NAFCU Compliance Blog

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

Compliance Roundup

Written by Shereefat Balogun, Regulatory Compliance Counsel

Happy Monday ya’ll… and happy November!   October was a pretty busy month on the regulatory side.  We had TRID implementation in the beginning of the month.  A few weeks later, NCUA’s final RBC requirements and CFPB’s final HMDA rule dropped…on the same day!  It was pretty rough.  So to start off the new month, we’re going to keep it light and just give you some compliance tid-bits for your general consumption. 

October Issue of NCUA Report Now Available.  NCUA’s latest report is now available.  The report covers topics such as expansion of the small credit union threshold, NCUA’s plan to acquire vendor authority, and possible field of membership changes.  Some highlights:

• NCUA Board Expands Small Credit Union Threshold to $100 Million- NCUA recently raised the asset ceiling for a “small” credit union from $50 million to $100 million under the Regulatory Flexibility Act.  The change adds 733 more federally insured credit unions to the classification of “small entity”, and thus makes them eligible for special consideration of regulatory relief in future rulemaking and assistance from the agency’s Office of Small Credit Union Initiatives.  The final rule is effective November 23, 2015.
• NCUA Highlights Push for Vendor Authority- NCUA has stated that acquiring vendor authority is one of the agency’s top legislative priorities.  NCUA wants the ability to examine and regulate third-party service providers.  Opponents of this plan argue that it will be another undue burden for credit unions; or that NCUA’s current policies requiring credit unions to exercise due diligence in their monitoring of third-party service providers is sufficient to quell any concerns. 
• McWatters Suggests Field of membership Changes- Also in this issue, NCUA Board Member, J. Mark McWatters explains that the FCU Act can support more flexibility for credit union as it relates to field of membership.  Moreover, McWatters opines that the agency’s current requirements on field of membership go beyond what the FCU Act authorizes.  McWatters challenges the agency to be bold, and present to credit unions a field of membership proposal that will facilitate growth for credit unions.  While acknowledging that the most significant changes on field of membership can only come from Congress, McWatters urges credit unions to agree upon and decide what changes they want to pursue and develop a plan to of action for Congress to consider.

Delegation of Community Charter Amendments.  Speaking of field of membership- NCUA recently issued a final rule relating to the approval of community charters.  We have been asked about how the new rule impacts a credit union’s request for expansion.  The new rule does not change the process by which a community chartered credit union applies for an expansion of its geographic boundaries; rather it transfers the authority to review and approve such requests that may result in a membership pool of more than 1 million people from the NCUA Board to the Office of Consumer Protection (OCP).  NAFCU has put together a summary of the final rule which can be found here.  Here are the highlights of the new Delegation:

• The NCUA Board delegated to the Office of Consumer Protection (OCP) its authority to review and approve community charter expansion requests involving a potential membership pool of more than one million people.
• Under the approved change, the Director of OCP now has the authority to approve all community charter application, conversion or expansion requests.
• OCP is required to request review and comment by the Office of Examination and Insurance prior to making any determination involving community charters with a potential membership pool of more than one million people.
• After approving a community charter conversion or expansion, OCP will continue to follow up with the federal credit union every year for three years to monitor progress.
• The NCUA Board reserves the right to hear appeals of any charter denials by OCP.

CFPB Releases 2016 List of Rural or Underserved Counties.  The 2016 list of rural or underserved counties is now available. What does that mean for you? Some businesses with volume in rural or underserved counties that outweighs volume in other counties are exempt from certain regulatory requirements in “Ability to Repay” and “Qualified Mortgage” standards, as well as escrow requirements, under TILA.   You can find the list here.

NCUA Proposed Rule: Investment and Deposit Activities- Bank Notes.  The NCUA Board proposes to amend the maturity requirement for bank notes to be permissible investments for federal credit unions by removing the word “original” from the current requirement that bank notes have “original weighted average maturities of less than 5 years.”  If this proposed rule is finalized, federal credit unions will be able to purchase bank notes that were originally issued with maturities greater than 5 years, but have remaining maturities of less than 5 years.  There is a 30-day comment period, rather than the traditional 60-day period.  The comment period ends on November 23, 2015.

 See, not too bad! 

