CUNA Regulatory Advocacy Report
May 22, 2012
CUNA Regulatory Advocacy Report: May 11, 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.
- New NCUA Examination Manual to be Released in June
- NCUA’s Second Listening Session
- Senator Durbin Files Brief Criticizing Fed’s Interchange Rule
- Loan Originator Standards
- HAMP Modification Changes
- CFPB Holds Industry Discussion
- Overdraft Protection
- Update on the CFPB’s Consumer Complaint Process
- Update from the Federal Financial Regulators’ General Counsels
- Bank Secrecy Act Advisory Group Meeting
- NACHA Proposal on ACH Security Framework
A new National Supervision Policy Manual for National Credit Union Administration (NCUA) examiners is scheduled to be finalized in June. CUNA is urging NCUA to make the manual available to credit unions.
The new manual, intended to result in greater consistency across the regions in how examiners treat credit unions, implements key recommendations from federally mandated Material Loss Reviews conducted by NCUA’s Office of The Inspector General.
Our Examination and Supervision Subcommittee plans to discuss the new exam manual with NCUA Director of Examinations and Insurance Larry Fazio.
Exam consistency was also emphasized in the recently completed National Training Conference, according to NCUA. Training at that conference, which was held in Orlando, FL., focused on interest rate risk, credit risk, and problem resolution at credit unions, NCUA said. Federally required training on ethics, diversity, and disability accommodations was also provided.
While consistency can be positive, the goal is to have examiners treat credit unions in a consistently professional manner, allowing the credit union to develop and implement its own solutions to address problems. CUNA will continue to advocate this to NCUA.
The NCUA said its decision to hold the training conference in Orlando, and not at its home base of Alexandria, Va., resulted in about an $80,000 savings. All funds that were spent on the Orlando session went to training, the agency emphasized. (In other words, unlike the GSA’s infamous conference, no clowns were hired for the occasion.)
Board Chairman Debbie Matz hosted the second NCUA Listening Session earlier this week in Alexandria, VA. About 70 credit union officials, mostly from NCUA Region II, and around 30 NCUA staff were in attendance. West Virginia League President and CEO Ken Watts participated, along with representatives from the New Jersey, DC/Maryland, Pennsylvania Leagues and others. CUNA’s Deputy General Counsel Mary Dunn also participated.
Minimizing regulatory burdens and improving the examination process were consistent themes during the meeting. For example, during the session, concerns about NCUA’s pending loan participations and CUSO proposals were reiterated. NCUA has already indicated that it is revisiting those proposals and will be making changes. A major area of concern in the loan participation proposal has been the 25%-of-net-worth ceiling on purchasing loan participations from any one originator. CUNA strongly opposed this and other provisions. CUNA Regulatory Advocacy staff are meeting with senior NCUA staff on Monday for further discussions on these proposals.
A number of participants said they appreciated being able to attend the session, indicating improved communication between credit unions and the agency are necessary and overdue. They urged CUNA to continue advocating that NCUA examiner policies and practices reflect a more constructive approach, as indicated in comments from Chairman Matz and NCUA staff during the sessions.
“We want to listen to you,” Chairman Matz told the audience. “And we want to be mindful of your need to do your business.” NCUA’s Director of Examination and Insurance Larry Fazio added that “examiners need to listen better and more…but both parties [credit union officials and NCUA examiners] need to listen.”
Fazio also touched on an issue of interest to most credit unions that have been recently examined: the issuance of Documents of Resolution (DoR) by their examiner. “We are working to clarify the DoR process,” Fazio told the group. “We shouldn’t regulate every aspect of risk management,” he said. He also reiterated that during the agency’s recent examiner training sessions, agency staff were instructed to listen to credit unions better. The credit union and the examiner should agree on problem areas, but the solution should be the credit union’s, Bill Myers, Director of the Office of Small Credit Unions, added.
