NAFCU Compliance Blog

A Little of This, A Little of That in the Waning Days of August.........

Written by Shari R. Pogach, Regulatory Paralegal

The Financial Crimes Enforcement Network (FinCEN) recently issued revised Geographic Targeting Orders (GTO) to target shell companies buying luxury properties.  Transactions conducted in Honolulu, Hawaii, are now included under the revised GTO, making a total of seven major metro areas where U.S. title insurance companies are required to identify the natural persons behind shell companies used to pay for high-end real estate.  The August 22, 2017, revised GTO also has broadened the transaction categories to now include wire transfers.  Any covered transaction made "without a bank loan or other similar form of external financing; and ...  made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, or a money order in any form, or a funds transfer" must be reported to FinCEN.

In addition to the revised GTO, FinCEN released FIN-2017-A003 to provide financial institutions and the real estate industry with information on the money laundering risks associated with some real estate transactions.  The guidance provides some red flag activity and case examples.  FinCEN also has a frequently asked questions document here.

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FFIEC BSA/AML Examination Manual Update.  Word on the street is that an interagency group of federal banking regulators has started working on amending the Federal Financial Institutions Examination Council’s Bank Secrecy Act exam manual to account for the new customer due-diligence rule issued by the Financial Crimes Enforcement Network last year.  No details as yet on how in depth the updated manual and standalone sections on the Customer Due-Diligence Rule will address the extent to which financial institutions will have to obtain and verify beneficial ownership data from existing clients or which of the rule's provisions will be prioritized for enforcement. 

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Useful Tools.  Our credit union industry friend, Andy Keeney, of Kaufman & Canoles, has provided you with these two useful resource tools:  NCUA's List of Required Policies for Board of Directors of Credit Unions and Credit Union Board Compensation by State.

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Upcoming NAFCU Webcasts.

CUSO Rules and RegulationsWednesday, September 6 | 2:00 p.m. – 3:30 p.m. ET

BSA/AML Risk Assessment: Building a Program to Evaluate Risk and Ensure ComplianceTuesday, September 12 | 2:00 p.m. – 3:30 p.m. ET 

Vendor Management TrainingWednesday, September 13 | 2:00 p.m. – 3:30 p.m. ET

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A Final Laugh.  Here, courtesy of Payments.com are a few quick stories of some incompetent bank robbers to hopefully give you a chuckle, because we all just need a laugh once in a while.

CFPB Finalizes HMDA Corrections, Temporary Increase to HELOC Thresholds; Filing 2017 HMDA Data

Written by Brandy Bruyere, VP of Regulatory Compliance

On Thursday, the CFPB published a final rule amending the 2015 Home Mortgage Disclosure Act rule. This finalizes technical changes and amendments that the Bureau proposed back in April 2017 while also finalizing a July 2017 proposal to increase the reporting threshold for open-end home equity loans from 100 loans to 500 loans. The regulatory references to HMDA below are not to the current version of the rule, but the rule as amended in 2015 (and further amended by last week's rule).

Technical Amendments. First, here is a summary of a few of the key amendments to the HMDA rule.

• Counteroffers. Section 1003.4(a)(8)(i) requires credit unions to report the action taken on covered loans and applications. Comment 4(a)(8)(i)– 9 explains how to report the action taken for a counteroffer where the applicant does not accept the counteroffer or fails to respond. The final rule amends comment 4(a)(8)(i)–9 to broaden the possible actions taken that could be reported in these situations, adding the following:

"…If the applicant agrees to proceed with consideration of the [credit union's] counteroffer, the [credit union] reports the action taken as the disposition of the application based on the terms of the counteroffer. For example, assume a [credit union] makes a counteroffer, the applicant agrees to proceed with the terms of the counteroffer, and the [credit union] then makes a credit decision approving the application conditional on satisfying underwriting or creditworthiness conditions, and the applicant expressly withdraws before satisfying all underwriting or creditworthiness conditions and before the institution denies the application or closes the file for incompleteness. The [credit union] reports that the action taken as application withdrawn in accordance with comment 4(a)(8)(i)–13.i. Similarly, assume a [credit union] makes a counteroffer, the applicant agrees to proceed with consideration of the counteroffer, and the [credit union] provides a conditional approval stating the conditions to be met to originate the counteroffer. The [credit union] reports the action taken on the application in accordance with comment 4(a)(8)(i)–13 regarding conditional approvals."

• Temporary and Construction-only loans. Section 1003.3 specifies which transactions are excluded from HMDA reporting. The Bureau finalized clarifying changes to comment 3(c)(3)–1 and to add new comment 3(c)(3)–2 to specify that a construction-only loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is extended to a person exclusively to construct a dwelling for sale. Here's the new comment:

"…Loan or line of credit to construct a dwelling for sale. A construction-only loan or line of credit is considered temporary financing and excluded under § 1003.3(c)(3) if the loan or line of credit is extended to a person exclusively to construct a dwelling for sale. See comment 3(c)(3)–1.ii through .iv for examples of the reporting requirement for construction loans that are not extended to a person exclusively to construct a dwelling for sale."

• Loan purpose for purchased loans originated before January 1, 2018. Section 1003.4(a)(3) requires credit unions to report the purpose of a covered loan or application. Categories include home purchase, home improvement, or refinancing, an “other” category, and a cashout refinancing category. The Bureau is adding new comment 4(a)(3)–6 to clarify that, for purchased covered loans where the origination took place before January 1, 2018, a credit union complies with § 1003.4(a)(3) by reporting that the requirement is not applicable.

There are many more technical amendments and NAFCU is still reviewing the final rule. In the coming weeks, we will publish a Final Regulation for members providing a summary of the changes as well as a consolidated regulatory text so stay tuned.

Amended Open-end Line of Credit Threshold.

Section 1003.2(g) contains an institutional coverage test as one of five criteria for determining if a credit union is a "financial institution" subject to HMDA reporting. This is detailed in a past NAFCU Compliance Blog post, here's some of the commentary explaining the test as originally adopted:

"Originations. Whether an institution is a financial institution depends in part on whether the institution originated at least 25 closed-end mortgage loans in each of the two preceding calendar years [January 1, 2017] or at least 100 open-end lines of credit [January 1, 2018] in each of the two preceding calendar years. Comments 4(a)-2 through -4 discuss whether activities with respect to a particular closed-end mortgage loan or open-end line of credit constitute an origination for purposes of § 1003.2(g)."

The Bureau is amending HMDA effective January 1, 2018, to increase the open-end threshold from 100 to 500. However, this increase is only temporary – effective January 1, 2020, the threshold will revert to 100 open-end lines of credit.

Reporting 2017 HMDA Data (and Beyond). We've had some credit unions ask us about reporting methods for 2017 HMDA data. Currently, and in the past, the FFIEC has collected and processed HMDA data for the CFPB, OCC, FDIC and NCUA. Currently, for 2017 reporting of 2016 data, Appendix A still points credit unions to the FFIEC for reporting.

