CUNA Regulatory Advocacy Report

Good afternoon. Here is our CUNA Regulatory Advocacy Report for the week of February 3, 2012, which highlights some of the issues we have been dealing with this week.

  • CUNA Subcommittees Review NCUA’s TDR Proposal
  • Guidance Issued on Allowance for Loan and Lease Loss Estimation Practices for Loans Secured by Junior Liens
  • CUNA Seeks Additional Guidance & Clarifications on Multi-Featured Open-End Lending
  • CFPB Director Richard Cordray Testifies Before the House and Senate
  • President Obama announces his “Plan to Help Responsible Homeowners and Heal the Housing Market”

CUNA Subcommittees Review NCUA’s TDR Proposal

CUNA’s Examination and Supervision Subcommittee along with our Accounting Subcommittee met today by conference call to discuss NCUA’s proposed rule on Troubled Debt Restructuring. Comments are due to NCUA March 2, 2012, which is a very short comment period, responding to encouragement from CUNA and others to address TDR issues on a fast track.

Among other things, the proposal would require federally-insured credit unions (FICUs) to maintain written policies that address the management of loan workout arrangements and nonaccrual policies for loans. It would allow credit unions to modify loans without having to classify performing TDR loans as delinquent or track each TDR loan’s performance manually for 6 months, as is currently required.

The groups are generally encouraged regarding NCUA’s efforts and applauded the proposal. Several provisions have raised questions and CUNA will be urging NCUA to address them when the rule is adopted, which we anticipate will be this spring.

One of the issues is that while the proposal provides relief from manual reporting for most TDRs, member business loans that are TDRs would still necessitate a manual process for tracking loans for purposes of 5300 Call Reporting requirements. Also, while the proposal is supposed to address TDRs, there is considerable confusion between the definition of a TDR, as provided by Generally Accepted Accounting Principles, and a loan workout as described by NCUA’s proposal and that would receive different reporting and regulatory treatment. Moreover, some credit unions are concerned that while the call report changes should proceed, some credit unions may need a more than 120 days from the effective date of rule, which is what the proposal calls for. Also, we will be urging NCUA to make the Call Report changes, particularly for TDRs that do not involve MBLs.

Guidance Issued on Allowance for Loan and Lease Loss Estimation Practices for Loans Secured by Junior Liens

On Tuesday, four of the federal financial regulatory agencies, including the National Credit Union Administration (NCUA), issued supervisory guidance on allowance for loan and lease losses (ALLL) estimation practices associated with loans and lines of credit secured by junior liens on one- to four-family residential properties. The guidance addresses the responsibilities of financial institution management and examiners and builds on existing supervisory guidance for home equity lending and the allowance for loan and lease losses.

The guidance is intended to reiterate policy and to remind regulated financial institutions to monitor all credit quality indicators relevant to credit portfolios, including junior liens–a point made by the NCUA in numerous recent communications. Examples of junior liens include second mortgages and home equity lines of credit taken out by mortgage borrowers.

With respect to the ALLL estimation process for an institution’s junior lien portfolio, the guidance provides that management should:

  • Gather and consider sufficient information to adequately assess the probable loss incurred within junior lien portfolios, including information on the delinquency status of senior lien loans associated with the institution’s junior liens, and whether the senior lien loan has been modified;
  • Ensure adequate segmentation of the junior lien portfolio into groups of loans based on risk characteristics to appropriately estimate allowances for high-risk segments of the portfolio; and
  • Support qualitative or environmental factor adjustments to historical loss rates by an analysis that relates the adjustments to the characteristics of and trends in the individual risk segments within the junior lien portfolio.

The guidance states that management also should ensure that income recognition practices related to junior liens do not overstate income and should also ensure charge-offs are made in accordance with NCUA Letter to Credit Unions 03-CU-01, from January, 2003 entitled, “Loan Charge-off Guidance. The guidance also instructs examiners to evaluate an institution’s junior lien loan loss allowance methodology and documentation and the appropriateness of the level of the ALLL for the junior lien portfolio, including whether management’s estimation process has properly incorporated the practices described in the supervisory guidance.

The guidance was jointly issued by the NCUA, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. To access the guidance, click here. For NCUA’s Letter to Credit Unions 03-CU-01, click here. In addition to these resources, and in connection with the issuance of this guidance, NCUA has also issued Accounting Bulletin No. 12-1, which may be accessed here, providing additional information for credit unions.

CUNA Seeks Additional Guidance & Clarifications on Multi-Featured Open-End Lending

Last week, I reported that CUNA staff and CUNA Mutual are working with NCUA and the Consumer Financial Protection Bureau (CFPB) to pursue concerns relating to the regulation of Multi-Featured Open-End Lending (MFOEL). Earlier this week, Senior staff from CUNA submitted correspondence to NCUA which would seek to have the agency revise or supplement its Letter to Federal Credit Unions 10-FCU-02 in order to provide more clarity for credit unions offering these MFOEL programs. In the event that NCUA issues further guidance concerning MFOEL to its examiners, CUNA has also requested that the agency make such guidance available on its Web site so that credit unions may readily access this information.

CUNA recognizes that any additional guidance in the area of MFOEL must be coordinated with the CFPB, and to this end, this morning, we also delivered similar correspondence to the CFPB requesting that the agency work together with the NCUA, especially relating to any possible changes to the Official Staff Commentary to Regulation Z. I, along with several Senior CUNA staff, enjoyed lunch yesterday with Elizabeth Vale, Director of External Affairs with the CFPB, along with several of her key staff members. We will keep you apprised of any further developments in the area of MFOEL as they occur.

