NAFCU Compliance Blog

Deconstructing the QM Safe Harbor in Construction to Permanent Loans; CFPB Mortgage Servicing Guide Updates

By: Reginald Watson, Regulatory Compliance Counsel

Greetings Compliance Friends!

It has been a few years since the CFPB's implementation of the ability to repay requirements and qualified mortgage safe harbor, yet many credit unions still find the points and fees calculations confusing, particularly the scale of the exemption for construction loans in the context of a hybrid construction to permanent loan.  As a reminder, Regulation Z now requires credit unions to consider a consumer's ability to repay a residential mortgage loan and these requirements are set out in section 1026.43(c).

Loans that meet the standard of a qualified mortgage under sections 1026.43(e) or (f) are given a presumption that the borrower has the ability to repay. The calculation of all applicable points and fees are an aspect of determining whether a transaction is a qualified mortgage and therefore, whether the transaction is presumed to meet the “ability-to-repay” requirements of section 1026.43(c). The procedures for counting points and fees are the same as those provided in the high cost mortgage rule found in section 1026.32(b)(1). The credit union is required to establish a member's ability to repay for only those residential mortgage loans which are covered by the scope of section 1026.43(a), which contains a specific exemption for "a construction phase of 12 months or less of a construction-to-permanent loan." 12 C.F.R. §1026.43(a)(3)(iii). If a loan is outside the scope of section 1026.43(a), then there is no regulatory requirement to establish a consumer's ability to repay under section 1026.43 or calculate the points and fees.

So, how do we account for the points and fees calculation when the credit union is financing the permanent loan in addition to the construction phase? 

The commentary to Regulation Z seems to give us two options: for purposes of the qualified mortgage rule, the credit union may treat the construction phase and the permanent phase as one single transaction, or as two separate transactions.  Either way, the credit union would be required to follow the procedures under section 1026.32(b)(1) to calculate the points and fees for all applicable charges for both the construction phase and the life of the loan. However, it is not entirely clear how to allocate fees between the construction and permanent phase of a loan – but the preamble to the ATR/QM rule indicates that the ability to treat these kinds of loans as either one or two transactions draws upon section 1026.17(c)(6)(ii)-5. The preamble also referred back to section 1026.17(c)(6)(ii) in other areas, so while not entirely clear, it seems this rule may be helpful guidance generally.  The staff commentary to section 1026.17(c)(6)(ii)-5 seems to suggest that when separating the transactions, the points and fees may be allocated as the credit union sees fit:

5. Allocation of costs.When a creditor uses the special rule in §1026.17(c)(6) to disclose credit extensions as multiple transactions, fees and charges must be allocated for purposes of calculating disclosures. In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges under §1026.4 and points and fees under §1026.32(b)(1) that would not be imposed but for the construction financing. For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase and may not be included in the disclosures for the permanent phase. If a creditor charges separate amounts for finance charges under §1026.4 and points and fees under §1026.32(b)(1) for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges under §1026.4 and points and fees under §1026.32(b)(1) must be allocated to the permanent financing. Fees and charges that are not used to compute the finance charge under §1026.4 or points and fees under §1026.32(b)(1) may be allocated between the transactions in any manner the creditor chooses. For example, a reasonable appraisal fee paid to an independent, third-party appraiser may be allocated in any manner the creditor chooses because it would be excluded from the finance charge pursuant to §1026.4(c)(7) and excluded from points and fees pursuant to §1026.32(b)(1)(iii).

Thus, it seems that the credit union may make a risk-based business decision when allocating points and fees for purposes of the qualified mortgage safe harbor for the permanent financing phase of the loan. Appendix D to Reg Z provides specific guidance on how to make the actual calculations when these loans are treated as separate transactions in Part I or as a single transaction in Part II.

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CFPB Issues Update to Small Entity Compliance Guide

On March 29, 2018, CFPB updated the Mortgage Servicing Small Entity Compliance Guide (version 3.1) to incorporate recent amendments to the 2016 Mortgage Servicing Rules. As you may recall, we discussed these amendments in a previous NAFCU blogpost. Check out this link for our other blogs on the 2016 Mortgage Servicing Rules. CFPB also recently created a mortgage servicing coverage chart that credit unions may find helpful.

Government Agencies and Maturity Limits – Where Do GSEs Fall?

Written by Brandy Bruyere, Vice President of Regulatory Compliance

Lately, NAFCU has received questions from credit unions, sometimes stemming from examinations coming out of Region 5, about maturity limits for non-owner occupied homes. We blogged about some maturity limit exceptions a while ago, but unless an exception applies, the maturity limit for loans made by federal credit unions is 15 years. There are 20 year maturities and up to 40 year maturities available for some owner occupied loans, which may be the exceptions utilized most often by federal credit unions.

One exception that keeps coming up lately relates to loans that are "secured" by the "insurance or guarantee of, or with an advance commitment" to be purchased by a Federal or State government or "agency of either," here's the relevant excerpt from section 701.21(e):

(e) Insured, Guaranteed and Advance Commitment Loans. A loan secured, in full or in part, by the insurance or guarantee of, or with an advance commitment to purchase the loan, in full or in part, by the Federal Government, a State government or any agency of either, may be made for the maturity and under the terms and conditions, including rate of interest, specified in the law, regulations or program under which the insurance, guarantee or commitment is provided.

For example, some FCUs make loans under various Small Business Administration programs, which may fall into this exception. But what about government sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac?

While Fannie and Freddie are under the conservatorship of the Federal Housing Finance Agency (FHFA), NCUA has taken the position that GSEs are not "government agencies." Here is an excerpt from legal opinion letter 05-0514:

You have asked if a business purpose loan is exempt from the MBL definition under 12 C.F.R. §723.1(b)(4) if either [Freddie Mac] or [Fannie Mae] has made an advance commitment to purchase the loan in full. No, a business loan with an advance commitment from Freddie Mac or Fannie Mae is not exempt from the MBL definition because neither entity is a government agency.

[…]

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), not federal or state agencies or political subdivisions. “Fannie Mae and Freddie Mac are Congressionally-chartered, publicly-owned corporations whose shares are listed on the New York Stock Exchange. Under terms of their GSE charters, they are exempt from state and local taxation and from registration requirements of the Securities and Exchange Commission. Each firm has a back-up credit line with the U.S. Treasury…Business loans made with an advance commitment to purchase from Fannie Mae and Freddie Mac, which are not otherwise exempt, are subject to Part 723.

While this opinion letter was issued under a prior version of NCUA's rules relating to business lending, the agency took the position that Fannie and Freddie are not "government agencies," which indicates that loans made to GSEs would not be subject to the GSE's guidelines for maturity limits. Rather, unless another exception in NCUA's lending rule applied, it seems the 15 year maturity limit would apply to the loan. While the opinion letter was issued prior to FHFA conservatorship over Fannie Mae and Freddie Mac, even though the relationship between the federal government and these particular GSEs has shifted since the financial crisis, NCUA has not changed its position in more recent years.

Mind if I ask a favor, my credit-worthy friend? / New IRS Guidance

Written by Reginald Watson, Regulatory Compliance Counsel

Greetings! A little while ago, Stephanie blogged about the perils of being a non-member and the limited rights of nonmember joint-account owners. But do these rights extend to nonmembers in the case of co-applicants on a loan? In this day and age of hyper-connectivity and transient travel, credit unions can stand to lose some business if potential borrowers were not permitted to solicit help from a slightly more credit-worthy friend with the unfortunate reality of falling outside of the credit union's field of membership. This blogpost will address the permissible roles nonmembers can play in the loan application process. 

The Federal Credit Union Act provides credit unions with the power to make loans to its members, to other credit unions, and to other credit union organizations. Similarly, the FCU Bylaws require that federal credit unions may only extend loans to members. In response to questions about where exactly nonmembers fit in, the NCUA states in Legal Opinion Letter 2000-0605 that "nonmembers may participate in loans as long as their involvement does not distort the direct lending relationship between the FCU and the member." The NCUA General Counsel has also previously discussed similar issues in legal opinion letters 95-0616 and 94-0424, presenting a laundry list of synonymous sounding terms (such as joint-applicant, co-borrower, co-maker, co-signer, endorser, guarantor, etc.) that can become a bit head-scratching to navigate. The NCUA Examiner's Guide may help sort things out:

"The terms co-maker, co-borrower, co-signer, guarantor, and joint applicant sometimes create a degree of confusion. In general, these terms refer to one of two possible parties, either a co-maker or a co-signer.

A co-maker shares equal responsibility with the borrower for payment of the loan and receives an equal benefit in the loan proceeds, or access to future advances in an open-end loan. Regulation B (202.7(d)(1)) identifies a co-maker as a joint applicant and the resulting loan as joint credit.

A co-signer takes on liability for the obligation of another person without receiving goods, services, or money in return or, in an open-end credit obligation, without receiving the contractual right to obtain extensions of credit under the obligation. Credit unions request a cosigner’s signature as a condition for granting a member credit or as a condition for forbearance on collection of a member’s obligation in default.

(…)

The co-maker shares in the loan proceeds and bears joint liability for repayment. Thus, a credit union cannot make a loan to a nonmember co-maker. However, a credit union may permit a nonmember to sign a loan, provided the nonmember does so in the capacity of a guarantor (cosigner), rather than a loan recipient (co-maker.)"

NCUA Examiner's Guide, Chp. 10 at page 39.

So there you have it. It appears that co-makers are required to be members, whereas nonmember friends can be co-signers. After all, that's what friends are for!

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IRS Issues Guidance on Mortgage Insurance Premiums and Home Equity Loan Deductions

Despite fears to the contrary, the deductions for interest paid on home equity loans and for private mortgage insurance were mostly preserved in the recent Tax Cuts and Jobs Act (TCJA) and corresponding tax extenders bill. The IRS issued new guidance earlier this week on the deduction for home equity loans as well as the deduction for mortgage insurance premiums. The Instructions for Form 1098 and General Instructions provide guidance on amending Form 1098. For additional information, we recently blogged about some of the major components of TCJA that affect credit union operations. Until next time compliance friends!

Some Things Never Change: HMDA Commercial Loan Reporting; So, I heard something juicy...a Note from Carrie Hunt

Written By Reginald Watson, Regulatory Compliance Counsel

HMDA has switched from a purpose-based standard to a dwelling-secured rule in terms of scope for loans where the credit union has taken "final action" on or after January 1, 2018; however, there is an exception for business purpose loans that has been tripping up some of our members as they adjust to the new normal. Fear not, some things just don't change. This blog will discuss how to address business loans in this new landscape and the particular issues that arise with loans for mixed-use (residential and commercial) purposes.

Under the old Regulation C, closed-end, business or commercial purpose loans made to purchase, refinance or improve a dwelling were reportable under HMDA. While the CFPB shifts transaction coverage away from the purpose-based scope for consumer loans in new Regulation C, it does not do so for commercial or business purpose loans. Instead, it retains the same purpose-based scope of reportable business or commercial purpose transactions by excluding all other business or commercial loans or lines of credit not made for the three specific purposes of home purchase, refinancing, or home improvement. Thus, a closed-end mortgage loan or an open-end line of credit that is, or will be, made primarily for a business or commercial purpose is excluded from the new definition of a covered loan, unless the loan or line of credit is a home purchase loan, a home improvement loan or a refinancing as defined in the new section 1003.2.

To figure out whether to use the dwelling-based approach versus the purpose-based approach, the credit union in each case may look to whether a closed-end mortgage loan or an open-end line of credit is for a business or commercial purpose. This analysis might be simple in many cases, but gets a little trickier in "mixed-use" situations where a property is used for both residential and commercial purposes, for example, a loan to improve the heating system in a building containing apartment units and retail space.

The new HMDA rule clarifies that a property used for both residential and commercial purposes is a dwelling if the property's primary use is residential. The rule also grants credit unions the discretion to use any reasonable standard to determine the primary use of the property on a case-by-case basis. Here is the commentary for reference:

4. Mixed-use properties. A property used for both residential and commercial purposes, such as a building containing apartment units and retail space, is a dwelling if the property's primary use is residential. An institution may use any reasonable standard to determine the primary use of the property, such as by square footage or by the income generated. An institution may select the standard to apply on a case-by-case basis.

There is some discussion in the preamble to the rule as well but not much on what might be a "reasonable standard." However, the rule contains a similar provision for determining whether a loan is for agricultural purposes, so while not directly on point, that preamble discussion may be somewhat informative.

Sometimes credit unions also ask about loan purpose. That's a bit of a different issue, but the commentary to new section 1003.3(c)(10) indicates that section 1026.3(a) of Regulation Z and its commentary inform whether the loan is for business or commercial purposes.

***

So, I heard something juicy…A note from Carrie Hunt, NAFCU EVP of Government Affairs and General Counsel

At NAFCU we hear a lot of rumors- some true and some just pulp fiction.  Part of what we do is to figure out fact from falsehood.  One of our latest pieces of intel came from the Sunshine State.  We were hearing there was some new law or rule in Florida that was restricting credit union expansions to 5% of a county's population.  So, upon slicing in, we discovered that there is no formal rule/statute limiting a field of membership expansion to 5 percent of a county’s population.  HOWEVER, the Florida Office of Financial Regulation (OFR) may limit expansion on a case-by-case basis.  It seems that their concern is that a credit union with a field of membership of only 5,000, trying to expand to a field of membership of 100,000, would be too extreme of a move. As a result, the Florida OFR sometimes set limits based on the population size depending on how many members the credit union currently serves. 

Hmm.  I would prefer the fruit to ripen on the tree before being picked.

The Circle of Life: Federal Considerations for Member Decedents

Written by: André B. Cotten, Regulatory Compliance Counsel

Hello Compliance Friends! Over the holidays, I had a chance to relax, travel and check out some old and new films. One of my favorite movies will forever be Disney's The Lion King. The death of Mufasa will forever pull at my six-year old heart strings.  Today's blog will talk about what to do when Mufasa Member finds himself in a wildebeest stampede and the circle of life suddenly closes.

As compliance practitioners, I am sure that you are aware a lot of these issues would need to be discussed with your local counsel because they directly involve state law issues. However, I have highlighted some NCUA specific and federal law issues that may serve as helpful reminders. I have segmented this post according to subject areas for your convenience.

Accounts

The FCU Model Bylaws contain the following provision with regard to keeping a deceased member’s account open. You may want to review your credit union’s bylaws for a similar provision.

“(d) The share account of a deceased member (other than one held in joint tenancy with another member) may be continued until the close of the dividend period in which the administration of the deceased's estate is completed.” 12 CFR 701, App. A.

(emphasis added)

The bylaws do not address closing an account and re-opening a new one. On the other hand, an account held in joint tenancy can remain open. If it is determined that the joint tenant is not a member in his/her own right but within the credit union's field of membership, then the person would need to become a member so that the credit union would not impermissibly be offering services to a nonmember.Note, insurance may end six months after death of a member unless the account is restructured

Moreover, after a member dies, the credit union still has the responsibility to protect member funds and information. To begin, under many states' laws, absent a named beneficiary, the funds of the account are a part of the deceased member’s estate. Therefore, a credit union may need to avoid releasing the funds until the qualified representative of the estate has been named by a court or according to the applicable state’s probate laws. 

Account information is considered non-public personal information and therefore cannot be disclosed without providing an opt-out notice, unless the disclosure falls under one of the exceptions. Note, non-public personal information may be disclosed to a person holding a legal or beneficial interest relating to the member, and to persons acting in a fiduciary or representative capacity on behalf of the member.

Lastly, before closing a member account, the credit union may want to proceed with caution. Depending on its respective policy, the credit union may want to flag on the account that the owner has died, and then allow a period of time for any surviving owners or the member's estate to take ownership of the matter. The documents needed to close an account will depend on state law, the account agreement and the credit union's internal policies and procedures.

Tax Issues

To begin, one concern from a federal perspective is that having continued tax reporting of a member's social security number after the person's death can cause tax complications. Although, this may not always be possible if Mufasa Member dies later in the tax year. IRS Publication 559 contains an overview of issues involving deceased persons, and while aimed at executors of estates, has some helpful information about Form 1099.

In addition, the credit union should note that a discharge of indebtedness under a settlement agreement between a credit union and a debtor or a debtor's estate is an "identifiable event" that triggers the obligation to file Form 1099-C.  The instructions for Form 1099-C may be accessed here.

Loans

With regard to credit, the credit union's options would be determined by state law, the loan agreement, and the specific situation. Often, if the decedent was the only borrower, the credit union could be looking at making a claim against the estate.  Even though someone may be making loan payments, unless they are contractually obligated to make those payments, the credit union may want to see if an estate has been established (or if there’s some other claim that should be made, for example, if the member had life and disability insurance under which a claim could be made).  Absent a will, state law will determine the disposition of the decedent’s assets to heirs, including vehicles and real property. Often, heirs have to decide if they want to keep an asset (and likely refinance the loan), or if they want to sell the asset to pay off the credit union’s loan, etc.

In regards to mortgage loans, a lot of mortgages include due-on-sale clauses which allow the lender to call the loan upon the death of the borrower; however, there are situations in which a due-on-sale clause cannot be exercised – for example, if the property is transferred under joint tenancy.

This is the section of NCUA’s rules and regulations that references due-on-sales clauses.  Note the general prohibition on exercising a due-on-sales clause where property is transferred on the death of a joint tenant or tenant in the entirety, or transferred to a spouse or children, as discussed in 12 CFR 701.21(g)(6). Overall, this is a fact specific analysis that the credit union may want to review with local counsel.

Special Issues

There is a rule that Social Security benefits are not paid for the month that Mufasa Member dies. Here is the Social Security Regulation:

Ҥ404.311 When does my entitlement to old-age benefits begin and end?

[…]

(b) We will find your entitlement to old-age benefits ends with the month before the month you die.”

This seems unfair and actually legislation has been introduced in the past on this topic but the way the rule is written, even if a member dies on the last day of a month, the member is not entitled to Social Security benefits for that entire month. Here is an excerpt from a Social Security guide:

“If the deceased was receiving Social Security benefits, you must return the benefit received for the month of death or any later months. For example, if the person dies in July, you must return the benefit paid in August. If benefits were paid by direct deposit, contact the bank or other financial institution. Request that any funds received for the month of death or later be returned to Social Security. If the benefits were paid by check, do not cash any checks received for the month in which the person dies or later. Return the checks to Social Security as soon as possible. However, eligible family members may be able to receive death benefits for the month in which the beneficiary died.”

There is guidance with regards to check reclamations specifically. The Social Security Program Operations Manual has a section on electronic funds transfer reclamations and a section on check reclamations.

The Department of Treasury’s Green Book  also addresses check reclamations more specifically including how to reply to a "Notice of Reclamation" and when there may be a right to protest.

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As I previously mentioned, when the circle of life closes on a member, there are numerous state law issues that are implicated, and a credit union will need to consult with local counsel to determine how best to draft and modify its policies. However, there are some NCUA and federal law issues that are implicated when a member dies, and credit unions will need to maintain policies that strike a balance between state law, federal regulations, and the business needs of the credit union.

Editor's Note: As helpful insight from a blog reader, I added information about NCUA's 6-month grace period for decedent accounts. I modified this post on Friday, January 19, 2018 to provide a more through legal analysis and to be a more complete resource for NAFCU's members.

When You're Kind of a Big Deal: Loans to Directors and Staff

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

Good morning from NAFCU's Regulatory Compliance School being held in San Diego! As we get back to the basics at School, let's have a look at a handful of regulations that many compliance officers may not visit often, but the NAFCU Compliance Team get frequent questions about: NCUA's rules on making loans to directors and staff.

   

Board Review

Section 107 of the Federal Credit Union Act and its implementing regulation in section 701.21 contain requirements that may apply if a director, a member of the supervisory committee, or a member of the credit committee is taking out a loan at the federal credit union where he or she serves.

The initial approval of the loan can be performed by a loan officer or the credit committee, pursuant to the credit union's bylaws. But, if the aggregate of the amount of all loans to the individual director or committee-member exceeds $20,000 plus pledged shares, the board itself must approve the loan. The same rule applies if the director is just going to serve as endorser or guarantor for another borrower.

The federal credit union is required by section 701.21(d) to establish procedures for performing the aggregate calculation to determine whether board approval is required. If, after combining the amount of the loan applied for with all outstanding loans and lines of credit (including unused available balances) to the director, and subtracting any pledged shares, the aggregate amount is over $20,000, then the board must review and approve the loan before the federal credit union can make it. This review is non-delegable. We have previously had a few credit unions ask whether the director or committee member's loan balances and the math involved in the calculation must be reported to the board. There is no requirement in NCUA regulations or guidance that indicates that credit union staff must show their math to the board.

Non-preferential Treatment

All federally-insured credit unions must comply with the requirement of non-preferential treatment found in section 701.21(d)(5). See, 12 C.F.R. § 741.203(a). Any loan made to a director, a supervisory committee member, or a credit committee member cannot have more favorable rates, terms or conditions than those available to other credit union members. This prohibition also extends to the volunteer's spouse or family members in the same household as the volunteer. It also extends to business or investment partners of these volunteers, or the family of those partners.