Two participants raised concerns about NCUA assessments to fund the costs of the NCUA Temporary Corporate Credit Union Stabilization Fund. Fazio noted that at www.ncua.gov there are two web pages that address the costs of the stabilization effort and the NCUA’s management of the legacy assets of the conserved corporates. NCUA will provide an update on this information in July when the NCUA Board determines the 2012 assessment. Credit unions are “a good way” through in paying their total assessments, Fazio said. There are three credit unions that have indicated to NCUA they want to convert to a bank and those three will likely pay their assessments for this year. NCUA has taken the position that once an institution has converted, it is not liable for future Corporate Stabilization Fund assessments. CUNA does not agree with that position.
Two banks are seriously considering converting to a credit union, NCUA’s Director of the Office of Consumer Protection Kent Buckham noted.
Participants raised a number of issues and presented recommendations to the agency, which generally received favorable reactions from Chairman Matz and the NCUA staff. Here is a summary of these recommendations:
- NCUA should give credit unions advance notice when their examiner has been replaced;
- NCUA agreed this is a good suggestion.
- NCUA should do more to survey credit unions following their last exam regarding the examination experience;
- NCUA has tried this in the past without much success but supervisory examiners are working with their examiner reports to review exams and DoRs; NCUA is changing the cover of the 5300 Call Report to provide more details about its appeals process and to reinforce it has no tolerance for retaliation. CUNA has developed an exam survey, accessible on our website, www.cuna.org; an updated version of the survey will be announced soon. CUNA will also be working with a number of leagues that have developed their own surveys and will ensure that these efforts are well coordinated.
- NCUA should help protect credit unions from other regulators’ rules and actions;
- NCUA does discuss with other agencies their rules that affect credit unions but this is another area in which CUNA will be following up with NCUA.
- NCUA should reinforce that examiners’ actions should reflect NCUA Board rules and policies.
- If a credit union does not think that an examiner’s action reflects NCUA policy, it should call the supervisory examiner, NCUA’s office of Examination and Insurance or NCUA’s General Counsel’s office.
- NCUA should coordinate and talk with the credit union’s CEO when the credit union’s board and operating staff are consulted.
- NCUA agreed these are appropriate.
- NCUA Examiners should have a dialogue with the credit union’s management about the credit union’s strategic plan before the exam starts.
- NCUA also supported this recommendation.
- NCUA should ensure there are sufficient resources for small credit unions.
- NCUA has developed an Office of Small Credit Unions that is working closely with CUNA, AACUL and several leagues. NCUA is considering raising the ceiling on its definition of small credit unions to $18-20 million from the current $10 million and under.
- NCUA should provide additional regulatory relief, including on member business lending.
- NCUA likely cannot override the Federal Credit Union Act’s provisions that prohibit prepayment penalties on loans but is looking into removing the requirement for a personal guarantee on MBLs, a move that CUNA commends and has advocated for several years.
- NCUA should provide a letter to credit unions at the beginning of each year, along with the year-end financials from the previous year that addresses examination trends and concerns the agency will be flagging that year through policies or other actions. NCUA should encourage the CFPB to also provide a road map of the current and future issues it will be addressing in the coming months.
- NCUA seemed to support these ideas.
The next NCUA listening sessions will be:
1:00 – 4:00 CDT
1:00 – 4:00 EDT
1:00 – 4:00 PDT
1:00 – 4:00 MDT
Details on registering are available on NCUA’s website. CUNA and leagues will be attending the sessions, along with credit union representatives. CUNA staff and CUNA’s Examination and Supervision Subcommittee are following up on these issues with the agency.
Senator Richard Durbin (D-IL) has filed a ‘friend of the court’ brief in the merchants’ case challenging the Federal Reserve Board’s rule that caps debit card interchange fees for large issuers. The rule implemented provisions in the Dodd-Frank Act that Sen. Durbin and others had championed to protect merchants in the debit interchange process. Last fall, the merchants sued the Fed, saying that the rule ignored the statute and allows fees that are too high. The case remains pending in the U.S. District Court for the District of Columbia. CUNA is participating in a coalition with other financial institution groups that has filed its own friend of the court brief supporting higher fee income for large issuers. CUNA has been concerned all along that eventually, due to market forces, caps on larger issuers’ fees will affect smaller issuers.
Here are key points from the brief of Sen. Durbin:
- The Fed’s proposal in December 2010 was largely consistent with the Durbin amendment, which clearly lays out the authority of the Fed to regulate debit interchange fees. The proposal allowed a 12 cent/transaction debit interchange fee for large issuers.