CFPB Director Richard Cordray Testifies Before the House and Senate

On January 24, 2012, Richard Cordray testified before the House Oversight and Government Affairs Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs, and on January 31, 2012, he testified before the Senate Committee on Banking, Housing and Urban Affairs. The purpose of his testimony was to examine the CFPB’s actions to date, and to discuss the CFPB’s plans under Richard Cordray. Notably for credit unions, Mr. Cordray said he plans to form a Credit Union Advisory Council to examine the impact of proposed regulations on credit unions. He also said he plans to ensure even-handed oversight for bank and non-bank competitors, but he will work to minimize the impact of regulations on small institutions like credit unions. He wants to encourage a system where consumers get a “fair shake” – a system of consumer finance that works for consumers. He noted that the consumer-oriented business model of credit unions is the business model that the CFPB strives for, and that he realizes credit unions had “nothing to do” with bringing on the financial crisis.

Beginning this Spring, Mr. Cordray plans to convene Small Business Regulatory Enforcement Act (SBREFA) panels to review the impact of its proposed model TILA/RESPA forms on small businesses. He believes these panels are important to the CFPB’s rulemaking process not only because the law requires it, but because it helps the CFPB conduct its business.

Regarding its recently released remittance transfer rule, Mr. Cordray said that the CFPB is working to create an adequate threshold to exempt small institutions, and that this effort will continue over the next few months. Mr. Cordray also said he expects to release a final Qualified Mortgage rule by this summer and will continue to work on other mortgage issues throughout 2012. In addition to streamlining the regulations the CFPB inherited from other regulators, the CFPB is also currently focusing on increasing clarity regarding payment terms to students and families for private student loans, and gathering information regarding payday lending practices and the payday lending market. Throughout the two hearings, Mr. Cordray stressed that the CFPB will continue its practice of aggressively seeking comments from as many market players as possible (large and small industry participants, banks and non-banks, and consumers) before proposing any new regulations or model forms. The CFPB’s first semi-annual report, released on January 30, 2012, is available here.

President Obama announces his “Plan to Help Responsible Homeowners and Heal the Housing Market”

On February 1, 2012, President Obama announced his “Plan to Help Responsible Homeowners and Heal the Housing Market.” The programs set forth in the plan are intended to assist underwater homeowners and address the ongoing problems affecting the housing market. Although none of the programs outlined in the plan are directed at credit unions, as active mortgage lenders and servicers, credit unions will undoubtedly be affected by these programs.

The proposal includes a plan to help responsible homeowners (who may also be underwater) refinance their non-GSE mortgages at lower rates through a program that would be run by the FHA. This proposal will require legislative action, and the Administration has announced that it is working with legislators to this effect. It is uncertain whether such legislation would pass because it would not only assess a fee on large financial institutions, but could have the effect of increasing the Federal Housing Administration’s (FHA) role in the market by requiring FHA to run the program and to guarantee the refinanced loans.

A “responsible” borrower is one who meets all of the following criteria:

  • (a) borrowers must be current on their mortgage (making all payments for the past 6 months and missing no more than one payment over the prior 6 months);
  • (b) borrowers must have a minimum FICO score of 580;
  • (c) the loan must be no larger than the current FHA conforming loan limits in their area (currently set between $271,050 and $729,750); and
  • (d) the loan must be for a single family, owner-occupied property.

Since the plan would cost between $5 and $10 billion to implement, it would be paid for by a fee imposed on the largest financial institutions, and would require borrowers to enroll in mortgage insurance through FHA. The amount of the fee has yet to be determined. As for mortgage insurance, the Administration has stated that it would not be so high as to reduce homeowners’ incentives to participate in the program.

President Obama is also asking Congress to enact legislation that would permit borrowers participating in this program or the existing HAMP program to choose whether to take the benefit of the reduced interest rate in the form of lower monthly payments or to apply that savings toward rebuilding equity in their homes. For borrowers choosing the latter option, the GSEs or FHA (depending on the program the borrower goes through) would pay the borrowers’ closing costs. Borrowers choosing this option must agree to refinance to a loan with no more than a 20 year term with monthly payments roughly equal to their current payments.

Another important component of the plan (which would not require legislative action) is an extension of HAMP eligibility to reach a broader pool of borrowers, by (1) offering an alternative eligibility opportunity for borrowers whose first-lien mortgage debt-to-income ratio is below 31%, enabling lenders to evaluate borrowers’ other debt in determining their eligibility for HAMP refinancing, and (2) including properties that are currently occupied by a tenant or which the borrower intends to rent to qualify for HAMP. The Administration will also triple lenders’ incentives to participate in HAMP and pay principal reduction incentives to Fannie Mae and Freddie Mac.

Among President Obama’s other proposals are a plan to put people to work refurbishing foreclosed and vacant residential and commercial properties, create a “Homeowner Bill of Rights” for servicing, investigate abuses in the residential mortgage-backed securities market, implement streamlined refinancing programs for FHA and USDA loans, and to transition REO properties into rental properties. The FHFA announced its first major pilot sale on February 1, 2012 (here), which will be limited to renter-occupied REO properties. The next sales will likely involve vacant REO properties as well.

The White House’s Fact Sheet is available here, and President Obama’s remarks are available here. CUNA’s summary is available here.


With all these issues, we will pursue credit unions’ regulatory interests to the greatest extent possible. In the meantime, if you have any questions or comments about this report, please feel free to contact Mary Dunn, Bill Hampel, or me.

Best regards,

Bill Cheney

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