The prohibition does not extend to staff. Both staff and senior management may enjoy employee rates and other discounts, if the credit union offers them. However, if staff serves on the board or on the supervisory or credit committees, they cannot enjoy these discounts by virtue of their board or committee seat.

Commercial Loans

Section 723.7(a) has its own restrictions on who can obtain a commercial loan at a federal credit union. Any compensated director is prohibited from obtaining a commercial loan from the federal credit union unless the board of directors approves it. The compensated director must recuse himself or herself from any deliberations regarding the loan.

Further, neither senior management involved in commercial loan underwriting, servicing or collection, nor their family, nor those associated with them under the definition in that section, can obtain a commercial loan either.

State-chartered credit unions are exempt from the requirements of Part 723 if NCUA has determined that they are subject to substantially equivalent regulations.

Conflicts of Interest

One other thing to keep in mind is the general prohibition against conflicts of interest found in Article XVI, Section 4 of NCUA's Federal Credit Union Bylaws. See, 12 C.F.R. Part 701, App. A. The provision prohibits directors, committee members, officers, agents or employees from participating in the deliberation of any question affecting his or her financial interests, including through corporations or other organizations they may belong to. The bylaws describe an appropriate procedure for avoiding a conflict of interest in these situations:

"In the event of the disqualification of any director respecting any matter presented to the board for deliberation or determination, that director must withdraw from the deliberation or determination; and if the remaining qualified directors present at the meeting plus the disqualified director or directors constitute a quorum, the remaining qualified directors may exercise with respect to this matter, by majority vote, all the powers of the board. In the event of the disqualification of any member of the credit committee, if applicable, or the supervisory committee, that committee member must withdraw from the deliberation or determination."

I Am the Very Model of a Modern Arbitration Clause

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

Happy Wednesday, Credit Union Compliance World. As you know, on July 10^th, the CFPB finalized its rule on arbitration agreements. We blogged about the basics of the rule and the epic hero's journey that is trying to identify its scope. On Monday, thankfully, the CFPB released its Small Entity Compliance Guide regarding the final arbitration rule. While the amount of footnotes involved in discussing the scope should be a clue to the Bureau that the rule is painfully technical, it is nice to have a version written in Standard American English.

Thanks to the Equifax breach and the breathtaking cascade of bungled responses in its aftermath, arbitration provisions are back in the limelight. If your credit union is seeking to help assist members affected by the breach, visit NAFCU's Equifax Data Breach Resources webpage. If you're angry, know that your feelings are valid and shared. We've written to Congress, the CFPB, the FTC and NCUA to ask them to take action to protect credit unions and their members. In the meantime, perhaps this is a good time to take a deeper look at the arbitration rule's language requirements.

From Agreements to Delegates, In Order Categorical

NAFCU has gotten a few questions about when it is appropriate to use the nine different model clauses included in the rule. Below is a breakdown of the various clauses in the rule and when and how they can be used.

Firstly, all Pre-Dispute Arbitration Agreements entered into on or after March 19, 2018 must include one of two alternative clauses for the agreement:

Citation	Language	When Required
§ 1040.4(a)(2)(i)	“We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”	Generally, unless other language is applicable.
§ 1040.4(a)(2)(ii)	“We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. The following provision applies only to class action claims concerning the products or services covered by that Rule: We agree that neither we nor anyone else will rely on this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”	Can be used at the credit union's option as an alternative to the generally required language when the agreement applies to multiple products or services, only some of which are covered under Part 1040.

In addition to the required clauses discussed above, the Bureau has also identified several optional, add-on clauses:

Citation	Language	When Required
§ 1040.4(a)(2)(iv)(A)(1)	“This provision does not apply to parties that entered into this agreement before March 19, 2018.”	Optional add-on to the above agreement clauses
§ 1040.4(a)(2)(iv)(A)(2)	“This provision does not apply to products or services first provided to you before March 19, 2018 that are subject to an arbitration agreement entered into before that date.”	Optional add-on to the above agreement clauses
§ 1040.4(a)(2)(iv)(B)	“This provision does not apply to persons that are excluded from the Consumer Financial Protection Bureau's Arbitration Agreements Rule.”	Optional add-on to the above agreement clauses

Finally, there are two add-on clauses for specific issues:

Citation	Language	When Required
§ 1040.4(a)(2)(iv)(B)	“This provision also applies to the delegation provision.”	For agreements that contain a delegation provision, the required clause must be included in each delegation provision. Alternatively, credit unions can add this language to the generally required clause to meet that requirement.
§ 1040.4(a)(2)(vi)	“However, the defendants in the class action may claim they cannot be sued due to their sovereign immunity. This provision does not create or waive any such immunity.”	Add-on language applicable for an entity that believes it has sovereign immunity from suit.

However, suppose a loan is originated by another lender after March 19, 2018, and the loan agreement includes a Pre-Dispute Arbitration Agreement, but it does not include either of the above required clauses. Perhaps the originating lender was exempt.

Imagine that then, a credit union purchases the loan and steps into the shoes of the original lender with regard to the agreement. When the credit union becomes a party to the agreement established on or after March 19, 2018, and the agreement does not contain either of the required clauses, the Bureau requires the credit union to either amend the agreement to add the above clause or to provide the consumer with a written notice within 60 days. If a credit union opts to send the written notice, it must contain the below model language:

Citation	Language	When Required
§ 1040.4(a)(2)(iii)	“We agree not to rely on any pre-dispute arbitration agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action filed by someone else.”	Written notice language applicable when the agreement only applies to covered products and services.
§ 1040.4(a)(2)(iii)	“This notice applies only to class action claims concerning the products or services covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau.”	Written notice language applicable when the agreement applies to some products, only some of which are covered under Part 1040.

The final rule and the commentary allow for few other changes; it discusses replacing pronouns and putting it into the same language as the rest of the agreement.

Hope springs eternal that Congress might take action to lift the regulatory burden of this rule with legislation. However, for those of you who are former scouts, you know it's wise to always be prepared. NAFCU members who have questions as they absorb this rule's implications can feel free to reach out to your NAFCU Regulatory Compliance Team.

A Quick Rundown on Long-Term Principal Residence Loans

Written by Pamela Yu, Special Counsel for Compliance and Research

Federal credit unions may offer long-term mortgage loans of up to 40 years to their members.  You may wonder if this means that a member can obtain more than one long-term residential mortgage loan from their credit union—say, for the purchase of a second home that they would like to reside in half of the time. 

The Federal Credit Union Act (FCU Act) and NCUA’s general lending regulation permit federal credit unions to make first-lien, long-term residential real estate loans with maturities of up to 40 years on a one-to-four-family dwelling “that is or will be the principal residence of the member-borrower.” 12 U.S.C. 1757(5)(A)(i); 12 C.F.R. §701.21(g)(2) (Emphasis added).

It is important to understand that the long-term mortgage authority only applies to a loan to finance the purchase of "the principal residence" of the member-borrower.  NCUA has long held that the word "principal" is singular.  By definition, there can be no second "principal" home. This means a member can only have one principal residence at a given time.  As such, a 40-year long-term loan to finance a member's secondary principal residence is not permissible.  See, NCUA Legal Opinion 92-0330.

A federal credit union may, however, make more than one long-term residential mortgage loan to the same member-borrower under certain circumstances.  The statute requires that the dwelling "is or will be" the member-borrower's principal residence.  NCUA has interpreted this language to mean that a federal credit union may also finance a future principal residence under the long-term mortgage authority. Thus, a member that already has a long-term mortgage loan from the credit union could obtain an additional long-term mortgage loan to purchase a second home if that home is intended to be the future principal residence of the member.  See, NCUA Legal Opinion 10-0729.  A federal credit union must determine if the "principal residence" requirement is met—that is, the member intends to establish the dwelling as their principal residence in the future—at the time of the loan's origination.

If the proper intent is there when the loan was made, there is no obligation for the member-borrower to make the dwelling their principal residence within any certain timeframe. 

In the preamble to the 1983 proposed lending rule, NCUA noted that:

[t]he statutory requirement that the dwelling “is or will be” the principal residence of the member . . . would not require that the member occupy the dwelling within a certain time after the loan is made . . .

See, 48 Fed. Reg. 52475 (Nov. 18, 1983).

Accordingly, so long as the dwelling “will be” or is intended to be the principal residence of the member-borrower at some point in the future, the loan qualifies for the long-term maturity limit.

In addition, NCUA has indicated that a member may allow an individual, including a nonmember, to reside in the future principal residence until such time as the member-borrower occupies the dwelling as their principal residence.  The member's future principal residence may also be rented out for income and investment purposes during the interim period without violating the maturity limit rule.  See, NCUA Legal Opinion Letter 10-0729.

Federal credit unions offering 40-year long-term principal residence loans should keep in mind that, to qualify for this maturity, the loans must meet additional criteria as set forth in the rule, including specific loan application requirements and compliance with lien and territory requirements, as well as others.  In addition, the loan must be secured by a perfected first lien in favor of the credit union on the dwelling (or a perfected first security interest in the case of either a residential cooperative or a leasehold or ground rent estate).  Credit unions offering 40-year mortgage loans should ensure they are familiar with the full regulatory requirements regarding long-term mortgages in 12 C.F.R. § 701.21(g).

MLA Compliance – Covered Borrower False Positives/Negatives, Historic Lookback Prohibition; The Downside of Compromise

Written by André B. Cotten, Regulatory Compliance Counsel

Greetings Compliance Friends! Let’s talk about the Military Lending Act.

The updated MLA rule expands protections to a broader range of closed-end and open-end credit. Since October 2016, to comply with the safe harbor standards, many credit unions have been using one of the safe harbor methods listed in the final rule. The safe harbor methods include 1) checking the member’s duty status using the Defense Manpower Data Center (DMDC) database, or 2) using a consumer report obtained from a nationwide consumer reporting agency.

Section 232.5(a) allows a credit union to use its own method to determine whether a member is a covered borrower. However, the regulation only provides a safe harbor when a credit union uses either the MLA database or a member’s status that is obtained from a consumer report obtained from a consumer reporting agency (e.g., Experian, Equifax, Transunion). Questions have come up about the historic lookback prohibition, or if the safe harbor seems to have generated a false result?

In order to benefit from the safe harbor, the covered borrower check (DMDC database or consumer report) is required at the time “credit is offered or extended.” Looking directly at the regulatory language, this prohibition specifically prevents a creditor from using the database (directly or indirectly) to ascertain whether a consumer had been a covered borrower at a previous point in time and still meet the safe harbor. This seems to mean that a credit union has one bite at the apple in order to establish a safe harbor – checking with the database after consummation and determining that, in hindsight, the borrower was not covered on the date of consummation does not fall within the safe harbor.

232.5 Optional identification of covered borrower.

(a) No restriction on method for covered-borrower check. A creditor is permitted to apply its own method to assess whether a consumer is a covered borrower.

(b) Safe harbor—

(1) In general. A creditor may conclusively determine whether credit is offered or extended to a covered borrower, and thus may be subject to 10 U.S.C. 987 and the requirements of this part, by assessing the status of a consumer in accordance with this paragraph (b).

(2) Methods to check status of consumer—

(i) Department database—

[…]

(B) Historic lookback prohibited. At any time after a consumer has entered into a transaction or established an account involving an extension of credit, a creditor (including an assignee) may not, directly or indirectly, obtain any information from any database maintained by the Department to ascertain whether a consumer had been a covered borrower as of the date of that transaction or as of the date that account was established.

(ii) Consumer report from a nationwide consumer reporting agency. To determine whether a consumer is a covered borrower, a creditor may verify the status of a consumer by using a statement, code, or similar indicator describing that status, if any, contained in a consumer report obtained from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis, or a reseller of such a consumer report (as each of those terms is defined in the Fair Credit Reporting Act (15 U.S.C. 1681a) and any implementing regulation (12 CFR part 1022))…

32 CFR 232.5 (emphasis added).

With the prohibition against historic lookback, if a credit union were to use the DMDC to confirm a borrower's status at a later point in time, those transactions would not qualify for the safe harbor provision. Commentary in the preamble to the final rule suggests that the DoD anticipates credit unions will perform a covered borrower check in connection with each extension of credit made to a covered borrower:

“...the Department's longstanding policy regarding this aspect of the scope of 10 U.S.C. 987 is consistent with the provision set forth in § 987(f)(3),^[120] which makes any credit contract that is prohibited under 10 U.S.C. 987 “void from the inception of such contract.” Section § 987(f)(3) would operate unjustly if a consumer, upon obtaining the status of a covered borrower, could sue the creditor to void an existing credit contract on the grounds that the contract—which may have been entirely lawful when originally entered into with the consumer—violates one or more provisions of 10 U.S.C. 987. One practical consequence of the Department's longstanding policy is that a creditor is not required to constantly monitor the status of each consumer who has obtained credit or holds an account for credit to assess whether the consumer is a “covered borrower;” rather, the creditor may conduct that assessment, as the creditor may so elect, only at the outset of the transaction or when establishing the account for consumer credit. The Department proposes to adopt corresponding revisions to the language of certain other provisions of the regulation, notably §§ 232.3(f) and 232.5(b)(2), for the sake of clarity and consistency with this policy.”

79 Fed. Reg. at 58601, 58616 (emphasis added).

Overall, if your credit union does receive a false positive or negative, the rule does not clearly address the issue. Reporting the problem and waiting for the database to be updated and running a report later would be problematic in light of the historic lookback prohibition - the covered borrower check cannot be performed after consummation and provide a safe harbor. Delaying closing in hopes that the database updates also may not work for the borrower. If a person says they are not a covered borrower, but the DMDC database says otherwise, the credit union could treat that person as a covered borrower anyway but that has drawbacks. The credit union could also not treat the person as a covered borrower - but relying on information other than the DMDC database or consumer report does not provide a safe harbor which creates some risk.    

The good news is false positives or negatives should be rather rare. Recently, one of my colleagues attended a MLA forum with representatives from the DoD who indicated that the DMDC received very few reports of inaccurate results – even with over 2.2 billion covered borrower checks processed through the DMDC between October 3, 2016 and December 8, 2016. During this discussion, the DoD advised that when a credit union receives a false positive or false negative, this is a good time to contact the help desk on the website. This information can be found on the DMDC website, on the right side under the heading resources, select "Help with Browser Certificate Error." Also, in the event a credit union experiences an issue with the DMDC system, the DoD is available to help resolve your issue and receive your feedback. To reach the DMDC Support Office, please call 1-800-538-9552.

Keep in mind that a credit union could use another method besides the DMDC or consumer report to verify a borrower’s status, but the transaction in question would not fall under the safe harbor. This would not be a violation of the MLA, as section 232.5(a) specifies that there is no restriction on how covered borrower checks can be performed. It simply means the credit union would not be shielded from liability that might result from a failure to identify a covered borrower. To manage that litigation risk, a credit union may consider working with local counsel to draft policies and procedures which would establish a defense under 10 U.S.C. § 987(f)(5), for example, that the credit unions sufficiently maintains procedures that are reasonably adapted to avoid failing to identify a covered borrower. The decision whether to use the safe harbor or to exercise some other procedure, or both, is a risk-based business decision for a credit union.

NAFCU’s Military Lending Act Guide provides a detailed overview of the rule. Other NAFCU resources can be found here at our MLA Compliance landing page. We continue our advocacy on this issue as well, especially on credit card related issues given the October 3, 2017 compliance deadline.

***

The Downside of Compromise. Did you know that when the legislation that became Dodd-Frank was debated, NAFCU opposed giving the CFPB rulemaking authority over the credit union industry? Check out this CU Journal editorial from NAFCU’s President and CEO, Dan Berger giving background on our position and NAFCU’s continued commitment to pull credit unions from the regulatory authority of the CFPB.

This Week’s NAFCU Webcasts.

Embedding Cybersecurity into Vendor Selection

Live Webcast: Tuesday, February 28 | 2:00-3:30 p.m. ET

Enterprise-Wide BSA Compliance: All for One and One for All

Live Webcast: Thursday, March 9 | 2:00-3:30 p.m. ET

Considering a Member’s Immigration Status in Evaluating Loan Applications + Trivia! + Monitor Survey

Written by Shereefat Balogun, Regulatory Compliance Counsel

Seems like immigration is on many minds these days.  In fact, we’ve received a number of questions concerning an applicant’s immigration status in evaluating loan applications.  The general question often looks like this:

A member came in applying for a VISA credit card. He is not a permanent resident of the U.S. He has a work permit that expires in July 2017. Are we able to deny a credit card to someone who is not a permanent resident of the U.S?

As many of us are aware, the Equal Credit Opportunity Act (ECOA) prohibits discrimination related to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, and income derived from public assistance.  See, 15 U.S.C. §1691(a); 12 C.F.R. §§ 1002.1(b), 1002.4(a).  That said, a credit union may consider a member’s credit status or status as a permanent resident in determining the member’s creditworthiness and the credit union’s rights and remedies regarding repayment.  Indeed, section 1002.5 of Regulation B, which implements ECOA, provides in relevant part:

§1002.5 Rules concerning requests for information.

…

(e) Permanent residency and immigration status. A creditor may inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.

12 CFR 1002.5(e)(emphasis added.)

Moreover, in section 1002.6, the rule states:

§1002.6   Rules concerning evaluation of applications.

(a) General rule concerning use of information. Except as otherwise provided in the Act and this part, a creditor may consider any information obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis. The legislative history of the Act indicates that the Congress intended an “effects test” concept, as outlined in the employment field by the Supreme Court in the cases of Griggs v. Duke Power Co., 401 U.S. 424 (1971), and Albemarle Paper Co. v. Moody, 422 U.S. 405 (1975), to be applicable to a creditor's determination of creditworthiness.

…

(7) Immigration status. A creditor may consider the applicant's immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor's rights and remedies regarding repayment.

12 CFR 1002.6(b)(7) (emphasis added.)

The Official Interpretation to 1002.6(b)(7) provides more detail:

Paragraph 6(b)(7) .

1. National origin—immigration status. The applicant's immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor's ability to obtain repayment. Accordingly, the creditor may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa.

2. National origin—citizenship. A denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin. 

12 CFR 1002, Supp. I, comments 1002.6(b)(7) – 1 and 2 (emphasis added.)

While Regulation B generally gives credit unions the ability to consider residency and immigration status in evaluating a loan application, there may be some risks associated with denying a loan based on the member’s citizenship status.  Comment 2 above indicates that a denial of credit based on citizenship status is not per se discrimination based on national origin.  This suggests that the denial in and of itself may not be discriminatory; however an examination of the facts and circumstances may form the basis of a discriminatory claim exposing the credit union to litigation risks.  One issue that may arise concerns claims that the credit union’s policy is not being applied consistently.  For example, if citizens of countries A and B are ok but citizens of C and D are not, then it can be argued that the credit union is discriminating on the basis of national origin, i.e. the place of origin rather than status as a non-citizen.  The credit union may want to make sure applicants are being treated consistently across the board and that any different treatment has a legitimate business purpose.

One thing to consider is that the rule seems to focus on the credit union’s ability to look at immigration status in determining the member’s ability to repay.  See, 12 C.F.R. 1002.6.  Based on this, the credit union may want to focus on the repayment aspect and the particular risks a noncitizen applicant poses.  This is alluded to in the commentary.  See, 12 CFR 1002, Supp. I, comments 1002.6(b)(7) – 1 and 2.  For example, a member who is new to the country, with no employment, and no past credit history may pose more risks to the ability to repay, than a person who has been in the country for 10 years, working as a physician at $450k a year, with satisfactory credit history and owns a home.

Notably, Form C-1 located in Appendix C to Part 1002, is a sample adverse action form and provides a few adverse action options that may apply to these situations.  For example, some reasons listed such as “Temporary or Irregular Employment”, “Length of Employment”, “Length of Residence”, or “Temporary Residence” may be applicable.  Ultimately, though, the rule requires credit unions to look at their underwriting criteria and select the appropriate reasons. 

Also, here are some useful resources which may be helpful:

• NCUA’s Fair Lending Guide
• Letter to Credit Unions No. 174.  This letter includes a white paper that’s geared towards risk-based lending. Starting on page 3, there is a pretty good discussion of consumer compliance and discrimination issues.

As always, if you have any questions concerning ECOA/Regulation B, or any other issue, please feel free to contact the NAFCU Compliance team. We’re here for you!

Trivia: What is ECOA’s record retention period for consumer credit applications?

###

Each month, NAFCU's research division sends out an Economic and CU Monitor survey which is summarized and reported in the Economic and CU Monitor. This month’s survey topic is Housing, and it includes questions on GSEs, HMDA, TRID, and chattel lending. Your responses provide us with the meaningful data we need when we represent you before policy makers. You don’t need to complete the entire survey. Every response is a helpful one!