- Based on lobbying from the financial services industry, the Fed changed the proposal and issued a file rule that is inconsistent with the language and intent of the Durbin amendment in a number of ways.
- The Board also used the final rule to further its own policy goals of being more generous to issuing banks (the final rule allows 21 cents plus 5 basis points and a one-cent fraud prevention adjustment/transaction) and providing a compromise between the banks and the merchants.
- The statute directed the Fed to develop standards to determine whether an interchange fee is “reasonable and propositional” by only considering the incremental cost to the issuer for authorization, clearing and settlement (ACS) of the transaction. The Fed exceeded its authority by including other costs that were not specified in the statue. Such costs included those for fixed ACS costs, transaction monitoring, fraud losses, and network processing fees.
- The Fed is wrong that the final rule sets standards that are reasonable and proportional by setting a fee for large issuers that is roughly half of the average per transaction interchange fee, 44 cents.
- The Fed’s rule does not implement correctly the Durbin amendment’s network provisions, which basically prohibit an issuer and payment network from having an exclusive agreement to process the issuers’ debit card transactions.
- The Fed misused Senator Durbin’s comment letter to support the provisions of its final rule on exclusivity. Under the final rule, a card must be enabled with at least two unaffiliated networks. However, the rule falls short of the statutory requirements because it does not “guarantee” that networks and issuers will not have contracts or requirements that restrict the number of networks available to process a transaction to less than two unaffiliated networks. (The brief indicates that if a transaction is not compatible with PIN processing, such as some hotel charges, the transaction would not be able to be processed “over at least two unaffiliated networks.”)
On Wednesday, the CFPB announced it is considering rules that would simplify mortgage points and fees and bring greater transparency to the mortgage loan origination market. The CFPB plans to propose these rules this summer and finalize them by January, 2013. For a link to the CFPB’s press release, click here.
The Dodd-Frank Act places certain restrictions on the points and fees offered with most mortgages, and the CFPB is considering proposals, which would:
- Require an Interest-Rate Reduction When Consumers Elect to Pay Discount Points: The CFPB is considering proposals to require that any discount point must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point;
- Require Lenders to Offer Consumers a No-Discount-Point Loan Option: Under the proposal under consideration, consumers must also be offered a no-discount-point loan; and
- Ban Origination Charges that Vary with the Size of the Loan: Brokerage firms and creditors would no longer be allowed to charge origination fees that vary with the size of the loan. Under the rules the CFPB is considering, brokerage firms and creditors would be allowed to charge only flat origination fees.
In addition to the points and fees provisions, the CFPB is considering proposals that also address mortgage loan originators’ qualifications and compensation. The rules that the CFPB is considering would:
- Set Qualification and Screening Standards: Under state law and the federal Secure and Fair Enforcement Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is considering rules to implement Dodd-Frank requirements that all loan originators be qualified according to uniform standards. These would include:
- Character and Fitness Requirements: All loan originators would be subject to the same standards for character, fitness, and financial responsibility;
- Criminal Background Checks: Loan originators would be screened for felony convictions; and
- Training Requirements: Loan originators would be required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.
- Prohibit Paying Steering Incentives to Mortgage Loan Originators (MLOs): The proposals the CFPB is considering would reaffirm the Federal Reserve Board’s previously issued loan originator compensation rule, which bans the practice of varying loan originator compensation based on interest rates or certain other loan terms. The CFPB’s proposal would also clarify certain issues in the existing rule that have created industry confusion.
Importantly, the proposals under consideration by the CFPB may have a significant impact on credit unions in the area of MLO training requirements and MLO compensation, depending on which direction the Bureau takes in these areas. CUNA will be following up with the CFPB and others to learn more in the coming weeks and we will share additional information with you as it becomes available.
The CFPB is currently in the process of convening a Small Business Review panel to obtain further input from industry participants, and has indicated that this panel will meet within the next couple of weeks. For a link to the proposals under consideration, click here. CUNA will be working with its Consumer Protection Subcommittee, the CFPB and others on this and other mortgage-related proposals in the coming months, and continues to urge both Congress and the CFPB, where possible, to exempt credit unions from additional regulatory requirements and burdens.
