NAFCU Compliance Blog

Update on McWatters, MBL, and the Regulatory Moratorium

Update on McWatters, MBL, and the Regulatory Moratorium

Written by Ann Kossachev, Regulatory Affairs Counsel

Good morning! A bit about me: I joined NAFCU’s Regulatory Affairs team midway through last year and I feel like I’m really starting to find my place within the organization. Also, I’ve found several co-workers who are willing to indulge with me in some not-so-healthy lunch options!

Now let’s get to the really juicy stuff. My apologies for the length, but a lot has occurred in the regulatory and political world recently! Also, feel free to share this advocacy-focused blog post with any relevant parties at your credit union.

The first week of Donald J. Trump’s presidency was a whirlwind. I would like to discuss three very important events that have transpired in the past week and what they mean for your credit union. First, NAFCU would like to congratulate Mark McWatters on his designation by President Trump as the Acting Chairman of the NCUA Board. Second, last week, the National Credit Union Administration (NCUA) won a major victory when a federal court dismissed the Independent Community Bankers of America’s (ICBA) lawsuit related to the recent member business loan (MBL) rule. Third, on the day of his inauguration, President Trump issued a memorandum imposing a moratorium on all new regulations from executive agencies until further notice. Phew, I’m already tired! Keep reading for more details.

Mark McWatters as Acting Chairman

On January 23, 2017, President Trump designated J. Mark McWatters as the Acting Chairman of the NCUA Board. The designation as “Acting” Chairman is not unique; just this week we have seen President Trump do this with two other top agency positions, including at the National Labor Relations Board and the Equal Employment Opportunity Commission. NAFCU is looking forward to continuing to work with Chairman McWatters in his new position.  

Dismissal of ICBA’s MBL Lawsuit

On January 24, 2017, the United States District Court for the Eastern District of Virginia issued a decision granting the dismissal of a lawsuit filed by ICBA against the NCUA over its MBL rule. As a sign of industry solidarity, NAFCU and the Credit Union National Association (CUNA) filed a joint brief with the Court in support of the NCUA’s Motion to Dismiss. The Court dismissed the lawsuit on procedural grounds, specifically, the suit was untimely and ICBA lacked standing because it could not show an impending harm to its members as a result of the MBL rule. Aside from these procedural defects, the Court opined that the MBL rule would still pass muster under federal law.

The Court’s decision reaffirmed what NAFCU has believed all along - this lawsuit was nothing more than a frivolous attempt to distract from issues plaguing the banking industry, namely a lack of focus on serving their customers in favor of bigger profits. Credit unions, on the other hand, have always put their members first. Part of this effort includes the ability to better serve small, local businesses through a revised MBL rule. The new rule provides regulatory relief by removing unnecessary bureaucratic “red-tape” in the NCUA’s approval process for routine lending decisions.

Perhaps the bankers feel threatened by the fact that credit unions consistently provide higher quality loans with greater benefits to small-business owners. Or the fact that credit unions are willing and able to provide business loans in times of crisis when banks do not want to help those in need. Whatever the issue may be, the bottom line is credit unions are not only more willing and able to lend money to small businesses, but they also provide superior service, lower fees, and better rates.

ICBA may choose to file an appeal and has said it is currently evaluating its options. NAFCU believes that, given the court’s resolute opinion, ICBA will likely be hesitant to immediately appeal. NAFCU will continue to keep a vigilant watch on this litigation.

Regulatory Moratorium

On January 20, 2017, Reince Priebus, President Trump’s Assistant and Chief of Staff, sent a memorandum to the heads of executive departments and agencies informing them of a “Regulatory Freeze Pending Review.” The memorandum explained that to ensure the President’s appointees or designees have the opportunity to review and approve any new or pending regulations. However, the memorandum provides an exception for some regulations, including “urgent circumstances relating to health, safety, financial, or national security matters.”

The memorandum also called for any regulations already sent to the Federal Register to be immediately withdrawn and those regulations that have already been published but have yet to take effect to temporarily postpone their effective date for 60 days. To be clear, the memorandum is not an executive order – it does not require affirmative action. It is simply a request from the White House to allow President Trump’s appointees and designees the time to review regulations. This is nothing new in presidential transitions. The Chiefs of Staff to Presidents Bill Clinton, George W. Bush, and Barrack Obama all issued similar freeze memos.

            NCUA

As far as the NCUA is concerned, it is an independent federal agency as established by federal statute. Independent agencies are not specifically addressed in the memorandum. However, even though the memorandum does not carry any binding force, the NCUA could choose to voluntarily abide by its provisions.  

But what would this even mean? Chairman McWatters is already a sitting NCUA Board member and has been supportive of recent NCUA proposals. It is also encouraging that Chairman McWatters stated, upon his designation, that he wants true regulatory relief to the extent permitted by law.    

            CFPB

The CFPB is an entirely separate story. As to whether the moratorium applies to the CFPB hinges on whether the Trump Administration still considers the CFPB an independent agency in light of the D.C. Circuit’s recent decision in PHH Corp. v. CFPB. In PHH, the court held that the Bureau’s single director structure, only removable for cause, is unconstitutional. In its opinion, the court stated that the CFPB is no longer an “independent agency” and will instead now operate as an executive agency with its Director removable at will. The decision has not become effective because the CFPB has petitioned for rehearing en banc (i.e. the entire court), but the Trump Administration may still run with this decision and attempt to remove Director Richard Cordary without cause.

There is also a case brewing for President Trump to remove Director Cordray for cause under the Dodd-Frank Act. It was recently revealed in a new report from the House Financial Services Committee that the CFPB and Director Cordray may have violated the Administrative Procedure Act when issuing the 2015 rule authorizing the CFPB to supervise larger participants in the auto lending market. If Director Cordray were to be removed before the end of his term in July 2018, many in Congress believe he would likely explore his legal options.

Meanwhile, regulations currently in limbo include a number of recently proposed rules, including the much-debated arbitration proposal. It remains to be seen whether the final rules on prepaid accounts (set to take effect on October 1, 2017) and amendments to the mortgage servicing rules (effective October 19, 2017) will be delayed. If the Bureau decides to proceed with rulemaking as aggressively as it has in the past, Director Cordray could face even more harsh criticism and potentially removal.

