December 2018 1 Worth Noting ................................................................................................................................................................................... 1 2018 Year End Review – Federal Regulatory Compliance Highlights .........................................................................................2 Record Retention: A Brief Overview of Some of the More Common Federal Regulations ...................................................... 11 News Snippets ............................................................................................................................................................................... 13 Compliance Forum ........................................................................................................................................................................ 15 NAFCU Education ......................................................................................................................................................................... 17 Worth Noting Innovative Approaches to BSA/AML Compliance Encouraged. Recently, the National Credit Union Administration (NCUA), the Financial Crimes Enforcement Network (FinCEN) and three other financial regulators issued a joint statement to encourage credit unions and other financial institutions in the exploration and implementation of innovative approaches so as to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance requirements. The statement indicates the agencies recognize that private sector innovation can help strengthen the financial system against illicit financial activity. In its release, NCUA notes the use of innovative strategies or technology does not bring new supervisory expectations and a credit union’s participation in such innovations related to BSA/AML compliance will not affect the agency’s assessment. FinCEN is also launching an innovation initiative to promote a better understanding of the opportunities and challenges of BSA/AML-related innovation. It plans to reach out to “financial institutions, technology providers and other firms involved in financial services innovations to discuss the implications of their products and services, and their future applications or next steps.” The statement indicates NCUA and the other agencies will establish projects or offices “that will work to support the implementation of responsible innovation and new technology in the financial system.” In October, the agencies also released a joint statement concerning collaborative arrangements entered into by financial institutions to share resources to more efficiently and effectively manage BSA/AML programs. Such collaborative arrangements are generally more suitable for institutions with a community focus, less complex operations and lower-risk profiles for money laundering or terrorist financing. The risk profile must be specific to the institution and based on a risk assessment that adequately takes into account all areas of risk including: products, services, customers, entities and geographic locations.
2018 Year End Review – Federal Regulatory Compliance Highlights ......................................................................................... 2
Record Retention: A Brief Overview of Some of the More Common Federal Regulations ...................................................... 11
Compliance Forum ........................................................................................................................................................................ 15
Innovative Approaches to BSA/AML Compliance Encouraged. Recently, the National Credit Union Administration (NCUA), the Financial Crimes Enforcement Network (FinCEN) and three other financial regulators issued a joint statement to encourage credit unions and other financial institutions in the exploration and implementation of innovative approaches so as to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance requirements. The statement indicates the agencies recognize that private sector innovation can help strengthen the financial system against illicit financial activity. In its release, NCUA notes the use of innovative strategies or technology does not bring new supervisory expectations and a credit union’s participation in such innovations related to BSA/AML compliance will not affect the agency’s assessment.
FinCEN is also launching an innovation initiative to promote a better understanding of the opportunities and challenges of
BSA/AML-related innovation. It plans to reach out to “financial institutions, technology providers and other firms involved in financial services innovations to discuss the implications of their products and services, and their future applications or next steps.” The statement indicates NCUA and the other agencies will establish projects or offices “that will work to support the implementation of responsible innovation and new technology in the financial system.”
In October, the agencies also released a joint statement concerning collaborative arrangements entered into by financial institutions to share resources to more efficiently and effectively manage BSA/AML programs. Such collaborative arrangements are generally more suitable for institutions with a community focus, less complex operations and lower-risk profiles for money laundering or terrorist financing. The risk profile must be specific to the institution and based on a risk assessment that adequately takes into account all areas of risk including: products, services, customers, entities and geographic locations.
2018 Year-end Review – Federal Regulatory Compliance Highlights
This year, credit unions saw some regulatory relief, so while regulatory burden remains a key concern, there is hope to continue making progress towards having a regulatory environment where credit unions can compete and grow. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, or S.2155, reducing the regulatory burden of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) for many credit unions. Meanwhile, 2018 also brought relatively high litigation risk, with many credit unions receiving demand letters or served civil complaints claiming the credit union’s website was not compliant with the Americans with Disabilities Act (ADA). There is also increased class action litigation claiming overdraft protection and insufficient funds fees are being improperly assessed by some credit unions. As we transition to 2019, there are still plenty of compliance, regulatory and legal risks to consider. Here is our annual highlight of what happened in credit union regulatory compliance this year. It includes finalized regulations that became effective this year, regulations that were finalized this year and require compliance efforts in 2019, proposals to keep on your radar, and ongoing litigation risks. This can assist compliance professionals in their efforts to keep track of regulatory changes and flag areas for possible changes in 2019. Regulatory Relief From Congress Some of what regulators worked on in 2018 and will continue tackling in the new year is implementing S.2155. Changes that regulators are already addressing are noted in other sections of this article, but here are additional statutory amendments that may impact credit unions:
Section 101, Minimum Standards for Residential Mortgage Loans – adds a fifth category of qualified mortgage to the Truth in Lending Act (TILA) for mortgages that meet certain conditions including being retained in a portfolio by a credit union with less than $10 billion in assets.