As we've noted before, the CFPB is developing a web-based submission tool which will be intaking and processing HMDA data on behalf of the agencies. See, 80 Fed. Reg. 66246. That tool will be used for the submission of 2017 data in 2018. Beginning in 2018, Appendix A will direct reporting credit unions to use the CFPB website and it's submission tool/HMDA platform, which should be ready in the 4^th quarter of this year for testing.

Some credit unions have asked if submissions by mail will still be an option. Currently, subsection II.A. in Appendix A states "If…you elect to submit your data by regular mail, then use the following address: […]" and provides the FRB address for mailing data. As of January 1, 2018, the submission instructions in Appendix A will no longer contain any instructions for submission via regular mail, only instructions for submission through the CFPB's portal.

Beginning in 2019, Appendix A will be entirely removed and new section 1003.5(a)(5) will direct reporting institutions to the instructions on submitting data which will live in a separate document on the Bureau's website. The reporting in 2019 will be done under the new rule, meaning the inclusion of instructions for submitting the new data collected in 2018. However, the actual method of submission – the CFPB's HMDA Platform – will have already been used in 2018 while submitting 2017 data.

Another MLA FAQ: Is the Credit Card Rule Retroactive?

Written by Jennifer Aguilar, Regulatory Compliance Counsel  

Over the past several months, the NAFCU Compliance Team has written a few blogs on various aspects of the MLA credit card rules: Bona Fide Fee Exemption; Late Fees, Returned Payment Fees and More and Researching Call Reports and Card Agreements. With the credit card compliance deadline fast approaching, we continue to receive a number of questions on the MLA and its various credit card rules. Today's blog will focus on one particular issue that has come up for various credit unions lately: whether the rules apply retroactively.

The scenario goes somewhat like this: Jane Member opens a credit card before the compliance deadline. Jane is a covered borrower at the time she opens the credit card and remains a covered borrower throughout the life of the credit card. Does the MLA apply to transactions Jane makes on her credit card after October 3? What if Jane requests an increase in her credit limit after October 3, is the credit card now covered by the MLA?

Section 232.2 explains that the MLA applies to "consumer credit" extended to a "covered borrower," as determined at the time the member "becomes obligated on a credit transaction or establishes an account for credit." This suggests that whether a particular transaction is covered by the MLA is determined at consummation. This is supported by the fact that sections 232.12 and 232.13 state the rules do not "apply to [a credit card account] that is extended and consummated before October 3, [2017]." This is further supported by a couple different discussions in the preamble to the final rule:

"The Department proposed to add new subsection (a), stating: “Nothing in this part applies to a credit transaction or account relating to a consumer who is not a covered borrower at the time he or she becomes obligated on a credit transaction or establishes an account for credit.” The Department continues to believe that defining the scope of the regulation to apply only to a covered borrower when he or she enters into a transaction or establishes an account for consumer credit is consistent with the language and structure of 10 U.S.C. 987.[167] Interpreting 10 U.S.C. 987 as applying only to a covered borrower who holds that status when he or she agrees to obtain the consumer credit is fair to the creditor who, at the outset of the transaction, should be in a position to know the status of its counterparty to the agreement." (Emphasis added.) See, 80 Fed. Reg. 43579.

Section 232.12(b) provides a general rule that the definitions, conditions, and requirements of the existing rule apply to transactions involving consumer credit that are consummated or established prior to the compliance date. Relative to the Proposed Rule, the language in § 232.12(b) has been revised to clarify that the “definitions, conditions, and requirements” of the existing rule apply. The Department believes that this provision is equitable, particularly to avoid the potential injustice and operational difficulties that could arise if new requirements under the final rule were to apply to pre-existing transactions or accounts involving consumer credit to covered borrowers. (Emphasis added.) See, 80 Fed. Reg. 43591.

All this together seems to indicate that by “establishing” an account or “extending” credit the DOD was referring to consummation. The preamble discussion indicates that the DOD believes that credit unions are in the best position to determine whether a transaction is covered at the outset and there is no ongoing requirement to ensure the transaction is still not covered. The preamble also explains that the DOD does not expect credit unions to apply the rules retroactively to existing accounts as this may cause unnecessary operational problems. If an account was not covered at consummation, it will not become covered later on.

The DOD appears to apply the same logic to certain changes to existing credit accounts. Increasing a credit is not considered "extending" credit under the MLA if the account and its terms are already established:

"A comment on behalf of certain credit card issuers seeks clarification regarding the potential effects of certain 'customer management actions, such as credit line increases.' The Department believes that an action by a creditor within an existing account, such as to increase the available credit that a consumer may draw upon in an account, does not alter the status of the creditor's prior determination for that account." (Emphasis added.) See, 80 Fed. Reg. 43578.

While the DOD specifically includes credit limit increases as actions within an existing account, it does not expand on what other actions may be "within an existing account." Whether other actions, such as adding a joint owner or changing a rate, will trigger MLA protections is unclear from the rule.  For these changes, a credit union may need to review its underwriting process and internal procedures to make a determination whether new credit is being extended or a member is becoming obligated on or establishing credit. Some considerations may be whether the credit union performs new underwriting, whether the member will take on any new or different legal obligations, or whether new agreements or disclosures will be provided. The credit union may also want to reach out to its attorney to assist the credit union in making a determination or assessing the particular legal risks involved.

Complaint Management and a Review of NCUA's Complaint Process

Written by André B. Cotten, Regulatory Compliance Counsel

Hello, compliance friends! As a millennial, before trying a new restaurant, traveling somewhere new or even a joining a new credit union, I like to at least do some research. Normally, I try to read reviews from various sources to ascertain a broad sense of the market's feedback. As people continue to grow more reliant on the opinions of others, I want to explore what this may mean for credit union complaints and how credit unions can potentially mitigate this risk.

From a reputational risk perspective, a member complaint going viral presents a huge threat to credit unions. To mitigate this risk, a well-designed and properly implemented complaint management program is a tool that can uncover noncompliant business practices. Strong complaint management programs also can improve member service by providing members with an easy-to-use method of resolving issues.

Note: as a credit union considers their complaint management system, the credit union may also want to review and define what constitutes a "complaint" so that staff understands when escalation to the complaint resolution process is necessary. The credit union may also want to institute appropriate training on these policies for any staff members that resolve complaints or may have the opportunity to receive a complaint from a member. It is also important for policies and procedures to include how and when responses should be made, including any regulatory time limitation, i.e. Regulation E's error resolution process.

More importantly, regulators are increasingly focusing on member complaints as a source of future regulation and as an examination trigger. A comprehensive complaint management process allows a credit union to prevent and reduce regulatory violations through self-identification and correction. Alternatively, complaint data can validate a credit union's controls in some areas and indicate risks and the need for training in others.