Despite this legal gray area in terms of rulemaking, the CFPB has continued to forge ahead with its enforcement actions. So, we can probably expect more regulation through enforcement, as usual.

With all these changes happening at once, it is certainly an exciting time to be in Washington, D.C. Part of NAFCU’s advocacy goals include providing our members with the latest scoop at all times, to make you feel like a true Washington insider. If you ever have any regulatory or political questions, please contact NAFCU’s Regulatory Affairs team!

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Get updated on recent and upcoming rules from credit union regulators

Live Webcast: Tuesday, January 31 | 2:00-3:30 p.m. ET

• Explore the Trump Administration's regulatory agenda
• Discover the priorities of a new NCUA Board
• Learn NAFCU's stance against a premium charge in 2017
• Catch-up on our efforts for a stabilization fund rebate
• Prepare for housing reform in the new year
• Get updates on the latest cybersecurity developments

NCUA Issues Regulatory Alerts Regarding CFPB Mortgage Rules; Fed Reserve’s Consumer Compliance Regulatory Update Webinar

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

The compliance gauntlet that is 2017 is underway and compliance officers are running through it like it’s the finals of American Ninja Warrior. NCUA has started off the year by issuing two Regulatory Alerts, both relating the CFPB regulations governing mortgages. It always helps to see the obstacle course beforehand.

Mortgage Servicing and the FDCPA

In Regulatory Alert No. 17-RA-01, NCUA highlights the CFPB’s recent amendments to the 2013 Mortgage Servicing Rules and the Interpretive Rule issued by the CFPB regarding the amendments in light of the FDCPA. The alert is intended to provide general information about the CFPB’s rules, and outlines some very high level changes. Credit unions looking for more in-depth information about these rules can review NAFCU’s 2016 Mortgage Servicing Rules & TRID Compliance webpage.

HMDA Data Collection

In Regulatory Alert No. 17-RA-02, NCUA provided a summary of HMDA’s institutional coverage for data collection in 2017:

“Regulation C requires you to collect HMDA data associated with mortgage loan applications processed during 2017, if:

1. Your credit union’s total assets as of December 31, 2016, exceeded $44 million;²
2. Your credit union had a home or branch office in a Metropolitan Statistical Area on December 31, 2016;
3. Your credit union originated at least one home purchase loan (other than temporary financing such as a construction loan) or refinanced a home purchase loan, secured by a first lien on a one-to-four-family dwelling during 2016; and
4. Your credit union originated at least 25 home purchase loans, including refinancings of home purchase loans in each of the two preceding calendar years (2015 and 2016).³

If your credit union meets all four criteria, you must collect HMDA data during calendar year 2017 and submit the data to the Consumer Financial Protection Bureau no later than March 1, 2018.

If your credit union does not meet all four criteria, you are exempt from filing HMDA data for calendar year 2017.”

Credit unions looking for more in-depth information about the new HMDA rules, their institutional or transactional coverage, or the timelines for implementation, can visit NAFCU’s HMDA Compliance webpage.

Consumer Compliance Regulatory Update Webinar

 Compliance officers looking for more information on recent regulatory changes can sign up for the Federal Reserve’s Consumer Compliance Regulatory Update webinar. The webinar will be held Thursday, February 2 at 2:00 pm eastern. It’s a great resource for compliance officers wanting to get ahead of the compliance crucible that will be the 4^th quarter of 2017. Registration for the webcast is here.

Regulatory Compliance School

Lastly, if you feel like you need a bootcamp before tackling this year’s compliance gauntlet, join us at NAFCU’s Regulatory Compliance School. Our spring school in the Washington, DC metro area is quickly approaching. Get up to speed by taking exams and earning the NCCO designation. If you are already an NCCO, earn the 24 hours you need for recertification and get your warrior face on so you can attack the implementation challenges of this upcoming year.

Enjoy $200 in savings with the code SPRINGSAVINGS if you register by February 10, 2017. Seats are filling up quickly, so check out the agenda and make your plans soon.

AML Violations Cost Western Union $586 Million; January 2017 BSA Blast

Written by Shari R. Pogach, Regulatory Paralegal, NCBSO

On January 19, 2017, it was announced that the Western Union Company (Western Union) had agreed to forfeit $586 million and enter into agreements with the Department of Justice (DoJ) and the Federal Trade Commission (FTC) for willful anti-money laundering (AML) violations.  Not only did Western Union fail to maintain an effective AML program, it violated the Bank Secrecy Act (BSA) by aiding and abetting wire fraud from 2004 to 2012 by processing hundreds of thousands of transactions for its agents and others involved in international consumer fraud schemes.

The coordinated investigations determined that Western Union agents were:  participating in activities to defraud tens of thousands of U.S. residents via various forms of mass marketing schemes promoting prizes or job opportunities; assisting in hundreds of millions of dollars being sent to China in structured transactions (a great deal of this money was sent by illegal immigrants to pay their human smugglers); and not limiting transactions indicating illegal gaming from Florida to other countries offshore sportsbooks.

On the same day the Financial Crimes Enforcement Network (FinCEN) announced its $184 million civil money penalty against a subsidiary of Western Union, Western Union Financial Services, Inc. (WUFSI) for violating the BSA’s AML requirements.  Specifically FinCEN determined that prior to 2012, WUFSI failed to implement and maintain an effective, risk-based AML program on foreign agents/outlets and to timely file suspicious activity reports (SARs).  The company was found not to have appropriate controls to “effectively mitigate its money laundering risks along the southwest border between the United States and Mexico.  For example, in not performing proper or enhanced due diligence, it was found that some former agents owned by persons formerly terminated by WUFSI for money laundering concerns were able to sign “new agent” agreements and continue to use the company’s money transfer system for their fraud and money laundering activities.  And, before 2012, WUFSI took over 90 days to investigate activity for which the company had the facts as a basis to file a SAR.  WUFSI filed thousands of SARs on customers of its agent locations but only filed such reports on the agent if found to be “complicit.”  Typically an agent was only found to be complicit if the agent was “arrested, publicly identified to be implicated in illicit transactions, or if WUFSI’s own investigation determined that the agent location was complicit.”  This also delayed reporting.

