NAFCU’s Annual Regulatory Compliance Update

November 6, 2014

2:00 – 3:30 p.m. ET

Presented by: • JiJi Bahhur, NCCO, Director of Regulatory Compliance

• Bernadette Clair, NCCO, CAMS, Senior Regulatory Compliance Counsel

• Eliott C. Ponte, Regulatory Compliance Counsel

Roadmap

• Earlier this year

• NCUA

– Supervisory Focus

– Finals and Proposals

– Other Issues and Guidance

• CFPB

– Finals and Proposals

– Ongoing Initiatives and Enforcement

– CFPB’s Tea Leaves

• Also in the News

Earlier This Year

• NCUA & CFPB Updates, by NAFCU’s Regulatory Affairs Team, May 7, 2014

• Final Rules (went into effect in first part of 2014):

– CFPB’s Mortgage Regulations

– Derivatives

– Access to Emergency Liquidity/Central Liquidity Facility

– Loan Participations

– Stress Testing and Capital Planning

– Voluntary Liquidation

NCUA Update

• Noted Areas of Risk: – Interest Rate Risk

– Cybersecurity Threats

– Money Services Business and Private Student Lending

• Compliance – Loan Participation Rule

– Credit Union Service Organization Rule

– CFPB’s Ability to Repay

– Qualified Mortgage Standards

• Examiners have flexibility to “narrow or expand the scope of an exam”

2014 NCUA Supervisory Focus

NCUA Update

Final Rules

CUSOs

Credit Union Service Organizations (CUSOs)

• NCUA Board released final CUSO rule, requiring

CUSOs to provide annually basic profile information

to the NCUA and the appropriate state supervisory

authority.

• High-risk or complex activities require more detailed

reporting.

• Reporting burden on CUSO.

• CU must amend written agreements with those

CUSOs it lends to or invests in.

• Effective June 30, 2014.

NCUA Update

Proposed Rules

Risk-Based Capital

Key Concerns:

• Proposed rule to replace current calculation of net worth within statutory capital and prompt corrective action (PCA) regulations with new risk-based capital (RBC) requirements

• Would revise the risk-weights for many of NCUA’s current asset classifications and require higher minimum levels of capital for federally-insured natural person credit unions with concentrations of assets in real estate loans, member business loans (MBLs) or higher levels of delinquent loans

– More restrictive than the risk-weighting at the FDIC under Basal III

– Does not accurately capture risks associated with non-delinquent first mortgage real estate loans, investments, MBLs, and CUSOs

Risk-Based Capital

Key Concerns (continued):

• Would set forth a process where NCUA could require an individual federally-insured natural person credit union to hold higher levels of risk-based capital based on supervisory concerns raised by agency examiners.

– What’s wrong with that?

– NCUA can increase credit union’s individual RBC requirement through the examination process if it subjectively believe the credit union needs additional capital based on the credit union’s balance sheet risk.

Risk-Based Capital

• Feedback – unprecedented – 2,000+ comment letters (6,000/2,000 = 1/3)

– King-Meeks Letter (324 signatures from Congress)

– Johnson-Crapo Letter

– MBA, Home Builders, Realtors

• Next steps? – Second Comment Period

– Might be issued by the end of 2014

– Expect NCUA to pull back weighting, extend implementation period

https://www.nafcu.org/capitalreform/

Associational Common Bond Proposal

• Proposed amendments to the associational common bond provisions of NCUA’s Chartering and Field of Membership (FOM) manual.

• Follows after NCUA’s OCP Letter to FCUs 13-FCU-03 (re advertisements stating FCU’s FOM “open to anyone”).

• Amendment seeks to:

– Establish a threshold requirement that an association not be formed primarily for the purpose of expanding membership

– Expand the “totality of the circumstances” test by adding an eighth factor regarding corporate separateness

– Grant automatic approval into the credit union’s FOM to certain categories of groups

Associational Common Bond Proposal

• Quality Assurance Review (QAR)

– Preamble of the final rule highlights NCUA OCP’s ongoing process of reviewing associational groups on a case-by-case basis to determine compliance with current associational common bond requirements.

– If NCUA finds these associations no longer meet the totality of the circumstances test, it will remove them from the credit union’s field of membership.

• NAFCU’s Stance

– Opposition to threshold determination; inappropriate and unnecessary because of existing rules

– QAR could usurp associations that were previously approved under the Chartering and Field of Membership manual

Fixed Assets

• Proposed on July 31, 2014. Comment period closed October 10, 2014.

• The current rule limits FCUs investments to 5% of its shares and retained earnings. – Exception: FCUs can obtain a waiver to exceed 5%.