NCUA Incorporates Guidance on Member Business Lending into Examiner’s Guide – A Deep Dive into Guidance on Section 723.4

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On Tuesday, November 29, 2016, NCUA issued Letter to Credit Unions 16-CU-11 notifying credit unions that long-awaited guidance on the revised member business lending rule has been added to the NCUA Examiner’s Guide with just over a month before the effective date of the rule. The agency originally promised that guidance would be shared with credit unions in the preamble to the final rule published in the Federal Register on March 14, 2016. See 81 Fed. Reg. 13530, 13533 (Mar. 14, 2016).

Since the final rule was released, the NAFCU compliance team has received numerous questions regarding revised section 723.4, which mandates federally insured credit unions adopt and implement commercial lending policies and procedures that address topics such as the types of commercial loans offered by the credit union, trade area, qualifications of credit union employees involved in the origination process and commercial loan underwriting standards. The updated Examiner’s Guide finally provides some much-needed guidance for credit unions drafting commercial lending policies. Here is what the guidance has to say about some specific areas of concern.

Types of Commercial Loans and Trade Areas

The guidance notes that a “credit union should analyze its membership and ensure its commercial lending staff has the necessary expertise, gained through experience and training, to understand the needs of the membership and the types of loans offered.” For example, if a credit union predominantly serves fishermen in Gloucester, Massachusetts, the guidance seems to suggest that the credit union should have staff that have the requisite experience and training to understand the needs of commercial fishermen and the types of loans they may need for their businesses to thrive.

Similarly, a “credit union must be certain it is capable of serving its identified trade area.” This means understanding local demographics, economics and industries as well as being familiar with what influences those aspects of the trade area. Returning to our Gloucester example, the economy on the North Shore of Massachusetts is largely based on commercial fishing and tourism. The guidance seems to suggest that a credit union serving this area may want to have an understanding of what factors influence the local economy (e.g., overfishing or lack of tourism). Furthermore, such a credit union may want to make sure that it has the capacity to serve businesses that may have infrequent payment streams since both commercial fishing and tourism are largely seasonal and highly depend on the weather.

Qualifications and Experience Requirements for Lending Staff

When it comes to policies addressing the qualifications and experience of commercial lending staff, the guidance recommends that credit unions “consider relevant factors specific to the credit union and to the needs of its commercial borrowing members” such as “loan volume, projected loan growth, trade area, complexity of the borrowing relationships, types of loans permitted” and any other unique factors that could influence the commercial loan portfolio of the credit union. This seems to indicate that NCUA expects credit unions with higher loan volumes, higher projected loan growth or with greater complexity in borrowing relationships to have more experienced staff but that is not explicitly stated in the guidance or preamble.

In addition, the guidance notes that when determining staffing levels “a credit union should consider appropriate levels of management, relationship managers, and support staff as may be required to ensure member’s [sic] needs are responsibly serviced in a safe and sound manner.” Likewise, a “credit union should also consider an appropriate separation of duties to prevent potential conflicts of interest and other problems in loan underwriting, collection, and portfolio monitoring functions.” In other words, the guidance suggests that credit unions developing policies regarding staffing levels in commercial lending departments consider what staffing level is sufficient to ensure adequate separation of duties and how many additional resources, in the form of managers or support staff, are needed to maintain that staffing level.

Underwriting Standards

The Examiner’s Guide also states that a policy outlining credit union commercial underwriting standards “must address the required analysis and depth of the financial review performed to support a credit decision.” For example, a “credit union’s borrower analysis should focus on the borrower’s financial condition and ability to repay. The guidance indicates that this includes income and expense trends, debt service ability, balance sheet changes, and the impact of those changes on the borrower’s ability to service debt. NCUA also expects the guidance to discuss the required evaluation of related parties and the influence those parties have on a borrower’s ability to repay a loan.”

In addition, “the policy must establish due diligence requirements to evaluate the other sources of income or losses that affect the guarantors or principals to determine the global financial condition and the debt service ability of a borrower and any associated borrowers.” Moreover, a “credit union’s underwriting standards must address the quality of the financial information used to make a credit decision and ensure that the degree of verification reflected in the financial information is sufficient to support the financial analysis and the risk assessment of a credit decision. A credit union can determine the quality of a financial statement using the level of assurance provided by a preparer and the required professional standards supporting the preparer’s opinion.”

The guidance also addresses additional aspects of a credit union commercial underwriting policy including the use of tax returns or financial statements, the types of collateral allowed, LTV ratio limits, personal guarantees, and valuation methods.

But Wait! There’s More…

These are just some areas where credit unions have expressed concerns or sought additional clarification regarding the requirements of section 723.4. Other aspects of the commercial lending policy requirement are also discussed in the guidance. The Examiner’s Guide also addresses other aspects of the revised member business lending rule including commercial loan workouts and construction and development lending. As we continue to digest the guidance, we may provide periodic updates either on the NAFCU Compliance Blog or in other publications. As always, members are encouraged to reach out to the Compliance Team with any questions.

Have a great week!

Overheard at Regulatory Compliance Seminar: All I Want for Christmas is NCUA’s MBL Guidance

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

NAFCU’s Regulatory Compliance Seminar was held last month in New Orleans, Louisiana. Credit union volunteers, staff and compliance personnel from all over the country attended and it was a pleasure to meet so many of you in person.

One presentation I was especially looking forward to was by Vin Vieten, Senior Credit Specialist for NCUA who presented Principles Based Commercial Loan Risk Management. Following that presentation, NAFCU asked when NCUA expected to release the promised guidance regarding the new MBL rule and updates to the Call Report to accommodate the rule change. The guidance had been expected to be released in September. As of that moment, NCUA did not have an estimated release date for us. However, Mr. Vieten did say he expected it before January. Apparently, NCUA may be saving the guidance as a Christmas present. Mr. Vieten did also say that he didn’t expect that anyone will be shocked or surprised by the guidance, as it will focus on risk management. This echoes previous indications from NCUA that existing guidance on managing loan risk may significantly inform this new guidance.

Elements of Risk Management of Commercial Lending

Mr. Vieten’s presentation outlined 4 elements of commercial loan risk management: people, policies, process, and governance and control.

The “people” risk element includes the Board of Directors who are ultimately accountable for commercial lending by virtue of their approval of the policy and oversight of loans and staff. It also includes senior management, who must have a comprehensive understanding of commercial lending and be able to manage the risk appropriately, and lending staff who must underwrite, process and evaluate commercial loans.

The “policy” element refers to the commercial lending policy, which must address many aspects of the credit union’s commercial lending activities including:

• Types of commercial loans permitted;
• Trade area;
• Portfolio concentration limits;
• Qualification requirements for lending staff;
• Underwriting standards;
• Loan approval processes; and
• Other risk management processes, including periodic review, risk rating and monitoring.

The “process” element describes the risk management process. This includes performing and documenting an initial risk assessment on a commercial loan, monitoring and perhaps reevaluating that risk, and establishing a credit risk rating process.

The “governance and control” element addresses the responsibility of the board for overall supervision, and internal controls, such as the loan review area.

Below is a slide from the presentation containing a summary of the risk management process for commercial lending as a whole:

Newly Announced FFIEC Webinar on the Military Lending Act

On Wednesday, the FFIEC announced a webinar on the Military Lending Act being offered through the FFIEC’s Industry Outreach Program. The webinar will be held December 1, 2016 at 3:00 pm eastern. Credit unions can register for the webinar here.

CFPB Issues Supervisory Highlights Expressing Concerns with Automobile Loan Servicing, Debt Collection, Mortgage Origination and Fair Lending

Written by Benjamin M. Litchfield, Regulation Compliance Counsel

Greetings to all of you out there in regulatory compliance land. On October 31, 2016, the CFPB issued its latest voluminous supervisory report sharing multiple observations from recent examinations and other supervisory activities. The report covers issues observed by the Bureau in the areas of automobile loan servicing, debt collection, mortgage origination and fair lending. Other topics, such as student loan servicing, are also addressed. Provided below is a digest of some (but not all) of the Bureau’s many findings.

Automobile Loan Servicing.  In recent examinations of nonbank auto loan servicing companies, CFPB examiners identified unfair practices relating to repossession fees. The supervisory report alleges that certain nonbank servicing companies would often hold personal property seized as part of repossessing an automobile and refuse to return the property until after the borrower paid a fee for storing the property. Supposedly, if the borrower did not pay the fee, the companies would dispose of the property rather than returning it to the borrower.

Regardless of whether these companies had the contractual authority to engage in such practices, Bureau examiners felt these practices were unfair because the tactic was often used to leverage personal situations for collection purposes with extreme examples including retaining tools essential to the consumer’s livelihood and retention of personal possessions of negligible market value but of substantial emotional attachment or practical importance to the consumer. Examiners also found that some agreements, while disclosing that property would be stored, failed to disclose that a fee would be assessed for storage.

[Authors Note: Unlike the Federal Trade Commission, which promulgated a rule prohibiting certain unfair or deceptive credit practices after extensive public hearings, the Bureau continues to define unfair practices through examination and enforcement without providing credit unions with much guidance or prior notice. Even the FTC’s statements on unfairness and deception, which have defined which practices are prohibited under the FTC Act for decades, are mere guidance to the Bureau that it does not feel obliged to follow.]

Debt Collection.  Bureau examiners also identified several violations of the Fair Debt Collection Practices Act (FDCPA), including charging unlawful convenience fees, making several false representations, and unlawfully communicating with third parties in connection with the collection of a debt. [Author’s Note: While credit unions collecting debts on their own behalf are not considered “debt collectors” subject to the FDCPA, the CFPB has signaled its intention to use its UDAAP authority against so-called first-party debt collectors that engage in the types of acts or practices prohibited by the Act. In other words, the CFPB is trying to get all actors to follow a law that, by definition, credit unions are not required to follow.]

In recent examinations, the Bureau identified situations where debt collectors imposed convenience fees to process payments by phone or online that were not explicitly authorized by the loan agreement or permitted by law in violation of Section 808(1) of the FDCPA. Likewise, debt collectors are reported to have stated that all fees were “nonnegotiable,” which examiners felt amounted to a false representation of the types of compensation which may lawfully be received by a debt collector in violation of Section 807(2)(B) of the Act.

The supervisory report also highlights circumstances where debt collectors would use false representations or deceptive means to collect a debt in violation of Section 807(10) of the FDCPA. For example, the report alleges that debt collectors would place calls to consumers purporting to assess the consumer’s creditworthiness, credit scores, or credit reports, or stating that an immediate payment would need to be made in order to prevent any negative impact on the consumer’s credit. In addition, debt collectors are reported to have also impersonated consumers while using the original creditor’s consumer-facing automated telephone system to obtain more information about the consumer’s debt.

Finally, debt collectors are stated to have disclosed both the nature and purpose of collection calls to third parties when attempting to gather more information about the consumer in violation of Sections 804 and 805 of the FDCPA. These communications were often caused by inadequate identity verification during telephone calls. Collectors would also identify their employers to third parties without first being asked for that information by the third party in violation of Section 804 of the Act.

Mortgage Origination.  CFPB examiners also found deficiencies in mortgage origination compliance management systems which allowed for violations of Regulations G, N, X, and Z. One such purported violation was the reported failure of some financial institutions to verify income using reliable third-party records when conducting an ability to repay analysis. The report notes that examiners supposedly found that income disclosed on a mortgage application was not verified but instead was tested for reasonableness using an internet-based tool that estimates income based on zip code, job title, and years at the current occupation. [Author’s Note: Aside from the rather technical Regulation Z issues raised by the Bureau, this practice could also pose some rather obvious fair lending risks if credit eligibility is being determined, in part, by zip code which can be a proxy for race. #LowHangingFruit] Bureau examiners also identified instances where institutions failed to provide Loan Estimates within 3 business days in violation of the TILA-RESPA Integrated Disclosures Rule.

Fair Lending.  Bureau examiners also observed situations in which they felt that a financial institution’s treatment of limited-English-proficiency (LEP) and non-English-speaking consumers posed fair lending risk. One example offered by the report involves an institution that marketed only some of its available credit card products to Spanish-speaking consumers, while marketing several additional credit card products to English-speaking consumers. The institution lacked the appropriate documentation describing the business decisions that were made to market some but not all products to Spanish-speaking consumers which raised fair lending concerns for CFPB examiners. The report noted that some treatment of LEP and non-English-speaking consumers has led to enforcement actions by the Bureau and the Department of Justice in the past.

The supervisory report also notes that redlining will remain a supervisory priority for the Bureau. When assessing redlining risk, the Bureau will look to several factors including the unique attributes of the relevant geographic areas, lending patterns, peer and market comparisons, marketing, mapping, and additional evidence such as whistleblower tips. Rather than identifying instances of redlining, the supervisory report discusses ways in which credit unions can have a strong compliance program and outlines the Bureau’s approach to examining for illegal redlining. [Author’s Note: Even more information on redlining can be found in this interagency webinar that was held on October 4 and available on demand.]

These are just some of the highlights from the CFPB’s report. The full report is available here. As we can see, the Bureau remains laser-focused on third-party debt collection as it prepares for a possible rulemaking in this area and possible fair lending concerns involving the treatment of LEP and non-English-speaking consumers. If that is true, I may need a stronger prescription for my glasses.

Updated URLA/Form 1003; Early HMDA Compliance Period for Ethnicity and Race Data Collection

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

Freddie Mac and Fannie Mae have issued an updated Uniform Residential Loan Application (URLA, also known as the Form 65 or Form 1003). The URLA can be used by creditors to ensure compliance with Regulation B (see 12 C.F.R. Part 1002, Appendix B) and is required under Freddie’s Seller/Servicer Guide and Fannie’s Selling Guide.

The CFPB used its approval of the revised and redesigned forms, published in the Federal Register on September 29^th, to also address the collection of applicant ethnicity and race information in advance of the new HMDA rules.

Early Compliance on Ethnicity and Race Data Collection Permitted

Generally, Regulation B prohibits credit unions from inquiring into an applicant’s race or ethnicity. However, Regulation B permits inquiries for monitoring purposes in connection with HMDA reporting. See, 12 C.F.R. § 1002.5(a)(2). Thus, until HMDA’s new provisions are in effect, credit unions can only inquire into race and ethnicity to the extent required by the current HMDA provisions, unless otherwise permitted.

The Bureau’s approval of the updated form cited that the revisions to HMDA do not require the collection of disaggregated race and ethnicity categories until January 1, 2018. However, in an effort ease the transition to new HMDA and provide space for the implementation of new policies and forms, the Bureau is permitting early compliance with the collection of disaggregated race and ethnicity categories. In the approval, the Bureau stated:

“At any time from January 1, 2017, through December 31, 2017, a creditor may, at its option, permit applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule. During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule, shall not be deemed to violate Regulation B § 1002.5(b). During this period, a creditor adopting the practice of permitting applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule, shall also be deemed to be in compliance with Regulation B § 1002.13(a)(i) even though applicants are asked to self-identify using categories other than those explicitly provided in that section. The issuance of this Bureau official approval has been duly authorized by the Director of the Bureau and provides the protection afforded under section 706(e) of ECOA.” 81 Fed. Reg. 66930, 66931. (Emphasis added.)

For more information on the new disaggregated ethnicity and race categories, as well as new HMDA’s special transition rule for collecting ethnicity, race and sex information, NAFCU members can view this July 2016 Monitor Article.

Credit unions complying early should continue to submit aggregated data throughout 2017, even though they are collecting data in a disaggregated form. The approval notice contains instructions on how to re-aggregate the information for submission. We have created a chart of the re-aggregation below for credit unions’ convenience:

NAFCU Webcast – Save $100 by Registering by Thursday

Credit Union Vendor Management: Basic Concepts and Risk Mitigation Techniques

Live Webcast Thursday, October 13, 2016  |  2:00-3:30 p.m. ET

NAFCU's Director of Education Devon Lyon and Regulatory Compliance Counsel Benjamin Litchfield will discuss operational and compliance challenges posed by managing vendor relationships. Attend this webcast to pinpoint frequent vendor management trouble areas for credit unions, and learn agency supervisory expectations. Early-bird registration expires tomorrow!

 

"Abacus: Small Enough to Jail" and Non-Traditional Underwriting Resources

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

This past week, my husband and I were on vacation in Toronto, Ontario, attending the Toronto International Film Festival. We had a tremendous time. One film we saw, and were both very excited about, was the world premiere of the documentary Abacus: Small Enough to Jail.

The film chronicles the legal struggle of family-run Abacus Federal Savings Bank, the only U.S. bank indicted for mortgage fraud related to the 2008 financial crisis. It was a gripping and sobering reminder of the damage caused by irresponsible lenders, the unfair legal burden on small financial institutions, and for me, most critically, the importance of credit unions, their mission and their role in their communities.

Abacus: Small Enough to Jail will have its U.S. premiere at the 54th New York Film Festival in October. It was produced by PBS’s Frontline and will air in early 2017. I'd recommend it to everyone.

One of the areas that got Abacus FSB in trouble was insufficient documentation when underwriting loans. Abacus FSB’s customers are frequently cash-only businesses and credit-invisible borrowers, especially Chinese immigrants. Credit unions often have similarly situated members, so, as a reminder, below are some resources for credit unions with similar memberships:

• NCUA’s April 2016 report Serving the Credit Invisible discusses loan application evaluation and underwriting programs for members who have little or no credit history.
• NCUA’s Letter to Credit Unions 10-CU-01 and its enclosure, Supervising Low Income Credit Unions and Community Development Credit Unions also contains useful discussion. The guidance describes alternative sources of funding, common characteristics of borrowers for LICUs and CDCUs, and how to properly credit risk these loans.
• NCUA’s Letter to Credit Unions 05-CU-01 regarding supervising CDCUs and its enclosed white paper: Supervising Community Development Credit Unions ― Balancing Their Mission and NCUA's Regulatory Responsibilities, may also be helpful. The enclosure describes for examiners the non-traditional underwriting practices of CDCUs due to the modest means and unique circumstances of their members. The white paper discusses the need to verify and document non-traditional income.
• FFIEC BSA/AML Examination Manual section on Cash-Intensive Businesses.
• NCUA’s December 1, 2015 webinar entitled Unique Challenges and Opportunities Servicing Hispanic Credit Union Members which discusses several issues in serving immigrant populations with unusual documentation and underwriting needs.
• NCUA’s Legal Opinion Letter 05-1219 discusses when it is permissible to underwrite an MBL using cash flow as collateral.
• NCUA’s Letter to Credit Unions 04-CU-10 discusses underwriting MBLs made to self-employed borrowers.
• NCUA’s Letter to Credit Unions 99-CU-05 on risk-based lending.

Seasonal Pumpkin Spice Lattes and Skip-a-Pays are Back!

Written by Stephanie Lyon, Regulatory Compliance Counsel

I recently walked into a store to buy puppy food and between the Halloween treats, fancy Thanksgiving table decor and winter holiday ornaments, I was instantly reminded that the holiday season is right around the corner. Skip-a-pay programs are offered by many credit unions and are especially popular around major holidays. These programs are designed to give members a little extra spending money by allowing certain borrowers to skip a loan payment and resume payments during the next pay period. While each credit union’s program may be unique, some regulatory guidance exists pertaining to the components of skip-a-pay programs.

Notification Requirements for Loan Modifications

Regulation Z has various disclosure requirements for skip-a-pay programs depending on whether the loan is open or closed-end credit. For non-home secured open-end credit, the commentary to section 1026.9(c)(2)(v) states that credit unions are generally not required to issue a change in terms notice if the skip-a-pay program was properly explained in the account-opening disclosures. Otherwise, Regulation Z requires credit unions to give prior notice before resuming the original payment schedule even though prior notice would not be required before skipping a payment. See, 12 C.F.R. § 1026, Supp. I, cmt. 1026.9(c)(2)(v) – 2. The official interpretation to section 1026.9(c)(1)(ii) contains similar guidance for home-equity lines of credit. See, 12 C.F.R. pt. 1026, Supp. I, comment 1026.9(c)(1)(ii)-2.

As for non-home secured close-end loans, implementing a skip-a-pay program could be more challenging as the program may require a modification to the existing loan agreement. This type of modification would typically not trigger additional disclosures under Regulation Z unless the original obligation has been cancelled and substituted by a new obligation. See, 12 C.F.R. § 1026, Supp. I, cmt. 1026.20(a)-1.i. Home-secured closed-end loans add an additional layer of complexity because allowing a skipped-payment can create issues related to flood certifications and negative amortization. If the credit union is contemplating skips on real estate loans, it may want to discuss this with local counsel.  Keep in mind that real estate transactions are largely governed by state law and skips could impact the credit union’s legal recourse.

In addition to Regulation Z, a couple of things to consider when making loan modifications are:

• Will the credit union require all of the borrower(s)’ signature and consent prior to modifying the loan? From a contract enforceability perspective, when there is a co-borrower and the credit union is willing to modify the terms of the note, state law may require that both signatures be on the modification or the credit union may not be able to enforce the contract against the borrower who did not sign.