Section 106, Eliminating Barriers to Jobs for Loan Originators – amends the SAFE Act to allow a loan originator 120 days authority to work as a loan originator while transitioning to a new employer, such as switching from one state to another or from a non-depository institution to a federal credit union.
Section 108, Escrow Requirements Relating to Certain Consumer Credit Transactions – amends TILA to exempt certain higher-priced mortgage loans from mandatory escrow requirements, if the credit union has assets under $10 billion.
Section 109, No Wait for Lower Mortgage Rates – amends TILA and intended to make it clear that if the borrower’s annual percentage rate decreases, this would not trigger a new three-day waiting period for consummation. More details are available in this NAFCU Compliance Blog post.
Section 213, Making Online Banking Initiation Legal and Easy – allows credit unions to make a copy of a state-issued drivers’ license for purposes of opening an account or obtaining a service online. This provision also requires deletion of the copy once used for specified purposes. Many credit unions have expressed concerns with this as copies are used for things like fraud mitigation so NAFCU has sought clarification. More information can be found in NAFCU Compliance Blog posts from June and August 2018.
Section 303, Immunity From Suit for Disclosure of Financial Exploitation of Senior Citizens – protects credit unions and certain employees from liability when making a good faith, reasonable report of suspected exploitation of senior citizens. Certain requirements including training the covered employees is required to qualify for liability protections.
Section 307, Property Assessed Clean Energy Financing – amends TILA to require creditors to verify a borrower’s ability to repay a home improvement loan that is financed through Property Assessed Clean Energy (PACE) programs.
Section 601, Protections in the Event of Death or Bankruptcy – amends TILA to prohibit private student lenders from accelerating or declaring default for such loans on the sole basis of the bankruptcy or death of a co-signer, and releases co-signers from liability following the death of the student borrower. This provision also adds new notice requirements and requires lenders to allow borrowers to specify an individual who can handle the loan upon their death. More details are available in this NAFCU Compliance Blog post.
More information about S.2155 can be found in this NAFCU chart. NCUA Highlights From 2018 Under chairman Mark McWatters, the National Credit Union Administration (NCUA) indicated a commitment to regulatory reform in 2017 and this work continued throughout the year. While the board still has a vacancy on the board, board member Rick Metzger continue to serve until he is replaced, which could be soon. In June 2018, the Trump Administration nominated Rodney Hood to replace board member Metsger, and if that name sounds familiar, it may be because Hood also served on the board from 2005 to 2009. If confirmed, NCUA would have two Republican board members and the additional vacancy would need to be filled by a Democrat nominee. In the pursuit of some modest regulatory relief, here are some key items NCUA finalized this year. Advertising Rule On April 19, 2018, the NCUA Board finalized regulations to provide credit unions some additional flexibility with the requirement to provide the official advertising statement in advertisements. While the board did not adopt suggestions to provide more guidance or exemptions for social media advertising, there is modest relief. Specifically, credit unions have the additional option of simply stating “insured by NCUA.” Additionally, the exemption for radio and television ads was increased from applying to ads 15 seconds or less, to 30 seconds or less. The rule also eliminates the requirement to include the official advertising statement on annual reports and statements of condition.
NAFCU Final Regulation – 18-EF-06
NAFCU Compliance Blog – May 2, 2018
Field of Membership Many may recall that NCUA finalized modernized field of membership requirements in October 2016 that were quickly challenged by bankers who sued the agency in federal court. NAFCU supported NCUA with an amicus brief but in March 2018, a federal court invalidated part of the rule that expanded how community charters could operate. NCUA has appealed, but in the interim, the agency finalized a rule on how community chartered federal credit unions can submit a narrative to establish that a proposed area is a “well-defined local community” as required to demonstrate a common bond.
NAFCU Final Regulation – 18-EF-10 Voluntary Mergers Based on its concerns about transparency during voluntary mergers, NCUA finalized a rule that applies to all federally-insured credit unions. The rule, in part, increased the minimum notice period before a merger vote to 45 days; in some cases, it requires a merging credit union to disclose financial arrangements for the CEO/manager, four highest paid employees, and any member of the board or supervisory committee; changed the content and format requirements for merger notices; and created an online portal for members of the merging credit union to communicate with one another.
