new servicer (the transferee servicer) must comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer; however the rule does provide extensions to the timeframes in certain limited circumstances.

Rule’s Effective Date: Generally, the amendments to the final rule will become effective one year after publication in the Federal Register, with some exceptions including amendments to the rule that address successors in interest, the provisions of periodic statements to borrowers in bankruptcy, and the amendments that address when servicers may stop collecting information from borrowers for a particular loss mitigation option.  These amendments will not become effective until 18 months after publication in the Federal Register.   

In preparing for the new compliance requirements, credit unions may want to consider reviewing their policies and procedures to make sure they reflect the new servicing requirements, including policies that address communications with outside foreclosure counsel. 

As always, if you have any questions relating to this article or any other issues concerning the amended mortgage servicing rules, please contact NAFCU’s regulatory compliance team.  We’re here for you!

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DoD Military Lending Act Interpretive Guidance out Today!

A few weeks ago, NAFCU issued a statement indicating that the DOD is expected to publish interpretive guidance on the MLA rules soon.  Well, the guidance was published today in the Federal Register.  NAFCU's Regulatory Compliance team is studying the guidance and will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016).  In the meantime, you can find NAFCU’s extensive collection of MLA compliance resources here. 

A Brief Preview of NCUA’s New Interest Rate Risk Supervisory Tool

Written by Michael Emancipator, Senior Regulatory Affairs Counsel

In a webcast last Thursday, August 18, NCUA’s Office of Examination and Insurance (E&I) provided a background and overview of its upcoming interest rate risk (IRR) supervisory tool. NCUA stated that the IRR tool and guidance is expected to be published in the next few months, with official use during examinations no earlier than January 2017. While we were pleased to see that NCUA did not include an IRR component in RBC2, many experts have been paying close attention over the last several months to this issue for the impact of IRR supervisory guidance on credit unions. We will keep members posted once the agency releases the full tool and guidance, but in the meantime, we wanted to share a few high-level components from this E&I webcast to give you a better sense of what to expect.

First, the agency stated that the goals of the new tool include: improving the clarity of guidance, consolidating and unifying the guidance, reducing inconsistency of examiner interpretation, and instituting means through which NCUA can collect uniform and comparable IRR information across the industry to better identify “outliers.”

The agency also asserted this change will result in a number of benefits for credit unions. For example, NCUA claimed that the new tool will enable it to better focus on the risk outliers, and thereby reduce focus on lower risk institutions. Additionally, by creating a risk-based scope for IRR, NCUA hopes to gain savings in the time spent on IRR reviews and increase the agency’s ability to determine where it needs to send specialized staff.

So how will the new tool work? NCUA explained that the new IRR supervisory exam will utilize a risk-based scoping approach, the result of which will drive whether there is an increase or decrease in the number of required review steps, which also depends on the credit union’s asset size, as seen in the figure below.

The risk categories used for the scoping are tiered based on the levels of post-shock net economic value (NEV) ratios and the NEV change sensitivities. These classifications are designated as low, moderate, high, and extreme, and they serve as the primary guidepost for the overall IRR supervisory rating. The risk tolerance thresholds that NCUA will use to assign a supervisory risk rating to a credit union's IRR is found on a traditional NEV plus or minus 300 basis point shock test approach. In order to evaluate the level of market risk in a balance sheet, NCUA will first review the credit union's current base case and shock NEV levels, and then assess both the absolute level of the post-shock NEV ratio, as well as the total percentage change of NEV from the base to shock scenarios. Both thresholds apply, so either measure triggers the assigned risk level.

NEV is a capital-at-risk measure that identifies potential threats of a longer term nature that could adversely impact levels of net worth. It is a total balance sheet measure that takes into account both sides of the balance sheet, and thus includes potentially mitigating benefits from offsetting exposures. NCUA explained that NEV is already widely used by credit unions as a standard form of risk management and is used by virtually all credit unions in their internal ALM modeling. NCUA examiners will use that internal NEV information as the input values for assets and liabilities in its supervisory test model.

Finally, the webinar also briefly touched on how these IRR supervision changes relate to the CAMEL rating system. Currently, NCUA assigns a supervisory risk rating to IRR as part of the “L” rating of CAMEL. NCUA proposes to continue this approach for the immediate future until the Board decides it wants to move forward with an ‘S.’

Importantly, though, NCUA has determined that adding ‘S’ to CAMEL will require NCUA to reprogram numerous internal systems, and that a number of existing documents in supervision programs would require revisions. This means that if the Board wanted to adopt “S,” any such implementation would take several years.

MLA – Challenges with Share Secured Loans and Statutory Liens

Written by Brandy Bruyere, Director of Regulatory Compliance

As the first MLA compliance deadline quickly approaches, we are frequently asked about the rule’s possible impact on statutory liens/rights of offset and share secured loans. While there are not clear answers here, the reason these questions keep coming up is that the rule contains some problematic language:

Ҥ 232.8 Limitations.

 […]

 (e) The creditor uses a check or other method of access to a deposit, savings, or other financial account maintained by the covered borrower, except that, in connection with a consumer credit transaction with an MAPR consistent with § 232.4(b), the creditor may:

 (1) Require an electronic fund transfer to repay a consumer credit transaction, unless otherwise prohibited by law;

(2) Require direct deposit of the consumer's salary as a condition of eligibility for consumer credit, unless otherwise prohibited by law; or

(3) If not otherwise prohibited by applicable law, take a security interest in funds deposited after the extension of credit in an account established in connection with the consumer credit transaction.” (Emphasis added)

Let’s start with statutory liens or rights of offset. The rule and preamble never squarely address these situations. The prohibition against using an “other method of access” to a member’s deposit or savings account is rather broad, and the preamble does not discuss this language at all. This creates ambiguity as to whether the statutory lien is an “other method of access” to an account. Unfortunately, the DoD has not provided much guidance on the MLA outside of the Preamble, although we continue to work with them on the need for guidance and hope to see some clarification soon. Arguably, the broad language “other method of access” is intended to limit certain practices taken by some lenders such as securing a loan through electronic access to a checking account. To date, the DoD has not offered any clarification or guidance as to whether this provision should be construed to limit specific practices, or construed broadly to include even the statutory lien.