NCUA Complaint Process

In June 2015, NCUA issued Letter to Credit Unions 15-CU-04 advising that the agency had changed its complaint-handling process to allow credit unions 60 days to resolve most consumer complaints before the NCUA Consumer Assistance Center intervenes. The consumer complaint process has two distinct phases: 1) attempted resolution by the credit union and 2) investigation by the Consumer Assistance Center.

During the first phase, NCUA forwards the complaint to the chairman of the appropriate credit union committee, and the credit union then has the opportunity to review the complaint and has 60 days to attempt its resolution. During the complaint resolution process, the credit union is encouraged to communicate directly with the member. NCUA also recommends the credit union respond in writing to the member, with a copy of the letter going to the Consumer Assistance Center, referencing the case number and whether it was able to resolve the complaint.

The second phase involving a formal investigation will begin if the Consumer Assistance Center does not receive a written response from the credit union within the 60-day time frame or if a response is received advising no resolution was possible. Conversely, if the Consumer Assistance Center is notified in writing within the 60-day period that the matter has been resolved, it will close the case. However, the member retains the right to dispute the resolution of the complaint in writing, within 30 calendar days of the credit union's response letter. A member dispute may also trigger a formal investigation.

Elements of a Comprehensive Complaint Management Program

A comprehensive complaint management program consists of the following: policies and procedures; clear channels of communication; an investigation process; written response; maintaining records; corrective action; and retaining, organizing and analyzing complaint data.

A credit union's written policies and procedures regarding the handling of complaints is critical in creating fair, consistent and timely resolution of complaints. A credit union may also want to establish policies and procedures for both complaints received from a member directly, as well as a complaint received from a regulatory body.

The Office of Consumer Financial Protection and Access's guidance recommends establishing channels to receive member complaints and inquiries such as telephone numbers or email addresses dedicated to receiving this type of correspondence.

After a credit union receives a complaint, the method of investigation depends on the nature of the complaint. However, an investigation may include: interviewing the member; reviewing the member's account information and history; interviewing appropriate credit union officials and staff; reviewing pertinent written and unwritten policies and procedures; reviewing multiple loans to determine the actual practices of the credit union; and reviewing relevant laws and regulation.

Once the investigation is complete, both the supervisory committee guide and the OCFPA recommend that responses to complaints be provided to the member in writing. A written response allows the credit union to explain the resolution of the complaint to the member in a precise and clear manner, as well as creating a record of the date and manner in which the complaint was resolved.

If the investigation of a complaint leads to the discovery of illegal, improper, unfair or discriminatory practices at the credit union, it is critical that the discovery leads to change in that practice. The credit union may also consider developing procedures to address or correct illegal or improper practices. For example, a credit union's recommendation for corrections could include a change to policies and procedures, additional compliance training and monitoring, and updating tools, systems and written materials.

Lastly, collecting and logging complaint data has the potential to reveal a wealth of information. The credit union may want to consider refining its data indicators to better categorize, organize, and analyze complaint data. Theoretically, analyzing complaint data provides a credit union with the opportunity to address trends, isolate areas of risk, identify weakness in controls and self-identify compliance violations.

A comprehensive complaint management system can lead to cost efficiencies by preventing member loss, allowing for self-identification and correction of regulatory violations, and preventing litigation by preemptively fully resolving member complaints.

Please see the Office of Financial Protection and Access for additional complaint management guidance: https://www.ncua.gov/About/leadership/Pages/consumer-protection.aspx

Changes to Foreign TIN Collection Requirements for IRS W-8BEN Form

Written by Stephanie Lyon, Regulatory Compliance Counsel

Back in January 2017, The IRS made a few modifications to its Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting for Individuals (W-8BEN form). This form is filled out and returned to credit unions by individual nonresident aliens who are the beneficial owners of an amount subject to withholding. Sources of income that non-resident members may receive from the credit union subject to withholding can be dividends. This is why many credit unions try to obtain a W-8BEN form when a nonresident member opens a share savings account.

While NAFCU Compliance team does not have expertise in tax law, we thought it may be helpful to highlight some of these changes as many credit unions serve international members. For more complex tax law issues, the credit union may want to consult with its tax attorney/professional. The IRS also has a hotline service that is free and available to tax reporting credit unions and may help answer questions on IRS regulations and guidance documents—1-866-455-7438.

The final rule implemented by the IRS requires that credit unions obtain certain information from individual nonresident aliens such as their foreign tax identifying number (TIN) and date of birth on a withholding certificate. See, Instructions for Form W-8BEN (Rev. July 2017). Here is an image of Part I to the form where this information can be recorded:

Beginning in January 2018, if a member does not have a foreign TIN the credit union will be required to obtain a "reasonable explanation" as to why this information was not collected. See, 82 Fed. Reg. 2051. So what exactly is a "reasonable explanation"? According to the 2017 instructions, a reasonable explanation for not providing a foreign TIN could be the following:

… a statement that you are not legally required to obtain a TIN in your jurisdiction of tax residence. The explanation may be written on line 6, in the margins of the form, or on a separate attached statement associated with the form. If you are writing the explanation on line 6, you may shorten it to “not legally required.” Do not write “not applicable.” In addition, if you are not using this form to document a financial account described above, you may provide the TIN issued to you by your jurisdiction of tax residence on line 6 for purposes of claiming treaty benefits (rather than providing a U.S. TIN on line 5, if required).

Under the IRS instructions, if a member is a resident of country that does not issue TINs (i.e. Cayman Islands, Bermuda and Montserrat), a reasonable explanation may look like this:

It is important for credit unions to understand this new requirement as the IRS makes the credit union liable for the withholding and collection of the tax. See, 26 U.S.C. § 1474(a). In the case that the requirements for waiver of withholding are not met, such as when a W-8BEN is not filled out or is improperly filled out, the credit union must collect the full 30 percent tax. 26 U.S.C. § 1472(a)(2). The instructions on the W-8BEN form states:

…Failure to provide a Form W-8BEN when requested may lead to withholding at the foreign-person withholding rate of 30% or the backup withholding rate under section 3406.

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I know IRS rules can be somewhat dry so I am sharing a picture of my younger sister (who is visiting from Spain for the rest of the summer) and the activities we did on our recent trip to NYC. We had incredible Italian food, saw Anastasia on Broadway and took every tour imaginable—all in 36 hours! Talk about enjoying every minute of the day…

Next week, I am taking her to Universal Studios in Orlando. We cannot wait to visit the Wizarding World of Harry Potter^TM where we will meet up with my older sister who's already scouted out the theme park for us:

Breaking Down the TRID Fix: It's the Same with Affiliates, Only Different

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

As we tackle the painful job of picking apart the CFPB's TRID "Fix" final rule, we are reminded again of the Bureau's deep appetite for technical minutiae. It's a regulation in the style of ancient filigree, complex to behold and not particularly easy to use. Identifying and absorbing these hyper-intricate changes is just step one in the mission to actually understand what will change for credit unions who have to use this rule.