FinCEN determined that WUFSI willfully violated the program and reporting requirements of the BSA and its implementing regulations.  Its $184 million civil money penalty will be deemed satisfied by payment to the DoJ as part of the $586 million forfeiture for the victims of fraud. 

Western Union has also agreed to enhanced compliance obligations.  This includes creating policies and procedures: “for corrective action against agents that pose an unacceptable risk of money laundering or have demonstrated systemic, willful or repeated lapses in compliance; that ensure that its agents around the world will adhere to U.S. regulatory and AML standards; and that ensure that the company will report suspicious or illegal activity by its agents or related to consumer fraud reports.”

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BSA Blast.  The January 2017 issue of the BSA Blast is available today. (NAFCU login required).  The articles in this issue cover:  the New York State Department Financial Services’ enforcement action against the Agricultural Bank of China for anti-money laundering rules and regulations violations; an example of the importance of updating Bank Secrecy Act compliance programs as an institution’s business model changes; and comments by the deputy director of the Financial Crimes Enforcement Network (FinCEN) on the agency’s current focus.  Also included is a BSA quiz that reviews FinCEN’s last four advisories issued for financial institutions.

NCUA’s CUSO Registry Reaffirmation Period Begins February 1; Webinar on January 25

Written by Pamela Yu, Special Counsel for Compliance and Research

NCUA recently announced that CUSOs may begin their required annual reaffirmation with NCUA’s online CUSO Registry beginning on February 1.  CUSOs have until March 1 to complete this mandatory process.  This will be the first round of reaffirmations—NCUA’s CUSO Registry was first launched a year ago to implement changes made to the agency’s CUSO rule in 2013.

To assist CUSOs in complying with this annual requirement, NCUA will host a free 90-minute training webinar on the annual reaffirmation process this Wednesday, January 25 at 2:30 p.m. ET.  Those who wish to learn how to update their CUSO Registry information for the upcoming annual registration period can register for the webinar here. The webinar will offer registrants the opportunity to ask NCUA staff questions about the annual registration process.  Questions can also be sent beforehand to NCUA at [email protected]. 

Don’t forget that the annual registration requirement is a contractual obligation of the CUSO; credit unions are not obligated to complete this process for their CUSOs.  NCUA’s CUSO rule provides, among other things, that a credit union may invest in or loan to a CUSO only if certain conditions are met.  One of those conditions is that the credit union must obtain a written agreement from a CUSO, before making an investment or loan to that CUSO, that the CUSO will directly submit annual reports to NCUA on an annual basis (a newly formed CUSO must file a report within 60 days of its formation).  See, 12 C.F.R. §712.3(d)(4).  Nevertheless, NCUA has made it clear that it will examine credit unions for their CUSO’s adherence to its contract and “credit unions may not make additional investments or loans to the CUSO until the CUSO satisfies the annual registration requirement.”  See, NCUA 16-CU-02 (January 2016).  As such, credit unions are expected to monitor for its CUSO’s compliance with the registration requirement as part of its ongoing due diligence.  This can be accomplished with relative ease, since NCUA added a search feature to its registry in June 2016. 

One thing that may have tripped up some CUSOs during the initial registration process last year was the initial screening questions that present to a user when attempting to log in to the registry. For example, one screening question asks: “Does your organization primarily serve credit unions or credit union members?”

Since this is an issue that continues to pop up from time to time, and is raised by CUSOs and credit unions alike, let’s take this opportunity to revisit what it means to “primarily serve” credit unions or their members.

Under the CUSO rule, a “CUSO” is defined as “any entity in which a FICU has an ownership interest or to which a FICU has extended a loan, and that entity is engaged primarily in providing products or services to credit unions or credit union members.”  It also includes a CUSO subsidiary, or “any entity in which a CUSO has an ownership interest of any amount, if that entity is engaged primarily in providing products or services to credit unions or credit union members.”  12 C.F.R. §712.1(d) (Emphasis added). 

In addition, the rule imposes a customer base requirement for CUSOs: “An FCU can invest in or loan to a CUSO only if the CUSO primarily serves credit unions, its membership, or the membership of credit unions contracting with the CUSO. . .” 12 C.F.R. §712.3(b) (Emphasis added).

But how do we determine if an entity “primarily serves” credit unions or their members?

The “primarily serves” test was first addressed in the preamble to a 1986 final rule.  In that rulemaking, the NCUA Board stated:

“In light of the comments, the Board again considered providing a definition of the term "primarily." As it had concluded in the proposed rule, the Board believes that defining the term as a percentage of business or percentage of customers served would be arbitrary. The lack of a definition is not deemed critical since the wording in §701.27(d)(4) reiterates the statutory requirement and will provide the Board with a sufficient basis to deal with any clear abuses.”   

50 Fed. Reg. 10353, 10355 (March 26, 1986) (Emphasis added). 

While NCUA purposefully did not define the term “primarily” in the regulation, in the past, the agency has determined that a majority, or 50 percent or greater, may be sufficient to meet the “primarily serves” requirement. See NCUA OGC Ops. 96-0741 (September 20, 1996); 01-0746 (August 7, 2001); 11-0642 (August 3, 2011).

But as every good Compliance Officer knows: The rule is the rule, except when it isn’t. 

A 1996 legal opinion explains:

"[While NCUA has indicated that] "50% or greater" is often used as a rough indicator of "primarily," [it has] also stated that "50% or greater" is not the only definition of "primarily." In the past the definition of the term "primarily" has depended upon several variables, such as: type of business(es) provided; number of affiliated members served; gross or net revenues derived from affiliated members; amount of affiliated members assets under management; number of policies sold to affiliated members; number of services provided to affiliated members; and availability/access of services to affiliated members.”

NCUA OGC Op. 96-1214 (January 22, 1997).

Thus, while in some cases a “50% or greater” standard may meet the “primarily serves” test for CUSOs, this is not always true.  A number of variables must be considered, as noted in 96-1214, to determine if an entity meets the customer base requirement to qualify as a CUSO for the purposes of NCUA’s rule.