The CFPB posted on its blog information relating to upcoming changes to the Home Affordable Modification Program (HAMP) which become effective on June 1.
Under the changes, military homeowners and other families who are permanently displaced by a job-related move may still qualify as owner-occupants, which means they may still qualify for a HAMP mortgage modification. The new criteria states that a borrower may qualify if he or she:
- Is displaced due to an out-of-area job transfer such as PCS orders and was occupying the home as a principal residence immediately prior to the displacement;
- Intends to return to the home at some point in the future; and
- Does not own any other single-family real estate.
Military and other families who do own other residential properties may still qualify for a HAMP modification under expanded opportunities available for rental properties announced by Treasury in January. They also may qualify for a short sale through Treasury’s Home Affordable Foreclosure Alternatives Program (HAFA). For more information, click here.
CFPB Holds Industry Discussion
Last Friday, CUNA Staff attended an “industry discussion” held by the CFPB in New York City. CFPB officials in attendance included Director Richard Cordray, Deputy Director Raj Date, Assistant Director for Large Bank Supervision, Steve Antonakes, Assistant Director for Nonbank Supervision, Peggy Twohig, and Director for the Office of Enforcement, Kent Marcus. During the industry discussion, CFPB officials made it clear that they are rapidly increasing their examination staff across the country, and actively soliciting applications from additional candidates to join the CFPB’s supervision team. CUNA staff urged Bureau staff, where appropriate and permissible, to ensure the CFPB exercises its authority under Section 1022 of the Dodd-Frank Act to exempt credit unions from additional regulatory requirements and burdens as the Bureau moves forward with the various rulemaking endeavors required under the Dodd-Frank Act.
As we have mentioned over the last several weeks, CUNA is closely following the issue of Overdraft Protection in the regulatory realm as well as on the legislative front. In connection with the CFPB’s inquiry and request for information on this issue, CUNA has developed a survey that is available on our website for credit unions to provide information to us that we can use with the CFPB to help shield credit unions from new regulatory requirements on overdraft programs. To date, we have received approximately 513 responses from credit unions, and we encourage all credit unions to complete this survey to better assist CUNA with its regulatory advocacy efforts in this important area, and to submit responses to CUNA by May 25. For a link to our comment call, click here .
In this light, we also want to call to your attention a survey that was recently published by the Pew Charitable Trusts on this issue. You may access the Pew survey here. It is important to keep in mind that this report and others continue to be shared with the CFPB, and as recently as yesterday, Congresswoman Carolyn Maloney, D-NY, introduced legislation in the House of Representatives along with 46 cosponsors that if enacted would:
- Require consumer consent before permitting overdraft fees for paper checks, automated clearinghouse (ACH) charges, and debit card swipe-terminal transactions on consumer accounts;
- Define overdraft fees as finance charges subject to the Truth in Lending Act disclosures;
- Prohibit institutions from manipulating the sequence in which checks and other debits are posted if it causes more overdrafts and maximizes fees paid to banks;
- Require that fees be “reasonable and proportional” to the amount of the overdraft;
- Cap the number of fees that can be charged at one per month and six per year;
- Enhance disclosures to consumers both at the point of opt-in (disclosing alternatives to overdraft protection, including linked accounts or lines of credit) and when an overdraft fee is charged (if consumers choose to opt-in); and
- Require the CFPB to study prepaid debit card overdraft fees and grants rulemaking authority over those fees to CFPB.
CUNA continues to work with the CFPB, CUNA’s Consumer Protection Subcommittee and others relating to the overdraft protection issues, and we will keep you apprised of additional developments in this area.
Update on the CFPB’s Consumer Complaint Process
Earlier this week, staff participated in a briefing regarding the CFPB’s Consumer Response Unit, which handles consumer complaints. While it was noted that the agency is concerned that some of the consumer complaints received through its call center may be misinterpreted when formally filed into the agency’s database, the majority of the complaints the CFPB receives are filed directly through its website.
The briefing included an overview of the most common credit card complaints reported by consumers, as described in this table from the CFPB’s Consumer Response Annual Report.