• The proposed rule will: – Remove the requirement to have FCUs seek NCUA’s

approval before exceeding 5% investment into fixed assets. • Before exceeding 5%, a FCU must implement a Fixed Assets

Management program, which includes: (1) a written board policy, (2) board oversight, and (3) ongoing internal controls.

– Allow FCUS to set their own investment limits

Fixed Assets cont.

• The current rule (cont.): – The current rule requires FCUs to occupy a premises

(expansions) it acquires within one year, unless the board adopts a resolution that contains definitive plans for full occupation.

• The proposed rule will (cont.): – Establish a single time period for partial occupancy of

premises acquired for future expansion. – Eliminates the requirement to apply for a waiver from the

partial occupancy rules within 30 months of property acquisition.

• Overall, NAFCU thinks this is a step in the right direction – NAFCU has been working on getting the NCUA to update

this rule. See NAFCU’s Dirty Dozen.

• For more information, see Reg. Alert 14-EA-20

Securitization

• Proposed on June 26, 2014. Comment period closed August 25, 2014.

• The proposed rule adds a new provision to 12 C.F.R. Part 721:

– Proposed rule states the NCUA believes FCUs and FISCUs have the power to securitize loans.

• Restricted to the loans it originates (no re-underwriting).

• Does not prevent FCU from pooling loans that can be sold in secondary markets (but it cannot be a security).

Securitization cont.

• The proposed rule cont.

– Authorizes a credit union to create a special purpose vehicle or entity to hold the assets that collateralize the asset-backed security.

• Can be a LLC, Trust, Partnership, or Corporation that is limited to acquiring and financing the assets.

• Cannot be a CUSO because this is not a preapproved CUSO activity.

• Special entity must be isolated from creditors of the FCU in the event of insolvency.

Securitization cont.

• The proposed rule cont.

– Seven minimum safety and soundness requirements

• Compliance with all laws and regulations

• Independent risk management

• Annual audit

• Board knowledge (must understand the risks)

• Management expertise

• Board approved policies

• Internal controls

• For more information, see Reg. Alert 14-EA-16

Examination sites

• Proposed on December 23, 2013. Comment period closed January 23, 2014.

• This proposed rule would amend NCUA regulations (12 C.F.R. Part 701) to temporarily require examinations and other contacts with NCUA staff to occur in a FCU’s business office or other public location.

• This proposed rule would also require all FCUs to maintain and monitor an email address, a telephone number, or both, dedicated exclusively for the credit union’s business purposes.

Appraisals

• Proposed on June 16, 2014. Comment period closed August 25, 2014.

• Under the proposed rule, the NCUA will eliminate its regulation (12 C.F.R. 701.31(c)(5)) requiring a FCU to make available a copy of the appraisal used in connection with a member’s application for a loan secured by a first lien on a dwelling.

– This regulation is duplicative because Regulation B requires FCUs to do the same thing.

Appraisals Cont. • This proposed rule would also amend NCUA’s appraisal

regulations, specifically 12 C.F.R. § 722.3(a)(5), by expanding the current exemption for certain transactions involving existing extension of credit. – This proposal would allow a FCU to refinance or modify a

real estate-related loan without having to obtain an appraisal if: (1) there is no advancement of new monies (excluding monies to cover closing costs); or (2) if there is adequate collateral protection, even with the advancement of new monies.

• The proposed rule would also make a technical amendment to the definition of the term “application.” – It just removes a parenthetical quote regarding Regulation B.

• Multi-Agency (NCUA, OCC, FRB, FDIC, FCA)

• Biggert-Waters Flood Insurance Reform Act of 2012 – Proposed rule requires credit unions with assets of more than $1 billion,

or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loans secured by residential improved real estate or a mobile home.

– Requires credit unions to accept private flood insurance meeting the statutory definition to satisfy the mandatory purchase requirement.

– Includes new and revised sample notice forms and clauses.

• Homeowner Flood Insurance Affordability Act of 2014 – Delayed implementation date – January 1, 2016

– Narrowed scope of escrow requirement

• Proposed rule (comments due December 29, 2014)

Flood Insurance

NCUA Update

Other Issues and Guidance

NCUA Board

• Chairman Matz (D)

– Term through August 2, 2015.

• Vice Chairman Metsger (D)

– Term through August 2, 2017.

– Designated Vice Chairman by Chairman Matz; confirmed by NCUA Board

• Board Member McWatters (R)

– Confirmed by Senate for a term through August 2, 2019.

– Sworn in August 26, 2014

Bylaws

• The Federal Credit Union Bylaws were last updated in 2007.