• How is the member making up the skipped payment? For example, if the credit union adds another payment at the end of the maturity, this may extend the loan period and hence require a contract modification.

Adverse Actions

In addition to notification requirements under Regulation Z, Regulation B and to some extent the Fair Credit Reporting (FCRA) may require credit unions to issue adverse action notices to members that have applied for the skip-a-pay program and are denied. Under Regulation B, a member’s request to skip may be considered an application for the extension of credit. See, 12 C.F.R. §§ 1002.2(j) (defining “credit”); 1002.2(q) (defining “extension of credit”). Hence, the refusal to grant a skip-a-pay application could be considered an “adverse action” under Regulation B and require the credit union to send an adverse action notice. See, 12 C.F.R. §§ 1002.2(c)(1)(i) (defining “adverse action”); 1002.9(a)(1)-(2) (requirement to send an adverse action notice). One thing to keep in mind is that the rule generally does not require a credit union to send an adverse action notice to members whose account is currently delinquent or in default. See, 12 C.F.R. § 1002.2(c)(2)(ii).

The credit union may also have an independent obligation under the FCRA to send an adverse action notice if the credit union relied on a “consumer report,” such as a credit report issued by a reporting agency, to deny the application. 15 U.S.C. § 1681m. The FCRA definition of “consumer report” includes any “written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living…” 15 U.S.C. § 1681a(d)(1). This term does not include, however, information relating to the credit union’s own experiences with the member. See, 15 U.S.C. § 1681a(d)(2)(A)(i).

Skip-a-pay programs can be a great service to members. The credit union may just want to ensure it either anticipates these programs in the loan agreement or is prepared to properly modify contractual agreements under state law. If the skip-a-pay program is new to the credit union, refresh your recollection of Regulation Z’s notification requirements and any adverse action requirements that may be imposed from declining a skip-a-pay request.

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In honor of the impending fall and the inspiration for my puppy’s Halloween costume, here is a cute pugkin spice latte. I think Chewie could rock this, but I am open to suggestions.

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

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Upcoming NAFCU Webcast

Avoiding Truth in Savings Compliance Pitfalls

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

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

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?

 

Repossessions, Foreclosures, and the Servicemembers Civil Relief Act - A Primer and Some Resources

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Happy Friday to all of you out there in regulatory compliance land. On July 26, 2016, the U.S. Department of Justice filed a lawsuit against a creditor for repossessing servicemembers’ motor vehicles without first obtaining court orders authorizing repossession. Among the allegations made by the Justice Department include charges that the institution did not have adequate procedures for determining the military status of members prior to exercising its contractual rights to seize collateral to satisfy delinquent loans. In addition to injunctive relief, the Justice Department also seeks monetary damages and civil penalties.

The Servicemembers Civil Relief Act (SCRA or Act) prohibits credit unions from repossessing personal property (including a motor vehicle) or foreclosing on a mortgage after a servicemember enters military service without first obtaining a court order if the servicemember made a deposit or installment payment before entering military service. See, 50 U.S.C. § 3952(a)(1)-(2). The Act also contains additional protections against foreclosure or sale for any existing obligation on real or personal property owned by a servicemember secured by a mortgage, deed of trust, or other security in the nature of a mortgage. See, 50 U.S.C. § 3953(a)(1)-(2). A knowing violation of either of these provisions is a misdemeanor and can result in a fine or imprisonment for up to a year, or both. See, 50 U.S.C. §§ 3952(b), 3953(d).

Furthermore, the protections of the Act are not necessarily limited to servicemembers. When a court grants a stay, postponement, or suspends an action taken by the credit union, the court may also grant similar relief to sureties, guarantors, cosigners, or any “other person who may be primarily or secondarily subject to the obligation or liability.” 50 U.S.C. § 3913(a). Dependents may also request a court to grant similar protections if “the dependent’s ability to comply with a lease, contract, bailment, or other obligation is materially affected by reason of the servicemember’s military service.” 50 U.S.C. § 3959. Finally, the Act also protects citizens of the United States serving with allied forces. See, 50 U.S.C. § 3914.

Unlike the Military Lending Act, a servicemember may waive any rights and protections provided by the SCRA. Waiver of protections against repossessions and foreclosures, however, must be made in writing, “executed as an instrument separate from the obligation or liability to which it applies,” and are effective only if made during or after the servicemember’s period of military service. See, 50 U.S.C. § 3918(a). What this appears to mean is that credit unions may not rely on a blanket waiver in a loan agreement but rather must secure a separate waiver from the servicemember during or after military service. As with any other disclosure, credit unions may wish to review the document to ensure that disclosures are provided in a clear and conspicuous manner to ensure that the servicemember makes a knowing and intelligent waiver of his or her SCRA rights. Furthermore, there may be state law requirements for such a waiver, or state court procedural requirements for the presentation and reliance on such a waiver. While not necessarily addressing this issue, some useful resources addressing clear and prominent disclosures can be found in my last blog on deceptive advertising.

Although not required by the SCRA itself, NCUA has recommended that credit unions establish internal controls to manage potential SCRA compliance risk. Some internal controls recommended by NCUA and other banking agencies include:

• Determining military status prior to initiating a civil action by reviewing information available on the Defense Manpower Data Center (DMDC) SCRA database (available here);

• Researching military status periodically;

• Maintaining up-to-date books and records that document military status;

• Providing comprehensive training to loan officers and collections departments on SCRA compliance; and

• Having a quality assurance process to ensure that employees are following the credit union’s policies and procedures.

One thing to note is that the DMDC’s SCRA database is separate from the MLA database which is used to perform a covered borrower check to determine compliance with the Department of Defense’s Military Lending Act Rule.

Additional information on SCRA risk management can be found in this 2012 webinar on the SCRA available through the Federal Reserve. Letter to Credit Unions 09-CU-12 (June 2009) also provides resources, including interagency SCRA Exam Procedures and a copy of the AIRES Questionnaire dealing with SCRA compliance, that may also be helpful. In addition to SCRA compliance risk, credit unions may also wish to consider any potential reputation risk that may result from taking action against an active duty member of the armed forces. This article by an enforcement specialist at the Federal Reserve Bank of Philadelphia provides a useful summary on how credit unions may identify, measure, and mitigate reputation risk.

I hope this blog has been helpful and that you enjoy your weekend.

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DoD Military Lending Act Interpretive Guidance Released

This blog was written before DoD issued its MLA interpretative guidance on August 26, 2016. The interpretative guidance can be found in the Federal Register. NAFCU's Regulatory Compliance team will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.

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CFPB Updates TRID Webinar Question Index.  On Wednesday, July 27, 2016, the CFPB announced that it has updated its index of questions addressing the Bureau’s TRID Rule. The index now includes questions asked and answered during the March 1, 2016 and April 12, 2016 Outlook Live webinars hosted by the Federal Reserve. You can access that index here.

Oldie but Goodie – Record Retention

Written by Brandy Bruyere, Director of Regulatory Compliance

It has been a while since we blogged about a “frequently asked question” – how long do certain records need to be retained? As with most things involving the law, the answer is “it depends.”

First, for federally-insured credit unions, Part 749 of NCUA’s regulations contains guidance that is not terribly prescriptive. In fact, Appendix A to Part 749 notes the importance of state law in determining how long to keep particular records:

1. What Are the Recommended Minimum Retention Times?

Record destruction may impact the credit union's legal standing to collect on loans or defend itself in court. Since each state can impose its own rules, it is prudent for a credit union to consider consulting with local counsel when setting minimum retention periods. A record pertaining to a member's account that is not considered a vital record may be destroyed once it is verified by the supervisory committee. Individual Share and Loan Ledgers should be retained permanently. Records, for a particular period, should not be destroyed until both a comprehensive annual audit by the supervisory committee and a supervisory examination by the NCUA have been made for that period. (Emphasis added.)

For example, states set statutes of limitations that determine how long a person has to bring a civil suit against another party. These time periods vary by state, and even vary by type of claim/lawsuit so this is one way a state may “impose its own rules” that impacts a credit union’s recordkeeping. Power of attorney recordkeeping requirements are another example.

That being said, the NCUA guidance also notes that certain records should be retained permanently, including:

• The FCU’s charter, bylaws and amendments to these documents
• Minutes of membership meetings and meetings of the board, credit committee and supervisory committee
• Copies of the FCU’s call report (NCUA Form 5300 or 5310) and the Credit Union Profile Report (NCUA Form 4501) or its equivalent
• One copy of each supervisory committee annual audit report and attachments
• Supervisory committee records of account verification
• Journal and cash record
• General ledger
• Copies of periodic statements or the individual share and loan ledger (meaning, “a complete record of the account should be kept permanently)
• Bank reconcilements
• Listing of records destroyed

Part 749 also addresses vital records preservation and can be helpful when reviewing recordkeeping policies and procedures.

From a federal regulatory perspective, specific rules often have their own record retention provisions. Here are some examples:

Regulation Z addresses record retention in section 1026.25. The rule contains a general 2 year record retention requirement, with some longer retention periods for other specific documents. For example, there is a three year record retention requirement for information relating to loan originator compensation and the ability to repay/qualified mortgage rule. For loans subject to TRID, credit unions must retain evidence of compliance for three years, but all Closing Disclosures, including revised Closing Disclosures, must be retained for five years post-consummation.

Regulation B has a particular records retention rule found in §1002.12 and a requirement to keep in the application file a copy of any written notice that was required to be mailed under the regulation. There are more specific requirements relating to business credit, keeping records longer if the credit union knows it is under investigation by a regulator or state’s attorney general, and requires credit unions to keep records relating to prescreened offers of credit for 25 months so it may be worth reviewing in full. The rule’s commentary discusses keeping computerized records of notice.

Bank Secrecy Act. The BSA/AML examination manual contains an appendix on record retention requirements. Some records must be kept for 5 years, such as purchases of monetary instruments or funds transfers of $3,000 or more (although there are some exceptions here). Records under the credit union’s customer identification program (CIP) must be retained for five years after the account is closed.  Other BSA provisions are not subject to a specific record retention timeframe. However, to ease compliance, many credit unions keep all BSA-related records for 5 years rather than having to sort out which items are specifically required to be kept for 5 years and which are not.

Other federal rules. Here are a few other federal regulations with specific recordkeeping provisions:

• Regulation E, section 1005.13(b) (generally, two years from the time of providing disclosures)
• Truth in Savings, section 707.9(c) (generally, two years from the time of providing disclosures)
• Regulation X contains a few recordkeeping requirements. One example relates to mortgage servicing under RESPA, located at section 1024.38(c) (generally, until one year after the date a mortgage is discharged or servicing is transferred to another servicer). Other provisions have a five year retention period.
• Regulation C, section 1003.5(d) (modified register must be available to the public for 3 years, and the disclosure statement for 5 years
• Regulation CC, funds availability, section 229.21(g) (generally, at least two years)
• Fair Credit Reporting Act/Regulation V – Section 615(d)(3) requires credit unions to retain records relating to prescreened offers of credit for three years. Additionally, Appendix E of Regulation V contains guidelines on the accuracy and integrity of data reported to consumer reporting agencies (“Maintaining records for a reasonable period of time, not less than any applicable recordkeeping requirement, in order to substantiate the accuracy of any information about consumers it furnishes that is subject to a direct dispute…”)
• Flood insurance (record of receipt of the notice of special flood hazards and availability of flood insurance must be kept for as long as the credit union owns the loan)
• IRS Form 1099 (generally 3 years from the reporting due date, but four years for federal withholding information and filings under Form 1099-C for cancellation of debts, see p. 13 of this guide). The IRS generally requires that employment tax records are kept for four years.

Final thoughts. Again, this is not an exhaustive list, and besides federal regulatory requirements, there can be many good reasons to keep records for longer. Records can be key to success in litigation should the credit union be involved in a legal action such as enforcing a debt or defending against a civil suit. Records can also help demonstrate the credit union’s typical practices or how a credit union generally addresses an issue. Records often contain institutional knowledge, helping explain past decisions or provide context to existing policies and procedures. This does not mean everything needs to be retained forever though – record retention is a balance and outside specific regulatory requirements, this process often involves some decision making as well.

Treatment of Refinance Transactions under the MLA Rule; Coming Soon MLA Compliance Guide

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Happy Monday to all of you out there in regulatory compliance land. We have recently received questions about whether refinance transactions are exempt from the U.S. Department of Defense’s (DoD) revised Military Lending Act Rule (MLA Rule). There appears to be some confusion regarding some of the terminology used in the MLA Rule as well as some ambiguous provisions of state secured finance laws. The short answer is that refinance transactions are likely not exempt from the MLA Rule and credit unions will likely be required to comply with the rule’s requirements when refinancing a loan made to a covered borrower.

Section 232.3 of the MLA Rule defines “consumer credit” as “credit offered or extended to a covered borrower primarily for personal, family, or household purposes” that is also subject to a finance charge or payable in more than four installments. See, 32 C.F.R. § 232.3(f)(1)(i)-(ii). This section also sets forth a few exceptions to that definition including exceptions for residential mortgages, transactions exempt from Regulation Z and certain transactions “expressly intended to finance the purchase” of personal property or a motor vehicle “when the credit is secured by” the property or vehicle being purchased. See, 32 C.F.R. § 232.3(f)(2)(i)-(v). Some have argued that this last exception includes refinance transactions because those transactions qualify as “purchase money security interests” under state secured finance laws.

There is some support for the position that Section 232.3(f)(2) can be interpreted to exclude “purchase money security interests.” In the original MLA Rule, the DoD defined “consumer credit” to mean payday loans, vehicle title loans, and tax refund anticipation loans. A “vehicle title loan” was defined as “credit with a term of 181 days or fewer that is secured by the title to a motor vehicle, that has been registered for use on public roads and owned by a covered borrower, other than a purchase money transaction described in paragraph (b)(2)(ii) of this section.” See, 32 C.F.R. § 232.3(b)(1)(ii). The purchase money exception in paragraph (b)(2)(ii) is the same exception found in the current rule in paragraph (f)(2)(ii).

The DoD did not devote much discussion to this exception in either the preamble to the original rule or the preamble the recent MLA Rule. Instead, the Department makes a few references to “non-purchase money installment loans” in its discussion of the anticipated costs of complying with the 36 percent Military Annual Percentage Rate cap on loans made to covered borrowers. See, e.g., 80 Fed. Reg. 43560, 43602 (July 22, 2015). In the preamble to the original rule, the Department appears to focus its discussion on why vehicle title loans should be included on the definition of “consumer credit” without providing any clarity on the scope of the exception in then paragraph (b)(2)(ii).

The plain meaning of the rule, however, suggests that refinance transactions are not within the scope of the exception in paragraph (f)(2)(ii). The MLA Rule provides an exception for transactions “expressly intended to finance the purchase” of personal property or a motor vehicle “when the credit is secured by” the property or vehicle being purchased. The dictionary defines “purchase” to mean “to acquire by the payment of money or its equivalent; buy.” The plain meaning of the regulation, therefore, appears to only cover transactions where the covered borrower is buying a motor vehicle or personal property. Since, in a refinance transaction, a covered borrower does not typically buy a car or stove from himself but merely rolls over existing debt, it would be a stretch to try to fit that type of transaction within the plain meaning of the rule.

Furthermore, the MLA Rule expressly prohibits most refinance transactions unless the creditor is a bank, savings association or credit union. See, 32 C.F.R. § 232.8(a). To create an exception from the definition of “consumer credit” for refinance transactions in paragraph (f)(2)(ii) of Section 232.3, while also creating a prohibition of most refinance transactions in Section 232.8 would appear to create an inconsistency in the MLA Rule. Rather than inferring that the rule is logically inconsistent, a more likely reading of these two sections is that paragraph (f)(2)(ii) does not create an exception for refinance transactions. This preserves the general prohibition in Section 232.8 and avoids reading an ambiguity into the MLA Rule.

As for the argument that refinance transactions constitute “purchase money security interests” under state secured finance laws, courts appear split on this issue. Some federal appeals courts have held that refinancing a loan automatically extinguishes a “purchase money security interest.” Others have held that the “purchase money status” can survive and usually apply a dual status to different parts of the loan. See, e.g., In re Billings, 838 F.2d 405 (10th Cir. 1988) (providing a discussion of the apparent circuit split).

Given this ambiguity, it is unlikely that the DoD would adopt a definition of “consumer credit” or any exceptions that would invite uneven application of the protections of the MLA Rule. Furthermore, the dual-status approach that some courts have adopted could create compliance problems for credit unions since the Federal Trade Commission’s Credit Practices Rule (which I blogged on in April) prohibits creditors from taking a nonpossessory, nonpurchase money security interest in household goods. See, 16 C.F.R. § 444.2(a)(4).

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Coming Soon: MLA Compliance Guide – NAFCU’s Director of Regulatory Compliance, Brandy Bruyere, has worked over the past few weeks on a compliance guide for credit unions addressing many key areas of the DoD’s MLA Rule including credit cards, security interests and calculating the MAPR. As many of our members know, Brandy is NAFCU’s resident expert on the MLA Rule. This guide is offered as a complimentary service to our members and will be available on NAFCU's website on May 5th. We have created an MLA landing page with access to all of the resources NAFCU offers on MLA Compliance available here.

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DoD Military Lending Act Interpretive Guidance Released

The DoD published its interpretative guidance on August 26, 2016 in the Federal Register that may have changed our analysis. NAFCU's Regulatory Compliance team will update the association’s MLA Compliance Guide in advance of the effective date (October 3, 2016) to account for the new guidance.

Deconstructing TRID’s Application to Construction Loans: Disclosing AP Table in Single Combined Disclosures; BSA Webcast Series

Written by Shereefat Balogun, Regulatory Compliance Counsel

It has been over five months since the implementation of the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosure (TRID) rules, yet many credit unions are still worried about disclosure requirements, particularly as they apply to construction-to-permanent loans. One issue that credit unions have had questions about is the Adjustable Payment Table under §1026.37(i) and how it should be completed if a construction-to-permanent loan is disclosed as a single transaction with one set of disclosures. Some have had some confusion as to whether the table is even required in every circumstance.

Generally, the “Adjustable Payment Table” (the “AP Table”) described in 1026.37(i) is only required if the periodic principal and interest payment may change after consummation based on a loan term other than a change to the interest rate, or the transaction contains a seasonal payment product feature. If the transaction does not include either of these loan terms, then the table should not be disclosed on the Loan Estimate.

If the creditor is required to disclose the AP Table because the periodic principal and interest payment will change after consummation, for reasons other than a change to the interest rate, or if the transaction contains a seasonal payment feature, then Section 1026.37(i)(1) through (4) requires a creditor to disclose on the Loan Estimate the periods during which the following features will be in effect: (i) interest only; (ii) optional payment; (iii) step payment; and (iv) seasonal payment product features. The periods required to be disclosed should be disclosed by describing the number of payments counting from the first periodic payment due after consummation.

In the context of a construction-to-permanent loan, if the creditor chooses to disclose this loan as a single transaction with one set of disclosures, the AP Table must be disclosed. Note that, in the construction phase of this loan, the borrower will typically make interest-only payments. Once the construction phase is complete and the permanent phase starts, the borrower will transition into making regular periodic principal and interest payments. Accordingly, with construction-to-permanent loans transactions, there will always be a payment change after consummation that will not be based on a change to the interest rate.

When a creditor elects to disclose a construction-to-permanent loan as a single transaction, the AP table is disclosed pursuant to §1026.37(i), with particular adherence to §§1026.37(i)(1) and (5). The rule provides in relevant part:

(i) Adjustable payment table. If the periodic principal and interest payment may change after consummation but not based on an adjustment to the interest rate, or if the transaction is a seasonal payment product as described in paragraph (a)(10)(ii)(E) of this section, a separate table under the master heading “Closing Cost Details” required by paragraph (f) of this section and under the heading “Adjustable Payment (AP) Table” that contains the following information and satisfies the following requirements:

(1) Interest only payments. Whether the transaction is an interest only product pursuant to paragraph (a)(10)(ii)(B) of this section as an affirmative or negative answer to the question “Interest Only Payments?” and, if an affirmative answer is disclosed, the period during which interest only periodic payments are scheduled.

…

(5) Principal and interest payments. Under the subheading “Principal and Interest Payments,” which subheading is immediately preceded by the applicable unit-period, the following information:

(i) The number of the payment of the first periodic principal and interest payment that may change under the terms of the legal obligation disclosed under this paragraph (i), counting from the first periodic payment due after consummation, and the amount or range of the periodic principal and interest payment for such payment, labeled “First Change/Amount”;

(ii) The frequency of subsequent changes to the periodic principal and interest payment, labeled “Subsequent Changes”; and

(iii) The maximum periodic principal and interest payment that may occur during the term of the transaction, and the first periodic principal and interest payment that can reach such maximum, counting from the first periodic payment due after consummation, labeled “Maximum Payment.”

