NAFCU Compliance Blog

Found in NCUA's Own Backyard: Federal Credit Unions Have the Power to Issue and Sell Securities

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

In 2014, NCUA issued a proposed rule amending its regulations to clarify that a federal credit union is authorized to securitize its assets by issuing and selling securities. The proposal sat on the backburner for a few years until recently.

At this month's NCUA Board Meeting, it was clarified that an amendment is not actually needed. NCUA had determined that federal credit unions already have the requisite authority and incidental power to issue securities.

To that end, on June 21, NCUA issued Legal Opinion Letter 17-0670. In this Legal Opinion Letter, NCUA set out a VERY thorough explanation of how it determines what activities are supported by the FCU Act, and why, under this analysis, the issuing and selling of securities meet all the relevant criteria for an incidental power activity.

Securitization of Assets as an Incidental Power

Section 721.2 of NCUA's regulations sets out a three-part test which NCUA uses to determine whether an activity is an incidental power. An incidental power is authorized if it:

(a) Is convenient or useful in carrying out the mission or business of credit unions consistent with the [FCU Act];

(b) Is the functional equivalent or logical outgrowth of activities that are part of the mission or business of credit unions; and 

(c) Involves risks similar in nature to those already assumed as part of the business of credit unions.

NCUA found that issuing and selling securities offers FCUs an important source of liquidity and reduced dependency on share deposits to fund loan demand. It offers flexibility in responding to competition and market demand, making it both convenient and useful to carrying out the business of credit unions.

NCUA also found that securitizing assets can increase the amount of credit available to members and create a vehicle for mitigating risk, making it a logical outgrowth of an important part of credit unions' mission and business: to provide credit for provident and productive purposes.

Finally, NCUA found that the risks associated with issuing and selling securities were the same risks already assumed by credit unions. Specifically, NCUA identified 5 types of risk attached with securitizing assets: credit risk, liquidity risk, reputation risk, operational risk and strategic risk. In each case, NCUA found that the accompanying risks were similar in nature to those risks already faced by federal credit unions.

Having met all three criteria, NCUA determined that the issuing and selling of securities is, in fact, already permitted by the FCU Act and NCUA's rules and regulations. Having made that determination, the Legal Opinion Letter turned to safety and soundness considerations.

NCUA's Expectations for Starting A Securitization Program

The Legal Opinion Letter also set out some expectations for credit unions engaging in asset securitization activities. Below are some expectations for the creation and implementation of a safe, sound and successful securitization program from the Legal Opinion Letter:

• An FCU should consult with legal counsel and other advisors to understand and give due consideration to all legal requirements, including those from other regulators and jurisdictions.
• Management must consider whether securitization policies are realistic and carefully designed to serve the membership.
• The credit union must have developed proper internal safeguards including management oversight, internal controls and quality control.
• Due diligence must be exercised before entering into third party agreements or devoting credit union resources to securitization activity.
• The risks associated with issuing and selling securities must be properly examined and assessed, and appropriate adjustments must be made in the credit union's risk management processes and insurance coverage to appropriately mitigation that risk.
• Section 721.4 requires an FCU to complete and submit an application to NCUA requesting to engage in securitization activity, as it is not an a preapproved incidental power.

We expect further guidance on the topic to be issued by NCUA in the next 3 to 4 months and will keep you updated.

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

Written by Shereefat Balogun, Regulatory Compliance Counsel

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

NCUA Regulations

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

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

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

…

(iii) This section does not prohibit:

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

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

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

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

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

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

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

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

Regulation Z Prohibition on Mortgage Loan Originators’ Compensation Practices

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

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

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

See, 12 C.F.R.§1026.36(a).

