MOSS ADAMS LLP | 1

Compliance Hot Topics – Are You Ready?

ACUIA Annual Conference

June 16, 2011

Austin, Texas

Presented by:

Dan Huston, Partner, Moss Adams LLP

Travis Pettyjohn, Senior Manager, Moss Adams LLP

MOSS ADAMS LLP | 2

WHAT WE’LL COVER TODAY

• Key areas of Regulatory focus, including recent and upcoming implementations

• Regulations that may affect your credit union, that are new or have not been widely discussed

• What the Internal Auditor and Supervisory Committee should do to ensure the Credit Union’s Compliance program is on track

MOSS ADAMS LLP | 3

REGULATORY HOT SPOTS

MOSS ADAMS LLP | 4

UNFAIR OR DECEPTIVE ACTS OR PRACTICES

• Unfair or Deceptive Acts or Practices (Section 5 of the Federal Trade Commission Act - 15 USC 45)o Unfair practice:

1. May cause substantial consumer injury.2. The injury to the consumer is not outweighed by benefits

to the consumer or to competition.3. Fee income to Institution compared to cost to consumer4. The injury caused is one that consumers could not

reasonably have avoided (failure to notify customer of the program and costs).

MOSS ADAMS LLP | 5

UNFAIR OR DECEPTIVE ACTS OR PRACTICES

o Deceptive practice:1. There is a representation, omission, act or practice that is

likely to mislead.2. The act or practice would be deceptive from the

perspective of a reasonable consumer. 3. The representation, omission, act or practice is material

(can appear in marketing, misleading or unclear disclosures, or failing to disclose).

MOSS ADAMS LLP | 6

PAYMENT OF OVERDRAFTS AND OVERDRAFT PROTECTION PROGRAMS

• Joint Agency Guidance for Overdraft Protection Programs issued February 18, 2005o Provided general guidance regarding consumer

disclosures, advertising, funds availability disclosures as well as credit risk considerations

o Introduced the FTC Act, Section 5, and coverage regarding deceptive advertising and Unfair Acts and Deceptive Practices (UDAP) concepts

MOSS ADAMS LLP | 7

PAYMENT OF OVERDRAFTS AND OVERDRAFT PROTECTION PROGRAMS

• Regulation E (12CFR205) Amendment, Effective July 6, 2010o Restricts institution’s ability to charge overdraft fees

on a one-time ATM or debit card transaction unless the consumer “opts in” to the Institution’s overdraft protection programs.

o Provides rules for charging of continuing fees if negative balances persist, including prohibition of charging fees on negative balances caused by one time ATM or debit card transactions.

MOSS ADAMS LLP | 8

PAYMENT OF OVERDRAFTS AND OVERDRAFT PROTECTION PROGRAMS

o May not condition payment of overdrafts on members “opting in”. May not decline to pay overdrafts because member did not “opt-in”.

• TISA - Regulation DD (12CFR230) Amendment , Effective January 1, 2010o Requires disclosure of total fees on periodic

statements and aggregate fee disclosures for o Disclosures must be made in specific format

MOSS ADAMS LLP | 9

PAYMENT OF OVERDRAFTS AND OVERDRAFT PROTECTION PROGRAMS

• FOCUS ON UDAP:o Are advertisements related to overdraft programs

misleading? Do they leave important information out (fees charged, or lead the member to think the service is free?)

o Does the Credit Union provide a full program description, including charges, features and restrictions?

o Do disclosures include information on the cost and consequences of overdrafts?

MOSS ADAMS LLP | 10

PAYMENT OF OVERDRAFTS AND OVERDRAFT PROTECTION PROGRAMS

• FOCUS ON UDAPo Do consumers receive any warning or notice that an

overdraft might occur?o Do consumers have the opportunity to “opt-in” to

overdraft programs?o Does the Credit Union counsel members who have

excessive overdrafts (six or more occasions an account is overdrawn in a rolling 12 month period)

MOSS ADAMS LLP | 11

TRUTH IN LENDING - COMPENSATION

• Steering Incentive Ban (Loan Originator Compensation Practices), Effective April 1, 2011o Prohibit payments to the loan originator that are

based on the loan’s interest rate or other terms. Compensation that is based on a fixed percentage of the loan amount is permitted.

o Prohibits a mortgage broker or loan officer from receiving payments directly from a consumer while also receiving compensation from the creditor or another person.

MOSS ADAMS LLP | 12

TRUTH IN LENDING - COMPENSATION

o Safe Harbor Rule: If the consumer is presented with loan offers for each

type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage)

And Loan options presented to the consumer include:» the lowest interest rate for which the consumer qualifies» lowest points and origination fees, and» lowest rate for which the consumer qualifies for a loan with no

risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.

MOSS ADAMS LLP | 13

APPRAISAL REFORMS

• Guidance on Appraisal Standards issued December 10, 2010; additional changes pendingo For "higher-risk mortgages," requires written

appraisals based on physical inspection of the property, and in some cases second appraisals.

o FRB interim final regulations defining acts or practices that violate appraiser independence are required no later than 90 days after enactment.