What about share secured products? Notice that the MLA permits credit unions to take a security interest in funds, but with certain conditions:

1. The funds were deposited “after the extension of credit,” and
2. The account was “established in connection with the consumer credit transaction.”

Many credit unions have noted that the rule is written in a way that presents workability issues, given the timing related limitations on when the funds are deposited (after credit is extended) and when the account was established (in connection with the loan). Again, the preamble has no discussion of this provision, but the rule seems to contemplate taking a security interest in a separate account set up along with the loan. Meanwhile, violating the MLA comes with stiff penalties, including voiding the contract.

Overall, these two issues may require consultation with your attorney. While pending guidance from the Department of Defense could potentially shed some light on the ambiguities here, it is not clear how long it will take for that guidance to publish and meanwhile, the compliance deadline is only about 6 weeks away.

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DoD Military Lending Act Interpretive Guidance Released

This blog was written before DoD issued its interpretative guidance on August 26, 2016. The interpretative guidance does change the analysis in the above blog post. For an update discussion of this question in light of the interpretive guidance, see August 29th's blog post, U.S. Department of Defense Issues Interpretive Guidance on MLA – Share Secured Loans and Statutory Liens Revisited. The interpretative guidance can be found in the Federal Register. 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.

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NAFCU Webcast: Avoiding Truth In Saving Compliance Pitfalls

Wednesday, September 7  |  2:00 – 3:30 p.m. EST

Can your TISA compliance program meet the standards of the federal regulators? This webcast is designed to give you the tools needed to review your TISA program, and steer clear of UDAAP violations.

CFPB Issues Mortgage Servicing Rules – Part Deux: Force-Placed Insurance

Written by Stephanie Lyon, Regulatory Compliance Counsel

My colleague Benjamin recently blogged about the mortgage servicing final rule and how it will expand the rights granted to verified successors in interest under Regulations X and Z. This second part reviews a few force-placed insurance (FPI) requirements and highlights three revisions to section 1024.37 and the model forms. The FPI notice requirements take me back to the time when my mortgage servicing department sent an FPI notice signed with my name and phone extension to over one hundred members who had nonconforming hazard insurance. The conversation went something like this:

Member: “Hello, my name is Joe Smith and I received a FPI notice that states I do not have hazard insurance. Well I am calling to inform you, I do in fact have hazard                     insurance.”

Stephanie: “Mr. Smith, could you give me your account number so that I can find your account and verify this information?”

Member: “I don’t know it and I don’t feel comfortable sharing my social security number.”

Stephanie: “Mr. Smith I was able to pull your account from your phone number, I see that the reason you received that letter was not because you don’t have insurance, but rather because you don’t have the right amount of hazard insurance as stated in the mortgage agreement.”

Member: “Why didn’t you just tell me that from the start!?”

Unfortunately, credit unions had very few options when disclosing the reasons why hazard insurance was being force-placed as the current model forms lack clarity. This led to a few headaches for credit union folks and a great deal of confusion for members.

Currently, Regulation X allows servicers to force-place insurance if the servicer has a reasonable belief that the borrower has failed to comply with the mortgage loan’s contract requirement to maintain hazard insurance. See, 12 C.F.R. § 1024.37(b). Prior to force-placing insurance, there are a couple of notices that a servicer must provide— an initial notice (45 days prior to force-placing) and a reminder notice (15 days prior). See, 12 C.F.R. § 1024.37(c)(1)(i)-(ii). Section 1024.37(c)(4) and (d)(4) prohibit servicers from including in the FPI notices any information other than that required by the rule. It was unclear if this prohibition extended to language clarifying why the credit union would force-place insurance and additional disclosures required by state law. In the final rule, CFPB clarified that no additional information can be added to FPI notices even if the information is required by state law because of the potential to ‘confuse members’ and ‘obscure the most important information.’ See, Final Rule, pp. 173 & 178-9.

While credit unions may not include additional information other than what is allowed under Regulation X, the final rule does address some issues that may provide for greater clarity. The first issue the final rule corrects is that it permits credit unions to include a third option when disclosing the reason why insurance has been force-placed. : (1) hazard insurance has expired or (2) will expire and the credit union has not received evidence that the borrower has hazard insurance past the expiration date. See, 12 C.F.R. § 1024.37(c)(2)(v). Neither option adequately explains the case in which a borrower has hazard insurance but the amount is below the requirements stipulated in the mortgage agreement.

Effective 12 months from the date of publication in the Federal Register, the final rule adds a third option to paragraph 37(c)(2)(v) and Model Form MS-3(A) that will enable servicers to provide borrowers with notices that are more accurately tailored and potentially avoid confusing borrowers that have nonconforming FPI insurance. See, Final Rule, pp. 804-808. The option will read: (3) the borrower’s hazard insurance provides insufficient coverage. See, Final Rule, pp. 176-178. This third option provides enough flexibility to cover cases in which the member purchased hazard insurance for nonconforming amounts or through a company that the lender or servicer does not allow. Additionally, if the credit union needs to include information not required or allowed by the final rule, it may do so on a separate document that can be included in the FPI correspondence. See, 12 C.F.R. § 1024.37(c)(4).

The second addition to the FPI notice is the ability to include the mortgage or account number of the borrower. See, Final Rule, pp. 789. While this is a minor addition, it allows servicers to inform the member of the mortgage they are referencing and makes the communication between the servicer and the borrower easier. The rationale behind including account numbers is that some credit unions rely on this information to correctly identify the loan in question when members call in regard to the FPI notice. Do note that the inclusion of the account number is not mandatory.