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

Preferential Loans to Employees

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

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

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

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

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

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

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

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

 

Department of Labor Drops Fiduciary Duty Rule: What it Means For Credit Unions

Written by Shereefat Balogun, Regulatory Compliance Counsel

As many of you know, the Department of Labor recently issued its Fiduciary Duty final rule. Generally, the rule imposes a fiduciary standard of care on broker-dealers and investment advisers that provide investment advice to retirement plan investors. “But credit unions are prohibited from offering investment advice, why is this important to me?” you ask. Great question! The rule affects investment advisory services provided through vendors and credit union service organizations. As such, a credit union that offers investment advisory services through a third-party arrangement or through a CUSO may want to consider how it structures its agreements, and ensure that its third party brokers are compliant. Moreover, while credit unions may not offer investment advice directly, credit unions may at times provide general education on retirement savings. Therefore, it is important to understand what type of communications a credit union may have with its members about retirement accounts without triggering a fiduciary duty.

First things first. Federal credit unions are not authorized to sell nondeposit securities directly to their members. 12 C.F.R. § 721.3(g) states that a credit union may provide investment services to its members through a third party vendor as a finder activity. Moreover, § 721.6 explains that a credit union may earn income for such services. Also, NCUA Letter to Federal Credit Unions 10-FCU-03 reaffirms that credit unions are not authorized to sell nondeposit investments directly to their members. However, the letter explains that while credit unions cannot sell these investments directly to their members, credit unions may offer these services by employing third party brokerage arrangements. Generally, there are three ways to structure these arrangements: (i) CUSOs; (ii) shared employee arrangements with a third party brokerage firm; and (iii) credit union can act as a finder.

Now moving on to the final rule. We’ll break up the Final Rule to make it easier to digest and create a series of usable tools as you delve into it.

• Here’s a link to the Final Rule. This final regulation defines who is a fiduciary, and includes the preamble with rulemaking background, and a section-by section analysis with the provisions of the final rule and public comments.
• There’s a 3-page summary of the major changes which gives a high-level discussion of the major provisions of the rule. View the overview here.
• The actual regulatory text, which is just 6 pages, can be found here.
• Best Interest Contract Exemption. This document contains an exemption from the general prohibition on fiduciaries receiving compensation from third parties in connection with retirement plans and IRAs.

Here’s our general overview of the rule and its regulatory compliance impact on credit unions. The final rule expands the definition of “fiduciary,” and now includes any person who provides recommendations for compensation with respect to a retirement plan or IRA. It is important to note that only recommendations are subject to the rule. A “recommendation” is any communication that would reasonably be viewed as a suggestion that the investor engage in or refrain from taking a particular course of action. The more narrowly tailored the advice is, the more likely the communication will be considered a recommendation. Notably, the rule does delineate activities that are not considered recommendations, and thus are not subject to the fiduciary requirements, such as education. For instance, financial institutions, including credit unions, can provide general education on retirement savings without triggering fiduciary duties under the rule. Similarly, general circulation newsletters and general marketing materials would not fall into the category of recommendations, and are also excluded from the rule’s scope.

As compliance professionals, we understand the importance of rules. We also appreciate the relief that comes with the exceptions to the rules. The final rule provides the “Best Interest Contract Exemption”, which allows a financial institution to continue to use certain compensation arrangements if it meets certain conditions. For example, the exemption requires the financial institution and the adviser to sign a contract with the investor: (i) acknowledging fiduciary status; (ii) committing to adhere to basic standards of impartial conduct; (iii) committing to adopt anti-conflict policies and procedures; and (iv) disclosing any conflicts of interest and the cost of their advice. Credit unions were concerned about the rule’s impact on situations where a credit union shares employees with a broker-dealer. The preamble appears to suggest that in these circumstances, a credit union would not be required to comply with the exemption requirements. Specifically, the text says that the credit union would not have to act as the financial institution, but the broker-dealer would. Credit unions should remember that a shared employee may provide investment advice when doing so exclusively on behalf of the third-party broker-dealer; but not in the employee’s capacity as an employee of a federal credit union.  Accordingly, any third-party arrangement should be structured to clearly outline when a shared employee is acting on behalf of the broker-dealer and not as a credit union employee. 