MOSS ADAMS LLP | 14

APPRAISAL REFORMS

• A broker price opinion may not be used as the primary basis for determining the value of property that would secure a mortgage for the purchase of a consumer's principal dwelling.

• The FRB, FDIC, OCC, NCUA, FHFA, and CFPB may issue additional joint regulations and guidance on appraiser independence, and they are required to issue joint regulations on the appraisal requirements for higher-risk mortgages, appraisal management companies, and automated valuation models.

MOSS ADAMS LLP | 15

REGULATORY IMPLEMENTATIONS TO MONITOR

MOSS ADAMS LLP | 16

SAFE ACT

• Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) o All mortgage loan originators (MLOs) employed in

financial institutions must register with Nationwide Mortgage Licensing System and Registry.

o Registration includes fingerprints, background checks, personal history and lending experience.

o MLO is issued a Registration/license number that must be placed on all loans. No employee may originate mortgages until registered.

MOSS ADAMS LLP | 17

SAFE ACT

o Financial institution must have policy and procedures that require MLO registration, track status of registration and manage renewals.

o Consider registration and information updating in hiring process.

MOSS ADAMS LLP | 18

OTHER REGULATORY CHANGES TO NOTE

MOSS ADAMS LLP | 19

TRUTH IN LENDING - CONSUMER ABILITY TO REPAY

• Ability to Repay (Proposed by FRB April 19, 2011, Comments Due July 22, 2011)o Requires creditors to make a reasonable and good

faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay a residential mortgage loan at the time the loan is consummated.

o A creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer's income or assets

MOSS ADAMS LLP | 20

TRUTH IN LENDING - CONSUMER ABILITY TO REPAY

o A creditor can make a "qualified mortgage," which provides the creditor with special protection from liability provided the loan does not have certain features, such as: negative amortization fees are within specified limits and the creditor underwrites the mortgage payment using

the maximum interest rate in the first five years.

MOSS ADAMS LLP | 21

TRUTH IN LENDING - CONSUMER ABILITY TO REPAY

A creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio.

• A creditor can refinance a "non-standard mortgage" with risky features into a more stable "standard mortgage" with a lower monthly payment. This option is meant to preserve access to streamlined refinancing.

• The proposal would also implement the Dodd-Frank Act's limits on prepayment penalties.

MOSS ADAMS LLP | 22

TRUTH IN LENDING - CONSUMER ABILITY TO REPAY

• Prepayment penalty phase-out is mandated with a prohibition against them after 3 years.

• For adjustable rate and certain higher-priced mortgages, prepayment penalties are prohibited upon enactment of the legislation.

MOSS ADAMS LLP | 23

AND FINALLY…

MOSS ADAMS LLP | 24

REPEAL OF “REGULATION Q”

• Repeal of Prohibition against the Payment of Interest on Demand Deposits, § 627 (effective July 21, 2011)

• Effective one year after enactment of Dodd-Frank Act, the Act repeals various banking law provisions prohibiting the payment of interest on demand deposits.No effect on Credit Unions who have always been

allowed to pay dividends on share accounts…

MOSS ADAMS LLP | 25

BEST PRACTICES – MANAGING COMPLIANCE RISK

MOSS ADAMS LLP | 26

WHAT SHOULD THE COMPLIANCE OFFICER DO?

• Assess Compliance Riskso Prepare a compliance risk assessment; be sure to

identify controls that mitigate risk and program activities to test those controls.

• Monitoring (Testing)o Document testing, re-testing, and resultso Document corrective action and training

• Document Program Activities:o Monitoring, training, implementations, compliance

committee meetingso Activities should tie to your risk assessment

MOSS ADAMS LLP | 27

WHAT SHOULD THE COMPLIANCE OFFICER DO?

• Include comprehensive, independent audit of the compliance function in your plans

Ensure audit of the compliance program is independent; use a third party if independence is compromised

• Ensure areas where significant control issues are re-tested in a timely manner

• Obtain regular training

MOSS ADAMS LLP | 28

WHAT SHOULD THE SUPERVISORY COMMITTEE DO?

• Ask questions about implementation of changes and how your compliance officer ensures they occur and are integrated appropriately

• Keep informed through regular training and discussion with management

• Ensure testing is completed and reported on as necessary; review testing for problem areas

MOSS ADAMS LLP | 29

QUESTIONS?

Dan Huston, PartnerMOSS ADAMS LLP805 SW Broadway, Suite 1200Portland, OR 97205503.471.1291dan.huston@mossadams.com

MOSS ADAMS LLP | 30

The material appearing in this presentation is for informational purposes

only and is not legal or accounting advice. Communication of this

information is not intended to create, and receipt does not constitute, a

legal relationship, including, but not limited to, an accountant-client

relationship. Although these materials may have been prepared by

professionals, they should not be used as a substitute for professional

services. If legal, accounting, or other professional advice is required, the

services of a professional should be sought.