CUNA Regulatory Advocacy Report

Good afternoon. Here is our CUNA Regulatory Advocacy Report for the week of February 24, 2012.

  • NCUA Board Member Hyland Discusses Key Issues with CUNA
  • CUNA Comments on NCUA’s Maintaining Access to Emergency Liquidity Proposal
  • NCUA’s Proposal on TDRs and CUNA’s Comment Letter
  • Consumer Financial Protection Bureau Update Overdraft Protection and CFPB Advisory Groups
  • NACHA ACH Expedited Processing and Settlement (EPS) Update
  • Summary of Recently Filed Comment Letters and a Preview of Upcoming Letters

NCUA Board Member Hyland Discusses Key Issues with CUNA

On Wednesday of this week, I met with NCUA Board Member Gigi Hyland on top NCUA issues that credit unions are facing. This was one of the regular meetings that we have with NCUA Board members and NCUA staff to discuss concerns and upcoming developments. Accompanying her was Special Advisor, Gary Kohn, and I was accompanied by Bill Hampel, Eric Richard, and Mary Dunn.

We discussed many of the same issues that we did with Chairman Matz last week and because no career agency staff were present, we were able to explore some issues even further during the meeting this week. Board Member Hyland is speaking to the General Session of the CUNA Governmental Affairs Conference March 20 and is meeting with several CUNA Committees and Subcommittees in a combined session prior to the GAC. 

Regulatory relief was on the top of our list, as it is for credit unions, in terms of items to discuss with her. She reiterated that the agency is mindful of credit unions’ regulatory burdens.

As we mentioned last week, it appears from our discussions this week and last that NCUA is not planning to issue any new rules that have not already been announced or are already in the pipeline, such as ones on Credit Union Service Organizations, loan participations, access to liquidity, RegFlex, and derivatives. We know there are no guarantees that the agency will hold off on new rules but believe me, we are pushing as hard as we can to minimize any new rules, whether they are from NCUA or another agency such as the Consumer Financial Protection Bureau (CFPB).

We reviewed with her our strong opposition to several NCUA proposals, including those on loan participations, CUSOs, RegFlex, and emergency liquidity. We do not believe these proposals are warranted based on credit unions’ relatively low level of risks in these areas. They should be withdrawn and if NCUA is intractable on that point, they must be substantially improved. We believe, based on our discussions with a number of officials at NCUA that these proposals will be improved but we are continuing to press, through meetings and telephone discussions with NCUA, for either withdrawal of or substantial improvements to all of these proposals.        

Our advocacy efforts, which have included bringing our concerns to policymakers at the Treasury and elsewhere, will be ongoing until the agency takes these issues up at a future NCUA Board meeting.

We talked about the unfortunate situation in North Carolina, focusing on NCUA’s decision to conduct a separate examination for state chartered credit unions there. We urged NCUA to not penalize state chartered credit unions there with a separate exam because of the agency’s disagreement with the state regulator. Again, I commend North Carolina League President John Radebaugh for his efforts to get the regulators to resolve their differences.

We urged NCUA to let credit unions know as soon as possible what the Corporate Stabilization Fund Assessment will be for this year and we urged greater transparency in the agency’s handling of the Stabilization Fund, consistent with the recommendations of the Government Accountability Office’s study released in January. Also, we have raised concerns with NCUA officials that NCUA needs to report to credit unions more often and more thoroughly on the financial condition of the National Credit Union Share Insurance Fund.

CUNA Comments on NCUA’s Maintaining Access to Emergency Liquidity Proposal

Earlier this week, we filed a comment letter with NCUA in response to its advance notice of proposed rulemaking regarding credit union access to emergency liquidity. Our comments to the agency focus on: (1) whether credit unions should be required to maintain access to emergency federal liquidity sources under a new regulation; and (2) general reflections on the Central Liquidity Facility (CLF) and other sources of liquidity for credit unions.