 

 

NCUA March Board Meeting: Proposed Fixed-Assets Rule

Written by Victoria Daka, Regulatory Compliance Specialist

In the NCUA’s most recent Board meeting, the NCUA Board approved a proposal providing regulatory relief to thousands of federal credit unions by eliminating certain provisions in the agency’s fixed-assets rule. This proposal, if adopted, as is, would make three changes.

First, the proposal would eliminate the five-percent cap on investments in fixed assets. Thus, the proposal would relieve federal credit unions from the requirement to obtain a waiver to exceed the current five-percent aggregate limit on investments in fixed assets. The rule defines fixed assets as “premises, furniture, fixtures, and equipment, including any office, branch office, sub office, service center, parking lot, facility, real estate where a credit union transacts or will transact business, office furnishings, office machines, computer hardware and software, automated terminals, and heating and cooling equipment.” However, the proposal indicates that examiners would reserve the right to supervise federal credit unions investment levels in fixed assets, as opposed to the regulatory limitation under the current rule.

Second, the proposal would establish a single six year time period for partial occupancy of any premises acquired for future expansion, starting from the date of acquisition.  Under the current rule, a federal credit union must show that it will fully occupy the premises within a reasonable time by requiring the federal credit union’s partial occupancy of the premises within a time period set by the rule.  The rule sets a distinction in the requirements between improved and unimproved property. Specifically, for improved premises acquired for future expansion, a federal credit union is currently permitted up to three years from the date it obtains the property to meet the partial occupancy requirement, unless NCUA grants a waiver.  And for unimproved land or unimproved real property, a federal credit union has six years from the date of acquisition. The proposal would permit federal credit unions up to six years from the date of acquisition to meet the partial occupancy requirement, regardless of whether the premises are improved or unimproved property.

Third, the proposal would eliminate the requirement that a federal credit union apply for a waiver from the partial occupancy rules within thirty months of acquisition. Instead, the proposal would allow federal credit unions to apply for a waiver at any time, as appropriate.

The proposal has a 30-day comment period.

February 2014 NCUA Report; Interest Rate Risk; NCUA Economic Update

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

Recently, the NCUA released its February 2014 report. Featured articles include:

Office of Examination and Insurance Report: Riskier Credit Unions will Need More Capital Under Proposed Capital Adequacy Rule

Chairman’s Corner: Exams are a Two-Way Street

Office of Consumer Protection Report: Get Ready. Military and America Saves Week is Feb. 24 – March 1

Board Perspectives:  Teddy, Moses and Buford; It’s Never too Early to Stop Being Late

Board Actions: Final Derivatives Rule Approved; Board Also Approves NCUA Strategic Plan for 2014-2017; Renews Interest Cap

Office of the Chief Economist Report: Long-Term Investments Resulting in Increased Supervisory Actions

Region III Report: Frequently Asked Questions About Mergers

Office of Examination and Insurance Report: Get a Better Understanding of NCUA’s Capital Adequacy Rule with Our Online Calculator

OSCUI Workshop and CEO Bootcamp Schedule

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Interest Rate Risk. Interest rate risk is a top supervisory focus for NCUA in 2014, as noted in Letter to Credit Unions 14-CU-02.  Along these lines, the article in NCUA's February 2014 report from the Office of the Chief Economist, Long-Term Investments Resulting in Increased Supervisory Actions, notes that supervisory action has been necessary in some “outlier” cases, and cautions credit unions in managing their interest rate risk.  From the report:

“For credit unions, investments are primarily meant to be safe places to store excess liquid funds. Once liquidity objectives are satisfied, investments also serve as a source of additional income to augment core earnings. The recent shift toward longer-term investments may indicate a trend away from liquidity management toward yield by taking on more risk.

‘The concern is that credit unions are reaching for yield in order to supplement earnings,’ NCUA Chief Economist John Worth said. ‘It is an understandable response, given the compression of net-interest margins in the low-rate environment. But the nature of the interest-rate environment, along with credit unions reaching for yield, has the potential to create a perfect storm that could have a substantial drag on future earnings, and make some credit unions insolvent.’ The pace of these portfolio changes has Worth and Cole concerned that credit unions are increasingly ignoring the perils of interest-rate risk in order to meet current earnings objectives. In the past year alone, while total investments have remained at 28 percent of assets, investments with maturities of less than three years dropped 11 percent or $20 billion, while investments with maturities of more than three years rose 33 percent or $30 billion.