Clear as mud?  For more information on the CUSO annual reporting requirements, be sure to register for Wednesday’s training webinar, or visit NCUA’s CUSO Registry webpage.

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Upcoming NAFCU Webcast:

Benefits of Being a Community Development Financial Institution (CDFI)

FREE Live Webcast Wednesday, January 25, 2017 | 2:00-3:30 p.m. ET

Many credit unions have discovered, just in the past few years, that being recognized as a Low-Income Credit Union (LICU) provided new and untapped benefits, such as an exemption from the MBL cap. More recently, many LICUs are discovering another designation can provide even more opportunities for strategic growth: the Community Development Financial Institution (CDFI) certification. Obtaining a CDFI designation can provide benefits such as grant funding, awards, and exclusion from certain rules, like the QM/ATR rule. This webcast will provide you with an overview of the certification process and specific examples of CDFI designation benefits.

2017 NCUA Examinations – Priorities and Exam Flexibility Initiative

Written by Brandy Bruyere, Director of Regulatory Compliance

Happy Wednesday! Many of you probably noticed that NCUA issued its annual Supervisory Priorities last week in Letter to Credit Unions 17-CU-01. Meanwhile, credit unions have had questions about the Letter to Credit Unions on NCUA’s Risk-Based Examination Scheduling Policy (16-CU-12). Today’s blog will provide a high level overview of these two pieces.

Supervisory Priorities. The 2017 Supervisory Priorities are not surprising, our old friends cybersecurity and Bank Secrecy Act compliance remain high on the list. For cybersecurity, NCUA is “encourage[ing] credit unions to use the Cybersecurity Assessment Tool,” (CAT)  and will be “enhancing the examination focus with a structured assessment process.”  In other words, making use of the CAT. NAFCU members can find our user-friendly workbook version of CAT here.

NCUA will also focus on the following:

• internal controls and fraud prevention, including controls for insider fraud
• interest rate and liquidity risk
• commercial lending, including evaluating a credit union’s commercial loan policies and procedures and assess the risk management processes used to manage portfolios
• Military Lending Act compliance

NCUA includes various resources in the letter, but some of these topics like commercial lending/member business lending and interest rate risk are addressed in the updated version of the Examiner’s Guide.

Risk-Based Examination Scheduling Policy. Last month, NCUA issued another Letter to Credit Unions providing some information about its examination flexibility initiative and its efforts to move to an extended examination cycle for some credit unions.

Federally chartered credit unions. Federal credit unions meeting certain eligibility requirements will qualify for an extended exam cycle of 14 to 20 months from the prior examination completion date:

• Assets less than $1 billion;
• CAMEL code 1 or 2, in both the composite rating and the management component rating;
• “Well capitalized” under prompt corrective action (PCA) regulations;
• No outstanding documents of resolution (DOR) items related to significant recordkeeping deficiencies; and
• Not operating under a formal or informal enforcement or administrative order, such as a cease and desist order (C&D), letter of understanding and agreement (LUA), preliminary warning letter (PWL), or a PCA directive.

However, “small credit unions with limited segregation of duties that are otherwise eligible for an extended exam cycle may receive more frequent examinations on a random sample basis.” Also, while NCUA anticipates a full transition to this exam cycle for eligible FCUs within two years, some credit unions may receive examinations earlier than the 14 to 20 month timeframe. This means some credit unions will still have their next exam in the current shorter timeframes. Here is one of the FAQs NCUA issued on the exam flexibility initiative:

“When will eligible credit unions begin the longer, extended cycle?

While some credit unions will begin the new cycle on January 1, it could take up two years to be fully phased-in. NCUA’s regional management team is working on a plan to ensure consistent application across the country. While some exams may need to be performed on an annual basis, others will start to move to a longer cycle in line with the lower range for eligible credit unions. This is similar to what we planned for and experienced when the agency adopted risk-based scheduling in 2001, and an annual examination in 2009.”

What about federally-insured state chartered credit unions? Federally-insured state charters that meet any one of the following three criteria will receive NCUA exams between 8 to 12 months from the prior examination completion date:

• Assets greater than $1 billion;
• NCUA CAMEL code 4 or 5, with assets greater than $50 million; or
• NCUA CAMEL code 3 with assets greater than $250 million.

All other federally-insured state chartered credit unions will be examined by NCUA “based on risk, but no less frequently than once every five years.”

NCUA also states the agency “will make every effort” to conduct its examination jointly with the credit union’s state supervisory authority. To facilitate this, “a joint NCUA-state supervisory working group is being formed” to consider issues like improved coordination of joint exams, reducing redundancy with exam and supervisory approaches, and evaluate the “appropriateness and feasibility” of alternative examination approaches.

Other Changes. NCUA will also implement the following changes in 2017:

• Providing at least four weeks advanced notice when scheduling an exam, unless concerns at the credit union warrant shorter or no notice;
• Improving coordination of document requests tailored to the credit union’s risk profile and products; and
• Separating and emphasizing pre-exam planning & scoping from the beginning of onsite exam work.

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Get the Latest News from Washington DC. Worried about staying up to date given the changes in Washington? Subscribe to NAFCU Today, our free, daily enewsletter that provides up-to-date information on key legislative, regulatory and compliance issues facing credit unions.

Programming Note – Inauguration Day. Did you know that Inauguration Day is a federal holiday in the DC metro area? As a result, NAFCU will be closed this Friday and back to blogging on Monday. And shake your head at us if you want, but if you’ve seen our traffic on a regular day, it can be almost impossible to get around town when swearing in a new president.  

Consumer Compliance Outlook—Financial Innovation Technology: Fintech; NCUA Issues Supervisory Priorities

Written by André B. Cotten, Regulatory Compliance Counsel

Consumer Compliance Outlook. The Third 2016 Issue of the Philadelphia Federal Reserve’s Consumer Compliance Outlook is now available. This issue’s articles focus on the rise of financial innovation in the financial services industry. This issue’s articles include the following:

• Perspectives on Fintech: A Conversation with Governor Lael Brainard
• Fintech: Balancing the Promise and Risks of Innovation
• Fintech for the Consumer Market: An Overview
• Fintech Resources: Laws, Regulations, and Supervisory Guidance

The article on fintech discussed how consumers, especially Millennials, are accustomed to having a wide range of applications and information immediately accessible to them. The emergence of financial innovation applications has transformed consumer expectations around financial products, services and delivery. As a result, brick and mortar financial institutions, including credit unions, are feeling the increased pressure to update and diversify the way they deliver services and products to remain competitive.