As noted in our letter, we strongly oppose a new rule requiring all federally insured credit unions to maintain emergency liquidity access. That is because such a rule is unnecessary for NCUA supervisory purposes or for the operational purposes of credit unions. Rather, we believe credit unions should decide for themselves, based on their risks, whether an emergency liquidity source is called for and what the source or sources should be. If NCUA does decide to move forward with an emergency liquidity requirement, the Federal Home Loan Banks should be included as acceptable sources of emergency liquidity. In addition, our letter asks that NCUA determine which credit unions need to establish emergency lines of liquidity based upon an institution’s: (1) level of brokered deposits; (2) current level of liquidity; (3) payment system risk; and (4) level of capitalization.

NCUA’s Proposal on TDRs and CUNA’s Comment Letter

As we have mentioned in previous Regulatory Advocacy Reports and other CUNA publications, comments are due March 2 to NCUA on its proposed rulemaking, Loan Workouts and Nonaccrual Policy, and Regulatory Reporting of Troubled Debt Restructured Loans. In a nutshell, TDRs are loans that have been modified by the credit union to provide a concession to the borrower because of his or her financial difficulties that would not have otherwise been granted. The loan agreement is revised to reflect the modifications.

The proposal on TDRs came about largely through the insistence of CUNA and several Leagues. CUNA continues to meet with key NCUA staff to discuss the proposal, working with our Examination and Supervision Subcommittee, Accounting Subcommittee, and members of the CUNA CFO Council. Also, CUNA helped NCUA put together a working group on TDRs comprised of John Annaloro, Pam Finch, Keith Peterson, and Scott Waite who have provided ongoing guidance to NCUA on this matter.

While the proposal is generally an important step in the right direction in terms of how TDRs have to be reported, some regulatory and reporting issues remain.

Under the proposal, federally insured credit unions (FICUs) would maintain written policies on loan workout arrangements and nonaccrual policies for loans, consistent with industry practice and the Uniform Retail Credit Classification and Account Management Policy, adopted in June 2000 by federal financial regulators except for NCUA. The proposal includes the policy as an appendix to assist FICUs in complying with the rule.

The appendix, which is being proposed as an interpretive ruling and policy statement (IRPS), addresses regulatory reporting of TDRs on FICU call reports. Under NCUA guidance in Accounting Bulletin 06-01 (December 2006), credit unions should currently report TDRs as delinquent until the borrower/member has made timely and consecutive monthly payments over a six month period consistent with the restructured terms. Such loans may not be returned to full accrual status until the six-month consecutive payment requirement is met.

As CUNA and others urged, the proposed guidance 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. Delinquencies on TDR loans would be calculated consistent with loan contract terms, including amendments made to loan terms by the formal restructure. In addition to a written loan workout policy, each FICU approving loan workouts would be required to have sufficient monitoring and controls.

The proposed rule would eliminate data collection on “Modified Loans” and targeting data collection efforts to loans meeting the definition of a TDR under GAAP. The proposed rule would also codify the practice that FICUs stop accruing interest on loans at 90 days or more past due (with some exceptions). This policy is not currently in a statute or rule, but is a credit union practice that is supported by existing tracking systems.

It would require all FICUs to maintain member business loans in a nonaccrual status until the credit union receives six consecutive payments under the modified loan terms.  Currently, there are no formal requirements for MBL workout nonaccrual policies, except for TDRs. The proposed rule would change this aspect for MBLs that are not classified as TDRs.

While the proposal if adopted would provide regulatory relief on TDRs generally, the proposal’s treatment of MBLs is one of the concerns credit unions have raised. In our comment letter, CUNA will be questioning the need for nonaccrual treatment of MBLs and calling the agency’s attention to the fact that credit unions’ processing systems will have difficulties with this treatment, resulting in manual tracking of MBLs that have been modified.

