CUNA Regulatory Advocacy Report

 CUNA Regulatory Advocacy Report: April 6, 2012
Good afternoon. Another busy week has passed and we wanted to fill you in on some of the issues we have been pursuing since the last report.

  • NCUA Cancels April Open Board Meeting
  • CUNA Comments to NCUA on Limited Use of Derivatives To Hedge Interest Rate Risk
  • CUNA To Comment to CFPB on Remittance Transfers Proposal
  • Inspector General At NCUA Issues Report on Agency’s AMAC Operations
  • CFPB Bulletin on Loan Originator Compensation; Office of Older Americans
  • CUNA Raises Members’ GSE Reform Concerns at forum titled “America’s Housing Crisis: Private Sector Responses and Public Policy Innovation”
  • Federal Reserve Releases Policy Statement on Rental of Residential Other Real Estate Owned Properties


At CUNA’s Governmental Affairs Conference, NCUA Board Chairman Debbie Matz indicated that the agency is slowing the pace of new regulations. While some feel we can only believe that when we see it, the agency’s decision to forego the April open board meeting is a nod in that direction. CUNA has urged NCUA to stop and reconsider whether the loan participations and credit union service organization proposals as two examples are really necessary, but a number of senior officials at the agency have indicated they feel rules in these areas are necessary. CUNA will continue all our efforts at NCUA and other agencies such as the Consumer Financial Protection Bureau, to urge them in the strongest terms to hold off issuing any new rules that are not required by Congress or necessitated by safety and soundness.
Meanwhile, as there is no NCUA Board open meeting this month, where rules could be considered and approved, we can all feel a little relieved about that.


The issue of whether natural person credit unions should be authorized to engage in some derivative activities in order to hedge interest rate risks (IRR) deserves some further consideration, even though the comment period on NCUA’s request for comments on this topic closed April 3, 2012. Derivatives can serve two purposes, either as a speculative investment or as a technique to manage or hedge against risk. So long as credit union use of derivatives is restricted to hedging purposes, their use can lower the risk exposure of the credit union movement.
CUNA supported NCUA’s efforts to hear from the credit union system on this issue and is urging NCUA to develop an actual proposal.
The rationale for looking into the use of derivatives to manage interest rate risk is based on concerns that credit unions need to be able to protect themselves when interest rates begin to rise again, as they inevitably will. NCUA’s new separate rule and guidance on IRR, which take effect September 30, 2012 for a number of credit unions, define this risk as the uncertainly as to whether changes in market rates will adversely affect a credit union’s net economic value and/or earnings. IRR can occur when there is a mismatch between the timing of cash flows from fixed rate instruments, and interest rate resets of variable rate instruments, on either side of the balance sheet. As interest rates change, earnings or net economic value may decline, as NCUA’s rule notes.
Currently, NCUA permits a limited number of federal credit unions, on a case-by-case basis, to engage in some derivatives transactions to hedge IRR through an investment pilot program. In 2011, six federal credit unions participated in the pilot program through a third-party provider and two FCUs have independent authority.
In our comment letter, CUNA urged NCUA to allow state as well as federally chartered credit unions to be able to engage in certain derivatives as a permissible investment activity in order to manage IRR.
CUNA also supported derivatives authority through a third-party for well-managed credit unions and independent authority for healthy credit unions with adequate experience in derivatives; the existing investment pilot program should continue to have independent authority.

Early next week, CUNA will submit a comment letter to the Consumer Financial Protection Bureau (CFPB) on the remittance transfers proposal regarding safe harbor provisions from the definition of a “remittance transfer provider” and several areas related to transfers that are scheduled in advance, including preauthorized transfers and disclosure requirements. Under the final rule released in January, credit unions and other remittance transfer providers must disclose the exchange rate and all fees associated with an international money transfer so consumers know exactly how much money will be received. There is a limited, partial exception on the disclosure requirements for federally-insured credit unions until at least 2015, and possibly until 2020, as well as a limited exception on certain consumer ACH transfers sent to certain countries. Even with these limited exceptions, credit unions and others will have to fully comply with the rule’s other requirements such as error Page | 3