[…]

The current interest rate environment—with short-term rates near zero and long-term rates at historic lows—is unprecedented. As a regulator, NCUA does not have a specific view on interest rates. Instead, NCUA believes credit unions’ balance sheets should be resilient in a wide variety of rate environments.

However, given the unusually low current interest rates and the recent improvements in the economy, there is much evidence to suggest that a transition to a rising and more volatile interest rate environment is already underway. Therefore, especially in the near term, credit unions should pay particular attention to their exposure to rising rates.

NCUA strongly urges credit unions not to forsake the role of liquidity in investment-portfolio management or to ignore interest rate-risk implications if they invest in higher-risk instruments to maximize current income.”

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NCUA Economic Update Video.   Last week, NCUA released its latest economic update video. In addition to reiterating interest rate risk concerns, the video discusses the labor market and consumer spending. The video is available on NCUA’s YouTube channel here.

What's the Deal with Derivatives?

Written by Brandy Bruyere, Regulatory Compliance Counsel

After gathering comments in the rulemaking process and a lengthy pilot program, the NCUA Board finalized the derivatives rule in January. This rule allows qualified credit unions to trade in certain derivatives for the purpose of mitigating (i.e. “hedging”) interest rate risk (IRR). The rule is complex, so this blog post will only provide a very broad overview of the rule in terms of what is a derivative, which credit unions can trade in them, and how a credit union can receive approval to trade.

First, what is a derivative? NCUA defines a “derivative” as:

“…a financial contract which derives its value from the value and performance of some other  underlying financial instrument or variable, such as an index or interest rate.”

It is also helpful to remember that “derivative” is a catch-all term used to describe several kinds of contracts such as futures, options, and swaps. For a more detailed discussion of derivatives, check out this NAFCU blog post.

While the derivatives world can include many “exotic” instruments, NCUA limited credit unions to a handful of products:

• Interest rate swaps
• Basis swaps
• Interest rate caps
• Interest rate floors
• U.S. Treasury note futures

NCUA further limited credit unions’ use of derivatives by requiring that these derivatives have particular characteristics. For example, the derivatives must serve the purpose of mitigating IRR. Also, the maximum maturity for most derivatives is fifteen years (ten years for U.S. Treasury note futures). Credit unions also cannot invest in collective investment funds that invest in derivatives that are purely speculative—meaning, the derivatives do not hedge any real-world risk.

Second, which credit unions can trade in derivatives? In order to be eligible to use derivatives, a credit union must have at least $250 million in assets and its most recent CAMEL rating must be 1, 2, or 3, with a management component of 1 or 2. Credit unions who do not meet these two requirements but would like to utilize derivatives may request permission from their field director.

Third, how does a credit union receive permission from NCUA to mitigate IRR with derivatives? The rule sets forth a two-step process:

    1.    The credit union must create an IRR mitigation plan and submit the plan to NCUA. Key components of this plan include:

• An explanation of how derivatives fit into the credit union’s IRR plan, including demonstrating a need for derivatives and a justification and statement of use for each derivative product the credit union plans to use;
• A discussion of the credit union’s capacity to manage derivatives and how it plans to acquire the resources required by the regulations such as experienced staff, proper management and internal controls, a legal review, and the necessary policies and procedures.

    2.    After receiving the IRR mitigation plan, NCUA will evaluate the credit union on its actual readiness to trade in derivatives based on the credit union’s personnel, controls and systems in place. Credit unions that are new to derivatives and approved must operate safely for one year under “limited authority” before NCUA will grant full trading authority.

The rules are rather complex and address ongoing regulatory requirements such as limits on the amount of derivatives contracts a credit union can hold and penalties for rule violations. Also, in a move urged by NAFCU, NCUA removed the “pay to play” provision which appeared in the original rule and would have charged credit unions fees to use derivatives. NAFCU members can expect a Final Regulation from NAFCU sometime soon which will provide further details about this rule.