The third change to the FPI section of Regulation X is the modification of the Appendix to correct discrepancies between the model forms and the text of section 1024.37. Currently the model forms MS-3(A) through (D) omit the word “significantly” from the statement that “the insurance the servicer has purchased or purchases may cost more than hazard insurance purchased by the borrower.” The amendment will amend the phrase to read “…may cost significantly more…” in each of the model forms. The new model forms also include a requirement that certain text be formatted in bold type to emphasis that text in the forms. See, Final Rule, pp. 489-490. The format used in FPI notices will be important because a technical correction in the final rule will require that when some of the same information appears in both the initial and the final notice, the format of both notices must match. See, Final Rule, pp. 171.

Needless to say, my story would have been quite different if the Mortgage Servicing rule had amended a year ago. Hopefully, the final rule will allow a conversation to go from the example above to:

Member: “Hello, my name is Joe Smith and I received a FPI notice that states my hazard insurance provides insufficient coverage. An additional document that came with the notice stated that my hazard insurance coverage is $500 off what the mortgage agreement requires. I am sending you a copy of my new conforming hazard insurance with the loan number listed in the notice.”

Stephanie: “Mr. Smith, you are my favorite member.”

The Tooth Fairy and the Fed; Calculating the MBL Threshold – New Legal Opinion Letter Released

The Tooth Fairy and the Fed

Written by Carrie Hunt, EVP of Government Affairs and General Counsel

When I went in to wake up my daughter yesterday she was gripping a one-dollar bill and smiling.  “Did the tooth fairy come last night?,”  I asked.   She nodded her head yes and looked at the bill in her hands.  “Mommy, why does all money say ‘Federal Reserve note’ on it?”  Her question caught me off guard and I paused and stumbled through an explanation.  My daughter is 7 and I really had not had enough coffee yet to figure out how to explain the Fed to a 7 year old. 

Her question made me think though about the importance of the Federal Reserve and about NAFCU’s annual meeting with the Board of Governors.   Each year traditionally the NAFCU Board of Directors meets with a member of the Board of Governors of the Federal Reserve and presents a report on credit unions.  This report is an amazing opportunity to tell the credit union story before monetary policymakers and make the case for the importance of credit unions in the economy.  Much of information of what NAFCU puts in that report comes from a survey of our members.  So, please take a moment to fill it out! 

https://www.nafcu.org/research/participate/

Luckily, the Hunt household expects a few more visits from the tooth fairy in the upcoming months and I can work on perfecting my talking points on currency and the central bank.   Or how in a few years the tooth fairy will only be using apple pay…

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Calculating the MBL Threshold – New Legal Opinion Letter Released

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

On August 9^th, NCUA issued Legal Opinion Letter 16-0604 regarding the definition and reporting of member business loans (MBLs).

The question posed to NCUA was whether a member’s single closed-end MBL continues to be an MBL once it has been paid-down below the $50,000 threshold. See, 12 C.F.R. § 723.1(b)(3). NCUA affirmed that no, it does not. The letter referenced a prior legal opinion letter from 2002:

“In 2002, the Office of General Counsel considered whether a FICU could use the outstanding loan balance for an MBL, rather than the original amount, to determine if subsequent business purpose loans to the same member should be classified as MBLs. The resulting opinion concluded:

[A FICU] may add the outstanding balance of a member’s aggregate MBLs to the original loan amount of any new, subsequent loan to determine if, when added together, they exceed the rule’s $50,000 threshold for qualifying as an MBL. . . . If the combination of all of these loans does not exceed $50,000, the subsequent loan is not an MBL and is not subject to our MBL rule.”

Citing, NCUA Legal Opinion Letter 02-0384 (May 30, 2002). In addition, the letter quoted the Preamble to the 2003 MBL Final Rule:

“When the member pays down the amount of the total business purpose loans owed to the credit union so that the aggregate amount falls below the $50,000 threshold, the credit union is no longer required to report the [loan that caused the aggregate amount of business purpose loans to the member to exceed the $50,000 threshold] as an MBL.”

See, 68 Fed. Reg. 56537, 56545 (Oct. 1, 2003). The letter clarified that the same analysis that applies when aggregating multiple loans in the 2002 letter and the Preamble, also applies to a single loan. However, this analysis was specific to closed-end loans, as was indicated by the 2002 letter which stated, “We note, however, that a CU may not use outstanding balances in this context on lines of credit due to the member’s ability to draw on the line and easily alter the MBL’s outstanding balance.” Credit unions looking for additional guidance on calculating the MBL threshold can review the examples in the 2003 Preamble at 68 Fed. Reg. at 56545.

CFPB Issues Mortgage Servicing Rules – Part I: Successors in Interest

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On August 4, 2016, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a final rule amending certain mortgage servicing rules issued by the Bureau in 2013 and codified in various sections of Regulations X and Z. The rulemaking addresses issues such as force-placed insurance notices, early intervention, loss mitigation, prompt payment crediting, and the issuance of periodic statements. This blog highlights a topic that received more comments than any other aspect of the Bureau’s mortgage servicing proposal, the provisions addressing the rights of successors in interest.

Under the current 2013 RESPA Servicing Rules, credit unions are required to maintain policies and procedures designed to “promptly identify and facilitate communication with the successor in interest of [a] deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.” 12 C.F.R. § 1024.38(b)(1)(vi). In the October 2013 Servicing Bulletin, the Bureau provides examples of servicer practices that it believes should be part of the policies and procedures required by Regulation X, including promptly providing any party claiming to be a successor in interest with a list of all the documents that the servicer requires to establish the death of the borrower and the identity and legal interest of the successor and evaluating whether the successor is eligible for any loss mitigation options if the mortgage loan is delinquent. See, Servicing Bulletin at 2-3.

The 2016 Mortgage Servicing Rules amend commentary to Section 1024.38(b)(1)(vi) to provide further guidance on the types of documents that a servicer can reasonably require to confirm a potential successor in interest’s identity and ownership interest in the property. While these documents may vary depending on the law in the relevant jurisdiction, the Bureau provides several illustrative examples depending on the nature in which the successor in interest acquires an ownership interest in the property. In addition, the amended commentary notes that “a servicer’s policies and procedures must be reasonably designed to ensure that the servicer can promptly notify the potential successor in interest that the servicer has confirmed the potential successor in interest’s status.” See, Preamble to 2016 Mortgage Servicing Rules, pp. 821-4.