NAFCU Final Regulation – 18-EF-09 Emergency Mergers NCUA also made adjustments this year to the rules for emergency mergers, which includes redefining the meaning of “in danger of insolvency,” which determines whether such a merger is appropriate. Specifically, the forecast horizons were increased by six months for some of the net worth categories that a credit union must fall into to be considered “in danger of insolvency.”
NAFCU Final Regulation – 18-EF-01 Commercial Lending Rule S.2155 provided some relief for credit unions who make loans on 1-to-4 family dwellings that are not the member’s primary residence. Previously, these loans counted towards the Federal Credit Union Act’s cap, and S.2155 removed these kinds of loans from this limitation. NCUA amended its rule rather quickly and some additional information is available in this NAFCU Compliance Blog post. Share Insurance Funds Distribution NCUA completed a process the agency initiated in 2017 – closing the stabilization fund and providing equity distributions to credit unions. NCUA finalized a rule in March 2018 for how the agency would pay distributions and in September many funds from the $735.7 million were distributed to credit unions.
NAFCU Final Regulation – 18-EF-03 NCUA also issued a set of Frequently Asked Questions on this topic. NCUA Proposals to Watch The agency released several proposals this year that credit unions will want to watch in 2019 for possible finalization, including changes to bylaws and loan maturity limits for federal credit unions. NCUA is also revisiting its payday alternative loan or PAL program which may give federal credit unions additional flexibility for making small short term loans to members. Federal Credit Union Bylaws
NAFCU Regulatory Alert – 18-EA-34 NCUA Guidance and Resources from 2018 NCUA also issued a number of letters and other guidance in 2018. For example, Letter to Credit Unions 17-CU-02 highlights expectations for managing compliance risk and related Supervisory Letter SL No. 17-01 provided further details on how examiners will evaluate such risk. Letters to Federal Credit Unions
Operating Fee Scale Adjusted for 2018, 18-FCU-01
Requests to Serve a Well-Defined Local Community Using the Narrative Approach, 18-FCU-02
Operating Fee Scale Adjusted for 2019, 18-FCU-03
Letters to Credit Unions
Examination Modernization Initiatives, 18-CU-01
Examination Guidance for Bank Secrecy Act Customer Due Diligence and Beneficial Ownership Compliance, 18-CU-02
Merger Rule Provisions Including the Member-to-Member (MTM) Communications Process, 18-CU-03
Sharing Bank Secrecy Act Resources, 18-CU-04
Voluntary Credit Union Diversity Self-Assessment, 18-CU-05
Legal Opinion Letters
Other Similar Escrow Account Share Insurance Coverage, 17-0424
Preemption of Wisconsin Law Restricting Advertising and Use of the Word “Bank”, 17-1124
Field of Membership, 17-1219
Loan Participation, 18-0133
Other NCUA Letters
Supervisory Letter, Bank Secrecy Act Customer Due Diligence and Beneficial Ownership Rules, SL No. 18-01 and enclosures
Frequently Asked Questions About the Impact of S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, on Credit Unions
Bureau Highlights From 2018 This year the Bureau of Consumer Financial Protection (bureau) was not very active in issuing new regulations. Instead, the bureau was busy making policy changes to how it functions – including changing the agency’s name to precisely what the agency is called in Dodd-Frank. There are a few items of note for the year.