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Winter Weather—With snow in the South and the polar vortexes freezing out much of the country, January was a crazy month for weather. This became a problem for our dog and his “morning ritual.” I would open my back door and he would glare at me, offended that I would ask him to go outdoors in a -8 degree wind-chill. This became a battle of wills, because while mastiffs are generally gentle and loveable, they have quite the stubborn streak. So, we compromised with our spoiled dog:

Natural Person Credit Union Guidance for NCUA’s Final Credit Ratings Rule

Written by JiJi Bahhur, Regulatory Compliance Counsel

In December 2012, NCUA issued a final rule to remove reference to credit ratings in regulations and substitute other standards of creditworthiness that are considered appropriate.  As a result, revisions to NCUA’s investment regulations – Parts 703, 704, 709 and 742 of NCUA’s Rules and Regulations – took effect on June 11, 2013. 

The final credit ratings rule has prompted some confusion among credit union officials.  To assist with this matter, NCUA has issued natural person credit union guidance – Letter to Credit Unions 13-CU-05 – to clarify NCUA’s expectations regarding issues of creditworthiness and due diligence.  As an enclosure to 13-CU-05, NCUA has provided Supervisory Letter 13-03, which provides the new investment guidance NCUA has shared with its examiners.  The Supervisory Letter will provide your credit union with the key elements of the due diligence process and how to evaluate the risks associated with its investment purchases. 

Although the natural person guidance comes after the passing of the effective date (better late than never), I found it to be very well-organized and full of information that could be of great help to credit unions.  It starts off with what credit unions are subject to the guidance and then addresses why credit ratings have been removed from the regulations. It goes on to provide regulatory expectations for credit unions and considers factors involved in a creditworthiness determination without sole reliance on credit ratings.  The guidance then outlines key factors to consider in analysis for specific security types, counterparty agreements and credit risk and provides additional guidance for structured securities analysis.  And last, the guidance clarifies situations whereby investment positions are grandfathered. 

I also wanted to bring to your attention other credit ratings guidance that may be of use. First, NCUA released Corporate Credit Union Letter 2013-01, but of more interest to natural person credit unions may be NCUA’s Town Hall Webinar on Thursday, July 18, at 3 p.m. EDT.   The webinar will include several updates and guidance, including guidance on credit ratings and risk management.  Registration is free and available here.  And the last piece of guidance I want to mention is a NAFCU article on credit ratings and the impact on credit union investment activities (available with Member log-in). 

NCUA's Derivatives Proposal; Can't Help Myself

Written By JiJi Bahhur, Regulatory Compliance Counsel

Today, the NCUA Board issued a proposed rule to provide qualified credit unions limited authority to engage in derivatives activities for purposes of mitigating against interest rate risk (IRR). But, the proposal establishes a “pay-to-play” regulatory scheme for credit unions that are permitted to engage in derivatives activities. I’ll get into that in a moment. 

First, I should probably give some background on what derivatives are and what NCUA is proposing. NCUA has created a Q&A document addressing this, among other things.  From the Q&A document:

“Q.1: What are derivatives? What kinds of derivatives is NCUA proposing to allow for credit unions?

The Commodities Futures Trading Commission (CFTC) broadly defines a derivative as: “A financial instrument, traded on or off an exchange, the price of which is directly dependent upon (i.e., “derived from”) the value of one or more underlying securities, equity indices, debt instruments, commodities, other derivative instruments, or any agreed upon pricing index or arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). They can be used to hedge risk or to exchange a floating rate of return for fixed rate of return. Derivatives include futures, options, and swaps.”

While the term “derivatives” covers a broad spectrum of financial instruments in today’s market, NCUA is only recommending authorizing the use of plain-vanilla, US Dollar-denominated (USD) interest rate swaps and purchased-only interest rate caps. These instruments are widely transacted in today’s capital markets, have deep and transparent pricing and afford end users with strong liquidity and execution. The Bank for International Settlements reports that interest rate swaps are the largest component of the global over-the-counter (OTC) derivatives market.