In addition, it was mentioned that apparently many of the consumers filing complaints mistakenly believe that the CFPB will be able to immediately and directly rectify the problem/issue complained about, which is most likely not possible.
An update was provided this week by the general counsel’s office of each of the five federal financial regulatory agencies. They were represented by: Julie Williams, First Senior Deputy Comptroller & Chief Counsel of the Office of the Comptroller of the Currency (OCC); Scott Alvarez, General Counsel of the Federal Reserve (Fed); Michael Krimminger, General Counsel of the Federal Deposit Insurance Corporation (FDIC); Roberto Gonzalez, Principal Deputy General Counsel of the CFPB; and Lara Rodriquez, Deputy General Counsel of NCUA.
- NCUA: Credit union interest rate risk is one of the most areas of greatest concern. NCUA also mentioned NCUA’s proposals—which are much opposed by CUNA and the industry—on loan participations and CUSOs, citing the agency’s need for additional, detailed information on the entities with which credit unions are involved. CUNA has questioned the need for that information.
- CFPB: In response to the agency’s draft consolidated TILA/RESPA disclosure forms, the CFPB received over 20,000 comment letters, including CUNA’s. The CFPB expects to release shortly its studies on reverse mortgages and student lending, which is being conducted jointly with the Department of Education.
- FDIC: The FDIC’s Deposit Insurance Fund recently moved into the positive, with a current balance of $11.8 billion and a reserve ratio of 0.17%. Of the 750 employees in the FDIC’s Legal Division, 41% are term employees with contracts of around two years. Over the past several years, the FDIC has increased its employee base as the economy has struggled. However, the term-employment arrangement will make it easier for the Legal Division to (drastically) reduce the number of its employees as the economy and strength of the banking sector continue to improve. CUNA has urged NCUA to take a similar approach.
- The Fed, OCC, and FDIC cited as a top concern the Dodd-Frank Act provision that prohibits any reference to credit ratings in the agencies’ regulations. NCUA was the first of the financial regulators to issue a proposal to implement this provision, and expects to adopt its final rule on references to credit ratings by the end of the year.
On Wednesday, CUNA staff attended the Bank Secrecy Act Advisory Group (BSAAG) meeting at the U.S. Treasury Department. CUNA continues to participate and represent the credit union industry on the BSAAG and its working groups, including the Banking, Law Enforcement, Prepaid Access, and Suspicious Activity Report (SAR) Activity Review Subcommittees. At the meeting, Financial Crimes Enforcement Network (FinCEN) staff and BSAAG Subcommittee members discussed Bank Secrecy Act (BSA) regulatory issues; proposed regulatory changes; other developments that impact anti-money laundering (AML) and BSA; and FinCEN’s information technology and reporting form changes. CUNA is working with the BSAAG, the CUNA Payments Policy Subcommittee, Leagues, credit unions, and others on BSA developments and to minimize compliance burdens associated with reporting forms and regulatory proposals, including the recent customer due diligence advance notice of proposed rulemaking. We are also monitoring AML/BSA developments with other types of institutions, including money services businesses (MSBs). Recently released by FinCEN, the May 2012 SAR Activity Review provides detailed information regarding MSB regulatory developments and SAR trends and analyses.
On Tuesday, NACHA – The Electronic Payments Association released a proposal that is intended to improve the Automated Clearing House (ACH) security framework. This proposal is related to an earlier NACHA request for information in February 2011, and aims to improve the security and integrity of certain ACH data in the following areas: 1) Protection of Sensitive Data; 2) Access Controls; 3) Self-Assessment; and 4) Verification of Third-Party Senders and Originators. Comments are due to NACHA by June 22, 2012. For further information, please refer to the proposed modifications to the NACHA Operating Rules and a NACHA survey on the proposal. CUNA will provide a summary of the proposal on our regulatory comment call shortly, and we will review and obtain feedback with the CUNA Payments Policy Subcommittee and credit unions. If you have any questions or comments on ACH, or if you would like to send us a copy of your comments sent to NACHA, please contact CUNA Regulatory Counsel Dennis Tsang.
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.
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