TRID “Black Hole” On April 26, 2018, the bureau finalized amendments to the TILA-RESPA integrated disclosures (TRID) that were proposed in the summer of 2017. The rule clarifies when it is permissible to use a Closing Disclosure for determining good faith and tolerances, resolving an unintended problem in the original rules that made it difficult or impossible in some situations to revise disclosures close to consummation of a loan. Here are NAFCU's resources on the amendment:
NAFCU Final Regulation – 18-EF-07
NAFCU Compliance Blog – April 30, 2018 HMDA – Implementation of S.2155’s Partial Exemption One key amendment from S.2155 is an amendment to the Home Mortgage Disclosure Act (HMDA) creating a partial exemption from many of Regulation C’s data reporting requirements. A credit union that is subject to HMDA but does not originate 500 closed-end mortgage loans or 500 open-end lines of credit would not need to report the data points added to HMDA by Dodd-Frank. Examples include: total points and fees paid; the APR/APOR rate spread; value of the real property; introductory rate information; negative amortization; a unique identifier; credit score; and other data points the bureau added at its discretion. On August 31, 2018, the bureau issued guidance implementing this provision, and its resources can be found here. Here are NAFCU’s resources:
NAFCU Final Regulation – 18-EF-12
NAFCU Compliance Blog – June 4, 2018; September 5, 2018 CFPB Proposals and Policy Initiatives to Watch
Similarly, the bureau issued only one proposed rule in 2018. However, this year it issued over a dozen “requests for information” or RFIs seeking industry feedback on issues like: how the bureau is doing in providing implementation support; its approach to regulations it inherited (e.g. Regulation P, Regulation V); the bureau’s rulemaking process generally; and the consumer complaint database. These RFIs may inform ongoing policy changes at the bureau and perhaps even some future rulemakings. Meanwhile, on December 6, 2018, the Senate confirmed Kathy Kraninger as the new director of the bureau. She is expected to continue in a similar direction as acting director Mick Mulvaney did this year. For now, here are the currently pending proposed rules from this regulator:
Regulation CC The bureau and Federal Reserve have joint rulemaking jurisdiction for Regulation CC and on November 20, 2018, the agencies re-opened a 2011 proposal for additional comments. NAFCU members will have access to a Regulatory Alert as soon as the proposal is published in the Federal Register, and can find our 2011 Regulatory Alert here. RFIs NAFCU also created summaries of each of the bureau’s RFIs and commented on these documents, making suggestions for how it could make pro-credit union improvements. Here are these items for each of the RFIs:
Civil Investigative Demands; April 26, 2018 letter
Enforcement Processes; May 14, 2018 letter
Rules of Practice for Adjudication Proceedings; May 7, 2018 letter
Adopted Regulations and New Rulemaking Authorities; June 19, 2018 letter
Inherited Regulations; June 25, 2018 letter
Financial Education Programs; July 9, 2018 letter
Guidance and Implementation Support; July 2, 2018 letter
Consumer Complaint and Consumer Inquiry Handling Processes; July 16, 2018 letter
FinCEN Customer Due Diligence Rule One of the key compliance deadlines this year was the May 11, 2018, deadline for implementing the Financial Crimes Enforcement Network’s (FinCEN) customer due diligence (CDD) and beneficial ownership requirements. The agency issued FAQs in July 2016 and again in April 2018 to assist financial institutions with compliance, and provided regulatory relief for certain rollover accounts deemed low-risk. Here are NAFCU’s resources on this rule:
NAFCU BSA Blast – July 2016; April 2018; October 2018
NAFCU Compliance Blog – October 16, 2017; November 6, 2017; March 12, 2018; May 11, 2018; May 14, 2018; September 10, 2018; October 10, 2018
2019 Implementation Deadlines While regulatory relief seems to be in sight, there are still several compliance deadlines in 2018, some from rules finalized in 2016, including Bank Secrecy Act requirements and amendments to Regulation CC. Prepaid Cards On November 22, 2016, the bureau issued a final rule that would subject certain prepaid accounts to parts of Regulation E and Regulation Z depending in part on the features of the account. For example, in addition to disclosure requirements, certain accounts will also be subject to Regulation E error resolution and periodic statement requirements. The original effective date for these rules was in October 2017, but the bureau delayed the effective date twice while also modifying the rule. The effective date is now April 1, 2019.
NAFCU Final Regulation – 16-EF-10; 18-EF-02
NAFCU Compliance Monitor – February 2017
NAFCU Compliance Blog – November 30, 2016; February 1, 2017; July 3, 2017; February 7, 2018
The bureau’s fall 2018 rulemaking agenda indicates that in early 2019, it will issue additional provisions on this rule’s requirement to submit prepaid account agreements to the bureau.
Payday Loans Right now, the bureau’s rule on certain short term loans is scheduled to go into effect on August 19, 2019. However, this rule has been challenged in litigation, and the bureau has publicly communicated its commitment to revisit this rule in 2019. Credit unions that make these kinds of loans may want to monitor the issue.
NAFCU Final Regulation – 17-EF-10
NAFCU Compliance Blog – October 23, 2017 Looking Forward – Ongoing Risks and Pending Issues ADA Website Accessibility Litigation Risk In last quarter of 2017 and throughout 2018, over 150 credit unions in 25 states received a demand letter or were sued regarding their websites and alleged violations of the ADA. The ADA does not have clear regulations on what is required for a credit union’s website to be “accessible” to those with impairments, and plaintiffs’ firms have taken advantage of this regulatory void. NAFCU supports the protections of the ADA and efforts to ensure individuals with disabilities are not subject to discrimination, but this is best achieved with clear guidance. Starting in December 2017, NAFCU began filing amicus briefs to help credit unions fight against lawsuits. NAFCU has filed sixteen amicus briefs in trial and appeals courts in 7 different states. While the flow of demand letters and new filings appears to have slowed down, credit unions across the country are still attempting to take steps to mitigate risks. Positive decisions for credit unions have been issued in Virginia, Texas and Illinois, and motions to dismiss are still pending in several trial and appellate courts. NAFCU continues to track this litigation across the country to identify case law relevant to credit unions. NAFCU has also reached out to the Department of Justice and members of Congress with concerns about the lack of guidance surrounding the application of the ADA to websites and litigation risk it represents to credit unions.