Most importantly, however, the Rules significantly expand the protections afforded to successors in interest by redefining “borrower” in Subpart C of Regulation X and “consumer” in Regulation Z to include “confirmed successors in interest.” See, Preamble to 2016 Mortgage Servicing Rules, pp. 782, 854. This means that the mortgage servicing provisions contained in Subpart C of Regulation X, including error resolution, early intervention, and loss mitigation, will apply to successors in interest that have been verified by the servicer. Credit unions will also be required to provide confirmed successors in interest with rate adjustment notices for adjustable rate mortgages, periodic statements, and to promptly credit payments according to the requirements in Section 1026.36 of Regulation Z. Furthermore, the Mortgage Servicing Rules extend the coverage of Section 1024.17 of Regulation X, which sets forth certain requirements for escrow accounts, to confirmed successors in interest.

In addition, while the limited protections in the 2013 RESPA Servicing Rules were naturally limited to the “spouse, child, or heir of a deceased borrower or other party with an interest in the property,” the 2016 Mortgage Servicing Rules expand the number of individuals who qualify as successors in interest under Regulations X and Z. As amended, mortgage servicing protections, such as loss mitigation, will now be available to transferees of property securing a mortgage loan transferred from a borrower under the following circumstances:

• A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

• A transfer to a relative following the death of a borrower;

• A transfer where the spouse or children of the borrower become an owner of the property;

• A transfer resulting from a divorce decree, legal separation agreement, or incidental property settlement agreement, by which the spouse of the borrower becomes the owner of the property; or

• A transfer into an inter vivos ("between the living") trust in which the borrower is and remains a beneficiary and which does not relate to transfer of rights of occupancy in the property.

See, Preamble to 2016 Mortgage Servicing Rules, pp. 783-4. One point of clarification here is that individuals who may otherwise qualify as successors in interest but who are already joint obligors on the mortgage loan are already protected as borrowers under Regulations X and Z and those protections are not limited to those available to successors in interest under the 2016 Mortgage Servicing Rules. For example, as a joint obligor, this individual would typically have standing to bring a Regulation Z claim not related to any mortgage servicing acts or practices committed by the servicer.

The amended commentary also clarifies that confirmed successors in interest are not required to assume a mortgage loan prior to receiving the protections of the Rules. If the confirmed successor in interest does decide to assume the mortgage loan or otherwise becomes liable on the obligation, the successor in interest is entitled to the full protections of Regulations X and Z rather than just the mortgage servicing provisions. Furthermore, even after the servicer has confirmed a successor in interest, the servicer must still comply with all applicable requirements of Regulations X and Z with respect to the transferor borrower. See, Preamble to 2016 Mortgage Servicing Rules, pp. 114-5; 813-4.

To address privacy concerns raised by NAFCU, the 2016 Mortgage Servicing Rules also amend the error resolution and request for information provisions in Sections 1024.35 and 36 of Regulation X to permit credit unions to omit certain information such as location, contact information, and personal financial information other than the terms, status, and payment history of the mortgage loan from information provided to a potential or confirmed successor in interest. See, Preamble to 2016 Mortgage Servicing Rules, pp. 787-9. When responding to a request for information from a potential successor in interest, credit unions are required to treat the potential successor as a “borrower” for purposes of Section 1024.36. This means, for example, that the credit union would be subject to the timing requirements in paragraph (d) and the prohibition on charging a fee for an information request in paragraph (g)(1) of that Section.

While the bulk of the 2016 Mortgage Servicing Rules are effective 12 months after publication in the Federal Register, the successor in interest provisions are not effective until 18 months after publication. These effective dates happen to roughly coincide with the first and second implementation phases of the CFPB’s revised HMDA Rules, which NAFCU expects will be a significant compliance challenge for credit unions. In order to help assist our members, the Regulatory Compliance Team will provide additional resources on both the Mortgage Servicing Rules and revised HMDA in the coming months through blog posts, guides, and other publications. Currently available resources can be found here and here.

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A Seaside Vacation. While not typically NAFCU policy, I happened to write this blog post on a rainy day while on vacation in Rhode Island. I found the calm ocean vistas an interesting contrast to the sturm und drang of the CFPB’s Mortgage Servicing Rules. Here are some photos of Block Island, just an hour ferry ride away from the mainland.

 

CFPB May Be Reading TRID Email Again – Gifts of Equity; MLA Update

Written by Brandy Bruyere, Director of Regulatory Compliance

Does this look familiar to anybody? It’s at the bottom of all of the CFPB’s compliance landing pages for various rules, pointing you in the Bureau’s direction if you need more help:

Leading up to the effective date for TRID, many of our members would email the CFPB as advised here on their website. We would also submit questions on a member’s behalf or where we saw many credit unions having trouble with the same issue. While this process had a rather lengthy turnaround, sometimes we would receive helpful (although unofficial and nonbinding) guidance from the CFPB.

Then around September 2015, a few weeks before TRID went “live,” we would no longer receive responses to TRID-related questions. We would resubmit them, and still no reply. Many of our members reported the same experience – TRID questions sent to this CFPB email address just went unanswered. Several weeks ago, figuring it couldn’t hurt to try, a member of our compliance team resubmitted a question that we first sent nearly a year ago because the question came up again. Lo and behold, last week we received a response! Keep in mind that this guidance is informal. In fact, here’s the Bureau’s usual disclaimer that they place on their webcasts and similar items:

“[This] does not represent legal interpretation, guidance or advice of the Bureau. While efforts have been made to ensure accuracy, this presentation is not a substitute for the rule. Only the rule and its Official Interpretations can provide complete and definitive information regarding requirements. This document does not bind the Bureau and does not create any rights, benefits, or defenses, substantive or procedural, that are enforceable by any party in any manner.”