• NAFCU working group recommendations

• NAFCU expects the NCUA Board to issue an updated version of the Federal Credit Union Bylaws in late 2014.

• Civil Money Penalties for Late Call Reports and Profile Submissions – Up to a maximum of $2,000 per day may be assessed for each day a

required report is “minimally” late or contains uncorrected false/misleading information if the late or false/misleading filing is unintentional and the credit union has reasonable procedures in place to avoid such errors.

– Up to a maximum of $20,000 per day may be assessed for each day a required report is late or contains false/misleading information if the late or false/misleading filing is not covered by the “unintentional” safe harbor outlined in number one above.

– Up to a maximum of $1 million (or 1 percent of total assets, whichever is less) per day may be assessed if a FICU knowingly or with reckless disregard for accuracy submits a false or misleading report and fails to correct it.

Call Reports

2014 Letters to Federal CUs

• 14-FCU-01 Operating Fee Scale Reduced for 2014

• 14-FCU-02 Permissible Interest Rate Ceiling Extended

• 14-FCU-03 Unfair or Deceptive Credit Practices

2014 Letters to CUs

• 14-CU-01 Supervisory Guidance on Qualified and non-Qualified Mortgages

• 14-CU-02 Supervisory Focus for 2014 January 2014 Active

• 14-CU-03 Civil Money Penalties to be Assessed for Late Call Report and Profile Submissions in 2014

• 14-CU-04 Derivatives Applications Open March 3

2014 Letters to CUs

• 14-CU-05 Liquidity Requirements Take Effect March 31

• 14-CU-06 Taxi Medallion Lending

• 14-CU-07 Contractual Agreements with Credit Union Service Organizations (CUSOs)

• 14-CU-08 Home Equity Lines of Credit Nearing Their End-of-Draw Period

2014 Legal Opinion Letters

• NCUA LOL 14-0502

– Clarification of Amended CUSO Rule (05/29/2014)

• NCUA LOL 14-0311

– Multiple Insured Parties Under Fidelity Bond (03/21/2014)

2014 Supervisory Letters

• SL No. 14-05

– Capital Planning Under NCUA Rules & Regulations §702 Subpart E for Credit Unions with Assets of $10 Billion or More

– Enclosure: NCUA White Paper: Principles of Capital Policy and Capital Planning

2014 Accounting Bulletin

• No. 14-01

– Interagency Regulatory Reporting Policy on Accounting for a Subsequent Restructuring of a Troubled Debt Restructuring

NCUA Resources

NCUA Regulatory Alerts for the January Mortgage Rules • Mortgage Loan Originator Compensation Requirements from the

Consumer Financial Protection Bureau (CFPB)

• Mortgage Servicing Requirements from the Consumer Financial Protection Bureau (CFPB) under the Real Estate Settlement Procedures Act (RESPA)

• Mortgage Servicing Requirements from the Consumer Financial Protection Bureau (CFPB) under the Truth In Lending Act (TILA)

• New Homeownership Counseling and Consumer Protection Requirements from CFPB

• Ability-To-Repay and Qualified Mortgage Requirements from the Consumer Financial Protection Bureau (CFPB)

• Appraisals for Higher-Priced Mortgage Loans

NCUA Resources

Additional NCUA resources

• Office of Small Credit Unions Initiative

• NCUA Express

• NCUA’s YouTube Channel

– Economic Updates

– Supervisory Committee Training Modules

– Fraud Series

• Regulations and Legal Resources

CFPB Update

CFPB Update

Final Regulations

TILA/RESPA Integrated Disclosures

• Final Rule amending Regulation Z (TILA) and Regulation X (RESPA) to integrate mortgage loan disclosures.

• Compliance Deadline: August 1, 2015

• Implementation Resources:

o CFPB TILA/RESPA Implementation Page

o TILA/RESPA Ongoing Webcast Series

o NAFCU TILA/RESPA Page

o NAFCU TILA/RESPA Blog Series

• Proposed changes to TILA/RESPA Final – already?

Remittance Transfers

• Final Rule – effective November 17, 2014 – Extends temporary pricing disclosures exception.

– Transfers received or sent to a U.S. military installation are considered received in a “State” in the U.S.; therefore, excluded from remittance applications.

– Whether remittance is for personal, family, or household purpose may be determined by ascertaining primary purpose of account.

– Faxes are writings.

– Provider can include remittance-specific consumer website as the website disclosed on receipt.

• Final Rule – effective December 1, 2014 – Allows CFPB to oversee larger nonbank international money

transfer providers.