Fintech is composed of a variety of different sectors. The article by Tim Marder on page 4 of this issue provides an overview of four fintech market segments: credit; digital payments; savings, investments and personal financial management; and distributed ledger technology. Note, the aforementioned segments do not encompass the entire fintech ecosystem, but they are more likely to impact current credit union products, services and delivery methods.

However, fintech products and services are not seen solely as market disrupters. Some financial institutions have focused on partnerships, collaboration, and other relationships with financial technology firms. Financial innovation has introduced advanced technology, new uses of data and created changes in customer preferences and expectations.

Although, many segments of fintech are still in the early phases, the article explains that fintech credit providers or alternative lenders have enjoyed a range of collaboration with bank partners. While credit unions have lending limitations banks do not, some examples of this innovative partnership include banks providing funding through loan purchases, credit extensions, and equity investments. Financial institutions also originate loans on behalf of alternative lenders, use technology developed by alternative lenders to originate loans themselves, and direct customers to alternative lenders in exchange for marketing and referral fees. Other banks have provided workspace, seed funding, mentoring, training, and other related support to fintech startups. Some financial institutions have even shown some interest in acquiring alternative lenders.

Another notable change sparked by financial technology innovation is the way people pay merchants and transfer money, digital payments. Smart phones are also equipped with digital wallets that store credit card, debit card, and other financial information, thus further eliminating the need for cash and checks. The growing use of fintech applications has enabled an increasing number of small businesses to accept credit cards as a payment option. Beyond payments, some fintech applications have allowed people to more easily to transfer money to other people by simply using the recipient’s email address or phone number.

The financial regulators are taking a measured approach to assess the impact of supervision on financial innovation. The Federal Reserve notes the two questions the Board is most often asked about fintech. First, “what is meant by the term fintech?” Secondly, “what is the Federal Reserve doing to understand the impact of these new technologies?”  

The Consumer Financial Protection Bureau also created Project Catalyst to facilitate consumer-friendly innovation; it includes a “No-Action Letters” policy, finalized on February 18, 2016, to reduce regulatory uncertainty for a new product or service that offers the potential for significant consumer-friendly innovation.

Last October, the Office of the Comptroller of the Currency released a white paper titled Recommendations and Decisions for Implementing a Responsible Innovation Framework. Last month, Comptroller of the Currency Thomas J. Curry announced during a speech that the OCC is developing special purpose national bank charters for fintech firms.

According to Governor Lael Brainard, generally, regulators should seek to tailor regulatory and supervisory expectations to facilitate financial technology growth that produces benefits to the financial marketplace. At the same time, any contemplated adjustments must also manage corresponding risks. The goal is to ensure financial products are fair and transparent so that consumers can make informed choices.

The Consumer Compliance Outlook also lists certain federal laws and implementing regulations for financial services and products that may be relevant to fintech firms and their depository institution partners. The authors note that this is not an exhaustive list, and the applicability of each law depends on the specific circumstances. State laws and regulations, including usury limits may also apply to fintech services and products.

Given some of the lessons from the financial crisis, the article stressed the importance that financial institutions and fintech firms consider the long-term sustainability of the products and services they offer. Fintech firms can establish sound practices by articulating a clear risk tolerance and managing risk. The Federal Reserve intends to maintain an active dialogue with market participants to continue ensuring the safety and soundness of the nation’s financial system.

In a related note, the Office of the Comptroller of the Currency (OCC) announced that it was considering a possible charter for fintech firms, seeking public comment on the concept. Today, NAFCU will file comments, noting in part that if the OCC does move forward with such charters, regulators should require fintech firms to meet basic consumer protection requirements, such as the Truth in Lending Act and applicable usury laws, just as credit unions must do now

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Programming Note: The NAFCU office will close early today, Friday, January 13^th at 2:00pm, and the office will be closed on Monday, January 16, 2017 in observance of Martin Luther King, Jr. Day.

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NCUA Issues Supervisory Priorities Letter. Yesterday afternoon, NCUA issued its annual Supervisory Priorities in Letter to Credit Unions 17-CU-01. As no surprise to anyone, cybersecurity and BSA compliance remain on NCUA’s radar. Other priorities include internal controls for fraud, commercial lending, interest rate and liquidity risk, and compliance with the Military Lending Act and Servicemembers Civil Relief Act. 

Should Credit Unions Photocopy Identification Cards?

Written by Shereefat Balogun, Regulatory Compliance Counsel

So last week, I attempted to take some cash out of my credit union’s ATM but the customer in front of me had a bunch of checks she had to deposit and took forever.  I decided to walk into the branch and ask for the cash withdrawal.  The teller asked me for my driver’s license or any similar ID. I told her that I did not have any ID on me (don’t judge me!), but I had my ATM/debit card.  The teller said she would be able to process my request only if the credit union had a copy of my ID on file.  While I understood the benefits of having the copy on file, I could not help but to think about the different compliance issues this raises.  Yes, the copy of the ID is great for verifying your members’ identity or helping to detect fraud.  However, it got me thinking about compliance issues relating to IDs, such as military IDs and fair lending concerns.  Contrary to what we’ve been taught, what’s good for the goose is NOT always good for the gander. 