Now that we have that out of the way, here is the question we submitted:

Multiple members asked how to disclose a “gift of equity” (as often seen in a non-arms’ length sale with below-market sales price where someone essentially “gifts” equity to the buyer) as this disclosure is required by Fannie Mae/Freddie Mac investor guidelines to be on the Closing Disclosure. TRID is not clear on this. A few solutions posed have included (1) listing this as “Item Paid Outside of Closing” under section 1026.38(j)(4)(i); (2) listing this as a “Seller Credit” under section 1026.38(j)(2)(vi), but not as a dollar amount, and (3) adding an addendum under section 1026.38(t)(5)(ix) and listing “gift of equity.”

How can a lender do this in a way that is TRID-compliant?

Here is the CFPB’s unofficial, informal and nonbinding response:

 “For the Loan Estimate, you may want to review Regulation Z § 1026.37(h)(1)(vii) and the associated commentary, specifically comment 37(h)(1)(vii)-1.  As to the Closing Disclosure, you may want to review the disclosure of a gift of equity as an “Other Credit[ ]” in section L of the Summaries of Transaction table on page 3, pursuant to § 1026.38(j)(2)(vi), along with reviewing the requirements for disclosing an offsetting amount “Due From the Seller at Closing” in section N of the Summaries of Transaction table on page 3, pursuant to § 1026.38(k)(2)(viii)…

However, please note that your inquiry and the applicable sections of the rule identified in response are impacted by the proposed rule, which was issued to clarify a number of issues identified in the 2013 TILA-RESPA Integrated Disclosure rule.  We encourage you to review this proposed rule and consider providing comments for the public record.”

So it seems the CFPB has an idea of how gifts of equity should be disclosed, but is also open to considering this issue as part of the pending rulemaking aimed at clarifying TRID. NAFCU is working on its comment letter for this rulemaking so if you have thoughts, please let us know!

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MLA Update. The first MLA compliance deadline is less than 2 months away and NAFCU continues to receive questions on some of the rule's ambiguities like the treatment of share secured products, providing oral disclosures and similar issues. The DoD promised guidance several weeks ago and while guidance is apparently pending, it is caught up in the pre-publication bureaucratic process for an unknown amount of time. For now, we have MLA specific blogs here, and NAFCU members can find resources here or of course contact our compliance team and we'll do our best to help!

Credit Union Incentive Plans Can Be a Useful Tool to Drive Performance, if Done Properly + Compliance Trivia!

Written by Shereefat Balogun, Regulatory Compliance Counsel

Credit unions generally use incentive plans to drive results, whether that be more loans or more deposits.  The overall goal is to reward employees for achieving certain results.  In May 2016, NCUA and other financial regulators issued a proposed Incentive Compensation Rule; while the rule is not yet finalized, credit unions are subject to other regulations that place restrictions on employee compensation or incentive plans.  NAFCU gets a number of question regarding employee incentives, and given NCUA’s growing concern and examination of these plans, credit unions are advised to develop an Incentive Compensation policy that is approved by the Board, and complies with the regulatory framework governing compensation and incentive structures.

NCUA Regulations

There are generally 3 NCUA rules that limit incentive compensation practices: Section 701.21 (c)(8) which restricts practices in connection with lending activities; Section 701.23(g) which places limits on compensation relating to the sale or purchase of eligible obligations; and Section 721.7 which addresses compensation related to incidental powers.

NCUA’s lending rules prohibit senior management employees from participating in a loan incentive plan.  Section 701.21(c)(8)(i) prohibits paying compensation in connection with any loan made by the credit union.  This rule regulates incentives given to employees in connection with the extension of a loan to a non-employee member.  There are some exceptions in (c)(8)(iii), which include salaries and incentives based on overall financial performance. There is also an exception for employee loan incentive programs established and monitored by a credit union’s board of directors; however, senior management is specifically excluded from this exception.  From the rule:

(8)(i) Except as otherwise provided herein, no official or employee of a Federal credit union, or immediate family member of an official or employee of a Federal credit union, may receive, directly or indirectly, any commission, fee, or other compensation in connection with any loan made by the credit union.

…

(iii) This section does not prohibit:

(A) Payment, by a Federal credit union, of salary to employees;

(B) Payment, by a Federal credit union, of an incentive or bonus to an employee based on the credit union's overall financial performance;

(C) Payment, by a Federal credit union, of an incentive or bonus to an employee, other than a senior management employee, in connection with a loan or loans made by the credit union, provided that the board of directors of the credit union establishes written policies and internal controls in connection with such incentive or bonus and monitors compliance with such policies and controls at least annually.

(D) Receipt of compensation from a person outside a Federal credit union by a volunteer official or non-senior-management employee of the credit union, or an immediate family member of a volunteer official or employee of the credit union, for a service or activity performed outside the credit union, provided that no referral has been made by the credit union or the official, employee, or family member.

12 C.F.R. §701.21(c)(8)(emphasis added).

Note that under this rule an employee, including senior management employees, may receive an incentive in connection with a loan based on the credit union’s overall financial performance.  However, only non-senior management employees may receive incentives in connection with a loan pursuant to the credit union’s written procedures that are established and approved by the Board of Directors.

Section 701.23(g) is very similar and tracks the language of 701.21(c)(8), except that the restrictions pertain to the purchase, sale, or pledge of an eligible obligation (i.e., a loan or group of loans). The rule generally has the same restriction and exceptions, as well as limitation as applied to senior management employees. 

Similarly, Section 721.7 places the same restriction but is not specific to any particular activity, and is more broadly applied to any authorized activity the credit union engages in.  See, 12 C.F.R. §721.7.

Regulation Z Prohibition on Mortgage Loan Originators’ Compensation Practices

Incentive compensation is also regulated in Regulation Z, as applied to mortgage loan originators and is indeed a much scrutinized area.   Regulation Z, §1026.36(d) prohibits mortgage loan originators from receiving compensation based on certain terms of a mortgage loan transaction, such as interest rate, APR, collateral type, and origination fees.  See, 12 C.F.R. §1026.36(d).