NAFCU’s ADA Website Litigation webpage
NAFCU Compliance Monitor – March 2018
NAFCU Compliance Blog – February 2, 2018; March 9, 2018; August 1, 2018
Overdraft Litigation While litigation regarding overdraft practices has been ongoing for the past several years, in 2018 NAFCU began to see a handful of law firms begin to actively and aggressively seek class action plaintiffs through the internet. These cases usually rely on state law claims, however, many include claims of Regulation E violations which, if successful, could bring the safe harbor use of model forms into question. NAFCU has filed one federal appellate amicus brief regarding this issue, and is actively monitoring this litigation around the country for rising and evolving risk around credit union overdraft protection programs.
NAFCU’s Overdraft Litigation website
NAFCU Compliance Monitor – June 2018
NAFCU Compliance Blog – May 22, 2018
Remote Deposit Capture Patent Litigation In early 2018, NAFCU began to hear from multiple credit unions who had been contacted by attorneys for USAA, who alleged violations of a patent held by USAA regarding its remote deposit capture technology. These letters often invite the credit union to contact the firm to discuss licensing the patent, rather than demanding funds. This summer, USAA brought suit against Wells Fargo, drawing national attention to the issue. Given the widespread use of remote deposit capture technology, NAFCU will continue to monitor this litigation to identify and make credit unions aware of any increase in risk.
NAFCU Compliance Blog – January 29, 2018; June 25, 2018; November 2, 2018
TCPA Risk The Telephone Consumer Protection Act (TCPA) requires consent for certain calls and the type of consent required differs based on both the type of call being made, and the type of phone line the credit union is calling. While these rules have been complex for some time, in 2015 the Federal Communications Commission (FCC) issued an order that, among other things, took a very broad approach to what it meant to use an “autodialer” to call a consumer, creating operational difficulties for communicating with members by phone or text message. In March 2018, the DC Circuit Court vacated the parts of the FCC’s 2015 Order that defined autodialer and discussed reassigned numbers. On these issues, the TCPA essentially reverted to its pre-2015 status. However, in September, the Ninth Circuit Court of Appeals issued another ruling which sought to reinstitute a broad definition of an autodialer, like that established in the 2015 Order. In general, appellate courts are not in agreement on the issue and an opinion by the Supreme Court may be necessary to provide clarity. The FCC is also likely to resolve some of these clarity issues in a future order. NAFCU communicated its position with the FCC and has remained in contact with the commission on this issue.
NAFCU Compliance Monitor – July 2018
NAFCU Compliance Blog – March 21, 2018; October 3, 2018
NAFCU Resources As you can see, it was another busy year for the credit union industry – even regulatory relief requires implementation on the front end to gain the benefits. As we transition into another year, NAFCU will continue to keep our members posted and our Regulatory Compliance team is always looking for new ways to help members remain compliant. We hope this article serves its intended purpose for you and your credit union – a summary of final rules, proposals, guidance and resources to assist with the moving forward into a new year. Also, here are some of NAFCU's resources that can further assist you with implementation and compliance at your credit union:
NAFCU's Website
NAFCU's Compliance Resources
NAFCU's Legislative and Regulatory Issues
NAFCU Compliance Calendar
Contact NAFCU's Compliance Team
Brandy Bruyere Vice President of Regulatory Compliance
Record Retention: A Brief Overview of Some of the More Common Federal Regulations
NAFCU receives questions about record retention requirements from time to time. Because each law or regulation might have its own requirements, it can be challenging to identify all of the provisions that might be relevant. And as the first article in last month’s Compliance Monitor explained, credit unions are subject to several regulations under the jurisdiction of different regulators. In developing or modifying record retention policies and procedures, a credit union may want to speak with counsel about potential litigation risks and state laws like evidentiary rules that might be useful to incorporate into record retention policies and procedures. A credit union, in consultation with counsel, may wish to consider statute of limitations periods when evaluating its record retention policies to be able to defend against any litigation that arises. And counsel may be able to assist the credit union with identifying state laws or other issues that might influence its record retention policies. While the regulatory requirements can provide credit unions with a starting point for minimum retention periods, these other considerations can help a credit union create sound record retention policies and procedures that provide the right balance given its risk tolerance. To help credit unions identify what may be relevant considerations in the context of record retention, we created a chart, a sample of which appears on the next page. It does not identify all of the various record retention requirements that might affect a credit union. It does, however, identify some of the record retention requirements from federal laws and regulations most familiar to credit union compliance professionals. The chart includes a brief description of the records subject to the retention requirement, the applicable retention period and any guidance from the law or regulation about formatting of the retained records.