resolution and liability provisions, and must still provide consumers with disclosures with estimates of likely exchange rates, fees, and taxes. CUNA has provided a final rule analysis that describes the final rule’s requirements.
In our comment letter, CUNA will express concerns that the CFPB’s remittance transfers final rule’s high compliance costs and excessive legal liabilities, especially on transfers through “open networks,” including international wire, such as the Society for Interbank Financial Telecommunication (SWIFT), or international ACH through unrelated correspondent institutions (that are outside of the sender’s control) would force credit unions with relatively small volume international payments programs to stop offering such programs. Credit unions are concerned such programs will no longer be economically sustainable.
Also, CUNA does not believe the safe harbor should be based on a limited number of transfers per year; the proposed threshold of 25 would provide relief to just a few credit unions. Instead, the CFPB should permit a broader exemption for credit unions and other entities that do not provide “remittance transfers” as their primary business.
Further, we will ask the CFPB to delay the effective date of the final rule to minimize compliance burdens for credit unions. We also agree that the CFPB should provide additional flexibility on disclosure requirements and the additional use of estimates to minimize compliance burdens regarding preauthorized transfers. CUNA will continue to highlight credit unions’ concerns regarding the remittance transfers final rule and proposal to the CFPB, and will follow up with CFPB Director Richard Cordray and his senior staff.

A National Credit Union Administration (NCUA) Office of the Inspector General (OIG) review of the agency’s Asset Management Assistance Center (AMAC) found “deficiencies over the valuation process of real estate owned (REO) by AMAC.” The NCUA’s AMAC conducts credit union liquidations and performs management and recovery of assets, and can, at times, assist NCUA regional offices with the review of large complex loan portfolios and actual or potential bond claims, the NCUA OIG said. Many of the properties cited in the report were owned by now-defunct credit unions Norlarco CU and Huron River Area CU.
Norlarco, of Fort Collins, Colo., was placed into conservatorship by state regulators in May 2007, and the credit union was eventually purchased by nearby Public Service CU, Denver, Colo. Huron River Area CU, Ann Arbor, Mich., was taken under NCUA control in early 2007, and was liquidated later that year.
Credit risk and strategic risk were major factors in the failures of both of these credit unions, and the NCUA OIG in an earlier report on both failures said the management Page | 4

of each credit union failed to adequately manage and monitor the credit risk within their loan programs.
Both failures led to 850 properties that were owned by the credit unions being taken over by the NCUA, and 409 of those properties have been sold so far, the OIG report said. These NCUA-owned properties have sold for around 42.8% of their market value, on average, according to the report. The NCUA OIG report specifically noted that AMAC did not perform valuations on the properties in accordance with industry standards and did not always maintain proper support for the valuations that were completed. In the report, the OIG recommended that NCUA AMAC improve its review and documentation process for appraisals over $250,000, perform and document their analysis when determining whether to maintain properties versus selling them in a bulk sale, and improve its account reconciliation processes. Other recommendations were also made, and the AMAC agreed to follow the majority of the recommendations. The AMAC also noted that it has already acted to address some of the deficiencies identified in the OIG report.
CUNA’s NewsNow provided this item.

On Monday of this week, the Consumer Financial Protection Bureau published a bulletin relating to the payment of compensation to loan originators under Regulation Z, 12 C.F.R. § 1026.36. Subject to narrow exceptions, this section of Reg Z provides that no loan originator may receive (and no person may pay to a loan originator), directly or indirectly, compensation that is based on any terms or conditions of a mortgage transaction. The Commentary to the Regulation clarifies that compensation includes salaries, commissions, and annual or periodic bonuses. The CFPB has received several questions about whether and how this section of Reg Z apply to qualified profit sharing, 401(k), and employee stock ownership plans (collectively, “Qualified Plans”). Specifically, CFPB staff have been asked whether a financial institution can contribute to Qualified Plans for employees, including loan originators, if employer contributions to such plans are derived from profits generated by mortgage loan originators. Because neither the Regulation nor the Commentary expressly addresses whether the loan origination provisions apply to contributions made to Qualified Plans, the CFPB recognizes there has been confusion in this area.
The CFPB is mandated by Section 1403 of the Dodd-Frank Act to adopt final loan originator compensation rules by January 21, 2013, or the provisions of Section 1403 become self-effectuating on that date. Until final rules are adopted by the CFPB, this bulletin clarifies that Regulation Z allows employers to contribute to Qualified Plans out of a profit pool derived from loan originations. The bulletin is specific only to Qualified Plans, and contributions to nonqualified plans will be addressed in connection with a proposed rule on the loan origination provisions within the Dodd-Frank Act, which the CFPB has indicated it anticipates issuing in the near future. Page | 5

In other CFPB news, on Wednesday, Skip Humphrey of the CFPB’s Office of Older Americans visited Salt Lake City, Utah and met with Attorney General Mark Shurtleff, state and local senior services, and law enforcement groups to discuss the financial exploitation of seniors across America. You can read more about his visit here. One of the items he discusses is the Utah Elder Rights Resources Booklet, published by the Utah Division of Aging and Adult Services, which is an information booklet designed to inform seniors, in plain language and easy-to-read large type, about state and federal resources that can help them with important decisions like avoiding scams, obtaining benefits and medical insurance, and finding housing and care.
Last month during CUNA’s GAC, CUNA’s Consumer Protection Subcommittee had the opportunity to hear from several senior staff from the CFPB, including Judith Kozlowski, who works as Counsel alongside Mr. Humphrey in the CFPB’s Office of Older Americans. Ms. Kozlowski mentioned that the CFPB is currently in the process of creating a document she termed the “lay fiduciary guide” which might serve to meet the objectives of the CFPB in assisting seniors in a similar fashion. CUNA staff and CUNA’s Consumer Protection Subcommittee will continue to work closely with CFPB staff as this and other developments occur which may affect credit union operations.