For most credit unions offering brokerage services through a third party broker-dealer, compliance with this rule will rest on the third party broker-dealer.  The third party offering retirement or IRA services will be responsible for their own compliance with applicable laws and compliance standards.  However, credit unions want to ensure that contracts with their third party vendors specifically and clearly outline the duties, responsibilities, and liabilities of each party in the arrangement. Similarly, credit unions may want to make sure that it monitors the vendor’s compliance, as with any third party vendor management relationship.  For more information on this rule, NAFCU has issued a Final Regulation which may be helpful.

Also, in case you need a refresher course on NCUA’s guidance concerning credit unions’ ability to offer investment services, please refer to the NCUA letters below:

• NCUA Letter to Credit Unions 10-FCU-03Re: Sales of Nondeposit Investments
• NCUA Legal Opinion Letter 09-0511 Re: Investment Advice Services
• NCUA Legal Opinion Letter 03-0308 Re: Investment Advice and Financial Counseling
• NCUA Legal Opinion Letter 11-0124 Re: Sales of Nondeposit Investments
• NCUA Legal Opinion Letter 03-0736 Re: Providing Investment Services to Nonmembers

NCUA Tackles Packed Agenda at June Board Meeting

Yesterday, the NCUA Board held its June meeting. The agenda for the open meeting included the following action items:

1. Final Rule, Part 710 of NCUA’s Rules and Regulations, Voluntary Liquidations;
2. Proposed Rule, Part 721 of NCUA’s Rules and Regulations, Asset Securitization;
3. Proposed Rule, Part 709 of NCUA’s Rules and Regulations, Safe Harbor;
4. Proposed Rule, Parts 701 and 722 of NCUA’s Rules and Regulations, Appraisals;
5. Request to Convert Charter, Mainstreet Credit Union (Lenexa, Kansas).

Final Rule on Voluntary Liquidations. The Board approved a final rule which, through some technical changes, aims to “reduc[e] administrative burdens on voluntarily liquidating federal credit unions (FCUs) and recognizes technical advances…” Specifically, the final rule will allow those FCUs who voluntarily liquidate to publish required notices to creditors using electronic media instead of only “newspapers of general circulation.” The rule also increases the asset-size thresholds that dictate the number of notices a liquidating credit union must publish under 12 C.F.R. 710.5(a)(1)-(3). Finally, this rule limits preliminary partial distributions to members to the amount the share account is covered by share insurance and allows credit unions the flexibility to make these distributions by wire or electronically.

Proposed Rule on Asset Securitization. The Board also approved the issue of a proposed rule which would allow credit unions to securitize their own loans “as an activity incidental to the business for which an FCU is chartered…” The proposed rule includes multiple requirements credit unions would have to meet to be eligible for such asset securitizations:

• The FCU must have originated the loans;
• The FCU must create a “special purpose vehicle” or “special purpose entity” to hold the assets that serve as the collateral backing the security. The special purpose vehicle/entity must be structured such that its assets cannot be reached by the FCU’s creditors in the case of bankruptcy;
• The FCU must comply with all federal and state laws relating to securitizing transactions;
• The FCU must establish independent risk management and controls related to its asset securitizations;
• The FCU must audit its securitization transactions annually;
• The FCU’s board must have a general understanding of the asset securitization activities and their relation to the credit union’s overall business plan and strategy;
• The FCU’s senior management that oversees the asset securitization program must have expertise in these kinds of transactions and facilitate oversight of third-parties involved in the program;
• The FCU’s board must approve the policy using particularized information and criteria;
• The FCU must utilize effective internal controls to detect errors and ensure compliance with contractual obligations.

The proposal imposes a limit on carried residual interests and retained interests to 25 percent of the credit union's net worth. The Board also approved a proposed rule on Part 709 of NCUA’s Rules and Regulations, Safe Harbor. This directly relates to the asset securitization proposal and addresses the treatment of securitized assets that are transferred to NCUA in the case of the Board acting as liquidating agent or conservator of a FCU.