TIL Thresholds

• The Dodd-Frank Act requires that the dollar threshold for exempt consumer credit transactions be adjusted annually by any annual percentage increase in the Consumer Price Index.

– Student loans, real property, and personal property used as the principal dwelling of a consumer are never exempt.

• The 2015 exemption threshold under Regulations Z and M is $54,600.

• Notice issued by CFPB for Reg. Z, and Reg. M.

Privacy • Regulation issued on October 17, 2014.

• Under GLBA, financial institutions are required to send annual privacy notices to customers.

• The new regulation allows credit unions to post its annual privacy notice online under certain conditions.

• There is a five part test, .... But, think of opt-out rights. • This is a very simplified version, check the regulation before deciding whether to

post online in lieu of mailing the privacy notice.

– If the member has opt-out rights, they must receive the annual notice by mail.

– If the member does not have an opt-out right, then notice on the website is fine.

• Look to the compliance monitor in December for more details, or JiJi’s blog post on October 22, 2014.

• Ability to Repay/Qualified Mortgage

• Final Rule effective for transactions consummated on or after November 3, 2014

• Limited cure mechanism under the ability-to-repay rule that allows lenders to refund points and fees that exceed the 3 percent cap on a loan that otherwise meets the qualified mortgage requirements at consummation

Points and Fees Cure

• Refund excess points and fees, with interest, within 210 days, as long as one of the following has not occurred:

(1) Institution of any action by the consumer in connection with the loan;

(2) Receipt by the creditor, assignee, or servicer of written notice from the consumer that the transaction’s total points and fees exceed the cap; or

(3) The consumer becomes 60 days past due on the legal obligation.

• Policies and Procedures

• Expires January 10, 2021

Points and Fees Cure

• Compliance Guide and Policy Guidance

• Bulletin effective October 23, 2014 and applicable August 19, 2014

• Replaces Bulletin 2013-01

• Guidance for evaluating potential risks to consumers that may occur when transferring residential mortgage servicing rights

– General transfer-related policies and procedures

– Applicability of the new servicing rules to transfers

– Protections Under federal consumer financial law

– Plans for handling servicing transfers

Mortgage Servicing Transfers

CFPB Update

Proposed Rules

• 600 page HMDA proposal (comment period closed October 29, 2014)

• Dodd-Frank required changes, but also proposing adding additional HMDA reporting requirements that the CFPB “believes may be necessary to carry out the purposes of HMDA”

• Expansion of the transactions subject to Regulation C—all closed-end loans, HELOCs, and reverse mortgages

Home Mortgage Disclosure Act

• Expanded data collection points (age, credit score, debt-to-income ratio, reasons for denial, application channel, automated underwriting system results, information about the loan features such as pricing, etc.)

• Quarterly reporting for certain institutions that report large volumes of transactions

• ** Unsecured home improvement loans would no longer need to be reported**

Home Mortgage Disclosure Act

• Proposed rule to amend the TILA/RESPA Integrated Disclosures Rule (comments due November 10, 2014)

• Relax the redisclosure timeframe for revised Loan Estimate disclosures when the consumer locks a rate or extends a rate lock after the initial Loan Estimate is provided – until the next business day

• Construction loans

• 2013 Mortgage Loan Originator Final Rule – placement of the NMLSR ID on integrated disclosures

Know Before You Owe

CFPB Update

Ongoing Initiatives and Enforcement

Consumer Complaint Database

• Identifies trends

• Proposed policy statement: expand database to include narrative data.

• Risks to CUs:

– Undue reputational harm

– Inadequate ability to respond due to member privacy concerns

• Manage your complaints

– Today’s complaints are tomorrow’s regulations

– Detect and correct; mitigate risks

Guidance Implementation

• NAFCU has strongly encouraged the CFPB to provide authoritative opinions and guidance to credit unions on specific matters.

• Current Mechanisms:

– http://www.consumerfinance.gov/askcfpb/

– Guidance Documents

– Informal guidance from staff attorney at Office of Regulations: (202) 435-7700 or CFPB_reginquiries@cfpb.gov

UDAAP and Deceptive Marketing

• In September 2014, the NCUA repealed its UDAAP regulations in response to Dodd-Frank.

• Shortly after the repeal, the NCUA warned credit unions that they are still subject to the FTC Act, which prohibits certain unfair and deceptive acts and practices.

• M&T Bank was recently subject of a CFPB enforcement action for violating TISA Advertising violations and Unfair, Deceptive, or Abusive Acts” (found in 12 U.S.C. § 5536(a)(1)(B)).

Access to Checking Accounts

• The CFPB recently held a forum on Access to Checking Accounts.