It’s worth flagging, the CFPB’s definition of “loan originator”, as this could include non-lending employees.  The rule’s definition of “loan originator” is broader than the definition of “loan originator” used in the SAFE Act, and includes the following activities if done for or in the expectation of compensation:

• takes an application;
• offers, arranges, assists a member in obtaining or applying to obtain credit;
• negotiates, or otherwise obtains or makes an extension of credit for another person; or
• advertises, communicates, or represents to the public that they can or will perform any loan origination activities.

See, 12 C.F.R.§1026.36(a).

NCUA in 2014 issued a Regulatory Alert discussing the CFPB’s Mortgage Loan Originator Compensation Requirements.   

Preferential Loans to Employees

On a related matter, we also receive questions relating to preferential loans to employees.  Generally, credit unions may give preferential loans, or lower loan rates, to its employees, so long as those employees do not include officials.  The relevant section to rely on is 12 CFR 701.21(d).

Section 701.21 sets forth the standards to which a federal credit union must adhere when making loans. Under this provision, a federal credit union is prohibited from granting preferential loans to its officials or an immediate family member of an official. See, 12 C.F.R. §701.21(d)(5).  This includes any member of the Board of Directors, credit committee or supervisory committee.  However, there is no prohibition against a federal credit union offering preferential loans to its employees.

For reference, here are two NCUA legal opinion letters on the topic:

• https://www.ncua.gov/Legal/OpinionLetters/OL2006-0343.pdf

• https://www.ncua.gov/Legal/OpinionLetters/OL1997-0247.pdf

In light of the current rules regulating compensation and incentive structures and the impending finalization of the Incentive Based Compensation Rule, credit unions are strongly advised to develop comprehensive Board policies regarding compensation.  The policy should comply with the regulatory framework, including the presence of strong internal controls, and should be reviewed by the Board annually. 

As always, if you have any questions relating to this article or any other compliance issue, please contact NAFCU’s regulatory compliance team.  We’re here for you!

Trivia: Under the proposed Incentive Based Compensation Rule, what would be the record retention for documenting the credit union’s incentive-based compensation arrangement?

 

Common Issues and Problems in BSA Enforcement Actions

Written by Shari R. Pogach, Regulatory Paralegal

I attended the 2016 Mid-Atlantic Anti-Money Laundering Conference a couple of weeks ago. This conference is put on and sponsored by law enforcement agencies to share the latest trends in illicit and money laundering cases.

One panel discussion covered compliance challenges the financial industry faces in Bank Secrecy Act (BSA) compliance. During this session a panelist highlighted common issues and problems found in regulatory enforcement actions involving banks.  Regulators continue to find issues and problems with weak or poor internal controls, transaction monitoring and suspicious activity reporting such as: 

Internal Controls

 Risk assessments are too narrowly focused.

• Using incorrect customer risk ratings.
• A failure to obtain and verify Customer Identification Program information.
• Lack of documentation of customer due diligence and enhanced due diligence.

Transaction Monitoring/Suspicious Activity Reporting

• Using manual transaction monitoring.
• Institution has outgrown its monitoring systems.
• Model validation issues.
• Using caps on the numbers of alerts.

Regulators have found that institutions purchase expensive monitoring systems but then do not tailor the system to the institution’s customer base or transaction size. Often alerts are tweaked in accordance with an institution’s staffing levels rather than to its appropriate level of risk.  The effectiveness of manual transaction monitoring in terms of an institution’s transaction volume is also questionable.

The panel expressed that is acceptable to have alert suppressions with the appropriate justification but such a decision needs to be documented. And, an institution should not continue an alert suppression forever without an update of the analytics or the customer information.  What if the parameters have changed? 

Although the information presented here comes from the banking side, it still serves as a useful reminder of the more common BSA compliance failings. Credit unions looking for reminders on these points might review the following sections of the Federal Financial Institutions Examination Council’s (FFIEC’s) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual:

• Risk Assessment-Overview, FFIEC BSA/AML Examination Manual
• Customer Identification Program Overview, FFIEC BSA/AML Examination Manual
• Customer Due Diligence-Overview, FFIEC BSA/AML Examination Manual
• “Transaction Monitoring” and “Systems to Identify, Research, and Report Suspicious Activity” sections of the Suspicious Activity Reporting-Overview, FFIEC BSA/AML Examination Manual

Wet vs. E-SIGN(atures): Balancing Efficiency & Enforceability

Written by Stephanie Lyon, Regulatory Compliance Counsel

Credit Unions are increasingly going paperless and implementing fully electronic membership and loan origination processes. While going digital can expedite the application process, reduce staffing costs and eliminate the need to maintain voluminous paper archives, there may be legal and compliance concerns with the enforceability of electronic signatures (e-signatures).

Both federal and state laws affect the validity and enforceability of e-signatures; the two governing bodies of law are the Electronic Signatures in Global and National Commerce Act (ESIGN) and the various state enactments of the Uniform Electronic Transactions Act (UETA). As of today, 47 states and the District of Columbia have enacted some version of UETA — notably missing are New York, Illinois and Washington.

Both ESIGN and the model UETA define an e-signature as “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.” 15 U.S.C. § 7001. An important provision of the federal and state law is that an e-signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form.” See, 15 U.S.C. § 7001 (a)(1)-(2). Keep in mind that ESIGN does not apply to all documents. The law contains an explicit exception for certain documents that states have historically required in paper format and to have wet signatures. Some examples may include:

• Foreclosures and Evictions
• Wills and Trusts
• Domestic Relations matters
• Court Orders

See, 15 U.S.C. § 7003. Additionally, some land recording offices continue to require wet signatures for deeds of trust and other security agreements pertaining to real property. With all of these state variations, credit unions may want to consult with local counsel regarding the enforceability of e-signatures and e-documents in the states it transacts business.