Proposed Rule on Appraisals. The Board also approved a proposed rule amending three of NCUA’s appraisal provisions. First, the proposal would make a “technical amendment” to 12 C.F.R. 701.31(a)(1) by changing the definition of the term “application.” The rule currently cross-references and quotes the definitions section of Regulation B. The proposal would amend the quotation to reflect the current Regulation B definition.

The proposed rule would also eliminate the requirement at 12 C.F.R. 701.31(c)(5) to give members a copy of an appraisal upon request for first lien loans secured by a dwelling. The reasoning is that this provision is now duplicative given Regulation B’s appraisal requirements. However, members may still request a copy of the appraisal for subordinate loans secured by real estate. Finally, the proposed rule would amend 12 C.F.R. 722.3(a)(5), which relates to appraiser independence, by expanding an exemption. Specifically, the amendment would allow credit unions to refinance or modify existing loans without obtaining a new appraisal, “if there is no advancement of new monies or if there is adequate collateral protection, even with the advancement of new monies.”

Overall, the final and proposed rules are positive for credit unions as the changes either reduce regulatory burden or provide credit unions with additional flexibility in managing their assets. In addition to more detailed blogs, NAFCU’s Regulatory Affairs team will also issue Regulatory Alerts and a Final Regulation on these issues for NAFCU members which will provide particular details on these items.

Still Works for Treats. While we’re sharing positive news, my husband and I discovered this weekend that Lemmy does not like balloons when we used him to help announce some news of our own! We are expecting a baby boy in October, and while Lemmy does appear concerned about this new development, it’s really just the balloons. He was heavily rewarded with his favorite treats for his patience and modeling skills!

NCUA Reveals Regulatory Review Report; NAFCU's 2014 Technology and Security Conference; BSA Blast

Written by Alicia Nealon, Regulatory Compliance Counsel

Last week, NCUA’s Office of General Counsel released  its 2013 Regulatory Review report, concluding its annual review of one-third of  NCUA’s rules and regulations, which this year included CUSOs, appraisals, member business lending and the Central Liquidity Facility. The report confirms that NCUA will be addressing a number of issues that NAFCU continues to fight for to ease regulatory burden on credit unions. Particularly, the Office of General Counsel recommended that the NCUA Board consider eliminating or amending several of the regulations raised in NAFCU’s “Dirty Dozen.” 

For those of you who haven’t had a chance to see it, NAFCU prepared a list of twelve regulations- the “dirty dozen”-  that regulators need to eliminate or amend because they are unnecessary, outdated, or overly burdensome on credit unions. This Regulatory Review report affirms that NCUA is considering a number of recommendations included on the "dirty dozen" list as it reviews possible changes in rules on incidental powers, member business lending and appraisals.

The first of NAFCU’s “Dirty Dozen” is a call to expand credit union investment authority to include permissible investments in derivatives, securitization and mortgage servicing rights. The review notes that the NCUA Board may look into expanding credit unions’ incidental powers in allowing them to securitize their own loans. The agency is also expected to issue a rule on derivatives at the board meeting on Jan. 23.

The report mentions possible updates to the agency’s MBL rule, a change NAFCU pushed for as the fifth of its “Dirty Dozen.” These proposed updates would “reflect the current business climate” and address issues such as calculating market value in construction-related business loans and valuation-related issues. The report also raised the prospect of changes to the MBL rule’s personal guarantee requirement and its two-year direct experience requirement.

Addressing the final recommendation of the “Dirty Dozen,” the report recommends that the Board amend Section 722 to eliminate redundant NCUA requirements on credit unions to provide copies of appraisals upon request. 

Finally, the report acknowledges that the Dodd-Frank Act transferred the Fair Credit Reporting regulation to the CFPB and advises that Section 717 should be transferred to the CFPB. It also gives hope that NCUA may tackle other issues including modernizing advertising rules, and rules on notification of credit unions’ insurance status. 

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NAFCU's 2014 Technology and Security Conference.  NAFCU’s 2014 Technology and Security Conference, which will be held February 11-13 in Las Vegas, is a great place to discover the latest credit union security and technology trends. Conference topics include fraud trends, core processing issues, big data and credit union crisis management.  Check out more information about the conference and register here.