So, today, we are going to look at one piece of the amendments: clarification regarding costs paid to affiliates for which there is no applicable tolerance.

Paragraph 19(e)(3)(iii) Amounts Paid To Affiliates

Paragraph 19(e)(3)(iii) is the paragraph that describes the five categories of charges for which there is no applicable tolerance or comparison to the Closing Disclosure to determine good faith. Currently, it reads like this:

"(iii) Variations permitted for certain charges. An estimate of the following charges is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount paid by the consumer exceeds the amount disclosed under paragraph (e)(1)(i) of this section:

(A) Prepaid interest;

(B) Property insurance premiums;

(C) Amounts placed into an escrow, impound, reserve, or similar account;

(D) Charges paid to third-party service providers selected by the consumer consistent with paragraph (e)(1)(vi)(A) of this section that are not on the list provided pursuant to paragraph (e)(1)(vi)(C) of this section; and

(E) Charges paid for third-party services not required by the creditor. These charges may be paid to affiliates of the creditor." 12 C.F.R. § 1026.19(e)(3)(iii) (Emphasis added).

As you can see, the phrase "[t]hese charges may be paid to affiliates of the creditor" is attached only to subparagraph (E). In the proposal, the Bureau stated:

"The Bureau understands that there is uncertainty whether all five of the § 1026.19(e)(3)(iii) categories include charges paid to affiliates of the creditor or if only the § 1026.19(e)(3)(iii)(E) category (i.e., charges paid for third-party services not required by the creditor) includes charges paid to affiliates of the creditor. The Bureau believes there are reasonable arguments to support either of those interpretations under the current rule but is proposing to change the rule prospectively so that all five categories expressly include charges paid to affiliates." 81 Fed. Reg. 54332.

In exchange for choosing the more expansive of these possible interpretations, the CFPB is adding a caveat: a charge paid to an affiliate must be "bona fide" in order for it to have no applicable tolerance rules. The Bureau stated that this addition was intended to limit any potential harm associated with allowing variations without regard to tolerances on charges paid to affiliates.

In the final rule, the Bureau moves the phrase addressing affiliates out of sub-paragraph (E) and into paragraph 19(e)(3)(iii) itself, and adds the language about the charges being bona fide:

"(iii) Variations permitted for certain charges. An estimate of any of the charges specified in this paragraph (e)(3)(iii) is in good faith if it is consistent with the best information reasonably available to the creditor at the time it is disclosed, regardless of whether the amount paid by the consumer exceeds the amount disclosed under paragraph (e)(1)(i) of this section. For purposes of paragraph (e)(1)(i) of this section, good faith is determined under this paragraph (e)(3)(iii) even if such charges are paid to affiliates of the creditor, so long as the charges are bona fide: […]" 81 Fed. Reg. 37768 (Emphasis added).

The final rule also adds new comment 4 to paragraph 19(e)(3)(iii), which describes that a charge is bona fide if it is "lawful and for services that are actually performed."

The comment also reinforces that just because a charge has no applicable tolerance does not mean it is automatically in good faith under section 1026.19(e)(3)(i). The charge must still be consistent with the best information reasonably available to the creditor at the time the disclosure is provided. The existing commentary to section 19(e)(1)(i) directs readers to the commentary to section 1026.17(c)(2)(i) for an explanation of that standard.

The good news is that more fees may not be subject to a tolerance requirement for good faith analysis. The bad news is that there is now yet another hoop in the TRID rules to push a fee through before it can be confidently charged to a borrower. But credit unions and their affiliates are not in the business of charging their members illegal or sham fees, so this one should be relatively painless.

We Need You! NAFCU's Annual Federal Reserve Survey

Written by Pamela Yu, Special Counsel for Compliance and Research

We need your help! Yes, you!  Please make your voice heard by completing NAFCU's Annual Federal Reserve Survey.

What is it?

Since 1992, NAFCU's Board of Directors has met yearly with the members of the Board of Governors of the Federal Reserve System to discuss issues of mutual interest and concern affecting credit unions.  For example, among other things, NAFCU provides information to the Fed on credit union financial conditions, credit union service to members and use of Fed services, key legislative and regulatory issues facing credit unions, and other critical topics of importance for that particular year. 

In preparation for the annual meeting NAFCU produces a written report for each yearly session detailing the latest issues and trends affecting credit unions and the impact of Fed actions. NAFCU's Annual Federal Reserve Survey is an annual assessment of NAFCU members covering the topics discussed in the annual NAFCU Report on Credit Unions.  NAFCU's 2016 Report on Credit Unions was referenced by the Treasury Department in their recent study, which contained a number of credit union-specific and NAFCU-backed recommendations aimed at fostering credit union service to members and communities.

The 2016 NAFCU Report on Credit Unions highlighted a number of areas of concern for credit union compliance officers.  For example, our 2016 report emphasized that credit unions are significantly hindered by regulatory burden and growing compliance costs:

"91.1% of respondents to NAFCU’s 2016 Federal Reserve Meeting Survey cited 'total compliance activities' as an area in which significant expense increases are necessary for the near-term. While smaller credit unions continue to disappear due to the growing burden, all credit unions are finding the current regulatory environment challenging. Credit unions did not contribute to the financial crisis yet are still subject to increasing regulatory requirements mandated under the Dodd-Frank Act."

Our 2016 report also highlighted our members' concerns with respect to the following regulatory and compliance issues:

Federal Reserve

• Payments
• Debit Card Interchange Fees
• Regulation D
• Regulation CC

Consumer Financial Protection Bureau

• Unfair, Deceptive, or Abusive Acts and Practices
• Debt Collection
• Qualified Mortgages
• Mortgage Servicing
• Reputation Risk
• Remittances
• Home Mortgage Disclosure Act Requirements
• Privacy
• Overdraft
• Payday Lending
• Arbitration

National Credit Union Administration

• Risk-Based Capital
• Investment Authority

Department of Defense

• Military Lending Act

Federal Communications Commission

• Telephone Consumer Protection Act

By drawing attention to these crucial issues, our hope is that the Fed, and other federal financial regulators, can gain a better appreciation for our members' concerns with respect to regulatory burden and the tremendous compliance and operational challenges associated with implementing many extensive and complex rules.

Why does it matter?

NAFCU’s annual meeting with the Federal Reserve is one of the more important ways we ensure that our members’ concerns are heard at the highest levels of government.

Credit unions have always been some of the most highly regulated of all financial institutions, facing restrictions on who they can serve and their ability to raise capital. Additionally, there are many consumer protections built into the Federal Credit Union Act, such as the only federal usury ceiling on financial institutions, the statutory prohibition on prepayment penalties, and the arbitrary cap on credit union member business lending.  Despite the fact that credit unions are already heavily regulated and did not cause the financial crisis, they are still laboring under the weighty regulatory burden in the post-Dodd-Frank environment. Small credit unions, in particular, struggle to afford costly compliance expenses. Those that cannot keep up with ballooning compliance costs have disappeared due to merger at an alarming rate—the industry continues to lose roughly one credit union per day.