Other general concerns CUNA will be raising in our comment letter are that the final rule should include a discussion that reassures the credit union system that the agency’s treatment of TDRs is consistent with GAAP. (As indicated above, we will be urging NCUA to change its approach to restructured MBLs so that all TDRs are treated in the same manner.)

Also, while many credit unions want NCUA to adopt a final rule that provides regulatory relief on TDRs, smaller credit unions are concerned they may need more time to implement the changes. CUNA will be recommending NCUA adopt the rule as soon as possible but provide a transition period for credit unions that need it. In addition, a number of credit unions have been concerned about the agency’s use of the term, ?workout loans? and CUNA will be recommending NCUA remove the term and not use it as a substitute for modified loans. CUNA will be circulating our comment letter on the proposal early next week.

Consumer Financial Protection Bureau Update – Overdraft Protection and CFPB Advisory Groups

Wednesday, the CFPB held a roundtable discussion in New York City to introduce its newest initiative entitled, What’s your status when it comes to overdraft coverage? CUNA is urging the CFPB to focus only on overdraft programs that are clearly anti-consumer, such as those at a number of banks, and is working to ensure the CFPB understands credit union differences, including offering financial counseling to help members avoid overdrafts. CUNA is working with our Consumer Protection Subcommittee to establish an internal working group that will focus on developing background and other materials to explain and support credit union overdraft programs.

Bob Allen, President & CEO of Teachers Federal Credit Union, Long Island, NY, appeared at the roundtable on behalf of his credit union, the Credit Union Association of New York, and CUNA. He was accompanied by CUNA Senior Assistant General Counsel, Jared Ihrig. (They are pictured with CFPB Director Cordray). Bob did an outstanding job representing credit unions. You can view the archived presentation here.

Bob stressed the fact that credit unions are member-owned financial cooperatives which provide products and services that their members want at the best terms possible, including lower rates on loans, higher dividends on savings, and lower fees, and that abusive practices are not a part of a credit union’s DNA. Bob also emphasized that surveys continue to indicate that fees charged by credit unions are on average lower than those charged by banks, and this is also the case with respect to overdraft fees. Bob mentioned that interest rates for lines of credit which can serve as overdraft protection alternatives are typically also lower at credit unions, and also discussed that many credit unions offer overdraft transfer programs where members can have funds transferred from savings and/or money market accounts to cover an overdraft for a small fee, or in some cases, no charge at all. Bob included in his remarks that some credit unions choose to offer courtesy pay programs, and do so in an effort to minimize the embarrassment and possible reputation damage to their members. He urged the CFPB to consider the costs to credit unions that result from any new regulation, including in this area, as these costs would ultimately have to be passed on to credit union members. CUNA will be reaching out to Leagues and credit unions in the near future to ensure we have the most current information on credit union programs.

The CFPB has launched an inquiry into checking account overdraft programs to determine their impact on consumers and is seeking public input on a prototype “Penalty Box”—a disclosure on a consumer’s checking account statement that would highlight the amount overdrawn and total overdraft fees charged. In connection with this inquiry, the CFPB has published a Notice and Request for Information to gain additional insight into overdraft practices. The CFPB has indicated that a data request has been sent to a number of banks, but we are not yet sure whether the same request will be sent to credit unions.

The CFPB has announced this week that it is seeking nominations to its Consumer Advisory Board. Also, the agency will be establishing a Credit Union Advisory Council and is in the process of initiating a small business review panel known as the Small Business Regulatory Enforcement Fairness Act (SBREFA) panel; this panel is required under the Dodd Frank Act. Click here for more information on the SBREFA panel process.

CUNA plans to develop a list of credit union names to nominate for each of these three groups and urges Leagues to let us know the names of any members you want to include on the list. Credit unions that want to be considered for service on one of the panels may contact CUNA’s Deputy General Counsel Mary Dunn. Mary has spoken at length with CFPB staff about getting credit unions on these advisory groups.