12 CFR 1026.37(i)(1) and (5)(emphasis added).

As way of illustration, if the interest-only period during the 12-month construction phase has a rate that adjusts monthly, in disclosing whether there are interest-only payments as required under §1026.37(i)(1), the creditor should state “yes for your first 12 months”. Moreover, under §1026.37(i)(5)(i), the monthly principal and interest payments disclosure labeled “First Change” or “Amount” must disclose the range of minimum and maximum payments that will be made at the second payment.

Note that this general rule applies whether the construction and permanent phases have fixed rates or adjustable rates, or one phase is fixed and the other is adjustable. The key is to remember that the loan is considered a single transaction; and within that single transaction there is a change in payment after consummation as a result of the transition from construction to permanent, which therefore requires the AP Table and the corresponding disclosures under Section 1026.37(i).

On a final note, many creditors have criticized the CFPB for its lack of clear guidance on TRID’s application to construction loans and specifically cite the absence of sample forms and minimal reference to construction loans in the commentary. While some credit unions have considered whether to continue offering construction loans, TRID and Regulation Z's disclosure requirements and guidance generally apply to covered construction loans, except where otherwise mentioned. This is the case even if the guidance or rule provision is not directly on construction loans. And of course, for NAFCU members, if you have any questions on any specific disclosure requirements, please feel free to contact NAFCU’s Regulatory Compliance team, and we would be happy to address any of your specific concerns.

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BSA: Reports & Training for CU Boards

Live Webcast: Tuesday April 19 | 2:00 p.m. – 3:30 p.m. EST

Part of the BSA Webcast Series

It’s vital to understand the roles and responsibilities of credit union board members regarding the Bank Secrecy Act (BSA). Attend this webcast to understand your board’s BSA duties such as risk assessments, policy reviews, and updates, as well as recommended additional training needs. You’ll also get tips for in-house training and learn how to properly report SARs to your board.

Unfair Credit Practices – Security Interests in Household Goods

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans and happy Friday! We recently received questions about whether credit unions can take security interests in household goods to secure non-purchase money loans. Since this issue is somewhat complex and involves some twists and turns, I decided to write this blog post to (hopefully) clarify the matter for you. The short answer is that, in general, this is considered an unfair practice under Section 5 of the Federal Trade Commission Act (FTC Act) and is prohibited.

The Federal Trade Commission’s Credit Practices Rule states that it is an unfair act or practice within the meaning of Section 5 of the FTC Act for “a lender or retail installment seller directly or indirectly to take or receive from a consumer an obligation that…[c]onstitutes or contains a nonpossessory security interest in household goods other than a purchase money security interest.” 16 C.F.R. § 444.2(a)(4).

The rule defines “household goods” to include the following:

• Clothing

• Furniture

• Appliances

• One radio and television

• Linens

• China

• Crockery

• Kitchenware, and

• Personal effects (including wedding rings).

16 C.F.R. § 444.1(i). Informal Staff Opinion Letters issued by FTC Staff have also indicated that items such as sewing machines, telephones and answering machines, household pets, ovens, and patio furniture are also considered “household goods.” The term “household goods,” however, does not include works of art, electronic entertainment equipment, items acquired as antiques, or jewelry (except wedding rings). FTC Staff have also said that bicycles, power tools, lawn equipment, boats, and livestock are not considered “household goods.” Furthermore, even if an item is considered a “household good,” the creditor can take a security interest if it is a “fixture,” meaning that it is attached to real property.

In the Statement of Basis and Purpose for the Credit Practices Rule, the FTC explained why it believes this type of conduct to be “unfair”:

The record reflects the fact that creditors rarely engage in actual repossession of household goods. When it does occur, the furniture and other items seized frequently have little or no economic value; occasionally, the act of seizure appears to be undertaken for punitive or psychological deterrent effect.

Although seizure of household goods is rare, when it occurs it can have severe economic consequences…in the context of seizure the disproportionate economic impact of non-purchase money security interests is most apparent. Debtors lose property which is of great value to them and little value to the creditor. The value to the debtors consists primarily of the replacement cost of the goods seized, together with psychological and emotional value. The debtor is, in an economic sense, willing to pay more for the household goods than they are ever wroth to the creditor on the resale market.

49 Fed. Reg. 7740, 7763 (March 1, 1984). Since this practice appeared to the FTC to be likely to cause substantial injury to consumers that is not reasonably avoidable and not outweighed by benefits to consumers or competition, the FTC declared taking a non-possessory security interest in household goods to be unfair and a violation of the FTC Act.

In the past, NCUA had a similar rule that was applicable to federal credit unions. This rule was codified as Part 706 of NCUA’s Rules and Regulations. Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, NCUA no longer has rule writing authority under the FTC Act so the rule has been repealed. See, 79 Fed. Reg. 59627 (Oct. 3, 2014). However, NCUA and the federal banking agencies issued supervisory guidance stating that the agencies still considered these practices to be unfair and will take appropriate action under their respective authorities to enforce Section 5 of the FTC Act. See, Interagency Guidance Regarding Unfair or Deceptive Credit Practices (Aug. 22, 2014).

So, practically speaking, what does this mean? For federal credit unions, this means that even though the FTC does not have authority over federal credit unions, the FTC’s Credit Practices Rule applies since NCUA believes these practices to be unfair in themselves and to violate Section 5 of the FTC Act. For state-chartered credit unions, who have always been subject to the FTC's jurisdiction, this blog can serve as a reminder of what the Credit Practices Rule requires.

CFPB’s Policy Priorities Confirm Rulemaking Plans on Overdraft, Debt Collection and Interest in Small Business Lending

Written by Shereefat Balogun, Regulatory Compliance Counsel

On Thursday, February 25, 2016, the CFPB held a Consumer Advisory Board meeting which generally provided an overview of the bureau’s strategic outlook. The CFPB subsequently published a report outlining its two-year supervision and enforcement priorities. Many of the stated priorities are iterations of previous comments made by the bureau, and confirm impending rulemaking. Others provide insight on new areas of interest.  Credit unions under the bureau’s jurisdiction should note the following priorities as they set their compliance goals for the next two years:

• Arbitration: The CFPB indicated that it will continue the rulemaking process to regulate the use of arbitration clauses, especially those that limit a consumer’s right to bring a class action.

• Consumer Reporting: The bureau reported that it will continue to examine and investigate consumer reporting companies and furnishers of information, with a focus on accuracy and dispute resolution processes. The CFPB also stated that it may consider rulemaking around furnisher and consumer accuracy, dispute resolution, and related issues.

• Debt Collection: The CFPB confirmed that it will initiate the rulemaking process and finalize a rule that establishes guidelines to ensure that debt collectors treat consumers with respect, substantiate the debts they collect on, and “provide consumers with appropriate information about their rights and the debt collection process.”

• Mortgages: The CFPB has restated its commitment to ensure that the Home Mortgage Disclosure Act (HMDA) rule is successfully implemented, and that its supervisory and enforcement programs work to provide equal and fair access to mortgage credit. The CFPB also indicated a particular focus on implementing its mortgage servicing rules. Lastly, the bureau stated that it will begin to assess the effectiveness of significant rules that are already in place.

• Overdraft: The bureau makes clear that it fully intends to move forward with the rulemaking process related to overdrafts, with a purported goal of making the overdraft market “fairer and more transparent”.

• Small Business Lending: The CFPB confirmed its growing interest in small business lending, and lists its plan to build a small business lending team and begin “market research and outreach for a rulemaking on business lending data collection.” The bureau also indicated that it will continue to examine small business lenders for compliance with fair lending laws. As a reminder, Dodd-Frank amended the Equal Credit Opportunity Act (ECOA), requiring financial institutions to collect and maintain certain information in connection with credit applications submitted by women-owned, minority-owned or small businesses.

This is a few of the priorities listed in the report. NAFCU previously reported on the full list of priorities. Notably, the CFPB clarifies that, in addition to the stated priority goals, it will continue its ongoing efforts in its fair lending oversight of indirect auto lenders and rulemaking on prepaid cards. The bureau also advises companies to “continue their focus on complying with the law beyond the particular issues described in the goals, whether or not they see their particular industry or product mentioned explicitly among the shared cross-Bureau priorities.”

As a reminder, this will only be applicable to credit unions directly supervised by the CFPB- those with over $10 billion in assets. For those credit unions not subject to CFPB’s supervision, the priorities may nonetheless be a useful tool. The policy priorities can be found here. Credit unions are also advised to review NCUA’s Supervisory Priorities for 2016.

Rates They Are A-Changin’ – Disclosure Requirements for Variable Rate Products

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans! With the Federal Open Market Committee (FOMC) largely expected to announce an increase in the federal-funds rate today, many of you may be wondering what obligations credit unions have under federal law to inform members should rates on some variable-rate products increase. This blog post covers some of those questions by taking a look at NCUA’s Truth in Savings Rule and Regulation Z.

Before diving into these rules, keep in mind that share accounts and consumer credit plans are, at their base, contracts between a credit union and its membership that may be subject to various state and federal requirements outside of the scope of either Truth in Savings or Regulation Z. When contemplating a change in interest rates, the credit union’s agreement with the member will determine when the credit union can change rates on existing accounts.

Truth in Savings (TIS)

TIS rules regarding subsequent disclosures require 30 calendar days’ advance written notice for some changes to share accounts. However, section 707.5(a)(1) explicitly exempts variable-rate changes. Moreover, the rule only requires disclosure of changes that are adverse to the interests of the member. Therefore, an increase in the dividend rate and corresponding annual percentage yield would not be required to be disclosed in advance.

Regulation Z

For open-end consumer credit plans, such as credit cards, unsecured loans, and home equity plans, Regulation Z does not require credit unions to provide members with change-in-terms notices before rate increases under properly disclosed variable-rate plans. 12 C.F.R. § 1026.9(c)(2)(v)(C). For this exception to the advance written notice requirement to apply, the rate change must be based on a publicly available index that is not under the credit union’s control. Official Interpretations of Regulation Z state that an index is publicly available if the member can independently obtain and use it to verify the annual percentage rate applied to the account.

The commentary provides examples of certain circumstances where the index will be considered to be under a credit union’s control such as when the index is the credit union’s own prime rate or cost of funds. Another example is where the contract specifies a rate floor that does not permit the variable rate to decrease consistent with the index. It is worth noting, however, that the commentary does allow a rate ceiling that does not permit the variable rate to increase beyond a certain threshold. Finally, an index will be considered to be under a credit union’s control where the credit union has the authority to pick the index to be used.

The commentary also notes that the change must be as a result of a change in the index, and not a change in the margin used to determine the variable rate. For example, changing the margin from LIBOR + 2.50% to LIBOR + 3.00%, would not be considered an increase “due to the index” and therefore would require additional disclosures. For credit card accounts, changing the margin would also trigger the member’s right to reject the proposed changes.

For adjustable-rate mortgages (ARMs), Regulation Z requires credit unions to provide disclosures in connection with the adjustment of interest rates that result in corresponding adjustment to the payment. 12 C.F.R. § 1026.20(c). The disclosures should be provided to members at least 60 days but no longer than 120 days before the first payment at the adjusted level is due. For ARMs with uniformly scheduled rate adjustments, such as an adjustment every 60 days, credit unions must provide disclosures at least 25 days but no more than 120 days before the first payment at the adjusted level. This rule also applies to ARMs originated prior to January 10, 2015 in which the adjusted interest rate and payment are calculated based on a date that is less than 45 days prior to the adjustment date.

It is important to note that changes that occur within the first 210 days of the closing do not trigger advance notice requirements because homeowners will have received notices of the change at closing. 12 C.F.R. § 1026.20 (d). However, if the first adjustment to an ARM occurs within 60 days of consummation and the new interest rate disclosed at consummation was an estimate, the disclosures must be provided to members as soon as practicable but no less than 25 days before the first payment at the adjusted level is due.

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Cats and Christmas Trees: My wife and I recently put up our Christmas tree. While doing so, Hazel, the younger of our two cats decided that she wanted to help out. We adopted her from Meow Stories, a local cat rescue in Fredericksburg, VA and haven’t been happier. Her brother, Max, seems pleased to have a friend in his own haughty, cat-appropriate way.

 

 

Last Call Before the TRID Overhaul: Disclosing Lender Credits

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

It is almost upon us. On Saturday, the CFPB’s long-looming TRID rules actually go into effect. As credit unions prepare to use the new forms in actual transactions, the practical complexities and ambiguities of the rules are crystalizing before us. Your NAFCU Regulatory Compliance Team is fielding all your last-minute TRID clarifications, and one that keeps popping up again and again is lender credits. Below is a summary of the language in the comments and Preamble to clarify how to disclose lender credits.

Lender Credits and the Loan Estimate

Section 1026.37(g)(6)(ii) requires that the amount of lender credits be disclosed as a negative number, but the details of disclosing lender credits are largely described in the Preamble and the Official Interpretations. In order to determine what might be considered a “lender credit” the commentary to 1026.37 points you to the commentary to 1026.19. Specifically, comment 1026.19(e)(3)(i)-5 describes that lender credits come in two forms: general and specific:

 “Lender credits,” as identified in § 1026.37(g)(6)(ii), represents the sum of non-specific lender credits and specific lender credits. Non-specific lender credits are generalized payments from the creditor to the consumer that do not pay for a particular fee on the disclosures provided pursuant to § 1026.19(e)(1). Specific lender credits are specific payments, such as a credit, rebate, or reimbursement, from a creditor to the consumer to pay for a specific fee.

With that clarifying detour out of the way, we can return to section 1026.37(g)(6)(ii) on how to complete the form. Comment 1026.37(g)(6)(ii)-1 confusingly describes all lender credits disclosed in the form as general credits, but then Comment 1026.37(g)(6)(ii)-2 clarifies that specific credits should be disclosed in the same box as well:

For loans where a portion or all of the closing costs are offset by a credit or rebate provided by the creditor (sometimes referred to as “no-cost” loans), whether all or a defined portion of the closing costs disclosed under § 1026.37(f) or (g) will be paid by a credit or rebate from the creditor, the creditor discloses such credit or rebate as a lender credit under § 1026.37(g)(6)(ii).

The lender credits disclosed under section 1026.37(g)(6)(ii) are disclosed in Box J of the Loan Estimate.

Lender Credits and the Closing Disclosure

 So, after some circumnavigation through the commentary, we have determined the general credits and the specific credits are combined in your Loan Estimate. But what to do in the Closing Disclosure? Lender credits must be included in the Closing Disclosure under section 1026.38(h)(3). Comment 1026.38(h)(3)-1 clarifies what to do with specific credits:

When the consumer receives a generalized credit from the creditor for closing costs, the amount of the credit must be disclosed under § 1026.38(h)(3). However, if such credit is attributable to a specific loan cost or other cost listed in the Closing Cost Details tables, pursuant to § 1026.38(f) or (g), that amount should be reflected in the Paid by Others column in the Closing Cost Details tables under § 1026.38(f) or (g). For a description of lender credits from the creditor, see comment 17(c)(1)-19. For a discussion of general lender credits and lender credits for specific charges, see comment 19(e)(3)(i)-5.

So while both specific and general lender credits are entered into Box J on the Loan Estimate, only general lender credits are entered into Box J on the Closing Disclosure. Specific lender credits are itemized in the Closing Disclosure in the “Paid by Others” column. Of course removing specific credits from the lender credits will reduce the total in Box J as compared to the Loan Estimate. Regarding a good faith analysis, Comment 1026.19(e)(3)(i)-6 gives the following guidance:

For purposes of conducting the good faith analysis required under § 1026.19(e)(3)(i) for lender credits, the total amount of lender credits, whether specific or non-specific, actually provided to the consumer is compared to the amount of the “lender credits” identified in § 1026.37(g)(6)(ii). The total amount of lender credits actually provided to the consumer is determined by aggregating the amount of the “lender credits” identified in § 1026.38(h)(3) with the amounts paid by the creditor that are attributable to a specific loan cost or other cost, disclosed pursuant to § 1026.38(f) and (g).

Lender Credits and Revisions

Lender credits get zero tolerance for decreases under section 1026.19(e)(3) because both general and specific lender credits are negative charges to the consumer. Comment 1026.19(e)(3)(i)-5 states that decreasing the lender credit is the equivalent of increasing a charge to the consumer. Comment 5 also makes it clear that a lender can increase lender credits to compensate for higher fees as much as they desire, but they cannot lower it.

If a specific lender credit is given in a Loan Estimate, and the cost it is intended to compensate comes in lower than expected, the Commentary and Preamble, page 349 makes it clear that the borrower still must receive that credit somehow:

Under current Regulation X, the loan originator may only apply the amount of the excess lender credits to additional closing costs previously not anticipated to be included in the loan, apply the excess to a principal reduction to the outstanding balance of the loan, pay the consumer the excess in cash, or reduce the interest rate and the credit accordingly. Creditors will be able to take the same actions with respect to lender credits in streamlined refinancing programs under this final rule.

The inability to decrease a lender credit isn’t absolute though. Section 1026.19(e)(iv)(D) clearly contemplates revising a loan estimate with decreased lender credits which result from a rate lock. Further, the Preamble on page 348 states: “With respect to whether a changed circumstance or borrower-requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower-requested change can decrease such credits, provided that all of the requirements of §1026.19(e)(3)(iv), discussed below, are satisfied.” As long as the decrease in lender credits is related to a valid reason for a revised Loan Estimate under section 1026.19(e)(3)(iv), nothing indicates that loan credits cannot be decreased.

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Do not forget NAFCU members, your NAFCU Regulatory Compliance team is here to help you hash out the last minute details as you implement these rules. Don't hesitate to email us at [email protected].

NCUA Makes Technological Updates to Complaints Portal; NCUA Applies Broader Reading of Loan Participation Rule

Written by Victoria Daka, Regulatory Compliance Counsel

On September 10, 2015 the NCUA launched its improved online Consumer Assistance Center portal which creates a more streamlined process for complaint management. With the technological improvements in the portal, consumers are able to submit inquiries, complaints and additional documentation online through a secure portal. Additionally, they will also be able to check the status of their complaints online. NCUA indicates that in the upcoming weeks, credit unions will also be able to use the new Consumer Assistance Center portal to submit complaint response information securely and check the status and number of complaints concerning their institutions. However, the NCUA notes that the portal use is voluntary.

The technological ammendments in the complaints portal follow NCUA’s Letter to Federally Insured Credit Unions issued in June of this year, indicating improvements to the complaint handling procedures. This Letter encompasses two distinct changes to the consumer complaint process, the appeals process and recommendations for credit unions to maintain effective procedures to process consumer complaints in house. For more information on NCUA’s improved complaint handling process, see NAFCU’s Compliance blog here.

To assist credit unions, NCUA intends to release a video explaining how to use the Consumer Assistance Center portal and the new resolution process. In addition, NCUA plans to host a webinar about the portal and other federal consumer financial protection matters in October.

The online Consumer Assistance Center portal is located on NCUA’s consumer website, MyCreditUnion.gov.

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NCUA Applies Broader Reading of Loan Participation Rule

In a recent Legal Opinion Letter, NCUA applies a broader reading of the loan participation rule with respect to the “originating lender” definition. NCUA indicates in the Letter that a federally insured credit union (FICU) or other “eligible organization” that is the seller of a participation, may be considered the “originating lender” where the seller has generated the loan by an indirect lending arrangement with a retailer.  Furthermore, NCUA ultimately indicates that a FICU is permitted under its loan participation rule to purchase a participation in a loan generated by an indirect lending arrangement. However, this is only permissible under limited circumstances.

NCUA specifies the limiting circumstances in two prongs. First, the retailer must be acting as an agent of the FICU or other eligible organization, and is simply performing as an administrative functionary processing a loan for an FICU or other eligible organization. Second, the retailer’s activities must be part of, and an extension of, the FICU or other eligible organization’s lending operations. In other words, the retailer is not acting like a separate lender generating loans for itself.  Instead, the retailer is the facilitator of the FICU or other eligible organization’s loan processing mechanism, and the FICU or other eligible organization is the de facto originating lender, and, therefore the originating lender for purposes of the loan participation rule.

The Legal Opinion Letter can be viewed in its entirety here.

CFPB Allegations Against Santander; Indirect Lending Reminders; Fed Survey: Seeking Member Input

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Last Wednesday, Victoria wrote a round-up of recent CFPB enforcement actions. Later that day, the Wall Street Journal reported on yet one more: large auto lender Santander Consumer USA Holdings Inc. (Santander) said the CFPB has alleged that it violated U.S. fair lending laws. Specifically, the CFPB has alleged that Santander has violated the Equal Credit Opportunity Act (ECOA) by overcharging “protected groups” of consumers on auto loans made through car dealerships.

This is only the latest CFPB action focusing on indirect auto lending. Earlier this month, the CFPB called for Fifth Third Bank to cut its dealer markup to avoid possible discrimination in its auto-lending business. In July, the CFPB and the Department of Justice announced a $25 million settlement  to resolve discriminatory auto lending practices by American Honda Finance Corporation. In September, 2014 the CFPB announced its intention to extend its supervisory authority  to nonbank auto lenders. The same month an article appeared in The NCUA Report from the Office of Examination and Insurance Report cautioning credit unions about the dangers of indirect auto lending.