Now, more than ever, credit unions' voices must be heard.

Participate in NAFCU's 2017 Annual Federal Reserve Survey

In preparation for NAFCU’s 2017 meeting with the Federal Reserve, we would like your credit union's feedback on a variety of topics, including lending, liquidity and housing conditions, as well as a number of regulatory issues and strategic challenges. Your responses to these survey questions are very important to both the Federal Reserve Board and to credit union advocacy efforts.  Every survey response is helpful and greatly appreciated! Please participate today, or pass the survey along to the appropriate personnel within your credit union.

The survey results will be summarized the 2017 Report on Credit Unions. Participants will receive a free copy of the 2017 report later this year.

The deadline for the survey is August 25, 2017. Participants can either complete the survey online or download a fillable pdf version.

We look forward to hearing your thoughts!

Law Enforcement to Financial Institutions: SARs Are Being Used to Put Away the Bad Guys; MLA Update

Written by Shari R. Pogach, Regulatory Paralegal

Last week, several of my NAFCU colleagues and I attended the 11^th Mid-Atlantic Anti-Money Laundering Conference, a multi- day symposium held here in Washington, DC, and presented by the FBI, ICE, U.S. Secret Service, IRS and DEA.  This conference is a useful one in that it gives financial institution attendees the opportunity to hear law enforcement cases that illustrate how the "bad guys" are using the U.S. financial system to launder their ill-gotten proceeds.  It's also helpful to hear that the information you all submit doesn't just disappear into a black hole. 

The information provided in Suspicious Activity Reports (SARs) is useful and appreciated.  During the conference, multiple law enforcement investigators noted how important SARs are to their investigations and in one illustrated case, a SAR was the actual trigger for the investigation.  Whether a SAR starts an investigation or enhances an ongoing one, law enforcement stresses that such information sharing is vital.

Some additional takeaways from the conference:

Trends in Red Flag Activity

• Third party service providers and facilitators are moving monies for everyone – the provider simply wants the commission.
• In some cases a third party may have been with an institution for years – look for a sudden spike in activity as it may now be being used as a shell company for money laundering.
• Newly created companies with a great deal of account activity could be a possible indicator of fraudulent activity.
• Sudden usage of dormant accounts – law enforcement sees dormant accounts as vulnerable for fraudulent activity.
• Trade based money laundering, such as textiles, phones, vehicles and electronics, is growing.
• Think about when your institution's systems are sleeping – this vulnerability was handily used in the Bangladesh Bank heist, i.e., weekends, holidays and time zone differences.
• Employee benefit plan and trust fraud – fraud is ripe in instances where there is a single plan administrator. Look out for transactions making no business sense or sudden stoppage of deposits as funds could be improperly rerouted. There is no reason for funds to be transferred out of a pension plan. 
• While it is not illegal for a doctor's office to accept cash payments, it is a little strange especially if the amounts are quite high.
• Commodity purchases are being financed through financial institutions with the repayments being made with drug proceeds. How often do you review your repayments as opposed to deposits?

Maintaining a Strong BSA/AML Program

• Be proactive, not reactive!
• Understand the nature and purpose of your member's business.
• What triggers the re-categorization of your member from low risk to high risk?
• Make sure your BSA staff has the proper stature and influence within your institution. They should be involved with product and member/customer development.
• Your internal controls must not remain static in conjunction with your institution's risk profile.
• Update and evaluate your systems continuously – the robustness and effectiveness must be ongoing along with ongoing validation of rules.
• There should be clear elevation protocols and procedures for reporting of issues.
• Geographic risk must also be taken into consideration even by smaller financial institutions.

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MLA Update.  The Department of Defense informed NAFCU in a letter that, at this time, it would not delay its October 3 implementation date for credit card compliance under the Military Lending Act rule. More details can be found in this NAFCU Today story, here.

Significant Changes Require Advance Notice: What’s Significant?; Fiduciary Rule Delay Update

Written by Jennifer Aguilar, Regulatory Compliance Counsel

For one reason or another, credit unions often find themselves updating their credit agreements. Inevitably, this leads to the all-important question: Do I need to tell members before I make this change? While it is generally a good idea to inform members of changes to their credit agreements, Regulation Z has specific rules for when a credit union must provide advance notice – any significant change requires advance notice. So, the next question is: What's a significant change?

While Regulation Z covers various types of credit, this post focuses on the change in terms rules for open-end credit that is not secured by a home. Section 1026.9(c)(2)(i)(A) states that when a "significant change in account terms" is made, a credit union is required to provide written notice at least 45 days prior to the change taking effect. In the real world, we all have a general understanding of what significant means, but, under Regulation Z, this is a defined term with a very specific meaning that does not necessarily align with our real world understanding. Paragraph (c)(2)(i)(A) points you to another paragraph for the definition of significant changes and that paragraph redirects you to yet another paragraph. These incessant cross-references are enough to confuse any diligent compliance officer, so here's the basic starting point: the account opening disclosures.

For open-end credit that's not secured by a home, the account opening disclosure rules can be found in section 1026.6(b). A change to a term required to be disclosed under paragraphs (b)(1), (b)(2) or (b)(4) is defined as a "significant change in account terms."  The definition covers any change to these terms, not just increases or additions. This covers the following terms:

• Periodic rate and APR;
• Fixed finance charge and/or minimum interest charge;
• Transactions charges;
• Grace period;
• Balance computation method;
• Fees for the following events: cash advances, late payments, over-the-limit transactions, balance transfers and returned payments;
• Fees for required insurance, debt cancellation or debt suspension coverage; and
• Certain variable rate information.

In addition to the account opening disclosures, Regulation Z's change in terms rule also includes two other changes in the definition of a significant change in account terms. These are: increases in the required minimum periodic payment and the acquisition of a security interest. For all significant changes, the rule requires 45-day advance notice. The notice must be in writing and state the following:

• A summary of the change;
• A statement that changes are being made;
• For non-credit card accounts, a statement that the consumer has the right to opt out of the change;
• The date the change is effective;
• A statement that additional information about the change can be found in the notice, if applicable; and
• For APR increases:
• the balances to which the new rate will apply,
• if a penalty rate applies at the time, a statement that the new rate will not apply until the penalty rate no longer applies, and
• for credit card accounts, a statement of reasons for the rate increase.

There are account opening disclosures relating to some charges that may not require a 45-day advance written notice, but could still require notice before the member "becomes obligated" to pay the charge. These charges are detailed in section 1026.6(b)(3) and include certain finance charges; taxes; charges that affect the member's access to the plan; termination charges and charges for voluntary credit insurance, debt cancellation or debt suspension coverage. For changes to these charges, the rule requires a credit union to either comply with the 45-day advance notice requirement or provide notice before the member must pay the charge. Decreases to these charges do not require notice. For more details, see section 1026.9(c)(2)(iii).