Regulation/Law Citation Records Subject To Requirement Retention
Period
Guidance From Regulation/Law
About Retention
Format
NCUA Record Retention Guidelines – Permanent Retention
12 CFR Part 749, App. A. Section E
Charter, bylaws and amendments; certificates or licenses to operate under programs of various government agencies, such as a certificate to act as issuing agent for the sale of U.S. savings bonds; minutes of meetings of the membership, board of directors, credit committee and supervisory committee; one copy of each financial report, NCUA Form 5300 or 5310, or their equivalent, and the Credit Union Profile report, NCUA Form 4501, or its equivalent as submitted to NCUA at the end of each quarter; one copy of each supervisory committee comprehensive annual audit report and attachments; supervisory committee records of account verification; applications for membership and joint share account agreements; journal and cash record; general ledger; periodic statements of members, or the individual share and loan ledger – in other words a complete picture of the account; bank reconcilements; and a list of the records destroyed.
Permanently. NCUA does not recommend a particular format. Regardless of the format, the appendix suggests that the records should be accurate, reproducible and accessible.
NCUA Record Retention Guidelines – Periodic Destruction
12 CFR Part 749, App. A. Section F
Any record that does not have to be retained permanently. Examples include applications of paid off loans, paid notes, consumer disclosures forms, cash received vouchers, journal vouchers, canceled checks, bank statements, outdated manuals, correspondence from NCUA and other regulators, etc.
Whatever period is required to comply with the requirements of consumer protection regulations.
NCUA does not recommend a particular format. Regardless of the format, the appendix suggests that the records should be accurate, reproducible and accessible.
NCUA Board Meeting. During its November open meeting the National Credit Union Administration (NCUA) Board approved the 2019-2020 budget, which provides a $304.3 million operating budget in 2019 – a 71 percent increase over the past decade – and a $316.2 million operating budget in 2020. The Board also finalized the 2019 overhead transfer rate (OTR) at 60.5 percent, a 10 basis point increase from the draft budget. Also approved was a proposed rule to amend NCUA’s regulations regarding fidelity bonds. The proposal would better align regulations with current practices at federal credit unions and bond issuers by: 1) strengthening a board of directors’ oversight of fidelity bond coverage; 2) providing an adequate period to discover and file covered claims following a liquidation; 3) formalizing the allowance of fidelity bonds to cover certain credit union service organizations (CUSOs); and 4) requiring that all bond forms be approved by the NCUA Board every ten years. A summary and analysis of the proposal is available for NAFCU members here. Agencies Propose Amendments to Regulation CC Regarding Funds Availability. The Bureau of Consumer Financial Protection and the Federal Reserve Board jointly proposed amendments to Regulation CC to implement a statutory requirement to adjust for inflation the amount of funds depository institutions must make available to their customers. The amendments would apply in circumstances ranging from next business day withdrawal of certain check deposits to setting the threshold amount for determining whether an account has been repeatedly withdrawn. The proposal would also implement EFA Act amendments made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which include extending coverage of the EFA Act to American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam. The agencies are also reopening for public comment the funds-availability amendments were published in 2011 regarding funds availability schedule provisions and associated definitions. The agencies have not made a decision on whether to make any aspects of the 2011 proposal final, reopening the comment period will rather provide up-to-date public views to consider. Upon the proposal’s publication in the Federal Register, a Regulatory Alert analysis of the proposal will be available for NAFCU members here. Risk-Focused Supervision Emphasized. The Federal Financial Institutions Examination Council (FFIEC) released an update on the continuing efforts to modernize the examination process by financial regulators. The update notes a focus on tailoring examination plans and procedures based on risk, an area holding promise for reducing burden. As part of the review process, it was determined that similar programs and processes for risk tailoring examinations have been developed by the state and federal regulators with common risk tailoring principles and practices. The release highlights the commonalities and indicates, if necessary, FFIEC members (including NCUA) have committed to issue additional guidance to their examination staffs on the risk-focused examination principles. More information can be found in this NAFCU blog post. Senate Confirms Bureau Director The Senate voted to confirm Kathy Kraninger to lead the bureau for a five-year term. She will take over for Mick Mulvaney, who has served as acting director since November 2017. An associate director for general government at the Office of Management and Budget, Kraninger held prior jobs at the departments of Homeland Security and Transportation. During her nomination hearing before the Senate Banking Committee in July, Kraninger said rulemakings by the bureau should be tailored "to reduce the burden of compliance, particularly on consumers and smaller marketplace participants." Fourth Quarter Edition of The NCUA Report Available. NCUA announced the release of the fourth quarter edition of its online newsletter. Articles in this edition include: an overview on how to submit applications using a narrative for community-charter conversion or expansion; a discussion of the agency’s enterprise solution modernization program impact on credit unions; and a review of NCUA’s final revised merger rule.