With regard to interest rate swaps, the NCUA Board is proposing to authorize only standard “pay-fixed/receive-floating” and “pay-floating/receive-fixed” interest rate swaps. It is currently anticipated that most interest rate swaps users would enter into “pay-fixed/receive-floating” transactions to hedge against rising interest rates. This “plain vanilla” interest rate swap affords some protection against the most common interest rate exposure experienced by credit unions with material interest-rate risk (IRR) sensitivity—namely, a balance sheet with an asset portfolio that does not reset to external rate changes as quickly as its liabilities. Most credit unions use non-maturity and other short-term shares to fund longer duration assets, creating an inherent re-pricing mismatch for which pay-fixed/receive-floating interest rate swaps can provide some effective mitigation.”

Eligible credit unions seeking derivatives authority must submit an application for one of two levels of authority.  Level I authority contains more stringent limits, including limits to the notional value of interest rate swaps, aggregate book value of interest rate caps, combined limit of interest rate swaps and caps, and the maximum weighted average life of all derivatives transactions cannot exceed 5 years.  Level II authority has fewer limits, but credit unions that seek Level II authority must show why the Level I limits are not adequate to meet their IRR mitigation needs.

So what’s the catch? You have to “pay-to-play.”  The proposed rule calls for application fees and pretty hefty ones at that.  Level I application processing costs would range from $25,000 to $50,000 and Level II applications would range from $75,000 to $125,000.  If that’s not bad enough, there is an associated fee for every year after that. 

NAFCU has long advocated for expanded investment authorities for credit unions, but the "pay-to-play" proposal raises concerns as this would be the first time “pay-to-play” will be required in the credit union industry. 

The proposal can be accessed here.  NCUA’s Q&A document – which provides an understanding of the rule’s intent and the main contents – can be accessed here.  Also, NAFCU’s Regulatory Affairs team is in the process of drafting a Regulatory Alert (NAFCU Member Log-In required) on this proposal so keep your eyes peeled for that. 

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I just had to share these pictures with you all.  Have a great weekend.

Bozo's Grand Prize Game & Share Insurance; NAFCU's March Compliance Monitor

Written by Steve Van Beek

NAFCU's Compliance School is only a couple of weeks away and we are busy putting together the final details - including our presentations.  One of the sessions is on NCUA's Share Insurance and I wanted to share my favorite slide:

To me, Bozo's Grand Prize Game contains lessons for understanding share insurance coverage.  An account can only fit in one "bucket" at a time.  Understanding this helps explain share insurance coverage and how members can structure their accounts to maximize share insurance.  

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NAFCU's March Compliance Monitor.  The March issue of NAFCU's Compliance Monitor is now available for NAFCU members.  The March issue highlights NAFCU's Scope & Applicability Charts and includes two main articles:

• Understanding the Small Servicer Exemptions

• NCUA's Final Credit Ratings Rule Impacts Credit Union Investments

There are also numerous Q&As on the CFPB's new mortgage requirements - including ones submitted during our webcast on the CFPB's Final Mortgage Regulations (available for on-demand purchase).

NAFCU Members:  If you click on the article links above you'll notice a new feature - we are publishing our articles in HTML format (in addition to the PDF).  This means the articles are fully-searchable on NAFCU's website.  And, we have more enhancements in the works as well - so stay tuned!

Have a great weekend!

NCUA Board Meeting; Boardmember Hyland; Cordray Testimony; Video Contest

Written by Steve Van Beek

We'll try to keep it short and sweet for Friday.  

NCUA Board Meeting.  NCUA held a busy Board Meeting yesterday.  A good resource for an overview of NCUA's actions is their Board Action Bulletin.  The NAFCU Today also has additional details: Small CU; Payday Alternative Loans and Treasury Inflation Protected Securities (TIPS) and rural district definition.

Boardmember Hyland.  After the Board Meeting, Boardmember Hyland announced it would be her last as a NCUA Boardmember.  She will officially leave the NCUA Board on October 5th.  Hyland's official term ended in August 2011 but she remained on the Board to ensure NCUA had a three-person Board to lead the agency.  More in the NAFCU Today.

Director Cordray.  Yesterday, Director Cordray testified before the House Financial Services Committee.  This is after testifying before the Senate Banking Committee last week.   

Additionally, the CFPB announced the first meeting of their Consumer Advisory Board:  September 27th in St. Louis.  Attendance is open to the public but RSVPs are required.  