As we enter the 2016 model year, and in light of the CFPB’s allegations against Santander, now might be a good opportunity to review NCUA’s expectations for indirect lending relationships. In August, 2010, NCUA issued Letter to Credit Unions no. 10-CU-15 regarding the unintended exposures to risk which can result from indirect lending relationships. This letter was primarily focused on safety and soundness, and did not specifically address the ECOA, but it did cite dealer incentives and compensation programs as possible areas of risk and discussed the importance of clear vendor policies and consistent reviews.

While NCUA still has supervisory authority over credit unions with $10 billion or less in assets regarding compliance with the ECOA, Bulletin 2013-02 issued by the CFPB gives useful guidance on avoiding ECOA issues in indirect lending relationships. NCUA has indicated in its Fair Lending Examination and Compliance Program Questions and Answers that credit unions should review their indirect lending programs in conjunction with this CFPB bulletin to ensure their programs comply with ECOA and Regulation B. (See Question 21).

Both the NCUA’s Letter to Credit Unions and the CFPB’s Bulletin cite dealer mark-up and compensation policies as a major area of potential risk. The CFPB Bulletin recommends eliminating dealer discretion to markup buy rates and finding other mechanisms to compensate dealers that cannot result in discriminatory treatment. In the alternative, it recommends imposing controls on dealer markup and compensation policies, and monitoring these policies to ensure compliance and to address unexplained pricing disparities.

A credit union may not have sufficient leverage to negotiate a competitive program for its members while disallowing dealer mark ups. In that situation, the CFPB recommends sending communications to all participating dealers explaining the ECOA, the credit union’s expectations with respect to ECOA compliance, and the dealer’s obligation to markup interest rates in a non-discriminatory manner. Then the CFPB recommends follow up in the form of regular analysis of dealer-specific and portfolio-wide loan pricing data to locate potential disparities, and where disparities are prohibited by the ECOA, taking corrective action against dealers and properly remunerating any affected members.

Finally, NCUA’s Letter to Credit Unions and the CFPB bulletin both emphasize the important of robust compliance management programs. The AIRES Questionnaire regarding indirect lending requires review of dealer compensation programs to ensure it is competitive, yet fair. It also requires a credit union have policies in place regarding dealership compensation. The difficulty of establishing an indirect lending program where dealer compensation is competitive, yet fair and nondiscriminatory toward members is challenging. It’s clear it is an issue that will not be going away anytime soon. 

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NAFCU Seeks Member-CU's Input for Report to Fed

In other news, NAFCU is asking members to complete a survey on a range of issues, including the impact of CFPB's qualified mortgage rule, the Durbin Amendment and NCUA's proposed risk based capital rule, in preparation for this year's meeting between its board and Federal Reserve Board Gov. Jerome Powell. The deadline for survey submission is Sept. 11. 

CFPB Finalizes TRID Delay; CFPB and Justice Department Action Against Honda for Alleged Discriminatory Auto Lending Practices; Farewell; Programming Note

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

CFPB Finalizes TRID Delay. Yesterday, the CFPB finalized the delay of the TRID rule until October 3, 2015 and clarified that the delay will also apply to the post-consummation escrow cancellation and mortgage servicing transfer notices. NAFCU noted this ambiguity in the proposal and stressed in our comment letter that this needed to be clarified. Here is the excerpt relating to the post-consummation notices (escrow cancellation, changes to mortgage servicing transfer notice):

“The technical amendments also take effect on October 3, 2015, the same effective date as the TILA-RESPA Final Rule and Amendments. Some commenters specifically asked whether the change in effective date to October 3, 2015, applies to the postconsummation notice requirements including §§ 1026.20(e) and 1026.39(d)(5). As discussed in the TILA-RESPA Final Rule, implementation of the Dodd-Frank Act disclosures in §§ 1026.20(e) and 1026.39(d)(5) becomes mandatory on the effective date, now October 3, 2015. As discussed further in part VII below, the portions of this final rule related to the delay in the effective date to October 3, 2015, are effective immediately upon publication in order to move the effective date for the TILA-RESPA Final Rule and Amendments and the amendatory instruction discussed in note 4 from August 1, 2015 to October 3, 2015. As a result of this final rule, the provisions of the TILA-RESPA Final Rule and Amendments, as well as the technical amendments and corrections made in this final rule, are not effective immediately upon publication, but on October 3, 2015.” (Emphasis added)

The Bureau also rejected requests for a “formal grace period or dual compliance period” meaning early compliance with the rule is still not permitted.

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CFPB and Justice Department Action Against Honda for Alleged Discriminatory Auto Lending Practices. Last week, the CFPB and Department of Justice (DOJ) announced a settlement to resolve alleged discriminatory auto lending practices by American Honda Finance Corporation (Honda) against African-American, Hispanic and Asian/Pacific borrowers. The CFPB’s press release and the consent order between the CFPB and Honda are available here and here, respectively. Honda’s settlement with the DOJ is subject to court approval, and the DOJ has filed a complaint and proposed order in the U.S. District Court for the Central District of California.

The action focuses on indirect auto lending practices, specifically dealer markups. According to the consent order, Honda permitted dealers to mark-up consumers’ interest rates by as much as 2.25 percent for contracts with terms of 60 monthly payments or less, and 2 percent for contracts with greater than 60 monthly payments. However, the allegations are that as a result of its dealer discretion pricing policies, Honda charged borrowers higher interest rates because of their race or natural origin, and not because of the borrowers’ creditworthiness or other objective credit risk criteria.

From the DOJ’s press release:

“The United States’ complaint alleges that the average African-American victim was obligated to pay over $250 more during the term of the loan because of discrimination, the average Hispanic victim was obligated to pay over $200 more during the term of the loan because of discrimination and the average Asian/Pacific Islander victim was obligated to pay over $150 more during the term of the loan because of discrimination. The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending.”

Under the CFPB order, Honda must substantially reduce or eliminate entirely dealer discretion; pay $24 million in damages for consumer harm; and administer and distribute funds to victims. I thought this excerpt from the CFPB’s press release, regarding dealer discretion, was of interest:

“Honda will reduce dealer discretion to mark-up the interest rate to only 1.25 percent above the buy rate for auto loans with terms of 5 years or less, and 1 percent for auto loans with longer terms. Honda also has the option under the order to move to non-discretionary dealer compensation. The Bureau did not assess penalties against Honda because of Honda’s responsible conduct, namely the proactive steps the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether.”

The CFPB has been looking at fair lending issues in the indirect auto market for some time now. As we have previously blogged, the CFPB released Bulletin 2013-02 in March 2013 to indirect auto lenders about compliance with the Equal Credit Opportunity Act (ECOA), and released a supervisory highlights report in September 2014 detailing supervisory activities in the indirect auto lending market.

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Farewell.  Today is my last day at NAFCU, so I just want to take a moment to thank everyone. I’ve had the opportunity to work with great colleagues here at NAFCU and I am thankful for all of the opportunities over the past few years. A big thank you to NAFCU members and blog readers – I’ve enjoyed working with many of you on compliance questions, meeting folks at conferences, chatting over the phone, and emailing.  I’m also staying within the credit union industry, and will be moving in-house at a credit union. So, I’m not going far and I look forward to staying in touch. Thanks again for everything!

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Programming Note. NAFCU’s office will close at noon today for an all-staff team-building event.

CFPB TILA/RESPA Implementation Delay; NCUA Board Meetings Results

Written by JiJi Bahhur, Director of Regulatory Compliance

The Consumer Financial Protection Bureau (CFPB) and National Credit Union Administration (NCUA) have been busy bees this week with announcements and issuances that credit union professionals will definitely want to know and hear more about.

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Delayed Implementation of TILA/RESPA.  On Wednesday, Director Richard Cordray of the CFPB announced that the bureau will be issuing a proposed amendment to delay the implementation deadline for the Truth in Lending Act and Real Estate Settlement Procedures Act (TILA/RESPA) Integrated Mortgage Disclosure requirements until October 1.  This delay would provide credit unions two more months to comply with the rules, which are currently scheduled to go into effect on August 1, 2015.

“The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015,” CFPB Director Richard Cordray said in a prepared statement. “We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks.”

While this delay is a step in the right direction, and one that NAFCU welcomes, a two-month delay may still not be enough to meet credit unions’ needs. Credit unions have been gearing up and working diligently with vendors to ensure timely compliance with the TILA/RESPA Integrated Mortgage Disclosure rule, but there are still a number of ambiguities in the rule that need to be addressed by the CFPB. 

At this point, it’s hard to tell what this will mean or how this will affect credit unions, but once the CFPB releases its proposal on delayed implementation of TILA/RESPA, NAFCU will provide greater detail on what it entails on our compliance blog. 

As an aside, what I would love to see the CFPB do between now and the new October 1 effective date is issue an FAQ detailing answers to questions and ambiguities the bureau has been made aware of. 

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NCUA Board Meeting Results. On Thursday, the NCUA Board held an open meeting to discuss the following items, all of which were unanimously approved:

1. Final Interagency Rule, Part 760 of NCUA’s Rules and Regulations, Loans in Areas Having Special Flood Hazards.
2. Board Briefing, Final Interagency Policy Statement Establishing Joint Diversity Assessment Standards.
3. Final IRPS 13-1, Minority Depository Institution Preservation Program.
4. Notice and Request for Comment, Regulatory Review in Accordance with the Economic Growth and Regulatory Paperwork Reduction Act.
5. Federal Credit Union Loan Interest Rate Ceiling.
6. Proposed Rule, Part 723 of NCUA’s Rules and Regulations, Member Business Lending.

While it would bring me great pleasure to go into all the details surrounding each of these agenda items, I’ll save you from having to read a 5-page blog on a Friday morning.  That being said, we plan to cover some of these items in detail on the blog next week.  If you would like to get a head start on your reading, take a look at NCUA’s Board Action Bulletin, available here. 

Taxi Medallion FAQs Issued by NCUA; Little Big Man

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, the National Credit Union Administration (NCUA) released an FAQ document that provides additional guidance on taxi medallion lending.  This guidance comes about a year after NCUA’s issuance of Letter to Credit Unions 14-CU-06 and Supervisory Letter 14-04 which we blogged about here.  The FAQs do not impose new requirements, but rather are intended to clarify the guidance provided in the 2014 supervisory letter. 

Credit unions that either make taxi medallion secured loans, participate in these loans, or that are contemplating doing so, may find this additional guidance helpful.  The FAQs contain nine questions related to taxi medallion lending and address, among other things, financial reporting of taxi medallion loans, methods for valuing taxi medallions and influences on the value of the medallions as collateral.

Here’s a taste of what you’ll find:

“What is the “speculative” (or market) premium that is mentioned in the guidance?

A taxi medallion is an income-producing asset. Income-producing assets are generally valued by determining the asset’s net operating income (NOI), which is calculated as the gross revenues generated by the asset, minus any operating expenses before depreciation and interest. The NOI is the basis for determining the economic value of the asset, that is, the value of the asset based on its ability to generate income.

However, the value of a taxi medallion is also influenced by the number of medallions made available by the local taxi authority. A limited supply of taxi medallions in a given market can raise the value of the medallions in that market above the economic value relative to a given level of demand. Simply put, the speculative value is the difference between the economic value of a medallion and the price the market is willing to pay for that medallion.

Examiners should understand that the portion of the value that is identified as the speculative premium is less stable than the economic value supported by the ability of the medallion to generate income. Any change in the market (e.g., increased competition, reduced supply of drivers or other market changes) will have a more pronounced impact on medallion values.

In addition, because the speculative portion of the price is not supported by the taxi medallion’s NOI, repayment of the speculative portion will have to be from another source (such as, the borrower’s liquidity or other earnings of the principal).

As communicated in the guidance to examiners, credit unions that perform proper credit analysis (that is, analysis that identifies sources of repayment and the reliability of those sources) should be able to withstand the impact of fluctuations in the value of taxi medallions. When the repayment relies on sources other than a borrower’s own operations, examiners should determine whether those repayment sources have been identified by the credit union and are committed to the loan repayment via guarantees or additional pledged collateral.”

To view the rest of the FAQs, click here. 

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Little Big Man.  I just had to share this photo . . . my little man is getting big way too quickly. 

 

CFPB Kicks Off Payday Lending Rulemaking Process

Written by Brandy Bruyere, Regulatory Compliance Counsel

Happy Monday, today’s blog is a high-level overview of recent developments in the area of payday lending. On March 26^th, 2015 the Consumer Financial Protection Bureau (CFPB) formally announced that it is considering rules that would impact payday loans and certain vehicle title loans. Note—this was not a proposed rule, but rather an indication of where the CFPB may go with future rulemaking.

Generally, the bureau is looking at regulating two kinds of “covered loans”—those with a maturity of 45 days or less as well as longer-term loans that have an “all-in” APR that exceeds 36%. These longer-term loans would be “covered loans” if the lender is either repaid via some kind of authorization to access the borrower’s deposit accounts, or the loan is structured as a vehicle title loan.

For both types of covered loans, the CFPB is considering requiring lenders to follow one of two basic sets of rules. First, “debt trap prevention requirements” that would focus on things like determining the borrower’s ability to repay the loan. Alternatively, the bureau is considering proposals focused on “debt trap protection requirements” which would aim to prevent borrowers from ending up in an “unaffordable, long-term cycle of debt” by limiting rollovers during set timeframes (i.e. six or twelve months) and structuring loans so they amortize. The CFPB is also looking at including 60 day “cooling off” periods between loans. These requirements differ for short term versus longer-term loans, for more details on the specifics, check out this CFPB press release and fact sheet.

So the question is how will this process potentially impact credit unions?

NCUA “PAL” Program

NCUA has its “Payday Alterative Loans” or “PAL loans” (formerly called “short term small dollar amount” or “STS” loans). Under section 701.21(c)(7)(iii), federal credit unions [FCUs] may offer loans with interest rates 10% above NCUA’s usury cap, meaning up to 28%, for loans of at least $200 but no more than $1000 so long as the loan meets several requirements:

• The loan term is at least one month but no more than six months;
• The FCU makes no more than three PAL loans in any rolling six month period to a member;
• The FCU only makes one PAL loan to a member at a time;
• The loan is fully amortized;
• The member has been a member for a least one month;
• Applicants are charged an application fee reflecting processing costs at a maximum of $20; and
• The credit union develops underwriting guidelines to minimize risk and limit this kind of loan to no more than 20% of the credit union’s net worth.

Thus, some PAL loans could fall under the proposals the CFPB is considering. The bureau actually discussed impact on FCUs specifically in its outline.

Impact on Federal Credit Unions According to the CFPB

As one possible option for regulating loans with terms above 45 days, the CFPB indicated that loans may be acceptable if they somewhat follow NCUA’s PAL program. However, unlike the other covered loans, PAL loans may be limited to one rollover instead of two. Here is an excerpt from the outline on p. 48:

“Specific impacts on small entities making longer-term loans

[…]

The proposals under consideration would impose several requirements on [FCUs] that currently offer [PALs]. [FCUs] would be required to access commercially available reporting systems and report covered loans to those systems…Lenders would also not be able to make these loans to consumers who have a covered loan outstanding. The Bureau seeks information on how often this would limit [FCUs’] ability to make these loans. The NCUA [PAL] program allows [FCUs] to make up to three loans in a six-month period and allows loans that are at least 30 days in length. The proposals under consideration would limit lenders to two loans in a six-month period and require that loans be at least 45 days in length…The restriction on the number of loans in a six-month period could have an impact on the revenue of [FCUs] that make these loans; the Bureau believes these impacts would not be substantial.” (Emphasis added).

This seems to indicate that FCUs would not be able to utilize the “short term loan” options for loans with terms under 45 days, but rather the CFPB would seek changes to the existing PAL program. It is not clear why PAL loans, with their lower 28% usury cap, would be targeted for having one rollover less than what the CFPB may permit for other loans, but frankly this outline is not the model of clarity.

In addition to regulating the loan products themselves, the CFPB is also considering regulations relating to certain automatic payment features, credit unions would be required to provide three business days’ notice before drafting a payment from a member’s account or prepaid product.  NAFCU will monitor the CFPB’s activity in this area as the bureau moves forward in its rulemaking process.

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Palate Cleanser. This was rather long for a Monday, so here’s a photo of a very little boy and his very giant dog!

 

NCUA Supervisory Focus for 2015; Consumer Compliance Outlook; Last Day for Holiday Savings

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

NCUA Supervisory Focus for 2015. NCUA recently released Letter to Credit Unions 15-CU-01, detailing the agency’s supervisory priorities for 2015. Areas of focus include cybersecurity, interest rate risk, Bank Secrecy Act compliance, and compliance with new regulations – NCUA’s liquidity rule, the CFPB’s Ability-to-Repay and Qualified Mortgage rule, and the CFPB’s TILA/RESPA Integrated Disclosure rule (after the rule goes into effect on August 1, 2015), are specifically mentioned.

In the area of cybersecurity, the focus is on proactive measures to protect data and members, as well as the ability to respond in the event of a breach. From the letter:

“NCUA field staff will focus on proactive measures credit unions can take to protect their data and their members, including:

• encrypting sensitive data;
• developing a comprehensive information security policy;
• performing due diligence over third parties that handle credit union data;
• monitoring cybersecurity risk exposure;
• monitoring transactions, and
• testing security measures.

Field staff will also be evaluating credit unions’ capacity to recover and resume operations in the event a security breach does occur. Appendix B to NCUA Rules and Regulations Part 748 provides guidance on developing an incident response program that can help a credit union react to a breach. These programs can help the credit union assess the nature and scope of an incident, determine when to contact law enforcement and notify members, and take steps to safely resume operations.

Credit union officials are also encouraged to review the online cybersecurity resources posted by NCUA and the FFIEC’s Cybersecurity and Critical Infrastructure Working Group to promote cybersecurity throughout the financial services industry.”

In the letter, NCUA also indicates that it is continuing to monitor trends in credit unions’ loan portfolios, and that it is streamlining exams for credit unions with assets up to $50 million and CAMEL ratings of 1, 2, or 3. For complete details, the letter is available in its entirety here.

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Consumer Compliance Outlook. The Fourth Quarter 2014 issue of the Federal Reserve’s Consumer Compliance Outlook is now available.  One of the articles, entitled “Managing Compliance Risk Through Consumer Compliance Risk Assessments,” discusses the use of consumer compliance risk assessments in identifying, measuring, monitoring, and managing consumer compliance risks associated with products and services.  Although geared towards institutions subject to the Federal Reserve Board’s Community Bank Risk-Focused Consumer Compliance Supervision Program, the article is a good read.

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Final day: Save $200 on any NAFCU Conference! Save $200 when you use code HOLIDAY on any of NAFCU’s 2015 conferences. It’s a great way to save big on NAFCU training; you can use code HOLIDAY as many times, and with as many employees, as you like! Our conferences are jam-packed with ideas designed to help you eliminate compliance headaches. View our conferences now and register using code HOLIDAY today; it’s your last day to save $200!

NCUA’s December Report Addresses Concerns about Liability Under the Ability-to-Repay-Rule; Impact of DoD Proposed Rule Webcast; Programming Note

Written by Victoria Daka, Regulatory Compliance Specialist

Compliments of the season! "It’s the most wonderful time of the year.”

On Friday, Brandy blogged about the Region III Report article from the latest NCUA Report. Today, I’d like to take a look at another article from the NCUA Report, which focuses on the Ability-to-Repay Rule. This article seeks to address the concerns about liability under the CFPB’s Ability-to-Repay Rule by indicating the reason for the “qualified mortgage” definition; extending leeway to credit unions to continue using their existing successful traditional relationship-lending approach; and, summarizing the three main categories of “qualified mortgages.”

As per the article, “Congress directed [the CFPB] to define a category of loans where lenders would have certainty that their loans comply with the rule, and where borrowers would have the greatest protections. So, [the CFPB] developed criteria for what are called “qualified mortgages.” In addition, this article informs credit unions that they may continue to utilize their successful traditional relationship-lending approach, regardless of whether the mortgagees are “qualified,” as there many loans that are not qualified mortgages, yet are fundamentally sound.  

 Furthermore, this article summarizes the three types of qualified mortgages: (1) the general definition; (2) the “GSE eligible” provision; and (3) the small-creditor provision as follows:

“General Definition. Any loan for which the consumer’s income and debt have been considered and verified with a debt-to-income ratio of 43 percent or less is a qualified mortgage.

GSE or Agency-eligible” Category of Qualified Mortgages. If a mortgage is eligible to be purchased, guaranteed or insured by one of several government-sponsored enterprises or certain government agencies—Fannie Mae, Freddie Mac, the U.S. Department of Agriculture and the Rural Housing Service—it is considered a qualified mortgage…

Small-Creditor Category of Qualified Mortgages. If your credit union has less than $2 billion in assets (adjusted annually for inflation) and your credit union and affiliates made 500 or fewer first-lien, closed-end mortgages in the prior year, then all mortgages you keep in portfolio are considered qualified mortgages.”