Prohibition Notices. All individuals listed are prohibited from participating in the affairs of any federally insured financial institution. On November 30, 2018, NCUA issued one prohibition notice and one prohibition order. A former employee of Business and Industrial Federal Credit Union in Columbus, Indiana, Michelle Cain pleaded guilty to the charge of theft. Mitchell Reiver, a former employee of Melrose Credit Union in Briarwood, New York, agreed and consented to the issuance of a prohibition order and agreed to comply with all of its terms to settle and resolve the NCUA Board’s claims against him. Prohibition and administrative orders are searchable by name, institution, city, state, and year at NCUA’s Administrative Orders webpage. The webpage also provides links to the enforcement actions of federal banking agencies against other institutions or their affiliated parties. FFIEC on OFAC Cyber-Related Sanctions. The FFIEC released a statement on recent actions taken by Treasury’s Office of Foreign Asset Control (OFAC) under its Cyber-Related Sanctions Program and the potential impact it may have on financial institutions’ risk-management programs. It describes issues that should be considered concerning any impact on the operations of the financial institution and implications of the continued use of products or services provided by a sanctioned entity. Financial institutions should refer to OFAC resources or the FFIEC’s Information Technology Examination Handbook for additional information information on OFAC-related compliance and operational risk management requirements and expectations. This NAFCU blog post further discusses the FFIEC statement. NAFCU 2018 Year-End Advocacy Update. On Wednesday, December 12, join in on our member call-in at 4pm ET. NAFCU's senior advocacy team will discuss the outcome of the midterm elections, what credit unions can expect in the lame duck session as well as the next Congress, and nomination developments affecting the Bureau of Consumer Financial Protection (previously the CFPB) and NCUA. Callers will also hear about NCUA’s supervisory priorities outlook, including cybersecurity, BSA and overdraft. Participation is free for all NAFCU members but attendees must register. Six Credit Union Failures Cause Loss to Share Insurance Fund. NCUA announced six federally insured credit union liquidations through September 30, 2018, resulted in a $744.9 million loss to the National Credit Union Share Insurance Fund (NCUSIF). The liquidated credit unions were: St. Elizabeth’s Credit Union, First Jersey Credit Union, Louisville Metro Police Officers Credit Union, Greater Christ Baptist Church Credit Union, Melrose Credit Union and LOMTO Federal Credit Union. The agency stated the fund has sufficient equity and reserves to cover anticipated losses. Bureau Enforcement Action. The bureau announced a settlement with Santander Consumer USA Inc. (Santander), a consumer financial services company based in Dallas, Texas. The company was found to have: 1) violated the Consumer Financial Protection Act of 2010 by not properly describing the benefits and limitations of its S-GUARD GAP product, an add-on to its auto loan products and 2) failed to properly disclose the impact on consumers of obtaining loan extensions. Under the consent order, Santander will pay $9.29 million in restitution and a $2.5 million civil money penalty.
Question – If a credit union has a rate board in the lobby, what are the rules for rounding the APY? Is it possible that rounding the number could make the APY inaccurate compared to what interest the member might receive? Answer – Rate boards are generally considered advertisements under the Truth in Savings regulation. Therefore, any statements of the rate must be disclosed as described in paragraph 707.8(b). While section 707.8 does not address rounding, paragraph 707.3(f) discusses rounding and accuracy rules for rates in all disclosures under Part 707:
“(f) Rounding and accuracy rules for rates and yields—(1) Rounding. The annual percentage yield, the annual percentage yield earned, and the dividend rate shall be rounded to the nearest one-hundredth of one percentage point (.01%) and expressed to two decimal places. For account disclosures, the dividend rate may be expressed to more than two decimal places.” (Emphasis added.) See, 12 CFR § 707.3(f)(1).