Apart from the exceptions noted, federal regulations that require a signature or a written document generally also state that an electronic version can meet the requirements as long as it is ESIGN compliant. For example, the Credit Card Act and its implementing regulations require young members to submit a written application and a signed agreement of a consigner, guarantor, or joint applicant who is at least 21 years old. See, 12 C.F.R. § 1026.51(b)-(ii)(A). The official interpretation explains that an electronic application and consent would meet the requirements of Regulation Z. See, 12 C.F.R. Pt. 1026, Supp. I, comment 1026.51(b) – 4. Hence the main concern is not whether you can use e-signatures, but rather what makes the e-signature enforceable.

The manner of evidencing the member’s intent to be bound to the terms and conditions of the contract is essential in the enforceability of both wet and e-signatures. See, NCUA Examiner’s Guide, Chapter 19. Neither ESIGN nor UETA recommend a specific technological standard for electronic signatures, hence the method of obtaining a signature or executing a contract may vary from credit union to credit union. Some legal enforceability and admissibility questions that a credit union may want to consider are — “Was the intent of the member to sign the document and be bound by the terms and conditions of the contract?” “Is the document an accurate representation of the original?” “Was the identity of the signatory established?” The process the credit union uses to obtain e-signatures should be able to answer these important legal questions. The credit union may also want to review applicable state law to ensure the digital process mirrors the enforceability requirements of wet signatures, as well as investor requirements, which may have their own provisions for the acceptability of e-signatures.

Finally, it is worth noting that the CFPB has been working on an “eClosing” project since 2015 that seeks to streamline the use of electronic documents. Here is the CFPB’s Press Release and the CFPB’s Report. NAFCU’s Regulatory Affairs team will alert our members if there are any new developments in this area.

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Don't Miss NAFCU's Webcast!

Using ALM for Actionable Business Intelligence — An Executive Perspective

Tuesday, Aug.16 from 2:00pm to 3:30pm ET.

As the degree of balance sheet complexity increases, so should the amount of training provided to ALCO members. Attend this webcast to get enhanced training, gain a better understanding of the link between strategy and Asset Liability Management (ALM), and learn how ALM can be used to help you stay on top of the competition.

CFPB Proposes Changes to TRID – Part II: Modifying Disclosures for Sharing and Disclosing the Ability to Shop; It’s Not Too Late to Attend NAFCU’s Risk Management Seminar

Written by Elizabeth M. Young LaBerge, Senior Regulatory Compliance Counsel

On Monday, this blog post highlighted some of the proposed revisions to the TRID rules, including:

• clarification that creditors can reset tolerances using a revised Closing Disclosure when a Closing Disclosure had already been issued; and
  
• clarification regarding post-consummation inspection fees and completing the Loan Estimate for multiple-advance construction loans.

Your NAFCU Regulatory Compliance Team is continuing to pick apart the proposal, but here are a couple other changes to highlight…

Modifying Disclosures for Sharing with Sellers and Third Parties

Whereas Regulation X required providing sellers and the parties’ agents with the HUD-1, it has not been clear how the Closing Disclosure can be shared. Section 1026.38(t)(5)(v) and (vi) state that the Closing Disclosure can be modified to create separate disclosures for buyers, sellers and third parties by removing certain information. The CFPB has provided additional guidance in the commentary on how to achieve this:

Paragraph 38(t)(5)(v).

1. Permissible form modifications to separate consumer and seller information. The modifications to the form permitted by § 1026.38(t)(5)(v) may be made by the creditor in any one of the following ways:

i. Leave the applicable disclosure blank concerning the seller or consumer on the form provided to the other party;

ii. Omit the table or label, as applicable, for the disclosure concerning the seller or consumer on the form provided to the other party; or

iii. Provide to the seller, or assist the settlement agent in providing to the seller, a modified version of the form under § 1026.38(t)(5)(vi), as illustrated by form H-25(I) of appendix H to this part. (Emphasis added). See, pg. 284.

Another roadblock to sharing this information has been privacy concerns under the Gramm-Leach-Bliley Act (GLBA) and Regulation P. The CFPB also addressed privacy concerns surrounding sharing the disclosures in the preamble:

Regulation P generally provides that a financial institution (such as a creditor or settlement agent) may not disclose its customer’s nonpublic personal information to a nonaffiliated third party without providing notice to the customer of such information sharing and an opportunity to opt-out of such sharing.

There are several exceptions to these notice and opt-out requirements, however. For example, GLBA section 502(e)(8) provides an exception that applies if a financial institution shares its customer’s non-public personal information to comply with Federal, State, or local laws, rules and other applicable legal requirements. GLBA sections 502(e)(1) and 509(7)(A) provide another exception that applies if a financial institution’s sharing of its customers’ nonpublic personal information is required, or is a usual, appropriate, or acceptable method, to provide the customer or the customer’s agent or broker with a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product.

See, pg. 147.

Requirements for Disclosing the Ability to Shop and the Written List of Providers

The amendments also add some language to comments 2 and 4 to section 1026.19(e)(1)(vi) that require the creditor to specifically identify services that are payable by the consumer and can be shopped for by the consumer. Comment 4 is being amended to specifically require that a creditor specifically identify those services payable by the consumer and for which the consumer is permitted to shop on the written list of providers. There is clarification in the commentary regarding packaged services. Below is the new language added to comment 1026.19(e)(1)(vi)-4:

If the charge for a particular service for which the consumer is permitted to shop is payable by the consumer, the creditor must specifically identify that service and an available provider of that service on the written list of providers unless, based on the best information reasonably available to the creditor at the time the disclosure is provided, the creditor knows that the service is provided as part of a package (or combination of settlement services) offered by a single service provider. Specific identification of each service in such a package is not required provided they all are services for which the consumer is permitted to shop. (Emphasis added.) See, pg. 223.