There are also a few related items to keep in mind when dealing with changes in terms. The right to reject for credit card plans applies to significant changes in account terms. The change in terms rule excludes certain changes from the 45-day notice requirement such as changes the member agreed to and rate increases due to delinquency, default or as a penalty. These changes have their own notice requirements. There is also a separate notice rule for decreasing a member's credit limit. Finally, there is a list of changes that do not require advance notice detailed in section 1026.9(c)(v) which include "reduction of any component of a finance charge," extension of the grace period, and some situations where the line is suspended or terminated.

NAFCU members can find more resources related to change in terms notices in this past Compliance Monitor article.

* * *

On Wednesday, the Department of Justice filed a notice of plans to delay implementation of three fiduciary rule exemption changes from Jan. 1, 2018, to July 1, 2019. More details on this notice can be found in yesterday's NAFCU Today. NAFCU will keep its members posted as more information is released.

HMDA – Lessons from the CFPB's Recent Webcast; LEI FAQs

Written by Brandy Bruyere, Vice President of Regulatory Compliance

Some of you may have tuned in to the CFPB HMDA webcast that NAFCU hosted last Thursday (available on demand here and free for both members and nonmembers). Michael Byrne, project director in the CFPB's Technology and Innovation Division, provided an overview of the CFPB's new web-based HMDA data submission tool. Here are a few of the FAQs that seem worth sharing based on the webcast, with summarized answers.

Question- We use different loan platforms for our closed-end mortgages, HELOCs, and business loans, and each system produces its own set of data. Will the new system allow credit unions to submit multiple LARs and stack the documents within the application?

Answer – The new system will not accept multiple LARs so credit unions will need to aggregate all the data into one document before uploading to the new filing application. Also, every time a new file is uploaded, the application will overwrite the previously submitted file.

Question – We currently input LARs manually for some kinds of loans because our volume is not that high. Will we need software now to create LAR files?

Answer – The CFPB created an Excel based LAR Formatting tool on its HMDA for Filers webpage which will help with these kinds of situations. The tool can be downloaded here.

Question – How many individual log ins does the new system allow a credit union to create? Can the credit union allow third-party vendors to access the application?

Answer – The new application leaves it to the credit union to determine how many users can log into the system and whether or not to allow any third parties to have access.

Question – Will the system allow for administrator-level type privileges to be designated so the credit union can delete the log on files for employees who have left the credit union, limit access for some personnel at some points in the process, and similar situations?

Answer – At this time, the system is not configured for this kind of feature.

Question – When will we have access to the 2017 HMDA submission platform?

Answer – The tentative production schedule has the beta version of the 2017 submission platform becoming available sometime in the third quarter of 2017 and the final version available sometime in the fourth quarter 2017. On a related note, the previously promised check digit tool and geocoding tool are also tentatively scheduled to be available in fourth quarter 2017. The production schedule, which was provided in the handouts to last week's webcast, can be downloaded here:  Download HMDA Tools Production Schedule. (Editorial note – we've blogged about these "missing" tools in the past so we appreciated this news).

The webcast covered many more questions than these and in some cases added additional details. If you missed it or there is someone in your credit union that handles HMDA filing and would benefit from more information, please feel free to share with them.

***

LEI Questions. Recently, a member shared some insights about the process for registering for a Legal Entity Identifier with the GMEI Utility (note, Bloomberg is also offering an LEI service). Overall, there are questions that do not seem to apply to credit unions, like the name of the "ultimate parent" or the "registration authority" of the organization. While Bloomberg had response options like "no known person" some of these issues seemed less clear for using GMEI's system. I sent a couple of questions to their customer service email address, and thought I would share their answers.

Question – For some states, under "03. Entity Information," there is a "Registration Authority ID" for Alaska, California, Montana, Nebraska, and Utah. Federal credit unions are not incorporated under state laws like other US entities as they are federally chartered. Would federal credit unions from these states just put "not available" even if they operate in one of these 5 states?

Answer – "The Registrations Authority ID pertains to the relevant state business or regulatory registry the entity is listed with. The choices for this field are currently limited; for a credit union I would advise selecting “Not Available” from the drop down."

Question –  Federal credit unions that seem to have successfully registered for an LEI have answered the question about "ultimate" and "direct" parent listings as "opt out" and then "no known person" but some have asked whether this is actually accurate.

Answer – "…if you are at all unsure about what to select for parentage, you choose to “OPT OUT” of providing both direct and ultimate parent information. Please then select the reason as “NO LEI” and you should be able to proceed to the next section. Please find a direct link to our FAQ documents below which includes guidance on Level 2 data; opt out reasons are found under the heading “What if I am not able to provide this information?”:

https://www.gmeiutility.org/frequentlyAskedQuestions.jsp"

Question –Does GMEI Utility send an email or other notification/reminder that the LEI is up for renewal before the year mark, or is the entity responsible for keeping track of that date itself and following up accordingly next year to renew?

Answer – "The [credit union's] contact will receive automated renewal reminders approximately 60 days prior to the next renewal date. Further reminders will subsequently be sent 30 days, 15 days, 10 days, 5 days and 1 day prior to renewal."

Overall, I found GMEI Utility to have a helpful customer service option, although it did take about two weeks to receive a response. For those using Bloomberg, they have a 24 page User Guide and their own email address to contact for help – [email protected].

***

Palate Cleanser. It's been a while since I've posted a Nolan/Lemmy update. Lemmy turns 6 this month, but for a big guy he's still in pretty good shape. Here he is trying to pretend he does not want to steal my dinner. Meanwhile, Nolan is turning the corner towards 3 and since he's so active, he's in toddler soccer!

  

CFPB: "Hello, hello. It's Pay by Phone Fees and UDAAP"

Written by: André B. Cotton, Regulatory Compliance Counsel

Recently, the CFPB issued a Compliance Bulletin that provides guidance to credit unions regarding fee assessments for pay-by-phone services and the potential for unfair, deceptive, or abusive acts or practices (UDAAPs) when assessing phone pay fees. The Bulletin also provides guidance to debt collectors about compliance with the Fair Debt Collection Practices Act (FDCPA) when assessing phone pay fees.

The CFPB's Compliance Bulletin summarizes the current law, highlighting relevant examples of conduct observed during supervisory examinations and enforcement investigations that may violate Federal consumer financial law. Today's post will provide an overview of some of the CFPB's fact specific examples.

Background

The CFPB has observed across various consumer financial products and services, many financial institutions provide consumers with multiple payment options. For example, a credit union may provide its members the option of making payments over the phone by using an automated system or speaking with a live representative. A credit union may also provide members the option to make phone payments by using a debit card, electronic check, or to have their payment expedited. A number of financial institutions also use third-party service providers to handle and process the payments.