The commentary that illustrates this rounding: “Examples of permissible rounding are an annual percentage yield calculated to be 5.644%, rounded down and shown as 5.64%; 5.645% would be rounded up and disclosed as 5.65%.” See, 12 CFR Part 707, App. C, comment 3(f)(1)-1. It is true that the actual calculation of dividends may be a few pennies off from the advertised rate, due to rounding. However, both the regulation and the commentary state that for account disclosures, the dividend rate may be expressed to more than two decimal places. So, the fully accurate rate can be expressed in the account disclosures under section 707.4, and the member will have received the fully accurate rate information pertaining to their account. Question – If a credit union denies someone membership into the credit union, is a written notice required? Answer – Under Article II, Section 2 of the National Credit Union’s (NCUA) model federal credit union bylaws, when an applicant is denied membership, a federal credit union must only explain the denial in writing if requested by the person who was denied. An individual credit union’s bylaws may differ, so a credit union should always review its own bylaws to see if the language differs. Credit unions may, as a matter of policy, decide to send written notices as a matter of service, but there is not a regulatory requirement to do so. An adverse action notice may be required under either Regulation B or the Fair Credit Reporting Act (FCRA) under some circumstances. If the application for membership was made in connection with a loan application, for example, through an indirect lending channel, then an adverse action notice may be required under section 1002.9 of Regulation B. Only the credit union’s refusal to grant credit requested would be considered an “adverse action” as defined in subsection 1002.2(c)(1), not the refusal to grant membership. In other words, the denial of credit alone triggers the adverse action notice. Even if no application for credit is made, if an individual applies for membership and an account and is denied on the basis of a report that meets the definition of a “consumer report” under section 603(d) of the FCRA, an adverse action notice may also be required. This can include a ChexSystems report. If an individual is denied an account, in whole or in part, on any information contained in a consumer report, an adverse action notice may be required under section 615(a) of the FCRA. If the application for membership was not at all based on information in a consumer report, then an adverse action notice would not be required.
Question – Are credit unions required to provide consumers with either the Summary of Consumer Rights or Summary of Consumer Identity Theft Rights found in the appendices to Regulation V? Answer – Generally speaking, neither of these model forms are intended to be provided to consumers by financial institutions. The Summary of Consumer Rights found in Appendix K to Regulation V (or Part 1022) is required under section 609(c) of the Fair Credit Reporting Act (FCRA). It must be provided by a consumer reporting agency (CRA) whenever the CRA makes a written disclosure of information to the consumer. Also, it may need to be provided by employers taking adverse employment actions in connection with a credit report. The Summary of Consumer Identity Theft Rights found in Appendix I to Regulation V is required under section 609(d) of the FCRA. It must be provided by a CRA when a consumer reports they are a victim of identity theft. A credit union is not required to provide either summary to consumers directly unless it is operating as a CRA as those requirements apply only to the CRAs themselves. Question – Does the Federal Reserve realize that Regulation CC still says the next day availability requirement is $100? Why is it still wrong? Answer – The Dodd-Frank Act changed the funds availability threshold as of the transfer date of the Act, rather than establishing a deadline for implementing regulations. The result was that updating the regulations became nothing more than a technical exercise of bringing the regulation into conformity with the law. In 2011, a proposed rule was issued to do so. In addressing this issue, the Federal Reserve indicated it wanted to use a minimum amount reference rather than a specific number, so the regulation would be evergreen:
“Section 1086(e) of the Dodd-Frank Act increases from $100 to $200 the minimum amount of funds deposited by check or checks on a given business day that a bank must make available by opening of business on the next business day pursuant to § 603(a)(2)(D) of the EFA Act. That provision of the EFA Act is implemented in § 229.10(c)(1)(vii) of Regulation CC, and the increase is expected to take effect on July 21, 2011, regardless of whether the Board and the Bureau have amended Regulation CC. Accordingly, the Board proposes to amend the commentary to § 229.10(c)(1)(vii) to facilitate future amendments to the minimum amount of a deposited check a bank must make available on the business day following the banking day of deposit. Specifically, the Board proposes to replace references to “$100” with references to “the minimum amount.” The Board proposes to make this amendment throughout the commentary, as well as in the model forms.” (Emphasis added.) See, 76 Fed. Reg. 16869.
Some of the changes found in that 2011 proposal have been finalized and gone into effect. But, the Federal Reserve’s regulatory agenda indicated the Subpart B provisions, including that availability amount, was being pushed out separately, though the expected date for a final rule has consistently been pushed out year after year. However, regulators did recently reopen this 2011 proposal for additional comments.
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