Comment 3 to section 1026.19(e)(1)(vi) is being amended to clarify that use of model form H-27 is deemed compliant, but is not required. Use of the model form was discussed in detail in the preamble to the proposed amendments:

Unlike the model forms for the Loan Estimate and the Closing Disclosure, which, under §§ 1026.37(o)(3) and 1026.38(t)(3), respectively, are mandatory forms for a transaction that is a federally related mortgage loan (as defined in Regulation X), form H-27(A) is not a mandatory form. Moreover, TILA section 105(b) permits creditors to delete non-required information or rearrange the format of a model form without losing the safe harbor protection afforded by use of the model form if, in making such deletion or rearranging the format, the creditor does not affect the substance, clarity, or meaningful sequence of the disclosure. Accordingly, the proposed revision to comment 19(e)(1)(vi)-3 would clarify that, although use of the model form H-27(A) of appendix H to this part is not required, creditors using it properly will be deemed to be in compliance with § 1026.19(e)(1)(vi)(C). (Emphasis added.) See, pg. 48.

If these provisions will affect your operations, positively or negatively, please reach out to NAFCU and let us know so that we can incorporate your feedback in NAFCU’s advocacy efforts regarding these amendments.

It’s Not Too Late to Attend NAFCU’s Risk Management Seminar…

Join us for critical compliance training in Denver during our Risk Management Seminar.  Affordable summer flights are still available from many major U.S. cities. You’ll learn firsthand how to prepare for NCUA risk-focused exams, what NCUA's Revised IRR and Adding the 'S' to CAMEL will mean for your credit union and much more. You’ll also have the unique opportunity to earn the NAFCU Certified Risk Manager (NCRM) designation, which can only be earned in-person during this event, plus 16.5 credits toward current NCRM and NCCO renewal.

CFPB Proposes Changes to TRID

Written by Brandy Bruyere, Director of Regulatory Compliance

On Friday, as promised, the CFPB released proposed revisions to the TRID rules that aim to provide improved clarity and incorporate informal guidance provided in unwieldy forms like webcasts into the rule text or official staff commentary. The proposal is nearly 300 pages long, so we will not bog everyone down too much on a Monday morning, but here are a few highlights.

Change in Circumstances After the Closing Disclosure is Issued

One common question that has caused problems since the implementation of TRID relates to changes that would permit credit unions to issue a revised Loan Estimate (LE), except a Closing Disclosure (CD) was already provided so a revised LE is not an option. This posed barriers to resetting tolerances. Here’s a description of the problem from the preamble to the proposed rule:

Section 1026.19(e)(4)(ii) imposes certain timing restrictions on the issuance of revised Loan Estimates relative to consummation and the issuance of a Closing Disclosure to ensure that the consumer does not receive disclosures containing estimates and disclosures containing actual costs at the same time. Existing comment 19(e)(4)(ii)-1 explains that, where the rule prohibits issuance of a revised Loan Disclosure, the creditor can instead use the Closing Disclosure to reflect changes in costs that would otherwise justify issuing a revised [LE] and that that Closing Disclosure may be used for the purpose of determining good faith under § 1026.19(e)(3). The Bureau proposes to add comment 19(e)(4)(ii)-2 to clarify that creditors may use corrected Closing Disclosures provided under § 1026.19(f)(2)(i) or (ii) to reflect further changes in costs that will be used for purposes of determining good faith under § 1026.19(e)(3).

[…]

.. a creditor may use a corrected Closing Disclosure to reset applicable good faith tolerances when there are fewer than four business days remaining before consummation or when the Closing Disclosure has already been issued, provided that the creditor also complies with the other requirements of § 1026.19(e)(4). The Bureau is proposing comment 19(e)(4)(ii)-2 to clarify this point. (Emphasis added.)

Here is the comment language itself:

2. Corrected disclosures provided under § 1026.19(f)(2)(i) or (2)(ii). If there are fewer than four business days between the time the revised version of the [LE] and consummation or the Closing Disclosure…has already been provided to the consumer, creditors comply with the requirements of § 1026.19(e)(4) (to provide a revised [LE] for the purpose of determining good faith under § 1026.19(e)(3)(i) and (ii)) if the revised disclosures are reflected in the corrected [CD], subject to the other requirements of § 1026.19(e)(4)(i) [addresses revised LE].

Clarification for Construction Loans

Construction loans have been a challenge under TRID. The CFPB proposal, on page 286, includes significant additions to current Appendix D, giving some TRID-specific guidance for multiple advance construction loans. There is also proposed commentary to section 1026.19(e)(1)(iii) that would provide examples for providing the LE for multiple-advance construction loans. Here’s one of these examples:

1. Assume a creditor receives a consumer’s application for construction financing only on Monday, June 1. Assume further that the creditor generally makes both construction and permanent financing available to qualifying consumers and that the consumer does not expressly state that the consumer will not obtain permanent financing from the creditor. In these circumstances, the construction loan that the consumer applied for is a loan to finance construction of a dwelling that may be permanently financed by the same creditor under comment 17(c)(6)-6. The creditor therefore must deliver or place in the mail the [LE] for both the construction financing and the permanent financing, either disclosed as one or more than one transaction, not later than Thursday, June 4, the third business day after the creditor received the consumer’s application, and not later than the seventh business day before consummation of the transaction, even though the application is for construction financing only.

There are other sections that may add some clarity for construction loans. For example, comment 38(g)(4)-1 would “clarify that (disclosed) inspection fees…are for pre-consummation inspection fees, not post-consummation inspection fees..” Instead, post-consummation inspection fees would be disclosed on an addendum attached as an additional page of the CD. This revised comment would also clarify that if some funds for construction are disbursed after closing, these amounts are still placed in the “At Closing” column on the CD.

There are a few big issues that the CFPB intentionally did not address, like the formula for simultaneously issued title insurance and issues with cure provisions. I’m also sure we’ll find other problematic items as we continue working through the proposal. In the meantime, if you spot any disconcerting items in this proposal, let us know (well, let my colleague Alex know) – our members’ input drives our advocacy efforts as we work on comments.

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Don’t Miss Wednesday’s NAFCU Webcast!

Key Facts for RBC2 Implementation

Wednesday, Aug. 3  |  2:00 – 3:30 p.m. EST NCUA’s risk-based capital (RBC2) rule will now apply to all credit unions over $100 million in assets. Attend our webcast to understand the regulation and the related risk-based capital calculations prior to launch, to ensure a smooth implementation process.