– Confirmed speculation that the CFPB was interested in checking account disclosures and polices.

– Forum discussed the CFPB was interested in how financial institutions implement checking account screening policies and how these policies/practices affect consumers. • Director Cordray mentioned (1) the information being assessed by

banks and credit unions, (2) consumers access to these “special” reports, and (3) how they are being used by banks and credit unions.

– NAFCU believes that the CFPB is monitoring this with a careful eye.

No-Action Letter

• Proposed on October 10, 2014. Comment period closed December 15, 2014.

• A no-action letter is like a queen-for-a-day letter

• Requirements:

– Credit union must ask for the no-action letter

– Credit union must offer an innovative financial product or service

• That promises “substantial” consumer benefit

• Where there is “substantial” uncertainty in the law or regulations

– Credit union must explain how the program will work

No-Action Letter cont.

• Upside of this policy

– Credit union staff knows the best way to do things, so credit unions can be innovative and create efficiencies in the system

• Down side of the policy

– CFPB has built in a lot of escape clauses

– Who knows what the CFPB will do with submitted programs in the future... new regulations?

CFPB Update

CFPB: Reading the Tea Leaves

Payday Loans

• Should we expect regulations? Probably, but not in the immediate future. – The CFPB has publically stated that it is researching

and considering whether rulemaking is warranted for payday loans and deposit products. • 2013 whitepaper on the short-term/small dollar loan

market.

– The CFPB listed payday loans on its spring 2014 agenda.

– The CFPB held a field hearing in March of 2014 in Nashville, TN, and issued a report analyzing payday lending shortly after.

• ANPR in May 2012 • Potential disclosures tested – may propose

using on packaging of prepaid cards • Field hearing coming up November 13, 2014 • Possible CFPB to Extend Reg E Protections to

General Purpose Reloadable (GPR) Cards • Focus on:

– Fees and Terms Disclosures

– Unauthorized Transactions

– Product Features

Prepaid Cards

Overdraft Programs

Study of Overdraft Programs:

• Data study looks at market and contextual factors in the offering of overdraft services since the 2010 implementation of a consumer opt-in requirement under Regulation E.

• Account-level study conducted to better understand how differences in bank practices affect consumers (no credit unions in study).

Overdraft Programs

Study of Overdraft Programs (continued):

• If it finds that policies or practices do not protect consumers in accordance with federal consumer protection law, it will use its authorities to provide such protection.

• Possibility of more studies in the future before rulemaking.

Student Lending

• Should we expect regulations? Not in the near future.

– 2012 Report with Dep’t of Edu. shows more than 850,000 student loans in default.

• More in delinquency.

• To mitigate the growing issue, CFPB has been instructing borrowers on how to give payment instructions to servicers.

– August of 2013, CFPB launched an initiative to help public service employees with debt.

Also in the News

Department of Defense

Proposed Rule

• Proposed rule (comment due November 28, 2014)

• Current MLA implementing rules

– Closed-end payday loans with term of 91 days or less

– Closed-end auto title loans with terms of 181 days or fewer

– Closed-end tax refund anticipation loans

• Proposed changes

– Amend the definition of “consumer credit” to more closely match the definition under the Truth in Lending Act, expanding 36 percent rate cap to additional consumer credit products

Military Lending Act

• Would include payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit and credit cards (with some exclusions)

• But not residential mortgages and purchase-money loans (to buy items like cars) – they are excluded from the MLA’s definition of “consumer credit”

• Proposed safe harbor for lenders who use DoD database

Military Lending Act

FFIEC

Federal Financial Institutions Examination Council (FFIEC)

Cybersecurity Assessment

FFIEC

“FFIEC Cybersecurity Assessment General Observations”

• Cybersecurity Inherent Risk

– Defined as “the amount of risk posed by a financial institution’s activities and connections, notwithstanding risk-mitigating controls in place.”

• Current Practices and Overall Preparedness

– Risk management and oversight;

– Threat intelligence and collaboration;

– Cybersecurity controls;

– External dependency management; and

– Cyber incident management and resilience.

NAFCU Resources

• Check out our new website!

– www.nafcu.org

• Compliance Resources:

– http://www.nafcu.org/complianceresources/

• Legislative and Regulatory Issues:

– http://www.nafcu.org/issues/

• Contact the Compliance Team:

– http://www.nafcu.org/contactcompliance/

Questions? compliance@nafcu.org

JiJi Bahhur, jbahhur@nafcu.org

Bernadette Clair, bclair@nafcu.org

Eliott C. Ponte, eponte@nafcu.org

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