Bank Secrecy Act and CIP Recordkeeping

The Bank Secrecy Act requires a credit union to know its member (KYC or KYM whichever lingo you prefer) and have a customer identification program (CIP). This includes checking a government identification number, which can be done with documentary evidence like an ID.  So collecting the ID to verify the information is one thing.  But should a credit union keep a copy of the ID in its records?  For recordkeeping purposes, the CIP rule leaves it up to the credit union to determine how it wants to document verification that has been performed.  Generally, the rule requires a credit union to retain a description of the document that was relied on, noting the type of document, any identification number contained in the document, the place and date of issuance, and expiration date.  So, a description is generally sufficient.  Though the credit union may retain a copy of the ID, it certainly is not required.  See, 31 C.F.R. §1020.220(a)(3)(i)(B).  This is also confirmed in FinCEN’s Guidance on Customer Identification Regulations FAQs:

2. Can a bank keep copies of documents provided to verify a customer’s identity, in addition to the description required under 31 C.F.R. § 103.121(b)(3)(i)(B), even if it is not required to do so?

Yes, a bank may keep copies of identifying documents that it uses to verify a customer’s identity. A bank’s verification procedures should be    risk-based and, in certain situations, keeping copies of identifying documents may be warranted. In addition, a bank may have procedures to keep    copies of documents for other purposes, for example, to facilitate investigating potential fraud…

(Emphasis added.)

Keep in mind though, that although there are no federal regulations prohibiting a credit union from photocopying ID, some states prohibit photocopying IDs.  Be sure to check with your individual state law to see if there are any limitations here.

But wait…what about military IDs?  Good question!  While a credit union may use a military ID to collect identifying information for CIP purposes and other purposes, it cannot copy the ID for CIP purposes.  Federal law generally prohibits the copying or scanning of military ID:

Whoever manufactures, sells, or possesses any badge, identification card, or other insignia, of the design prescribed by the head of any department or agency of the United States for use by any officer or employee thereof, or any colorable imitation thereof, or photographs, prints, or in any other manner makes or executes any engraving, photograph, print, or impression in the likeness of any such badge, identification card, or other insignia, or any colorable imitation thereof, except as authorized under regulations made pursuant to law, shall be fined under this title or imprisoned not more than six months, or both.

(Emphasis added.)

As stated above, photocopying military ID can subject a person to fines and imprisonment up to 6 months.  If your BSA/CIP program permits the photocopying of military ID identification, you may want to reassess your CIP requirements. 

To emphasize, the statute prohibits the photocopying the military identification card.  For CIP purposes, it’s our understanding that some credit unions document information found on the military ID since they are unable to make a copy.  This practice is consistent with the CIP recordkeeping requirement discussed above. 

Fair Lending Concerns

So we’ve established that it is customary to collect and retain a copy of a driver’s license for CIP purposes.  However, for purposes of Regulation B and other fair lending laws, credit unions may want to keep that copy out of the member’s loan application file.  For example, Regulation B prohibits financial institutions from considering certain information when evaluating an application and making a credit decision.  Indeed, the FinCEN FAQ highlighted above also warned:

Nonetheless, a bank should be mindful that it must not improperly use any document containing a picture of an individual, such as a driver’s license, in connection with any aspect of a credit transaction.

(Emphasis added.)

Regulation B and Regulation C require a credit union to collect certain information for monitoring purposes.  For instance, Regulation B requires a credit union that receives a credit application to collect certain information, such as ethnicity, sex, and age.  See, 12 C.F.R. §1002.13(a).  Similarly, Regulation C requires a credit union to collect certain data in relation to applications for home purchase loans, home improvement loans, and refinancings.  This information includes information about the ethnicity, race, and sex of the applicant or borrower.  See, 12 C.F.R. §1003.4(a)(10).  When collecting this information, a credit union may list questions regarding the ethnicity, race, and sex of the applicant on the loan application form, or on a separate form that refers to the application.  See, Appendix B to 12 C.F.R. Part 1003.

Although neither rule explicitly instructs credit unions to refrain from maintaining a copy of a driver’s license from a loan file, doing so may increase your fair lending risks, and may lead to examiner scrutiny.

As always, if you have any questions about this blog or any other compliance issue, please feel free to reach out to NAFCU’s Regulatory Compliance Team.  We’re here for you!

2017 Adjusted Threshold Levels for Regulations Z and C; Updated HMDA Resources

Written by Stephanie Lyon, Regulatory Compliance Counsel

The Consumer Financial Protection Bureau (CFPB) has been updating and adjusting threshold dollar amounts for transactions covered under Regulation Z (which implements the Truth in Lending Act) and Regulation C (which implements the Home Mortgage Disclosure Act) since the middle of last year. As most threshold adjustments became effective as of January 1^st, 2017, we thought it would be helpful to gather this information in a one-stop shop.

Regulation Z

The Dodd-Frank Act and the CARD Act require the Bureau to adjust a variety of thresholds annually for inflation. Below are a few of the most notable adjusted amounts:

Credit Cards

Regulation Z prohibits a card issuer from imposing a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) plan unless the fee “represents a reasonable proportion of the total costs” incurred for the violation, or is within the safe harbor provision of 12 C.F.R. section 1026.52(b). If a credit card issuer charges anything up to the safe harbor amount for certain violations, it is considered to be in compliance with Regulation Z.

The safe harbor amounts will remain the same as in 2016:

• $27 for a first late payment; and
• $38 for each subsequent late payment over six months.

Ability-to-Repay/Qualified Mortgage

For dollar amounts related to determining a borrower’s ability to repay a transaction secured by a dwelling, the threshold for what is a qualified mortgage in 2017 will require that total points and fees not to exceed:

• 3 percent of the total loan amount for a loan greater or equal to $102,894;
• $3,087 for a loan amount greater or equal to $61,737 and less than $102,894;
• 5 percent of the total loan amount for a loan greater or equal to $20,579 but less than $61,737;
• $1,029 for a loan amount greater or equal to $12,862 and less than $20,579; and
• 8 percent of the total loan amount for a loan less than $12,862.

Home Ownership and Equity Protection Act (HOEPA) Loans

Regulation Z sets additional requirements for high-cost mortgages. To be considered a high-cost mortgage, the transaction must be secured by the consumer’s principal dwelling and the APR and loan amount have to be over a certain threshold. For 2017, the total loan amount will be increased to $20,579 and the loan’s points and fees must exceed 5% of the total loan amount. See, 12 C.F.R. § 1026.32(a)(ii). Loans below $20,579 will also be high-cost if the points and fees exceed the lesser of 8% of the loan amount or $1,029.