CUNA’s Counsel for Special Projects Kristina Del Vecchio represented CUNA at a forum titled “America’s Housing Crisis: Private Sector Responses and Public Policy Innovation” on April 4 and 5 in New York City. The forum was sponsored by Zillow, the Progressive Policy Institute and Columbia Business School, and its purpose was to address the private sector and the Federal government’s past, present, and future response to the housing crisis. Representative Jim Himes (D-CT) presented the Congressional perspective, specifically regarding Congress’s plans to tackle the ongoing conservatorship of Fannie Mae and Freddie Mac (the “GSEs”). Rep. Himes sits on the House Committee on Financial Services, which is the House Committee addressing GSE reform. CUNA raised its members’ concerns with proposed legislation that would replace the GSEs with a fully privatized secondary market for mortgage securities, specifically because of the risk that such a market would be controlled by the largest banks. Rep. Himes responded that he firmly believes this will not be the outcome, especially because Congress has been listening to credit unions’ and other industry members’ concerns in this respect. He added that if the GSEs are in fact wound down, the consensus in Congress is that they would be replaced by an entity providing for an explicit guarantee of well-underwritten mortgages, with a catastrophic insurance fund, in line with the third option laid out in the Treasury Department’s February 2011 White Paper.
The Honorable Janice Eberly, Assistant Secretary for Economic Policy for the U.S. Department of the Treasury, also spoke regarding the future of the GSEs. She said that the winding down of the GSEs (as they currently exist) is widely anticipated, and Page | 6

is highly likely. She said that the questions with which the Administration is struggling are what will replace the GSEs and over what time period. She added that the Treasury Department’s efforts in this regard are currently focused on the relationship between the job market and housing market, specifically relating to how the current job and wage situation will impact the housing market recovery. Regarding the Administration’s efforts to date, Ms. Eberly said that its piecemeal approach implementing programs targeted at specific subsets of homeowners has been effective, although these programs have not worked as quickly as expected. She added that the Administration has taken this approach since there does not seem to be an adequate “one size fits all” solution. Among the various private sector speakers at the forum, the general consensus was that there is presently too much uncertainty regarding rulemaking under the Dodd-Frank Act and the future of the GSEs for the private market to re-enter the mortgage securitization market in a meaningful way. Finally, many of the panelists agreed that given the significant role that the government now plays in the housing market, it will be virtually impossible for the government to completely exit the housing market, especially in the short run. Along these lines, CUNA will continue to follow developments in housing finance reform, and we will report back to you on additional developments.


On April 5, 2012, the Federal Reserve (Fed) released a policy statement regarding the rental of real estate owned (REO) properties acquired in foreclosure. The Fed’s statement reiterates its position that banks are permitted to rent out REO properties as part of an orderly disposition strategy, and outlines supervisory expectations for residential rental activities. The Fed’s policy, as discussed in its policy statement, is that banks should make good faith efforts to dispose of foreclosed properties at the earliest practicable date. However, in light of the current housing market conditions, the Fed states that banks may rent residential REO properties within legal holding period limits without demonstrating that they are continually actively marketing the property for sale. Banks must follow applicable local, state and federal laws, as well as any homeowner and association bylaws. Banks must also appropriately supervise third party property managers (if applicable), follow generally accepted accounting principles and applicable regulatory reporting instructions. The policy statement also gives specific instructions for large-scale residential REO rentals, and notes that to the extent the REO rental properties meet the definition of community development under the Community Reinvestment Act (CRA), regulations, banks would receive favorable CRA consideration. Banks must examine the overall costs and benefits of renting its REO properties and follow suitable policies and procedures. CUNA is currently working to urge NCUA to pursue a similar policy with regards to credit union held REO properties. CUNA hopes that NCUA will follow the Fed’s direction in this respect, given the slow progress of recovery in the housing market. Page | 7


As we look forward to the new week, we will continue to press regulators for a better environment with fewer regulatory burdens imposed on credit unions. Our highest regulatory advocacy priority is to minimize the rules credit unions have to follow and to improve the examination process to the greatest extent possible. We will cover these and other issues in our next report.
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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