 The article is available in its entirety here.

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Webcast: How All Credit Unions Will Be Impacted by the DoD Proposed Rule

If you offer unsecured credit of any kind, then this webcast is a must-attend event—the proposed rule doesn’t just affect military-focused credit unions. The Department of Defense’s proposed rule would amend the Military Lending Act (MLA) to make the definition of “consumer credit” cover more credit types. Learn what you can do to prepare and protect your credit union with this strategic webcast.

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Programming Note. NAFCU's office will close at noon today and will also be closed on Thursday and Friday for the long holiday weekend. We will be back to blogging on Monday. Happy Holidays!

Comment Letter Talking Points for DoD’s Military Lending Act Proposal; Recent Policy Changes to Military Allotment Process

Written by Quincy Enoch, Military Liaison

Hello and Happy Holidays,

The Holidays are fast approaching which means the comment period deadline for the Department of Defense (DoD) lending rule is approaching fast as well. As Mike and I noted in our November 21^st post, this rule is going to impact all credit unions by creating additional compliance burdens for all credit unions.

Understanding the impact the DoD proposed rule will have on the credit union industry, many of our members have expressed interest in sending comments to DoD. With this in mind, NAFCU has prepared a helpful guide to look to when preparing your comment letters. If you have any questions, please don’t hesitate to contact me at [email protected].

DoD rule talking points

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Additionally, I would like to mention a recent change to the military allotment process. According to DoD, as a result of abuses of the allotment system by predatory banks and retailers, Secretary Hagel has prohibited the use of allotments to pay for particular items (for only active duty troops). These items include:

  - Vehicles (e.g., automobiles, motorcycles, boats);

  - Appliances or household goods (e.g., washer, dryer, furniture);

  - Electronics (e.g., laptop, tablets, cell phone, television); or,

  - Other consumer items considered to be tangible and movable.

The policy change is with respect to new allotments and will not affect any current allotments. The prohibition will only apply to allotments started on or after the effective date, which is January 1, 2015. The policy change will not affect allotments to savings account, checking accounts, investments, mortgages or rent.

These policy changes were made under Secretary Hagel’s authority to make changes to the Financial Management Regulation (FMR) and did not require the typical rulemaking procedures. To enforce the prohibition, DoD will require servicemembers to certify under penalty of the Uniform Code of Military Justice (UCMJ) that the allotment is not being set up for the purpose of the purchase, lease or rental of personal property or payment towards personal property.

Some helpful links:

DoD Announcement

Fact Sheet

Why the DoD Rule Affects All Credit Unions; Mike Coleman Says Goodbye to NAFCU

By Michael Coleman, Director of Regulatory Affairs, and Quincy Enoch, Military Liaison

In talking to credit unions about the impact of a recently proposed rule from the Department of Defense (DoD) regarding the Military Lending Act (MLA), many credit unions have noted that they have very few servicemembers in their membership or they don’t have any products that are over the 36% lending cap. Unfortunately, neither of those facts have a major impact on the compliance burden caused by the proposed MLA rule.

The real question credit unions should be asking is, “Do we offer credit cards, signature loans, traditional lines of credit, overdraft lines of credit or essentially any unsecured credit of any kind?” If so, then the MLA rule most definitely impacts your credit union.

The rule requires not only that covered products (which the rule defines as “consumer credit”) remain under a 36% “military annual percentage rate” but also that servicemembers receive special disclosures when consumer credit is extended to them. Under the proposed rule consumer credit is defined as all credit extended to servicemembers and dependents except mortgages, loans secured by personal property or loans for vehicle purchase. The definition includes essentially all unsecured lending. This is a significant expansion of the definition of consumer credit, which currently has a targeted focus on payday loans, vehicle title loans, and tax refund anticipation loans.

The true compliance burden stems from the fact that the rule places the responsibility of identifying servicemembers on the lender. That means  anytime a member comes in to obtain consumer credit it is the responsibility of the credit union to have a method in place to determine if that member is a servicemember or not. The rule allows flexibility regarding methods to determine the status of an applicant, but the lender is only granted a safe harbor if the lender checks the Defense Manpower Data Center (DMDC) database. This means that credit unions will need to integrate checking the DMDC into their systems before issuing any consumer credit to ensure compliance and obtain the safe harbor. Another significant problem with using the DMDC for a safe harbor is that the DMDC has not functioned properly recently, and the proposed rule would exponentially increase the number of searches the DMDC would need to handle. So the question then is, what do you do to obtain the safe harbor if the DMDC is down? Right now, it’s not clear.

Unfortunately, this  only gets you  half way to complying with the rule because there is an actual knowledge provision as well. The provision states that if the lender has actual knowledge of the status of the servicemember or dependent, the safe harbor will no longer be in effect. This mean that credit unions will also need to setup an internal database or procedures to check what the credit union actually knows as well, because if a servicemember presents you with a military ID when opening a joint account for himself and his spouse, the credit union then has actual knowledge that both the servicemember and spouse are covered borrowers for the purpose of the MLA rule.

The bottom line is that even if you do not have servicemembers in your credit union’s field of membership, this rule will have a significant impact on your credit union. It might affect the types of credit products that you are able to offer members of the military, and it definitely will increase compliance costs and operational burdens. Credit unions have a strong history of providing excellent service to servicemembers and safe credit products that meet their needs, which makes getting this rule right essential. NAFCU has issued a regulatory alert, and will submit comments to the DoD. We sent a letter to the NCUA on the proposal to express some initial credit union specific concerns, and called on the DoD to extend the comment period for the proposed rule. We’ve also joined other industry efforts related to the DoD proposal. Check out the Chairman’s Corner article in the most recent NCUA Report where Chairman Matz noted that NCUA will provide comments formal to the DoD on the rule.

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Thank you Credit Union-Land! This is just Mike talking now. Today is my last day with NAFCU, and I can’t say it loud or often enough, I am incredibly thankful to NAFCU for all the opportunities over the past several years, and for the best group of colleagues around. From my days in Compliance with Steve, JiJi, Bernadette, and Shari, to my current role as Director of Regulatory Affairs with Alicia, Angela, Megan, and PJ, and my time with all of NAFCU's government affairs team, I couldn’t have asked for a better group of people to work with to help NAFCU members and the credit union industry. And working for and learning from Dan, Fred, Carrie, and Anthony has been an incredible experience.

And of course, many thanks to the best members around. It’s impossible for me to describe how many devoted credit union people I have met along the way. I’ve talked to many of you directly, whether in person at conferences, or over the phone, via email, you name it. And the most common theme I have seen is that credit union people care. They care about their credit unions and they care about the credit union movement. It’s been an honor working with you, and I promise I won’t be a stranger! Thanks again for everything.

DOD Proposes to Expand Military Lending Act Rate Cap to More Consumer Credit Products

Written by Shari R. Pogach, Regulatory Paralegal

Last Friday, the Department of Defense (DOD) announced a proposed regulation that would expand the Military Lending Act’s (MLA’s) 36 percent rate cap, among other protections, to additional consumer credit products.  DOD’s proposed changes would apply the MLA protections to all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit and credit cards (with some conditional exclusions).  

Under current implementing rules, MLA protections extend to closed-end payday loans for no more than $2,000 and with a term of 91 days or fewer, closed-end auto title loans with a term of 181 days or fewer and closed-end tax refund anticipation loans. The proposed changes would amend the definition of “consumer credit” to more closely match the definition under the Truth in Lending Act, covering more credit products.  Not all credit products would be affected by the proposed regulation - residential mortgages and purchase-money loans (to buy items like cars) are excluded from the MLA’s definition of “consumer credit.”

Elements of the proposal include:

• Amendments to extend the protections of the MLA implementing regulations to a broader range of credit products. The proposal would define “consumer credit” to be consistent with closed- and open-end credit products that already are regulated under the Truth in Lending Act. The intent is to move away from the product-by-product approach and towards a comprehensive, no-gaps approach.
• Alignment of the MLA with TILA to provide service members with more lasting protections.
• Loan disclosures intended to simplify a lender’s disclosure obligations to covered borrowers under the MLA and would provide for a non-numerical descriptive statement of Military APR that would be consistent across loans offered to service members.
• Allow lenders to assess whether borrowers are covered by the MLA by checking their status in an existing, publicly-available online DoD database. Lenders who used the database would receive a safe harbor from liability under the MLA.

NAFCU will be studying the proposed rule carefully for any unintended consequences from the proposal that would prevent credit unions, particularly those operating on military installations, from providing those safe credit products that servicemembers have come to depend on from their credit unions.  Comments on the proposed rule are due November 28, 2014.  A Regulatory Alert with an analysis of the proposal will soon be available for NAFCU members here (NAFCU member login needed). 

CFPB Warns Credit Card Companies Against Deceptively Marketing Promotional Offers; Free Kick; Farewell

Written by Ricardo Piñeres, Regulatory Compliance Counsel

CFPB Warns Credit Card Companies Against Deceptively Marketing Promotional Offers.  In a bulletin released last week, the Consumer Financial Protection Bureau (CFPB) warned credit unions, and other credit card issuers, against deceptively marketing interest-rate promotions.  The CFPB issued the bulletin because of the Bureau’s concerns regarding the marketing practices of some card issuers, especially with regards to promotional rates and balance transfer offers.

According to a press release that accompanied the bulletin’s release, “[t]he Bureau believes some companies’ marketing materials do not clearly disclose that consumers must pay off the promotional balance by their due date to avoid racking up unexpected interest charges on routine purchases for which they were not charged interest previously. For some consumers, these surprise charges can make the cost of transferring a balance more expensive than revolving the same balance on their existing card.”

After a brief discussion regarding the CFPB’s reasons for releasing the bulletin, the bulletin discusses: the risks of deceptive advertising practices; the risks of abusive practices; and Regulation Z’s disclosure requirements.  Furthermore, the bulletin has a final section that states the Bureau’s expectations for credit card issuers, as follows:

“The Bureau expects credit card issuers to incorporate into their compliance management systems adequate measures to prevent violation of Federal consumer financial laws, including the Dodd-Frank Act’s prohibitions on unfair, deceptive, or abusive acts or practices.  Consequently, credit card issuers are expected to implement internal controls sufficient to ensure that they market promotional APR offers in a manner that limits the risk of statutory or regulatory violations and related consumer harm.  These steps should include, but are not limited to, ensuring that:

• All solicitations, applications, account-opening materials, and convenience checks comply with the requirements in Regulation Z;
• All marketing materials clearly, prominently, and accurately describe the material costs, conditions, and limitations associated with the offers; and
• All marketing materials clearly, prominently, and accurately describe the effect of promotional APR offers on the grace period for new purchases.”

In addition to the bulletin and the press release, the CFPB also hammered home their perspective with a consumer-facing post on the Bureau’s blog.  The blog post warned consumers to be on the lookout for deceptive advertisements regarding promotional rates, and also warned consumers on the implications of losing the protections of the grace period.

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Free Kick.  My wife and I just got back from a great week on vacation in the city of my birth – Cartagena, Colombia.  While there, we were lucky to get to watch Colombia’s friendly against Brasil on television.  Sadly, Neymar found enough magic on a free kick to give Brasil a 1-0 victory.  That being said, watching the match at a restaurant in Cartagena reminded me of why I fell in love with football.  It may have only been a friendly, but it seemed like every other person was wearing a national team jersey and the city came to stop for those two hours while people were glued to the game cheering on their Seleccion Colombia.  It was an absolutely wonderful way to cap off a summer that brought me so much joy after having not seen Mi Seleccion in a World Cup since 1998.  I can’t wait to see wait the next four years under Jose Pekerman bring to Colombia.  In the meantime, here are two videos from Colombia’s World Cup opener that still give me goose bumps: Colombian National Anthem and Caracol Highlights.

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Farewell.  This will be my final blog post here at the NAFCU Compliance Blog.  While I have decided to leave the NAFCU Compliance team in order to head back to the government relations field, I have thoroughly enjoyed these past eight months of covering compliance hot topics and providing my take on the wonderful world of football.  It has also been a pleasure providing compliance advice to the many of you that have called or emailed with compliance questions.  I leave behind some great colleagues here at NAFCU Compliance, and I thank them for sharing their knowledge, thus making me a better attorney.  Lastly, I also want to thank all of the readers of this blog.  It has been so much fun interacting with you and trading perspectives on the beautiful game and sharing in the excitement of a truly incredible World Cup.

SBA Announces New Business Credit Score Model; Free Kick

Written by Ricardo Piñeres, Regulatory Compliance Counsel

SBA Announces New Business Credit Score Model.  The Small Business Administration (SBA) is currently in the final phases of preparation before launching a new predictive business credit scoring model.  SBA Administrator Maria Contreras Sweet made this announcement as part of a speech on June 10, at the Center for American Progress in Washington, D.C.  The new model will produce a score based upon a combination of an entrepreneur’s personal and business credit scores, and it will be made available to all SBA lending partners for loans of $350,000 or less starting in July.

The SBA has been working on this initiative for over a decade, and the agency believes that transitioning over to this new model will “make it easier and less time-intensive for banks to do business with the SBA.”  One of the reasons that the SBA is touting the new model’s time savings is because under the new model a lender will no longer need to run an analysis of the borrowing company’s cash flow.  According to the agency, this step was a cumbersome one that delayed many loan decisions.  Furthermore, according to the SBA, the new model “ensures that risk characteristics – not socio-economic factors – determine who is deemed creditworthy.”

Along with announcing this new predictive business credit scoring model, SBA Administrator Contreras Sweet also spoke about the SBA One initiative during her speech that was largely focused on how the SBA and its programs need to continue becoming more inclusive of minorities and women.  SBA One, when launched, will be an interactive and user-friendly SBA lending platform that aims to save credit unions and other lenders processing time on the agency’s 7(a) loan program by replacing fax machines and paperwork with automated uploads of  documents, generation of forms and allows electronic signatures.  Contreras Sweet said, “[b]y making the process quicker, cheaper and more intuitive, these reforms will help existing lenders do more small-dollar lending.”  There is no launch date yet available for SBA One.

Along with announcing these two initiatives, Contreras Sweet talked about the agency’s focus on getting more loans to qualified business owners.  She highlighted three areas that the SBA will be focusing on in this effort.  First, the agency is planning to modernize and implement smart systems, so that the SBA is in a position to keep pace with technological advances.  Second, the SBA wants to create a more inclusive agency by tailoring programs that embrace the U.S.’s changing demographics and are more responsive to future demographic shifts.  Lastly, the agency wants to serve as a market maker for small companies by opening new business channels within the federal government, corporate supply chains, and international commerce.

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Free Kick.  The group stage is now two-thirds of the way done, and there is not much more than can be said about the quality of play other than - wow!  This World Cup has had it all so far: amazing goals (another one); heroic individual efforts; incredible upsets; and uplifting performances.  Here is a short primer on where we stand (from my perspective).

Most Impressive teams: Colombia, France, and Germany

Biggest surprise: Costa Rica

Biggest disappointments: Argentina and Spain

Top performers: Guillermo Ochoa, Thomas Muller, and Luis Suarez

In terms of my rooting interests, I am still on a high after Colombia booked its place in the Round of 16 last Thursday.  This is the first time that they have made it out of the group stage since 1990, and I think that Los Cafeteros can win a few more games during this tournament.  James Rodriguez has been excellent, the defense has been solid, Juan Cuadrado has been an unending creative spark in the midfield, and Jose Pekerman has been expertly pulling the strings both in terms of tactics and personnel.  VAMOS COLOMBIA!

Turning to the U.S. squad, I think that all of our collective hearts dropped when Portugal scored that equalizer at the last possible second.  That it came from a Cristiano Ronaldo cross after he had been forced into irrelevancy for 94 minutes was even more deflating.  So, where does that leave the U.S. in terms of qualifying for the business end of the tournament?  They have four points (tied with Germany atop the group, but in second place due to goal differential) entering the last pair of group matches.  Here are the qualifying scenarios facing the U.S. for Thursday’s game (12:00 pm EDT) against Germany:

• The U.S. wins the group if they beat Germany.
• The U.S. advances to the Round of 16 as the second place team in the group if:
  • They draw against Germany;
  • They lose against Germany and the Ghana-Portugal game ends in a draw;
  • They lose against Germany, Portugal beats Ghana, and Portugal’s goal differential in the final game is greater than the U.S.’s by four or less;
  • They lose against Germany by one goal, Ghana beats Portugal by one goal, and Ghana scores an equal number or less goals than the U.S. in their last games; or
  • They lose against Germany by a score of 3-0, Portugal beats Ghana by a score of 2-0, and the U.S. wins the drawing of lots against Portugal.

LET'S GO USA!

HUD Proposes Rule on ARM Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages; NAFCU Webcast – Quarterly Economic Update & Credit Union Outlook

Written by Bernadette Clair, Senior Regulatory Compliance Counsel

The Department of Housing and Urban Development (HUD) recently issued a proposed rule that would align adjustable rate mortgage (ARM) notification requirements and the look-back period for FHA-insured single family mortgages with the Truth in Lending Act (TILA), as implemented by the CFPB’s Regulation Z mortgage servicing rule (“mortgage servicing rule”) published in the Federal Register February 14, 2013, and which became effective January 10, 2014.

Currently, FHA regulations have a 30 day look-back period for determining the current index to use for interest rate changes on FHA-insured ARMs and require notification at least 25 days in advance of a corresponding change in the mortgagor’s monthly payment. These timeframes were consistent with the rate adjustment notification requirements of prior Regulation Z, which required notice of rate adjustments between 25 and 120 days before the due date of the new payment. However, going forward, these timeframes will not be sufficient to comply with the revised timing requirements in Regulation Z, section 1026.20(c), which generally requires advance notice of a rate change with a corresponding payment change between 60 and 120 days before the new monthly payment is due.

Noting the timing issue for existing ARMs with short look-back periods, the CFPB’s mortgage servicing rule included special timing requirements for providing the section 1026.20(c) notice for ARMs with look-back periods less than 45 days and originated prior to January 10, 2015.  For these loans, the section 1026.20(c) disclosure must be provided at least 25 days, but no more than 120 days, before the new payment is due. This “grandfathering” of loans with look-back periods of less than 45 days was intended to provide HUD with enough time to bring its regulations in line with TILA and the mortgage servicing rule.

Accordingly, HUD is now proposing two revisions to FHA regulations that would (1) establish a 45 day look-back period for FHA-insured ARMs, instead of the current 30 day look-back period; and (2) require the mortgagee of an FHA-insured ARM to comply with the disclosure and notification requirements in the mortgage servicing rule.

For additional details, the proposed rule is available here.  HUD is accepting comments until June 9, 2014.

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NAFCU Webcast – Quarterly Economic Update & Credit Union Outlook. Economic and regulatory factors can affect you just as much as your members and employees. Gain a greater understanding of the most impactful current and forecasted economic conditions. You’ll also explore key performance metrics to help you measure the health of your credit union, such as member growth, ROA, delinquencies, and mortgage lending. The webcast will take place on Thursday, June 12, 2014 at 2:00pm Eastern time. Register by June 5 to save $100. For details on this webcast, click here.

NCUA Releases Taxi Medallion Supervisory Letter; NCUA’s “Small Dollar Lending” Webinar; Free Kick; Helpful Webcast

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Last week, the NCUA released Supervisory Letter 14 – 04, Taxi Medallion Lending.  The letter is intended to give NCUA examiners further guidance on how the agency wants them to review taxi medallion loans inside of a credit union’s member business lending portfolio.  Furthermore, the letter also gives credit unions insight into how the agency views the unique risks associated with taxi medallion lending.  The NCUA has released this letter in light of the recent increases to medallion values in several major metropolitan areas, thus leading to increases in medallion lending and the potential risks that go with such lending.

The Supervisory Letter is divided into three main sections: background information on medallions; exam procedures; and additional guidance/resources available to both credit unions and examiners.  The background section is particularly helpful in understanding the NCUA’s view with regards to medallion lending through its discussion of how the medallion business model works and what risks are associated with the medallion’s valuation.  While the bulk of this information is geared towards examiners that may have not encountered much taxi medallion lending during previous examinations, the information is particularly helpful for credit unions to be able to anticipate the questions/concerns from examiners with regards to this unique form of member business lending.

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Next week, on Wednesday, April 16, the NCUA will be hosting a free webinar titled Small Dollar Lending.  The webinar, hosted by Tom Penna, Jr., Economic Development Specialist with NCUA’s Office of Small Credit Union Initiatives, will cover the benefits and requirements of NCUA’s Alternative Payday Loan.

Penna will be joined by Lucinda Johnson, Program Officer in NCUA’s Office of Examination and Insurance, and representatives from two credit unions active in small-dollar lending.  Together, they will discuss how various credit unions have created short-term lending programs that work for their members and factors to consider before starting such a program, including:

• The benefits short-term, small-dollar loans can bring to a credit union’s portfolio mix;
• Regulatory concerns governing this type of product offering; and
• The costs associated with developing or initiating short-term loans.