Examples of Conduct that May Violate or Risk Violating the Prohibition on UDAAPs

Pursuant to the Dodd-Frank Act, "an act or practice is unfair when (i) it causes or is likely to cause substantial injury to consumers; (ii) the injury is not reasonably avoidable by consumers; and (iii) the injury is not outweighed by countervailing benefits to consumers or competition." Furthermore, an "act or practice is deceptive when (i) the act or practice misleads or is likely to mislead the consumer; (ii) the consumer's interpretation is reasonable under the circumstances; and (iii) the misleading act or practice is material" The CFPB notes that UDAAP violations depends on the facts and circumstances. Below, I have included a non-exhaustive list of examples of conduct related to phone pay fees.

Failing to Disclose the Prices of All Available Phone Pay Fees When Different Phone Pay Options Carry Materially Different Fees

For example, the CFPB has noted that many financial institutions charge different phone pay fees depending on the payment method. Some financial institutions send periodic billing statements or other documentation that discloses that "transaction fee may apply" to various payment methods, but the statements do not disclose the relevant fees to be charged for those methods. In some other instances, a financial institution may solely depend on phone representatives to disclose the relevant fees before the charge is imposed. However, in some cases, the phone representatives only reveal the higher-cost options. Consequently, this conduct poses a risk of an unfair practice.

Misrepresenting the Available Payments Options or that a Fee is Required to Pay by Phone

In an enforcement action, the CFPB alleges that a mortgage servicer engaged in a deceptive practice by misrepresenting to consumers, both expressly and by implication, that a particular pay-by-phone option was the only available payment method, or that consumers must use the particular pay-by-phone option in order to avoid negative consequences, including incurring a late fee or even facing foreclosure. To the contrary, in this case, the servicer accepted several payment options free of charge.

Failing to Disclose that a Phone Pay Fee would be Added to a Consumer's Payment could Create the Misimpression that there was No Service Fee

For example, a member owes a payment of $300. The member calls and tells the credit union's customer service representative that he will pay by phone. The member customer service representative confirms that the member borrower authorizes a payment of $300. In fact, the member's checking account is debited $315, which is the $300 for the otherwise applicable payment amount and $15 for a pay-by-phone fee.

Lack of Employee Monitoring or Service Provider Oversight may lead to Misrepresentations or Failure to Disclose Available Options and Fees

A number of financial institutions have policies and procedures that direct live representatives to disclose all available phone pay options and fees. Many entities even provide representatives with detailed phone scripts. Unfortunately, when live representatives veer off-script, they potentially misrepresent available phone payment options and fees. This may result in members being charged higher fees than otherwise would have been applicable. The CFPB recommends adequate monitoring can reduce the risk of misrepresentations.

Examples of Conduct that May Violate or Risk Violating the FDCPA

Pursuant to Section 808(1) of the FDCPA, "a debt collector may not collect any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law."

CFPB Supervision has noted that one or more mortgage services meet FDCPA definition of "debt collector". Thus, when these mortgage servicers charged fees for taking mortgage payments over the phone, they violated the FDCPA because the mortgage instruments did not expressly authorize collecting such fees. As a result, the CFPB instructed the mortgage servicers in question to review mortgage notes and applicable state law, and to only collect pay-by-phone fees where expressly authorized by contract or state law.

The Bureau's Expectations

The CFPB expects entities to review their practices on charging phone pay fees for potential risks of committing UDAAPs or violating the FDCPA. Credit Unions may consider the following suggestions in assessing whether their practices present a risk of constituting a UDAAP or FDCPA violation:

• Review applicable law (state, federal, FDCPA) to confirm whether the credit union is permitted to charge phone pay fees
• Review debt agreements to determine whether such fees are authorized by contract
• Review internal and third-party vendor policies and procedures on phone pay fees
• Review whether information on phone pay fees is shared with the membership (i.e. account disclosure, periodic statements, payment coupon books, on the company's website, over the phone, etc.)
• Incorporate pay-by-phone issues in regular monitoring or audits
• Review member complaints regarding phone pay fees
• Perform regular reviews of third-party provider practices
• Ensure that the credit union has a corrective action program to address any identified violations and reimburse members when appropriate

The CFPB will continue to closely review the practices of entities charging phone pay fees for potential UDAAPs and FDCPA violations. The CFPB will use all appropriate tools to assess whether supervisory, enforcement, or other actions may be necessary.

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Last week, I attended NAFCU Risk Seminar in Denver, Co. I learned a lot, and I am now André B. Cotten, Esq., NCCO, NCRM! Here's a photo from my hike at the Red Rocks Amphitheatre:

 

BSA Concerns: From Under-filing to Over-filing SARs

Written by Stephanie Lyon, Regulatory Compliance Counsel

First of all, I wanted to congratulate our newest class of NCBSOs! NAFCU wrapped its second BSA Seminar in beautiful Colorado last week where several questions were asked and concerns raised that are worth noting. Apparently, the latest issue with Bank Secrecy Act (BSA) examinations seems to surround examiners who believe credit unions may be over-filing Suspicious Activity Reports (SARs). FinCEN addressed this issue back in 2004 when it coined the term "defensive filing" to mean "when an institution files a suspicious activity report on an activity or transaction that really is not suspicious."

Prior to this over-filing concern, credit unions were criticized a couple of years ago for potentially under-filing SARs and CTRs. These over/under-filing concerns are leaving credit unions attempting to comply with BSA requirements feeling a little bit like this:

Before we attempt to understand examiners' concerns, let's start with the basics on SAR filings. Under the BSA, credit unions are required to file these reports in several circumstances. For example, credit unions must file a SAR for insider abuse involving any amount (insiders may include employees, officials, and managers). Credit unions are also required to file a SAR when there is a criminal violation of $5,000 or more and the suspect is known or can be identified. See, 31 C.F.R. § 1020.320(a)(2). In instances when the suspect is unknown, the credit union must file a SAR if the criminal violation amounts to $25,000 or more.

Other SAR triggers include transactions conducted or attempted by, at or through the credit union and aggregating $5,000 or more if the credit union suspects, or has reason to suspect that the transaction may involve potential money laundering or other illegal activity. The same requirement applies if the credit union suspects the member may be structuring to evade BSA reporting or if the transaction has no business or apparent lawful purpose. See, 31 C.F.R. § 1020.320(a)(2)(ii)-(iii). Aside from these required filings, the BSA also allows credit unions to file SARs to "report of any suspicious transaction that it believes is relevant to the possible violation of any law or regulation…" See, 31 C.F.R. § 1020.320(a)(1). This is commonly known as a catch-all provision.