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NAFCU Member Video.  Back in July we blogged on our NAFCU Member Video Contest.  Check out the winning video here.  After a long week, it is a real good laugh.  Well done Baylands FCU!!

Agenda for NCUA's September Board Meeting; Mortgage Servicing Proposals in Federal Register

Written by Steve Van Beek

The agenda for NCUA's September 20th Board meeting is now available.  The agenda includes:

1. Proposed Rule – Part 703 of NCUA’s Rules and Regulations, Permissible Investments – Treasury Inflation Protected Securities.
2. Proposed Rule – Parts 702 and 741 of NCUA’s Rules and Regulations and Interpretive Ruling and Policy Statement 12-2, Regulatory Relief for Small Credit Unions.
3. Proposed Rule – Section 701.1 of NCUA’s Rules and Regulations, Expanded Definition of “Rural District” for Field of Membership.
4. Advanced Notice of Proposed Rulemaking – Section 701.21 of NCUA’s Rules and Regulations, Payday-Alternative Loans.

NCUA will also be meeting in closed session for a few additional agenda items.  

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Mortgage Servicing.  Back in our September 7th blog post, we linked to the CFPB's mortgage proposals as they were published in the Federal Register.  At that time, the Reg Z and Reg X mortgage servicing proposals had not yet been published.

Today, those mortgage servicing proposals have been published in the Federal Register.  The links are below.

• Regulation Z (TILA) Mortgage Servicing Proposal
• Regulation X (RESPA) Mortgage Servicing Proposal

Note:  Even though the proposals were published in today's Federal Register (September 17th), the CFPB is sticking with their October 9th deadline for comments.  

Remember, the CFPB is required by Dodd-Frank to finalize the mortgage servicing rules by January 21, 2013.  In order to meet that deadline, the CFPB is providing very limited timeframes for comments - especially on a proposal that would require 20 new notices.  

When It Rains, It Pours............Regulations

Written by Steve Van Beek

The DC area has had some unseasonably warm weather the past couple of weeks - but the flood of regulations coming from the regulators make it seem like we need to have our galoshes with us at all times.  The past couple of weeks have been a good example of regulatory onslaught from multiple angles - making the lives of compliance officers everywhere very difficult.

Given the fast-paced nature of the recent proposals and finalized regulations, I thought a quick blog post highlighting where to find the new rules was a good start up this mountain I like to call "regulatory change."  As an aside, I'm very interested to see Chairman Matz discuss NCUA's efforts to ease the regulatory burden on credit unions during NCUA's February 8th webinar (which also features CFPB Director Richard Cordray).

Interest Rate Risk Policy - Final Rule.  Recently NCUA issued a final rule on interest rate risk policies.  That rule will be published in the Federal Register this morning.  This final rule becomes effective September 30, 2012.    

Loan Workouts, Nonaccrual Policy & TDRs - Proposed Rule.  At its January Board meeting, NCUA also proposed a new rule that would require all federally-insured credit unions to have a written loan workout/modification policy.  The proposal also contains an Interpretive Ruling & Policy Statement discussing nonaccrual status and troubled debt restructuring reporting.  This proposal was published in the Federal Register yesterday and includes a short, 30-day comment period.

Derivatives - Advanced Notice of Proposed Rulemaking (ANPR).  NCUA also issued a ANPR on derivatives that would provide opportunities for credit unions to use derivatives to manage interest rate risk.  This proposal has not been published yet, but it will have a 60-day comment period (from the date it is published in the Federal Register).

Regulation E (Remittances) - Final Rule.  We discussed this final rule yesterday and I'm fairly certain we'll all become good friends with this rule over the next year.  The final rule will become effective February 7, 2013.

Regulation E (Remittances) - Proposed Rule.  Quite possibly a new record - proposing a rule to amend a final rule that was published on the same day.  Bravo!  The CFPB issue a proposed rule that would tweak the recent final rule.  Rest assured (warning - you may need to adjust your snark meter), the CFPB has indicated they will finalize this proposed rule before the finalized rule that it amends becomes effective.