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BSA Blast – The January 2014 edition of NAFCU’s BSA Blast is now available (a NAFCU member login is needed).  This issue is all about enforcement – from FinCEN’s enhanced focus on holding financial institutions responsible for Bank Secrecy Act (BSA) violations and its enforcement action against JP Morgan Chase in connection with the Madoff scandal to recent OFAC enforcement actions against three banks. In addition the issue contains a new BSA quiz for use in staff training.

NCUA’s Final Rule on Charitable Donation Accounts; FHFA's Plan to Increase Mortgage Fees Delayed; Programming Note

Written by Alicia Nealon, Regulatory Compliance Counsel

Happy holidays compliance community!! 

‘Twas the week before Christmas,

When all through this place…

In came a new rule,

Actually bringing a smile to a credit union’s face……

In keeping with the season of giving, the NCUA board voted 3-0 last Thursday to approve its final rule on charitable donation accounts (“CDA”), which is set to take effect upon its publication in the Federal Register.

This final rule establishes new ways in which credit unions may use their preapproved investment powers to support charitable donations and contributions to the community. 

The rule defines CDA as a hybrid charitable investment vehicle that facilitates the charitable activities of federal credit unions by allowing for investments with a higher expected return, within the safe and sound parameters the rule establishes. 

As in the proposed rule, the final rule requires federal credit unions to ensure that:

• A minimum of 51 percent of the total return from such an account must be distributed to one or more 501(c)(3) charities.
• Distributions must be made to qualified charities no less frequently than every five years.
• Assets in a charitable donation account must be held in segregated custodial accounts or special purpose entities regulated by the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission or other federal or state financial regulatory agency.

NCUA, however, has advised that a credit union may make distributions at any time. So, if the credit union is a “victim of success,” and is running the risk of piercing the 5% ceiling, it can make a distribution to the charity. Alternatively, the credit union can make a distribution back onto its books to hold as cash until it wants to put the distribution back into the CDA or make a distribution to charity. 

This new rule expands the charitable opportunities for credit unions within their communities. NCUA’s Rules and Regulations have long recognized an FCU’s authority to make charitable contributions. 12 C.F.R. 721.3(b). Charitable contributions and donations are gifts you provide to assist others through contributions of staff, equipment, money, or other resources. Examples of charitable contributions include donations to community groups, nonprofit organizations, other credit unions or credit union affiliated causes, political donations, as well as donations to create charitable foundations. Charitable contributions, however, must still be necessary or requisite to enabling the credit union to effectively carry on its business. 

Moral of this holiday story, the final rule gives credit unions an opportunity to be a little more jolly, and little less scrooge just in time for the holidays.

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Update on FHFA Plan to Increase Mortgage Fees.  Last Friday, we blogged on the FHFA’s plan to increase Fannie Mae and Freddie Mac's guarantee fees, but later that night, Rep. Mel Watt (D., N.C.), the incoming director of the FHFA, the WSJ reported Watt's announcement that he intends to delay the implementation of an increase in mortgage fees until further evaluation is completed.  This announcement came shortly after NAFCU’s President and CEO Dan Berger sent a letter to FHFA Acting Director Edward DeMarco expressing concerns about the negative impacts of these changes on credit unions and their members. 

Winning! It looks like it really is the season to be jolly! 

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Programming Note.  NAFCU’s offices will be closed this Tuesday, Wednesday, and Thursday (December 24-December 26) for the holidays, but we will be back to blogging on Friday, December 27.  To you and your family, happy holidays! 

 

NAFCU's Regulatory Compliance School Just Got Better - Regulatory Update Day

Written by Steve Van Beek

We've heard you!  For the past couple of years, we've received the following feedback about NAFCU's Regulatory Compliance School (paraphrased, of course):

"School is great and provided a solid foundation for understanding the regulatory requirements credit unions face on a daily basis.  BUT, the rules are changing so fast that it would be great to receive updates on what has just changed and what is changing next."

