No Reg Relief in Sight
Complying with new and existing regs continues to burden CUs.
The more things change, the more they stay the same. And so it is with credit unions’ compliance load, which continues to get heavier. The bulk of last year’s regulatory changes focused on open-end lending and Credit Card Accountability, Responsibility, and Disclosure (CARD) Act implementation—changes that were largely intended to benefit consumers. This year, the focus shifts to amending mortgage regulations also in favor of consumers (but the CARD Act isn’t going away either).
• Mortgage changes this year affect all types of home-secured loans.
• The Dodd-Frank Act’s interchange regulation could have serious bottom-line consequences.
• Board focus: Take a strategic view of your compliance duties, and give staff the tools they need to keep your CU in compliance.
Major regulatory changes in 2011 will fall into three general categories:
1. Mortgage compliance;
2. The Dodd-Frank Wall Street Reform and Consumer Protection Act regulations; and
3. National Credit Union Administration (NCUA) actions.
Mortgage compliance changes are coming fast and furiously, affecting all types of home-secured loans, including closed-end, open-end, and reverse mortgages. The Federal Reserve has issued interim and final rules effective in 2011, including those relating to appraisals, payment schedules, and loan originator compensation.
In this month alone, credit unions must:
• Revise their closed-end mortgage loan disclosure under Regulation Z to provide for the payment schedule in a tabular format;
• Begin an evaluation of their mortgage loan officer compensation structure; and
• Provide risk-based pricing notices when members will receive credit that’s materially less favorable.
Credit unions also should be preparing to register mortgage loan originators under the Safe and Fair Enforcement for Mortgage Licensing Act (SAFE Act). Registration begins this month (barring any unforeseen delays with the registry) and runs through July.
In addition to the final mortgage rules effective this year, two sets of proposed rules—issued by the Fed in 2009 and 2010—are still pending. The 2009 proposal pertains to the disclosures credit unions provide for home equity lines of credit and closed-end home-secured loans at application and closing. These disclosures look entirely different from the current disclosures, but continue the Fed’s current trend of putting disclosures in a “tabular format.”
The 2010 proposed rule provides for changes to the right of rescission, credit protection disclosures, and reverse mortgages. The credit protection disclosures are intended to favor consumers, but the disclosure makes the credit protection product appear to be unfavorable.
It’s unlikely that a final rule based on these proposals will be issued until authority is transferred to the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Act (the transfer is set to occur on July 21, 2011). And Dodd-Frank contains additional mortgage rule-making provisions, one of which is to combine the Truth-in-Lending and Real Estate Settlement Procedures Act disclosures so that one disclosure requirement exists for closed-end mortgages.
It’s critical for credit unions to carefully consider the state of mortgage compliance from a strategic planning perspective. These new rules will require changes to documents, processes, and staff training—all of which cost credit unions time and money.
The Dodd-Frank Act
The most important issue facing credit unions under new Dodd-Frank rules involves the legislation’s debit interchange amendment (CUMag 10/10, p. 30). It will be one of the earliest rules to be finalized (at press time, a proposed rule was forthcoming) and potentially might have the greatest effect on credit unions’ bottom lines. Expect a final rule by this April.
The legislation requires interchange fees to be “reasonable and proportional” to the cost of the issuer regarding the transaction. The rules might reflect a two-tiered system because there’s an exemption for issuers with less than $10 billion in assets. But whether the exemption actually holds financial institutions with less than $10 billion in assets harmless remains to be seen.
Along with the CFPB, new mortgage rules, and debit interchange fees, Dodd-Frank also provides for changes to Regulation CC which implements the Expedited Funds Availability Act. The legislation will require credit unions to make the first $200 of a check available the next day (rather than only $100 as is currently required). This requirement will mean credit unions must revise Reg CC disclosures, policies, procedures, and signage, as well as train credit union staff to provide the additional funds.
It’s important to develop a system in your credit union that tracks the various rule changes this massive piece of legislation requires. Consult the Credit Union National Association’s (CUNA) chart describing the rules and effective dates. It’s available at cuna.org(select “regulations & compliance,” “regulatory advocacy,” and then “financial regulatory reform resources”).
Looking at examination hot topics, indirect lending definitely sticks out as a front-runner. NCUA considers it a key issue and will be taking a closer look at your credit union’s loan concentration and vendor due diligence.
In August 2010, NCUA issued Letter to Credit Unions No. 10-CU-15 titled “Indirect Lending and Appropriate Due Diligence.” In the letter, NCUA indicates that examiners are reviewing call report information for “red flags” and, if the agency sees any, it might “conduct on-site supervision” even if an exam isn’t scheduled.
NCUA guidance provides that a sound due diligence program for indirect lending should include these components:
• A planning process;
• Comprehensive written policies;
• A review of the vendor’s financial and operational risks;
• A legal review of agreements; and
• A risk management process.
Also on the agency’s hot plate: board governance. NCUA last year proposed rules relating to indemnification and federal credit union directors’ fiduciary duties. A final rule is expected to be in place early this year.
And finally, NCUA last fall issued its long-awaited rules on repairing the corporate credit union system. Effective in the first half of the year are provisions for investment limitations, asset/liability management provisions, credit risk management, liquidity management, corporate credit union service organizations limitations, and corporate governance.
An additional proposed rule came out in late 2010 and addresses the issues of membership fees, nonfederally insured credit unions paying assessments, and limitations on membership in corporate credit unions. Expect discussions on how to restructure the corporate credit union system to continue throughout 2011.
POLICYWORKS OFFERS COMPLIANCE SOLUTIONS
PolicyWorks is a wholly owned subsidiary of the Iowa Credit Union League and a national leader in providing credit union compliance solutions.
Created in 2006, PolicyWorks helps credit unions respond to the increasingly complex and ever-changing regulatory challenges. Its team of compliance experts with legal and operational backgrounds provides the
• 24/7 federal compliance support (on-demand phone/e-mail assistance);
• Bank Secrecy Act independent tests;
• Full-scale compliance audits;
• Lending audits;
• Vendor-management services;
• Compliance training (staff and board);
• Shared compliance officer program; and
• Free compliance information at theworksblog.com.
For more information, contact Andrea Stritzke, vice president of regulatory compliance for PolicyWorks, at email@example.com, or visit policyworksllc.com.