The webinar will be held at 2:00 pm EDT.  Interested participants must register online in order to participate in the webinar.

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Free Kick.  The Premier League has but one month before it closes its 2013-2014 season.  It has been an exciting season so far that has produced a tight race for the championship, and an equally exciting race for survival at the bottom of the table.  Here are my brief thoughts on how this season will close out.

Bottom Three: While there will inevitably be a surprise or two, I think that Cardiff and Norwich are as good as gone from the Premier League.  I think that Fulham will join them in the Championship, as well.

The Fight for Fourth: A few weeks ago, I said that I thought the top-four had been settled.  Well, sadly, Arsenal has fallen apart these last couple of weeks and they are now in a true dogfight for the final Champions League spot.  While the Gunners have been unable to find any quality, Everton is on a true roll and currently control their destiny by being one point back with one game in hand.  That said, I just have a hard time envisioning Everton maintaining such a strong form over their final six games.  Their run in is just too hard for them to snatch fourth from Arsenal.  I see them dropping at least eight points in three of those matches – at home in the games against Man City and Man U, and away to Southampton.  Arsenal’s final five games are at home to West Ham, Newcastle, and West Brom, and away to Hull and Norwich.  I see them, at most, dropping 5 points over that stretch, and hanging on to fourth.

Top Three: With Liverpool and Man City facing off this coming Sunday, I suspect that the championship race will be defined by what plays out at Anfield that day.  There is just something special happening in that Liverpool clubhouse right now, and I have a feeling that they will find a way to get a positive result on Sunday.  That will put them in the driver’s seat for the last few games, but I don’t think it will be enough.  I see this as another Man City title year with Liverpool a hair behind them in second and Chelsea finishing several points behind in third.

All that said, the Premier League has shown its unpredictability over the last few years, so it would not surprise me at all if the season’s final month takes a few more crazy turns that lead to a completely unforeseen outcome.  No matter what happens, I will just sit back and enjoy the football!

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Webcast.  NCUA & CFPB Updates: What You Need to Know, Now

Get a jump on regulatory preparedness with an update on the most critical upcoming NCUA and CFPB regulations. NAFCU’s Regulatory Affairs team will cover what will be new around capital reform, risk-based capital, interest rate risk, and more.

NCUA January Board Meeting Results; 18 Percent Interest Rate Cap to Continue through September 2015; NAFCU Webcast – Advertising and Regulation Z.

Written by JiJi Bahhur, Director of Regulatory Compliance

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

1. NCUA’s      Strategic Plan for 2014 through 2017, and Annual      Plan for 2014 and 2015.
2. Federal      Credit Union Loan Interest Rate Ceiling.
3. Final      Rule, Parts 703, 715 and 741, Financial Derivative Transactions to      Mitigate Interest Rate Risk.
4. Proposed      Rule, Part 702, Prompt Corrective Action and Risk-Based Capital Measures.

By a unanimous vote, all actions presented at the open meeting were approved.  Since it’s Friday, I won’t go into the nitty and the gritty of every action item above, but you can get those details here in this message from NAFCU’s President and CEO, Dan Berger.  Also, you can find the details here in NCUA’s Board Action Bulletin.  And keep a lookout for future blog posts on the final derivatives rule and the proposed risk-based capital rule. 

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18 Percent Interest Rate Cap to Continue.  During yesterday's NCUA Board meeting, the NCUA Board voted to extend the current interest rate cap of 18 percent for most federal credit union loans through September 10, 2015. Had this action not been approved, the cap would have reverted to 15 percent on March 11, 2014.

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Webcast: Advertising and Regulation Z: Are You Covered? As your credit union creates fresh ideas to advertise loan products, make sure you know the latest Reg Z rules regarding social media, print, web and other marketing vehicles. Register by Feb. 12 to save $100 and learn important information to stay in compliance.

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TGIF!  Last weekend, I came to the realization that my children really don't like to share.  Unlike the kiddos, I love to share and below I have shared two pictures that get me giggling each time I see them.  The first is a photo of Ava - she's taking Kyse's car for a spin.  The second photo was snapped right after Kyse hijacked the car back from Ava.

 

Have a great weekend!

NCUA Letter to Credit Unions on QM and Non-QM Loans; Fannie Mae Updates

Written by JiJi Bahhur, Director of Regulatory Compliance

Last week, we blogged about NCUA’s Regulatory Alert on Ability-to-Repay (ATR) and Qualified Mortgages (QM), two of several mortgage rules that go into effect as of today.   In the Regulatory Alert, NCUA stated that it would be releasing a Supervisory Letter to its examiners pertaining to the subject matter.  As promised, the Supervisory Letter accompanied NCUA’s Letter to Credit Unions 14-CU-01 as an enclosure. 

The Letter to Credit Unions (Letter) reiterates that “NCUA field staff will take into account a credit union’s good –faith efforts to comply with the new rule.”  Further, the Letter emphasizes that credit unions may originate both QM and non-QM loans, explaining that non-QM lending can be an effective member service if conducted safely and soundly.  NCUA’s field staff will be placing an emphasis on safety and soundness implications which will not be judged solely on the basis of a loan’s status as QM or non-QM.

Addressed to the NCUA Examiners, the enclosed Supervisory Letter provides guidance to credit union mortgage lenders on the expectations for complying with the Consumer Financial Protection Bureau (CFPB)’s final ATR and QM rules.  It describes specific examination procedures and expectations for credit unions and may serve as another handy tool for preparing for your examination.

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Fannie Mae Updates. As a follow-up to our recent blogs (here and here) on FHFA fee increases, FHFA Director Mel Watt announced that his agency is reconsidering guaranteed fee hikes announced last year by Fannie Mae and Freddie Mac.  Watt also stated that any changes in fees will not be implemented for at least 120 days following review.

Other recent Fannie Mae news:  Fannie Mae published a new web page with information about the recently implemented Appraiser Quality Monitoring (AQM) process (described in Lender Letter LL-2013-10). The new AQM page includes FAQs and a link to the AQM list identifying appraisers whose appraisals will be subject to 100% review by Fannie Mae or whose appraisals are no longer accepted by Fannie Mae.  

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I wish you all a happy Friday and a great weekend!

 

NAFCU Responds to FHFA on Increases to Fannie Mae & Freddie Mac’s Guarantee Fees and Changes to Loan-level Price Adjustments

Written by Brandy Bruyere, Regulatory Compliance Counsel

Last week, in response to a directive from the Federal Housing Finance Agency, Fannie Mae and Freddie Mac announced increases to loan guarantee fees for all maturities and loan-level price adjustments for single-family loans with original maturities greater than 15 years. FHFA believes this will meet the conservatorship goal of “gradually contracting Freddie Mac and Fannie Mae’s dominant presence in the marketplace.” Here are the basic details of these releases:

• The base g-fee for all mortgages will increase by 10 basis points;
• Upfront fees in the Loan-level Price Adjustment (LLPA) matrices will be adjusted to “better align pricing with credit risk” (Fannie Mae announcement; Freddie Mac announcement);
• The adverse market fee of 25 basis points that has been assessed on all of Fannie and Freddie’s mortgages since 2008 is being eliminated except in four states with higher than average foreclosure costs (New York, New Jersey, Connecticut, and Florida);

The FHFA expects the combination of fee changes to result in an average increase of 14 basis points for the typical 30 year mortgage. According to some in the mortgage lending industry, this will result in additional costs for borrowers, particularly because loan fee increases are typically passed along to borrowers through higher interest rates. To put this in perspective, an increase of just 10 basis points costs a borrower about $4,000 over the life of a 30 year, $200,000 mortgage. Also, the new LLPA fees will significantly increase initial costs for borrowers, even those with good credit scores.

In response, NAFCU’s President and CEO Dan Berger sent a letter to FHFA Acting Director Edward DeMarco about the negative impacts of these changes on credit unions and their members:

“NAFCU does not believe that these actions are appropriate because the cost of borrowing will greatly increase and lending will inevitably slow down. While we recognize that the housing market is recovering, it is important that the FHFA considers that there are many indicators showing a slowdown in the recovery. For example, applications for purchase transactions have decreased by 10 percent from the 3^rd quarter in 2012 to the same time this year. During the same period, lenders have seen over 50 percent fewer mortgage applications, including refinancings. Further, and crucially, many lenders, including a vast majority of NAFCU member credit unions, do not plan to extend mortgages that do not meet the definition of ‘qualified mortgage.’” 

NAFCU is closely monitoring this issue.  The FHFA will soon have a new director, current Representative Mel Watt, after he is sworn in. He would replace Acting Director Edward DeMarco.

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After that news, I’m sure everyone could appreciate a pick me up, so I’ll introduce you to my 130 pound lovable American Mastiff, Lemmy—would you believe he’s a runt? As you can see, like all of us at NAFCU, he wishes you a safe and happy holiday!

                       

CFPB Finalizes TILA/RESPA Integrated Disclosure Rule; 2013 NAFCU Compliance Seminar Group Photo

Written by JiJi Bahhur, Director of Regulatory Compliance

After more than two years of research and testing, the Consumer Financial Protection Bureau (CFPB) issued – this past Wednesday – the long-anticipated Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) rule.  Among several highlights from the rule, it provides for new, easier-to-use integrated disclosures, also known as the “Know Before You Owe” mortgage forms, that clearly lay out the terms of a mortgage for a homebuyer. The purposes of these new integrated disclosures are to provide improved consumer understanding, better comparison shopping, and avoid costly and unexpected surprises at the closing table. 

Currently, credit unions are required to provide two separate disclosures – “early” TILA Statement and Good Faith Estimate (GFE) – within three business days after receiving a mortgage application.  Under the final rule, these disclosures would be combined into one early disclosure document, the Loan Estimate, which borrowers must receive within three days after application.

Also, credit unions are currently required to provide two separate closing disclosures – final TILA Statement and HUD-1 Settlement Statement – three business days before closing on a loan.  The final rule combines the final TILA and HUD-1 disclosures into one closing form, the Closing Disclosure, which borrowers must receive three days before closing.

The TILA/RESPA rule (and mandatory use of the new integrated forms) is set to take effect on August 1, 2015.  While this extended implementation time is a win for credit unions – and something NAFCU pushed the CFPB for – it is important to note that the rule is 1,888 pages long and will require your credit union to make significant changes to how it conducts a mortgage transaction.

For a quick look at some of the other highlights from the rule, take a look at this message from Carrie Hunt, NAFCU’s Senior Vice President of Government Affairs/General Counsel.  Also note, NAFCU will issue a Final Regulation providing a summary of the final rule.  When it is available, you can find it here (NAFCU log-in required).

For further information on these new integrated mortgage disclosures, check out these CFPB resources:

• CFPB Press Release
• Factsheet about the “Know Before You Owe” Mortgage Disclosures
• The TILA/RESPA Mortgage Disclosure Rule

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On a lighter note, I’d love to share the group photo from NAFCU’s Regulatory Compliance Seminar that took place this past October in Nashville, Tennessee.  It was a great crowd and we look forward to seeing you all next year in Baltimore, Maryland. 

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Have a fabulous weekend!

CFPB Releases Guidelines for Protecting Servicemembers from Payday Lenders

Written by JiJi Bahhur, Regulatory Compliance Counsel

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) specifically tasked the Consumer Financial Protection Bureau (CFPB) with supervisory authority over payday lenders.  And after the Department of Defense concluded that predatory lending practices by payday lenders were a threat to military personnel and their families, Congress passed the Military Lending Act (MLA) – which provides greater protections for military families – and gave the CFPB the authority to enforce it as well.  As part of its efforts, the CFPB, earlier this month, issued guidelines to its examiners on how to identify consumer harm and risks related to MLA violations when supervising payday lenders. 

The new guidelines (updated examination procedures) apply to the short-term, small-dollar credit market, known as payday lending.   More specifically, the special protections offered by the MLA apply to closed-end payday loans of $2,000 or less with terms of 91 days or fewer.  Quoted from the CFPB’s news release, the requirements that payday lenders must follow include:

• “Annual percentage rate capped at 36 percent: Because most payday loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed, a typical two-week term can equate to an annual percentage rate (APR) ranging from 391 percent to 521 percent. Payday lenders must cap the APR – which incorporates all fees and costs associated with the loan – at 36 percent when lending to servicemembers.

• No rolling over of loans: When consumers cannot pay back the loan at the time it is due, borrowers can often pay only the finance charges and renew the loan. This fee does not reduce the amount owed. If a payday loan is rolled over multiple times, it’s possible to pay several hundred dollars in fees and still owe the original amount borrowed. Payday lenders are banned from rolling over loans for servicemembers, unless the new transaction results in more favorable terms for the servicemember.

• No signing away of servicemember rights: The MLA prohibits lenders from making servicemembers waive their rights under the Servicemembers Civil Relief Act or other state or federal laws that provide critical consumer protections. The MLA also prohibits lenders from requiring servicemembers to waive their right to seek resolution of any legal claims in court.

• No requiring allotments to repay: Under the military allotment system, military personnel can repay their loans by having payments directly deducted from their paycheck before their salary is deposited in their account. When servicemembers pay by allotment, they lose certain consumer protections as well as their flexibility to adjust their budget if a financial emergency comes up. The MLA bans lenders from requiring military members to pay by the allotment system and gives servicemembers control over how their income is spent.”

Through its enforcement and supervisory work, the CFPB will be scrutinizing lenders to make sure that they are following the MLA requirements when they make short-term, small-dollar loans to servicemembers and their dependents.

NCUA Releases Supervisory Guidance on Loan Participation Waivers

Written by JiJi Bahhur, Regulatory Compliance Counsel

With the effective date of the final loan participation rule right around the corner (September 23, 2013), the National Credit Union Administration (NCUA) released, just last week, supervisory guidance to assist with the loan participation waiver process.  The Supervisory Letter, which is the enclosure to NCUA Letter to Credit Unions 13-CU-07, provides the process by which credit unions may obtain waivers, expectations for examiner review of waivers, and overall compliance with Part 701.22 of the NCUA Rules and Regulations.   

If your credit union buys participation interest in loans made by third parties, you are going to want to take a look at this Supervisory Letter.  It is very detailed and includes, among other items, the types of waivers available; what information is required on the waiver applications; the considerations NCUA looks at when evaluating a waiver request; the timing of waiver responses and appeals; what loan participations are permissible for credit unions; loan participation policy requirements; and master agreement requirements. 

NCUA’s loan participation rule is designed to protect buyers of loan participations.  If your credit union is in the business of buying participation interests, the rule applies to you and the Supervisory Guidance will be able to provide you with additional, explanatory information for the parts of the rule you may have been unsure about. 

To view the final loan participation rule, click here.  To view Letter to Credit Unions 13-CU-07 and the Supervisory Letter, click here and here.  Also, if you haven’t already, check out the September 2013 NAFCU Compliance Monitor – it features an article on NCUA’s final loan participation rule (NAFCU log-in required).

Leadership; QRM; Interchange Update; September Compliance Monitor

Written by Steve Van Beek

Last week, I wrote an article for CUinsight.com that asked How Can Credit Unions Create a Culture of Compliance? Here is a snippet:

"So, how can we change our culture into a culture of compliance – an environment where we can stop compliance snafus before they begin, by building risk management into product development from the start?

In the past, a compliance officer would be brought into a discussion at the tail end of a project’s development, to give approval or disapproval. In today’s world, a compliance officer needs a seat at the table to help evaluate the various risks of a new product or service. The Consumer Financial Protection Bureau is not just rule- and requirement-focused – it is principle-focused. Their offices want to know not only if a credit union’s product or service is compliant with rules and guidance, but if that product or service provides a real benefit to members." (Emphasis added).

As compliance plays a larger and larger role at credit unions, compliance officers need to expand their skill sets. Rather than sitting back, they need to take charge and demonstrate how an effective compliance program at the credit union can reduce compliance, strategic and reputation risks. 

While compliance professionals usually attend NAFCU's two compliance conferences (School & Seminar), I'd recommend taking a look at NAFCU's Management & Leadership Institute - October 7-11 in Philadelphia, PA. To successfully create a culture of compliance, compliance officers need to expand their leadership skills and this conference provides those tools - including:

• Tools to effectively build relationships with board members;

• Successful communication techniques to help move projects forward;

• Tactics for leading a successful credit union— from operations to marketing; and

• Clarity on board vs. management roles.

More information on the "institute experience" can be found here and the overall conference details are here.

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Qualified Residential Mortgage Proposal. Last week, the FDIC, OCC, FHFA, SEC and the Federal Reserve released a joint proposed rule (replacing the prior proposal) that would define a "qualified residential mortgage." Importantly, this proposed rule would not directly impact credit unions; however, it will impact the secondary mortgage market. 

One important improvement is that the proposed definition of "qualified residential mortgage" would be aligned with the CFPB's definition of "qualified mortgage." However, the devil is always in the details and the proposed definition of "qualified residential mortgage" would only be aligned with the CFPB's "general definition of qualified mortgage." According to the proposal, the definition of "qualified residential mortgage" would not include a mortgage that attains “qualified  mortgage” status on the basis of being eligible for purchase by Fannie Mae or Freddie Mac, issued by a “small creditor” (as defined in the CFPB’s rule), or is a “qualified mortgage" balloon loan.

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Latest Interchange Video. Looking for the latest on interchange? Check out NAFCU's Interchange Fee issue page - including the latest video update from NAFCU's Carrie Hunt.

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September Compliance Monitor. The September 2013 NAFCU Compliance Monitor is now available for download by NAFCU members. This month's articles are on NCUA's Loan Participation Rule and the CFPB's Remittance Transfer Rule. And, of course, the latest Compliance Calendar is also available.

NCUA Approves the Loan Participation Rule

Written by JiJi Bahhur, Regulatory Compliance Counsel

During the board meeting yesterday, NCUA considered and approved the loan participation final rule. Although NCUA made improvements to the rule as it was originally proposed, NAFCU still has some concerns that it will address after careful scrutiny of the final rule. 

The final rule amends Parts 701 and 741 of NCUA’s rules and regulations – the loan participation rule, eligible obligations rule and requirements for insurance rule.  For those that read the proposal, you’d be delighted to know that NCUA created a chart comparing key provisions of the proposed rule versus the final rule.  It’s a must-see. 

Once NAFCU examines the final rule more closely, we will have more details to share.  In the meantime, listed in the Board Action Bulletin are the highlights of the final loan participation rule:

• Purchasing credit unions will be subject to a single-originator concentration limit of $5 million or 100 percent of net worth, whichever is greater.

• The risk retention requirement for originating federal credit unions will be 10 percent, as required by the Federal Credit Union Act.

• The risk retention requirement for other originating eligible organizations – including federally insured, state-chartered credit unions – will be five percent, consistent with the standard for securitizers under the Dodd-Frank Act (unless state law requires a higher percentage).

• Federally insured credit unions may establish different underwriting standards for loan participations than they use when originating their own loans.

• Credit unions will have the ability to apply for waivers on certain key provisions of the rule.

The final loan participation rule is available here.  The rule is effective 30 days from its publication in the Federal Register.

Cyber Threats; SCRA; Fannie Mae Resources; Economic Update; Mortgage Servicing Transfers

Written by Steve Van Beek

Below are couple of tidbits for your Tuesday.

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NCUA Risk Alert on Cyber Threats.  NCUA issued Risk Alert 13-Risk-01 on steps credit unions should take to protect against Distributed Denial-of-Services (DDoS) attacks.  In recent months, these attacks have ticked up at financial institutions – including credit unions.  Be sure to pass this Risk Alert along to those in charge of risk management and information technology at your credit union.    

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CFPB “Hit or Myth” on SCRA.  The CFPB had a recent blog post on various confusing issues related to servicemember protections under SCRA.  These “Hit or Myth” questions and answers might be useful for internal SCRA training.  For more CFPB information on servicemembers, check out this page.    

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Fannie Mae Loan Quality Resources. If your credit union sells loans to Fannie Mae, be sure to check out their new resources regarding Loan Quality.  The webpage includes resource guides as well as free webinars to help understand Fannie Mae’s procedures.  Be sure to pass along the resource page to others at your credit union. 

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NCUA’s February Economic Video.  NCUA’s latest economic video is now available for viewing on YouTube.  Each month, NCUA’s Chief Economist John Worth provides an overview of the economic market and how it impacts credit unions.  These are great videos to include in strategic planning or board sessions as NCUA comes directly to you – via YouTube – each month with an economic update.  

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CFPB Bulletin on Mortgage Servicing Transfers.  In addition to changing nearly all the mortgage servicing requirements in January, the CFPB has mortgage servicing transfers in their crosshairs.  In mid-February, the CFPB announced their intent to “closely monitor transfer activity” by mortgage servicers.  In conjunction with the announcement, the CFPB issued Bulletin 2013-1 which provides specific information regarding the CFPB’s detailed focus on mortgage servicing transfers.