Junior Lien Loan Loss Allowances - Guidance.  On Tuesday, NCUA along with the other regulators who make up the Federal Financial Institutions Examination Council (FFIEC) announced new guidance for junior lien loan loss allowances.  The Interagency Guidance is here and NCUA also issued Accounting Bulletin 12-1.

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On a happier note, all this talk about raining, pouring and galoshes got me thinking about a wonderful trip with my (now) wife in Seattle.  Good times!  

Letter to Credit Unions on Debt Downgrade; Still Learning

Written by Steve Van Beek

NCUA issued a Letter to Credit Unions yesterday on how the debt downgrade could impact NCUA, credit unions and members.  The Letter can be found here.

The LCU discusses the follow issues:

• Credit Union Investments;
• NCUA Guaranteed Notes;
• Corporate Credit Union Liquidity Guarantee Program;
• Money Market Funds;
• Consumer Confidence; and
• Communications with Members.

The full Letter to Credit Unions is here.  The previous guidance from last Friday is here.  Additional details can also be found in the NAFCU Today.

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I had a wonderful compliance officer quiz me on the number of days until the wedding.  Failed again.  Luckily, I have a trip to Ohio (Wooster) this weekend.  I have a feeling by the end of the trip I will have a much better internal countdown clock.  Currently:  72 days and counting.   

Derivatives

Written by Carrie Hunt

NCUA has announced its agenda for Friday's NCUA Board meeting and front and center is an ANPR on derivatives.  Derivatives are one of those topics of cocktail hour conversations that no one wants to admit that they have no idea what one is.  "So Bob, how about those derivatives traders?  Can you believe they made those swaps?"  "No, I can’t, Carol.  Those deals were crazy."

Hedging.  Counterparties.  Third party transactions.  The fun never stops.

So what does Derivative mean?  Investopedia tells us that it is a "security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage."


Currently, NCUA has a pilot program relative to derivatives and almost all of the derivative action that credit unions participate in is relative to interest rate swaps.  NCUA discussed derivatives in a February 2011 NCUA Report:

"What are swaps and caps, and why use them? Depository institutions rely on both instruments to hedge interest-rate risk - the risk a change in rates will materially impair earnings. In a "vanilla" swap - the type credit unions use - one party makes a fixed payment (equal to an unchanging rate times notional value) and receives a floating payment (equal to a varying short-term rate times notional value). Suppose, for example, the floating rate is one-month LIBOR - currently 30 basis points (or bps, three-tenths of a percentage point) - and the fixed rate is 20 bps.  Further, suppose notional value is $10,000,000; payments are annual; and settlement is due. A credit union committed to receive floating/pay fixed will collect the net amount - $10,000 (the difference in rates, 0.001, x $10,000,000) - from the counterparty. In an interest-rate cap, the buyer pays an upfront premium to receive compensation when a floating short-term rate exceeds a fixed rate (say, a payment if one-month LIBOR exceeds 20 basis points on a certain date, equal to notional value times the spread). Note in both cases receipts rise with LIBOR."

With NCUA reconsidering their entire investment rule, derivatives may be an issue that credit unions will not be able to ignore.  As always, NAFCU will prepare a Regulatory Alert on NCUA’s ANPR, so stay tuned on this issue.

A Busy Year

Posted by Anthony Demangone

Not too long ago, I shared my general outlook for 2011.   That post dealt more with general trends.  But we do expect some specific things.  Regarding NCUA, look out for the following in 2011.

• Regulations on interest rate and concentration risks.  If you've been keeping up with the Material Loss Reviews issued by NCUA's Office of Inspector General, you already know that concentration risk has played a huge role in credit union failures.  And that risk affects more than just credit unions.  I was at a meeting recently where an OTS and OCC official both agreed that concentration risks played a role in every major bank failure as well.
• Member business lending. Rather than a major overhaul, look for NCUA to incorporate guidance documents into the regulation.
• CUSOs.  NCUA will ramp up its focus on CUSOs, and they may seek examination authority.
• Examinations.  NCUA will overhaul its examiner's manual.  This is one process to track closely.  In my view, the examiner's manual is a massive guidance document that can affect your operations and NCUA examinations.  For that reason, it is very important to see how they change it. 
• This and That.  NCUA may also overhaul its investment rule (Part 703) and it may direct examiners to review new credit union products/services at each exam. 