With this in mind, we've created Regulatory Update Day at NAFCU's 2013 Regulatory Compliance School (March 18-23 in National Harbor, Maryland).  

Regulatory Update Day (Thursday, March 21st) will provide:

• A clear understanding of what changes NCUA has in store for 2013 – including their Exam Focus

• An overview of the scope and applicability of the CFPB’s seven new mortgage regulations*

• A detailed look at the CFPB’s Qualified Mortgage/Ability-to-Repay requirements*

• Answers to Frequently Asked Questions on the mortgage rules from NAFCU’s compliance team*

• Insight from credit union attorneys and practitioners on how best to set up your implementation strategy

You can find more information on Regulatory Update Day here.  The three sessions with the "*" are sessions that are also part of NAFCU's Mortgage Reform Webcast Series.

The other 4 days of Compliance School will remain the same as will the opportunity to take the NAFCU Certified Compliance Officer (NCCO) exams.  Good luck!  

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And, all attendees at NAFCU's 2013 Regulatory Compliance School will receive NAFCU's 2013 GPS (coming soon!) as well as NAFCU's Scope & Applicability Charts.

Remember:  You do not need to be a NAFCU member credit union to attend NAFCU's conferences or webcasts.  In fact, you don't even need to work at a credit union.  Each School usually features a handful of consultants, vendors and other credit union "peeps" who support credit unions - in one way or another - on a daily basis.      

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Credit Card Interchange Settlement; Upcoming NAFCU Webcasts; Caucus Deadline

Written by Steve Van Beek

On Friday, VISA and MasterCard announced a large settlement regarding credit card interchange fees.  This setttlement culminates numerous years of lawsuits related to credit card interchange (which easily predates the Durbin Amendment and the debit card interchange debate).  Numerous news outlets - including the Washington Post - have additional details on the background.  The settlement still needs to be approved by merchants and their class representatives.  

The settlement itself includes:

• $6.05 billion in payments to merchants; 
• A 10 basis point reduction in interchange fees for 8 months (beginning sometime in 2013); and
• Merchants will now be able to apply a "checkout fee" (surcharge) to transactions where consumers pay with a credit card.  

The surcharge was previously prohibited by VISA and MasterCard rules.  There are approximately 10 state laws that would still ban these credit card surcharges - although you can bet merchants will lobby to change those laws.  

For additional details and information, check out the NAFCU Today.  

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NAFCU Webcasts.  I wanted to quickly mention three upcoming NAFCU webcasts that might be of interest.

• July 18th - Using Your Credit Union's Incidental Powers Wisely
• August 8th - Master Your Exam: Issues, Tips and Insight from NCUA
• August 15th - Security Incident Response - Lessons Learned

Additionally, if you missed it - you can still purchase and view the on-demand version of our July 11th webcast - Regulatory Compliance Update: New Developments and Hot Topics - which includes a 30-40 minute overview of the latest mortgage proposals from the CFPB.  Note - the July 11th webcast is 2 full hours.  

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Congressional Caucus.  Friday, July 20th is the last day to Save $100 at NAFCU's Congressional Caucus - September 11-14 in Washington, D.C.  If you or someone at your credit union is planning on attending, now is the time to sign up.  

NCUA Board Meeting; Charitable Activities

Written by Steve Van Beek

Yesterday, the NCUA Board met and announced a 2011 assessement of 25 basis points for the Corporate Stabilization Fund.  NCUA will begin distributing the invoices with the assessment due by September 27.  

The Board also announced a Management and Oversight Committee for the NCUA Guaranteed Notes.  Finally, NCUA proposed a regulation with technical corrections to the Corporate Rule.  Additional information can be found in NCUA's Board Action Bulletin.  

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NCUA also issued additional information on disaster prep and providing assistance and services after disasters.

Included in the information is information about how credit unions can help other credit unions as well as members and non-members in these types of situations.  Specifically, the information indicates:

"Federal credit unions may also provide assistance to other credit unions, their members, and non-members in the affected areas, under certain conditions.