Escrow Requirement

Creditors making higher priced mortgage loans must escrow the borrower’s property taxes and insurance unless the credit union meets certain exceptions. Credit unions with an asset size of less than $2.069 billion (increased from $2.052 billion in 2016) that extend a covered loan for a property that is located in rural or underserved areas and meet other requirements are exempt from establishing escrow accounts. See, 12 C.F.R. § 1026.35(b).

Special Appraisal Requirements

Higher-priced mortgage loans are considered to be higher risk and hence require that the credit union obtain a written appraisal based on a physical visit to the home’s interior.12 C.F.R. § 1026.35(c)(3)(i). The rule contains a few exceptions for the appraisal requirement including for transactions of less than an amount adjusted annually, which will remain the same as last year, $25,500.

For more information on Regulation Z’s 2017 adjusted thresholds, see the CFPB’s rule in the Federal Register or their press release.

Regulation C

HMDA Asset Size Reporting Exemption

HMDA exempts small credit unions from reporting HMDA data for the following year, using a multi-prong test that includes an asset threshold. There is no change from last year’s asset size exemption. So in 2017, credit unions with assets at or below $44 million as of December 31, 2016 will continue to be exempt from collecting and reporting HMDA data in 2017. See, 12 C.F.R. § 1003.2 (Financial Institution)(2).

Updated Resources

Also, I wanted to highlight that additional Resources for HMDA Filers were posted by the CFPB to their webpage and the FFIEC’s page. Among the additions are:

• The release of the 2017 Loan/Application Register (LAR) Formatting Tool
• Modifications to the Technology Preview, Filing Instructions Guide for data collected in or after 2018, and Frequently Asked Questions (FAQs).

The CFPB has an additional HMDA implementation page full of easy to digest coverage charts like the 2017 HMDA institutional coverage chart , which looks something like this:

NCUA’s New MBL and Commercial Lending Rule Is Now Effective

Written by Pamela Yu, Special Counsel for Compliance and Research

Happy Friday!  On January 1, 2017, NCUA’s new MBL rule finally went into effect.  While the personal guarantee provision had an early implementation in May 2016, the bulk of the new rule was not implemented until the beginning of this year.  While NAFCU’s Compliance Team has continued to blog about this topic since NCUA proposed comprehensive changes to its MBL rule in June 2015, now that the entire final rule is effective, let’s do a quick recap of the new rule and then talk a little more about another one of the key areas of the new rule that members have been asking about: the small credit union exemption.

Quick Recap

In February 2016, the NCUA Board approved a final rule to amend Part 723, NCUA’s MBL rule.  The new rule fundamentally changes the manner in which NCUA approaches commercial lending, from both a regulatory and supervisory perspective.

NCUA adopted its first regulation governing MBLs in 1987 and has amended the rule several times over the years, including amendments to incorporate MBL provisions enacted in 1998 in the Credit Union Membership Access Act (CUMAA).  Among other things, CUMAA limited the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under the FCU Act for a credit union to be well capitalized.  This statutory aggregate limit on MBLs was incorporated in Part 723 of NCUA’s regulations.  Part 723 also defined MBLs, established minimum safety and soundness standards for making MBLs, and implemented various statutory exceptions from the aggregate MBL limit.  Prior to the new final rule, NCUA had not significantly changed Part 723 since 2003.

Historically, Part 723 has treated commercial lending as synonymous with the statutory member business lending definition under the FCU Act. The new final rule, however, expands the scope of the rule to apply to commercial loans as newly defined under the regulation. The rule delineates loans subject to the statutory MBL cap and those subject to the safety and soundness policy and infrastructure requirements.

The new rule further diverges from prior iterations of the MBL rule by moving from a prescriptive regulatory framework to a broad, more flexible, principles-based regulatory approach.  This means that credit unions are no longer subject to strict underwriting requirements—including collateral and security requirements, equity requirements, and loan limits—expressly set out in the regulation.  Instead, the new rule sets out the broad elements that NCUA believes are necessary to ensuring that a credit union’s commercial lending policies and programs are safe and sound.  It is up to individual credit unions engaging in business lending to address these elements in their own commercial lending policies with risk-based limitations and requirements that are suitable to their own business lending activities.

Notably, because regulatory waivers are inconsistent with a principles-based regulatory approach, the new final rule eliminates the agency’s MBL waiver process.

Deep Dive: Small Credit Union Exemption

Section 723.1(b)(1) of the final rule includes an exemption for any credit union that is less than $250 million in assets and also meets both of the following requirements:

1. The credit union's aggregate amount of outstanding commercial loan balances and unfunded commitments, plus any outstanding commercial loan balances and unfunded commitments of participations sold, plus any outstanding commercial loan balances and unfunded commitments sold and serviced by the credit union total less than 15 percent of the credit union's net; and
2. In a given calendar year the amount of originated and sold commercial loans the credit union does not continue to service total less than 15 percent of the credit union's net worth.

Smaller credit unions meeting these conditions are exempt from the final rule’s requirements regarding board of director and management responsibilities and commercial lending policies in §723.3 and §723.4 of the final rule. 

In the preamble to the final rule, NCUA described the purpose of the exemption:

“. . . qualifying credit unions, especially smaller institutions which are only occasionally granting a loan(s) that meets the rule’s commercial loan definition, [are] alleviated from the burden of having to develop a full commercial loan policy and commercial lending organizational infrastructure.”

81 Fed. Reg. 13530, 13535 (Mar. 14, 2016).

The small credit union exemption provides significant regulatory relief for qualifying credit unions.  Section 723.3 of the new rule addresses the board duties and organizational requirements that a credit union must address in order to administer a safe and sound commercial loan program, including board oversight and approval of a credit union’s commercial loan policy, experience and expertise for personnel involved in member business lending, and necessary qualifications for senior executive officers and staff.  Section 723.4 of the new rule requires that credit unions involved in commercial lending must adopt and implement comprehensive written commercial lending policies and procedures for commercial lending that provide for ongoing control, measurement, and management of the credit union’s commercial lending activities.  Credit unions meeting the qualifying conditions for the exemption do not have to comply with these key provisions of the final rule.  