Keep in mind that we can't say for certain that NCUA will act on any one of these issues.  But based on our conversations with NCUA officials, these are some of the areas of interest.  Stay tuned!

Permissible Investments for Federal Credit Unions

Posted by Steve Van Beek

Last Thursday, NCUA issued Letter to Federal Credit Unions 09-FCU-01 which details federal credit unions (FCUs) ability to invest in unsecured debt obligations guaranteed under the Temporary Corporate Credit Union Liquidity Guarantee Program (TCCULGP) and senior unsecured debt guaranteed under the FDIC Temporary Liquidity Guarantee Program (TLGP).  The letter indicates FCUs are allowed to invest if certain conditions are met.

The letter provides a brief overview and background of the programs and when FCUs can invest in those programs.  The letter emphasizes that FCUs should confirm the obligations are guaranteed through maturity in order for them to be permissible purposes.

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In case you were wondering, this Letter only applies to federal credit unions.  NCUA, as it did in this case, sometimes analyzes issues solely from the FCU perspective as they are the primary regulator of FCUs.  Whether these investments are permissible for state-chartered credit unions will depend on other factors determined by its state laws and primary regulator. 

A Little of This, A Little of That; Foot-in-Mouth Disease

Here are a few compliance odds and ends:

• FinCEN reminds us again that users of magnetic filing must transition to E-filing by the end of the year.
• Banks continue to get flood-related civil money penalties.  This Bankers Online page details all the fines.
• NCUA issued Legal Opinion Letter 08-0917 regarding the safekeeping of investments. The letter indicates that a wholly-owned subsidiary of a registered bank holding company is eligiblee to act as an investment safekeeper for a federal credit union (FCU).  You may want to pass this along to whomever is in charge of your investments.

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I put my foot in my mouth more than an NFL wide receiver.  Case in point...

The other day, I wandered over to our caffeine station for a late afternoon cup of coffee.  These are always hazardous treks, since more often than not, the coffee available at such an hour is stale and cool to the touch.  Imagine my joy as I see a coworker brewing a fresh pot of coffee.

Imagine my horror as the following words tumble out of my mouth in a volume far too loud for the circumstances:

Compliance Guy: "Thanks for the fresh pot!"

Can a Credit Union Borrow Money to Purchase Investments?; HSA Index Amounts

According to NCUA, the answer is yes, subject to the general rules and limits that apply to borrowing and investing.  Go here to read  NCUA Legal Opinion Letter 08-0139 (April 18, 2008) for all the details.

Under the FCU Act, FCUs have the express power to borrow from any source, limited to 50% of paid-in and unimpaired capital and surplus. 12 U.S.C. §1757(9). The National Credit Union Administration’s (NCUA’s) regulation on maximum borrowing authority implements this provision at 12 C.F.R. §741.2. The statute and the regulation do not restrict how an FCU can use borrowed funds.

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The IRS has issued new Health Savings Account index amounts for 2009.  Read all about it here.

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We have more entries for the flower garden flower contest.  Check out the photos here. (Don't forget to send in your entry!)

Have a great weekend, everyone!

Investment Guidance?

NCUA recently issued its February 2008 newsletter.  The newsletter contains what appears to be guidance for credit unions in the area of investments.  Access the newsletter here. The article indicates that credit unions "should closely monitor" changes in the fair value of privately-issued investments for signs of credit deterioration.

Granted, an NCUA newsletter isn't quite a Risk Alert or Letter to Credit Unions.  But I doubt that NCUA wrote the "column" just for fun.  I bet they expect us all to read it.  Therefore, I'd print it out and pass it along to whomever is in charge of investments for your credit union.

NCUA issues Legal Opinion Letter Regarding FCUs Receiving Stock in Visa, Inc.

Yesterday, NCUA issued Legal Opinion Letter 07-1022, which indicates that federal credit unions (FCUs) may receive and retain Visa stock as a result of Visa's restructuring.  (As of this morning, the letter is not available on NCUA's website.) NAFCU members can access a copy of the letter here.  (Member log-in needed.)  You can read a NAFCU today article that provides a very good overview of the letter here.  State-chartered credit unions should check with their state regulator on this issue.