• Emergency financial services for non-members, including check cashing, access to ATM networks, or other services to meet short-term emergency needs of individuals in the areas affected by Hurricane Irene, can be provided under the authority to engage in charitable activities. Federal credit unions providing services on this charitable basis may not impose charges for services that exceed their direct costs.

• A federal credit union may provide services to other credit unions that it is authorized to perform for its own members or as part of its operations. This activity is part of a federal credit union’s incidental powers, so it may impose charges for these services."  

From yesterday's NAFCU Today story (ha!), it looks like NCUA is working on a legal opinion letter to provide additional details in these situations.  

Sorry - after typing that, I had to chuckle.  Just a few more days until college football kicks off!  Remember, everyone is currently undefeated.     

NCUA Happenings

Posted by Anthony Demangone

Here are a few items from NCUA that should be of interest.

First, NCUA released (via its NCUA Express service) a legal opinion letter that addresses the incidental power of "correspondent services." 

You asked if a federal credit union (FCU) could provide the following correspondent services to other credit unions: share draft processing; check collection; ACH origination and receipt; wire transfers; coin and currency; and a line of credit. An FCU may offer lines of credit to other credit unions under its statutory lending authority in the FCU Act. An FCU may provide the other proposed services to credit unions pursuant to its incidental powers authority. 

The letter is a nice overview of the "correspondent services" power, and it is a good reminder of the incidental powers regulation itself. Credit unions have a good deal of flexibility thanks to this rule, so it is worth a read if you haven't poked around in it in a while. 

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NCUA also has a "virtual" town hall coming up on February 17th.  Sign up here.  Here's what you can expect:

The 90-minute virtual Town Hall will feature detailed discussion of NCUA’s initiatives to reform the corporate credit union system, minimize costs to consumer credit unions and promote financial education for volunteers.

Advertisements in Periodic Statements?

Posted by Anthony Demangone

Can a federal credit union place advertisements in their periodic statement?  You bet they can.   You can do it pursuant to your incidental power of "finder activity." 

Finder activities are among the preapproved incidental powers of FCUs. 12 C.F.R. §721.3(f). Under NCUA’s incidental powers rule, an FCU may act as a finder and introduce or bring together its members with third party vendors so the two parties may negotiate and consummate transactions. Finder activities involve providing information to members about the products or services of third parties and include providing advertising space on an FCU’s web site, on ATM receipts, and in a newsletter, or including marketing materials in the mailing of account statements and newsletters.

Now, here's one issue that NCUA didn't address in this letter.  Can you gain income through the use of your "finder activities" incidental power? You bet you can. 

Keep in mind that NCUA raises a good point.  You always want to protect your reputation when deciding whether to run advertisements in your newsletters or periodic statements.  

Free Coin Counting Services

Posted by Anthony Demangone

Recently, NCUA issued Letter to Credit Union 10-0756 (September 22, 2010) to address the permissibility of offering free coin counting services.  The letter addressed a question from a credit union that wanted to offer free coin sorting services to non-profits.  NCUA said it could do so, as discussed in the letter.  But don't get too excited.  You have to read the letter closely.  You may think it gives a green light to the offering of free coin counting services to all non-members. That is not the case.   

First, it is very important to read the first paragraph of legal opinion letters.  This is where NCUA limits the scope of its letter and lays out its findings.  Here's the first paragraph from that letter.

You asked if it is permissible for your federal credit union (FCU) to offer free use of its coin sorter machine to non-member non-profit organizations as a marketing activity to promote membership in the FCU. Yes, as described below, the FCU may provide this free service to non-member non-profit organizations under its incidental powers authority. The FCU may also provide the service as a charitable activity to these organizations.

As you can see, NCUA's letter responded to a question from a credit union regarding non-members who are non-profits. Given that is the case, NCUA holds the following:

1. The credit union could offer the free coin sorting service to these non-profit non-members under its incidental powers authority of "marketing."
2. In addition, the credit union could offer free services to these members as a charitable activity, under NCUA's charitable donations rule.  