Identifying suspicious activity requires some level of subjective judgement as what may appear suspicious account activity for one member may be normal or have a reasonable explanation for another account. Generally, the Bank Secrecy Officer or SAR committee is in the best position to make the judgment call as to whether transactions require a SAR or simply monitoring. For that reason, guidance from the FFIEC BSA/AML Examination Manual explains that examiners should ensure credit unions establish and implement risk-based policies, procedures and processes to comply with the Bank Secrecy Act instead of questioning individual determinations unless the decisions are egregious. Here is an excerpt from the manual regarding the amount of deference that should be given to SAR decision-makers:

"The decision to file a SAR is an inherently subjective judgment. Examiners should focus on whether the bank has an effective SAR decision-making process, not individual SAR decisions. Examiners may review individual SAR decisions as a means to test the effectiveness of the SAR monitoring, reporting, and decision-making process. In those instances where the bank has an established SAR decision-making process, has followed existing policies, procedures, and processes, and has determined not to file a SAR, the bank should not be criticized for the failure to file a SAR unless the failure is significant or accompanied by evidence of bad faith."

So it is clear for BSA examinations, the role of the examiner is not to comb through all credit union's SARs. Rather examiners are tasked with ensuring the credit union is effectively monitoring accounts and transactions, flagging suspicious activity, and reporting the activity per the SAR requirements. After all, FinCEN even recognizes that a "one-size fits all approach" is not appropriate for suspicious activity monitoring and reporting.

The takeaway here is that in the interest of complying with BSA laws, credit unions should ensure they are filing SARs whenever they suspect illegal activity is involved with an account or transaction(s). This is especially important as FinCEN's recent enforcement actions against financial institutions target BSA program failures to detect and report suspicious activity. For more in-depth information on enforcement actions, see NAFCU's quarterly BSA Blast (member log-in required).

 If your examiner feels the credit union is over-filing, this may be a good time to: (1) have a conversation about the appropriateness of the credit union's internal controls, policies and procedures to identify suspicious activity instead of defending specific decisions; and (2) review the SAR narrative to make sure it is effectively explaining why the activity appears suspicious and drawing contrast to the prior use of the account—which according to the FFIEC BSA/AML Examination Manual, examiners "should not criticize the [credit union's] interpretation of the facts."

The CFPB's Final Arbitration Rule; NAFCU's Annual Federal Reserve Survey

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

On July 10^th, the CFPB finalized its rule on arbitration agreements. On July 19^th, the final rule was published in the Federal Register. If you haven't had a change to read it yet, prepare yourself -- it's already a CFPB classic. The final rule establishes Part 1040, which consists of 5 sections regarding the use of arbitration agreements and reporting of arbitration outcomes.

Despite the fact that it only establishes five sections… it still clocks in at 775 pages, making it longer than Ayn Rand's The Fountainhead (and, coincidentally, just as easy to read). In typical CFPB fashion, just understanding the scope of products and services covered in the regulatory text requires cross-referencing multiple portions of the U.S. Code (which then contain their own cross-references) and multiple regulations. It leaves you feeling a bit like this:

Definitions and Coverage in Sections 1040.2 and 1040.3

The general coverage of the rule (in extreme summary) is anyone that provides financial products or services to consumers primarily for personal, family, or household purposes -- or anyone that offers certain ancillary services to a provider of those products or services to consumers. The definition of consumer refers only to individuals, not legal entities, so the rule would not apply to incorporated member businesses or trusts.

Among the broad list of financial products and services included in coverage is the majority of credit union offerings, including deposit accounts covered by Truth in Savings and/or Regulation E, loans, check cashing and fund transfer services, and automobile leasing. Providers may also be covered if they offer certain ancillary services to institutions that offer these products, like settlement services, loan servicing, consumer reporting and debt collection. For the sake of clarity from here on out, I'm going to refer to credit unions that are providers of covered products and services under Part 1040 as "credit unions."

Requirements of Section 1040.4

Section 1040.4(a) prohibits credit unions from relying on arbitration agreement provisions with respect to any class action suits regarding the products and services that are covered. It also requires that any arbitration agreements contain the following language:

“We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”

There is separate language if the agreement includes products or services not covered by the rule, or if the agreement was originated by another party. The Bureau also offers some fun optional add-ons like:

“This provision does not apply to parties that entered into this agreement before March 19, 2018.”

Section 1040.4(b) contains the requirements for submitting records from court and arbitration proceedings. These requirements apply to any claim filed in arbitration in connection with a covered product or service that has an arbitration provision under Part 1040. In each of these cases, the section requires a credit union to submit:

• The initial claim and any counterclaim;
• Any answers to the above claims;
• The pre-dispute arbitration agreement;
• The judgment and/or award issued by the arbitrator;
• Any communication refusing or dismissing a case due to the credit union's failure to pay fees;
• Any communication from the arbitrator indicating that the arbitration agreement does not comply with applicable fairness principles, rules or other requirements for arbitration; and
• Any court filings relying on the arbitration to support dismissal, deferral or stay.

The section requires these to be provided to the Bureau within 60 days of filing the applicable document with the court or arbitrator, and allows for the redaction of certain information. The Bureau intends to post these records on the internet, and sets deadlines for itself in doing so.

Effective Dates of Section 1040.5

The rule becomes effective 60 days after publication, i.e. September 18, 2017. However, section 1028 of the Dodd-Frank Act, which was the provision requiring the CFPB to consider arbitration agreement regulations, stated that the provision would not apply to agreements until "after the end of the 180-day period beginning on the effective date of the regulation." To accommodate this delay period, the text of section 1040.5(a) specifies that it only applies to pre-dispute arbitration agreements entered into on, or after, March 19, 2018.

There is an exception for agreements already packaged into general-purpose prepaid cards where the consumer for the card is unknown. If the consumer becomes known and the credit union can contact the consumer in writing, it must amend the arbitration agreement to contain the appropriate language within 30 days of obtaining that contact information.

The commentary discusses when a pre-dispute arbitration agreement is "entered into." Obviously, this means when a new agreement is established, but it also includes when a credit union provides a member with a new covered product or service that is subject to a preexisting arbitration agreement, or when the credit union purchases a loan and obtains the rights under a preexisting arbitration agreement.

The commentary also clarifies instances that are not "entering into" an arbitration agreement, including modifying or amending the terms of a current loan subject to a preexisting arbitration agreement.

We are still digesting this rule and, given the Bureau's appetite for hyper-technical requirements, you will probably be hearing more from us on it as we pick it apart.

NAFCU's Annual Federal Reserve Survey

In preparation for NAFCU’s annual meeting with the Federal Reserve, we would like to know your opinion on a variety of topics, including lending, liquidity and housing conditions, as well as a number of regulatory issues and strategic challenges. Your responses to these survey questions are very important to both the Federal Reserve Board and to the credit union community, and every survey response is helpful and greatly appreciated! The survey results will be summarized in our annual Report on Credit Unions, a publication referenced by the Treasury Department in their recent study. Participants will receive a free copy of the 2017 report later this year.

The deadline for the survey is August 25, 2017. Participants can either complete the survey online or download a fillable pdf version.