In other CFPB news, last Sunday, the agency introduced its newest mortgage application and closing prototype forms as a continued part of its ?Know Before You Owe? mortgage disclosure project. Click here for more information on this latest round of disclosures. You may access the prototype forms here and here. The CFPB is expected to introduce a proposed rule and new proposed forms by July 21 of this year.

NACHA ACH Expedited Processing and Settlement (EPS) Update

CUNA continues to express concerns raised by credit unions on NACHA’s Expedited Processing and Settlement (EPS) proposal that would provide a new premium same-day, network-wide service on the Automated Clearing House (ACH) network. Late last week, we participated on a call with the NACHA EPS Industry Support Group to discuss comments and feedback received from all ACH stakeholders on the proposal. Our December 2011 comment letter emphasizes that not all credit unions and other receiving depository financial institutions (RDFIs) should be required to receive and post expedited ACH payments because of significant implementation and risk management costs, especially for smaller financial institutions. Instead, we recommended an opt-in or a pilot program approach. In the upcoming months, we will continue to work with NACHA, the CUNA Payments Policy Subcommittee, and credit unions on the proposal and will provide further updates shortly.

Summary of Recently Filed Comment Letters and a Preview of Upcoming Letters

On Tuesday of this week, we filed several comment letters, including the letter to NCUA regarding access to emergency liquidity discussed above. We filed our letter to NCUA on its egregious loan participators proposal last week. The other letters we filed this week were to the CFPB regarding interim final rules that republish regulations transferred to the CFPB from other federal regulators. While the CFPB sought comments only on the technical aspects of the republications, we took the opportunity to highlight specific issues with the regulations and reiterate our general concern regarding regulatory burden. Here are the comment letters: Truth in Lending (Reg Z); Equal Credit Opportunity (Reg B); Fair Credit Reporting (Reg V); Privacy of Consumer Financial Information (Reg P); and Real Estate Settlement Procedures Act (Reg X).

In addition to our upcoming letter to NCUA on TDRs discussed above, over the next week and a half we will be filing a letter with NCUA regarding its proposal on Regulatory Flexibility and with the CFPB regarding its request for comments on regulatory streamlining. Click here to see our Regulatory Comment Calls for these and all other proposed rules.

NCUA’s proposal would effectively eliminate the agency’s RegFlex program. However, the proposal would also amend rules affected by the current RegFlex program that are designed to provide some regulatory relief for FCUs. The proposal would place most of the six flexibilities of the current RegFlex rule into the subject-specific rules that apply to all FCUs. We support NCUA’s stated intent to provide all FCUs with the regulatory flexibility currently afforded only those designated by NCUA.

The proposal would make several other changes, such as extend the time period in the fixed assets rule by which a FCU must partially occupy certain premises from three years to six years for unimproved land, which appears to be a positive change. The proposal would make other changes that we have concerns with, such as replacing the current authority for RegFlex FCUs to purchase zero-coupon investments with maturities that exceed 10 years, with authority for FCUs meeting a ?well capitalized standard?—as defined in the proposal—to purchase zero-coupon investments with maturities of up to 30 years.

The CFPB is requesting comments on how the rules developed by other regulators that are now under the CFPB’s authority could be streamlined. The agency is planning a two-step process to review and consider rules for streamlining. Under the first step, for which comments are sought now, the CFPB will identify the highest priority areas for improvements, focusing on changes it can make without Congress having to revise any laws. After the CFPB reviews the comments on priority areas, it will consider whether to issue a proposal with specific changes for another round of comments.

Our comment letter to the CFPB will suggest, among other things, updates to certain outdated regulations, such as removal of the duplicate ATM disclosure requirements under Reg E. In addition, we will ask the Bureau to correct specific discrepancies between certain regulations, such as the notification requirements between ECOA and FCRA; ECOA requires that an Adverse Action Notice be provided only to the primary loan applicant, while FCRA requires such Notices be provided to all loan applicants.

Conclusion

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

Posted in Compliance.