Charitable donations.  Federal credit unions have the ability to make charitable donations to certain entities under NCUA's charitable donations rule.  The power is limited, but it does extend to non-profits that do business or are located in the credit union's business area.  The charitable donations power is an interesting angle, but it won't necessarily open up your ability to offer free coin sorting services to most of the non-member consumers in your community.  

Incidental powers.  Here's the text regarding this part of NCUA's analysis.

NCUA’s incidental powers rule authorizes an FCU to engage in certain activities incidental to its business. Marketing activities designed to attract or retain members or encourage use of FCU products and services are among the activities preapproved as an incidental power. 12 C.F.R. §721.3(h). Your described purpose in offering the coin sorting service is consistent with a marketing activity. We note, however, the marketing program should not become a substitute for membership.

Now, even though this letter answers a question regarding non-profits, this paragraph does appear to give guidance that would apply to all non-members.  The theory is this: Under your incidental power of marketing, you offer free coin sorting services to attract people to your branches, bags of change in hand.  But note the last sentence from that paragraph of guidance.  The marketing program should not become a substitute for membership.  Unfortunately, NCUA does not discuss that issue any further.

When does a free service provided under the incidental power of marketing become a substitute for membership?  An older legal opinion may help - NCUA Letter to Credit Union 02-0250.  That letter addressed a question from a credit union that wanted to offer wire services to non-members.  NCUA also mentioned the incidental power of marketing, but they gave a good deal more guidance, noting that the free services must be limited in scope and timing.

Our opinion is that, in the situation you have described of an FCU with a segment of its field of membership comprised of individuals with a special need for wire transfer services and a reluctance to join the FCU, providing wire transfers on a limited basis would be a permissible marketing activity.  The purposes of providing limited wire transfers would be to promote membership and familiarize the users of the service with the benefits of membership.  These purposes are directly consistent with the recognized purposes of marketing activities as stated in the regulation.

The limitations, which would be established by the FCU, should be narrowly drawn and clearly designed to ensure that the marketing program does not become a substitute for membership or result in providing wire transfers on an unlimited or continuous basis.  Appropriate limitations might include placing restrictions on the number of times an individual uses the service, or on the period of time for which the individual uses the service, before joining the credit union.  It should be clear that providing the service is used as an opportunity to promote and encourage membership.  While it is not feasible or appropriate to delineate precise conditions in this letter, it should be clear from all of the circumstances, and from results over time, that the purpose of the program is to bring the individuals into the FCU’s membership.

Providing wire transfers on a limited basis as a marketing activity does not establish a continuing customer relationship between the FCU and the individual.  It is distinguished, in that respect, from establishing a share account or providing a loan, and in our opinion it does not violate field of membership limitations and it does not conflict with the statutory restriction against providing wire transfers as an ongoing or continuous service to nonmembers.

So, according to the 2002 guidance, a free service to a non-member offered under the incidental power of marketing is not a substitute for membership if it is "narrowly drawn" with appropriate limits.  

Conclusion: If your credit union wants to offer free coin counting services to non-members under the incidental powers of marketing, it would be wise to incorporate guidance from both the 2002 and 2010 letters referenced in this blog posting. 

Lock Box Accounting Services OK

Last week (NCUA was busy) NCUA issued a legal opinion letter to clarify that credit unions can offer "lock box accounting services" pursuant to NCUA's incidental powers regulation. You can access the opinion letter here.  In NCUA's words...

In a letter to this office, you stated that your FCU proposes to collect monthly rental payments on behalf of a housing cooperative and apply those payments to the cooperative’s accounts. Also under your proposal, your FCU would pay, from the cooperative’s accounts, certain monthly bills and reconcile the account ledger to the monthly statements.

NCUA defines operational programs as programs that an FCU establishes to deliver products and services to members that enhance member service and promote safe and sound operation. 12 C.F.R. §721.3(j). These programs include pre-authorized member transactions and loan collection services. Id. Accordingly, the services you have in mind on behalf of your member are permissible.

So there you have it.  Here's a link to the incidental powers regulation itself.