For smaller credit unions that are minimally involved in commercial lending activities, meeting these more rigorous board oversight, infrastructure, and policy requirements could be difficult and, without the exemption, some credit unions would be hindered from providing credit access to small businesses. The small credit union exemption in the final rule “avoid[s] the inclusion of credit unions that infrequently originate minimal amounts of loans that technically meet the regulatory commercial loan definition.” 81 Fed. Reg. at 13535.

NCUA has cautioned, however, that the exemption is not meant to be a means for credit unions to circumvent the regulatory requirements of §723.3 and §723.4 by strategically keeping its held-in-portfolio amount below 15 percent of net worth.  To avoid circumvention of the rule, the final rule makes it clear that the 15 percent exemption threshold is measured against all commercial loans originated by the credit union, including commercial loans on the balance sheet, commercial loans sold and serviced, and commercial loans sold and not serviced.

NCUA has also emphasized in its recently-issued commercial loan and MBL guidance that all credit unions must have a board-approved loan policy covering their lending activity in general (See, 12 C.F.R. 701.21(c)(2)), including those credit unions that qualify for the exemption. 

So, exempt credit unions, you’re not completely off the hook:  Exempt credit unions must still ensure their general loan policy covers the types of commercial loans the credit union makes, including satisfying all other applicable commercial lending requirements in Part 723.

As credit unions adjust to the new rule, we may continue to provide information on the rule, either on the NAFCU Compliance Blog or in other publications. Of course, as always, members are encouraged to reach out to the Compliance Team with any questions.

Finalized Field of Membership Rules: Multiple Common Bond Charters

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

Welcome to 2017! Shake off that holiday sugar-hangover, and have a look at the upcoming field of membership changes. Last month, I wrote about the changes to the field of membership rules for community common bond charters. Now, with just a few weeks before NCUA’s modernized field of membership rules go into effect, let’s focus on the changes for multiple common bond charters.

What Became Final

The proposed rule included five changes for multiple common bond charters, three of which became final as proposed (more or less): the inclusion of contractors in SEGs, streamlined stand-alone feasibility determination processes and the addition of veterans as an affinity group.

Inclusion of Contractors in SEGs

Currently, a single common bond federal credit union (FCU) can include employees of contractors involved with the sponsor of the charter if there is a “strong dependency relationship” between the contractors and the sponsor. The final rule creates a parallel allowance for multiple common bond chartered FCUs to add employees of contractors who have a strong dependency relationship with a SEG sponsor.

Regarding what constitutes a “strong dependency relationship,” the new Chartering and Field of Membership Manual will state:

In this context, a “strong dependency relationship” is a relationship in which the entities rely on each other as measured by a pattern of regularly doing business with each other, for example, as documented by the number, the term length, and the dollar volume of prior and pending contracts between them.” See, 81 Fed. Reg. 88412, 88435 (December 7, 2016).

NCUA stated that it intends that FCUs will determine whether a contractor and sponsor meet this standard themselves, so as to create a rebuttable presumption. NCUA anticipates issuing further guidance to clarify what documentation is acceptable to establish a contractual relationship based on a pattern of regularly doing business. See, 81 Fed. Reg. at 88421.

Streamlined Stand-Alone Feasibility Determination

Under the current Chartering and Field of Membership Manual, when an FCU seeks to add a group of potential members that numbers 3,000 or greater, it must perform a stand-alone feasibility determination establishing that the proposed group does not have the ability to form their own credit union. Under the new rule, the documentation involved will be reduced and the process will be streamlined. The approach will be tiered based on the size of the group, with separate processes for groups of fewer than 3,000 members, groups between 3,000 and 4,999 members, and groups of 5,000 or more. This change is the result of complaints to NCUA that this process involves excessive paperwork and that large groups have withdrawn from the application process in frustration. See, 81 Fed. Reg. at 88422.

Addition of Veterans as an Eligible Group

Lastly, NCUA finalized the proposed rule to permit FCUs to include honorably discharged veterans of any branch of the United States Armed Forces as an affinity group. This affinity group applies only to veterans; retirees of other groups, such as teachers or federal employees must be permitted by the FCU’s charter. See, 81 Fed. Reg. at 88422.

What Was Clarified

NCUA had issued a proposal allowing tenants of an office park or industrial park to be considered a SEG able to be added to a multiple common bond chartered FCU’s field of membership. After receiving comments on the proposal, NCUA decided that the ability to add the tenants of an office park or industrial park as a SEG would not comport with the Federal Credit Union Act, as the landlord is not typically the tenants’ employer and the tenants lack a true common bond. However, NCUA also stated it believes the existing rule already permits tenants to become individual SEGs, thus allowing all employees of such a park to become members. To clarify the current availability of the multiple common bond option for employers within the same park, NCUA added it as a factual example within the Manual. See, 81 Fed. Reg. at 88421.

The Final Rule contains discussion of how credit unions can include this clause in its statement of its field of membership:

"To be able to have this type of clause in its charter, the multiple common bond credit union first must  receive a request from an authorized representative of the group or the park to establish credit union service. The park must be within the multiple common bond credit union's service area, and each occupational group must have fewer than 3,000 employees, who are eligible for membership only for so long as each is employed by a park tenant. Under this clause, a multiple common bond credit union can enroll group employees only while the group's retail or business employer is a park tenant, but such credit unions are free to serve employees of new groups under the above conditions as each respective employer becomes a park tenant." See, 81 Fed. Reg. at 88435.

In addition, any new tenants to the industrial park would be eligible for membership so long as they meet those two conditions.

What Did Not Become Final

In the proposal, NCUA attempted to modify the definition of “service facility” to include an FCU’s website or mobile platform, assuming it can perform certain functions. This was a potential change many credit unions were excited about. Unfortunately, the NCUA Board did not approve this change in the final rule, though it stated the proposal had merit. The Board decided to defer this change to a later date, after further study. See, 81 Fed. Reg. at 88420.

Here’s to another year of credit union excellence in 2017! We hope to hear from all our NAFCU-member credit unions with their compliance questions and what they need to make 2017 the year of working smart, not hard. We are here for you, please don’t hesitate to reach out!

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