Compliance Burden Grows Heavier
Rapid change and uncertainty complicate strategy development.
There’s precious little that’s predictable in the world of regulatory compliance. Gone are the days when you could implement new rules one at a time, at a deliberate pace. The current regulatory environment is fast-paced and unrelenting.
You need a comprehensive compliance strategy to keep up with regulatory changes from multiple state and federal agencies. Without one, it’s easy to fall out of compliance and threaten your credit union’s safety and soundness.
But a regulatory compliance strategy is difficult to pin down in the midst of so much change and uncertainty.
Consider, for example, the Consumer Financial Protection Bureau (CFPB). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the bureau, but it remains without a confirmed director due to political gridlock in Washington, D.C.
The CFPB has a daunting task under the Dodd-Frank Act. It must provide supervision and enforcement authority of consumer protection laws governing financial institutions with more than $10 billion in assets. It also has supervision and enforcement authority for consumer protection laws over nondepository institutions offering financial products.
But without a director, the CFPB can’t yet exert its authority over the nondepository institutions. So, the focus for now is on financial institutions.
Also, the lack of a confirmed director at the bureau is keeping the CFPB’s regulatory floodgates closed—for now.
But three questions loom in 2012:
1. When will these floodgates open?
2. What will be the results when they do?
3. And how prepared will credit unions be?
Credit unions’ concern isn’t necessarily over the CFPB’s examination authority (even though the bureau may join NCUA during an examination). The concern has to do with the bureau’s authority to issue new regulations or amend existing regulations relating to consumer protection.
The bureau’s ability to expand or change credit unions’ regulatory requirements that govern loan and deposit products creates anxiety. Credit unions have little choice but to expend valuable financial and staff resources to understand and implement regulatory changes.
Credit unions must read the rules, develop new forms and disclosures, communicate with vendors, update policies and procedures, and hireand train staff.
As if that’s not enough, regulatory changes often result in lower credit union fee income. That’s what happened with the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 and the Dodd-Frank Act’s infamous Durbin amendment, which reduced the amount of interchange income financial institutions receive.
Even if some of the consequences are unintended, your board and management team must be aware of and plan for all consequences as you implement your compliance strategy.
NCUA’s Office of Consumer Protection
The CFPB isn’t the only agency overseeing consumer protection. NCUA’s new Office of Consumer Protection (OCP) also will play a role.
The OCP came about as a result of the Obama administration’s regulatory restructuring plan, titled “Financial Regulatory Reform: A New Foundation.” The OCP has two divisions: Consumer Access, and Consumer Compliance and Outreach (CCO).
The Consumer Access division oversees:
- New federal credit union charters;
- Charter conversions;
- Field-of-membership expansions;
- Share insurance conversions;
- Bylaw amendments; and
- Low-income designations.
The CCO division is responsible for:
- Consumer compliance policies, programs, and rule making;
- Interagency liaison on consumer protection and compliance issues;
- Fair lending examinations;
- Consumer call centers;
- Financial literacy and outreach programs; and
- Ombudsman duties.
In addition to the above duties, the CCO division processes member complaints filed against federal credit unions. Federal credit unions should be familiar with how this process occurs under the CCO. When a member complaint is submitted to the CCO, the CCO sends a letter to the supervisory committee chairman, requesting a response within 21 days from the date of the letter. When the CCO receives the supervisory committee response, it will review the response and ensure all issues are addressed.
Then NCUA will notify both the federal credit union and the member of one of five actions:
1. The federal credit union has resolved the issue to the member’s satisfaction and the case is being closed;
2. The federal credit union didn’t violate either a consumer protection law or consumer compliance regulation, and the case is being closed;
3. One of the twoparties initiated litigation, so the courts will decide the outcome and the case is being closed;
4. Upon further investigation, the issue doesn’t involve either a consumer protection law or consumer compliance regulation, so it doesn’t fall under NCUA’s purview; or
5. A violation of either a consumer protection law or consumer compliance regulation has occurred. CCO cites the specific violation, or the law or regulation, and required corrective action the federal credit union must take.
Next: Fair lending and home-secured loans
Fair lending and home-secured loans
In addition to dealing with consumer complaints, the OCP will continue to conduct fair lending exams of those credit unions that raise Home Mortgage Disclosure Act (HMDA) red flags. These red flags could include late HMDA filings, pricing outliers, preapproval programs, or high denial rates.
The OCP isn’t alone in its focus on fair lending practices. The Obama administration has created a special fair lending unit in the Justice Department and the CFPB is specifically charged with focusing on fair lending abuses (not just related to mortgages, but all loan products including credit cards and auto loans).
It’s important that credit unions review their policies, procedures, and practices related to the Equal Credit Opportunity Act, the Fair Housing Act, and HMDA to ensure they have no fair lending violations.
As for NCUA examinations and rule making, the focus will continue to be on issues related to risk, including interest-rate and concentration risk. NCUA will likely issue a final rule related to interest-rate risk as well as a proposed rule related to loan participations.
We also might see this year a revised version of the credit union service organization rule. Expect the revision to reflect a narrow focus of the rule.
Last year, the first of many regulatory changes to home-secured loans began to take shape. These included:
- Changes to loan originator compensation;
- The payment schedule disclosure for closed-end home loans secured by real property or a dwelling was replaced with an interest rate and payment summary table; and
- A Regulation Z rule, as well as NCUA guidance, issued on appraisals.
There will be additional home-secured loan changes in 2012. The CFPB spent a lot of effort in 2011 testing disclosures for closed-end, home-secured loans under its “Know Before You Owe” project (available at consumer finance.gov). CFPB will issue its findings from these tests in the form of a proposed rule for new closed-end, home-secured loan disclosures this year.
These new mortgage disclosures will combine the two separate early disclosure requirements under the Truth in Lending Act (TIL) and the Real Estate Settlement Procedures Act (RESPA) into one disclosure.
The CFPB also will propose a new disclosure to be issued at or near the closing of the loan for closed-end, home-secured loans. This disclosure also will combine TIL and RESPA requirements for disclosures required at closing including the HUD 1/1A settlement statement.
Mortgage rules that could be finalized in 2012 also include disclosures for escrow accounts and requirements for underwriting practices (also known as the “Ability to Repay” rule). The proposed escrow rule requires that credit unions provide consumers an escrow disclosure no later than three business days before loan closing for closed-end, home-secured loans. A disclosure would be provided to members who have escrow accounts, and a different form would be provided to those who don’t.
The proposed Ability to Repay rule also applies to closed-end, home-secured loans. The proposed rule requires credit unions to make a reasonable, good faith determination that a member would have a reasonable ability to repay the loan as of the closing date.
There are four compliance options under the proposed rule that would allow credit unions to satisfy the minimum underwriting standards. Credit unions must review underwriting policies and procedures to make sure they’ve considered the required factors and have the appropriate documentation.
Changes also have been proposed for deposit account regulations, including Regulation CC (the implementing regulation for the Expedited Funds Availability Act), and Regulation E with respect to remittance transfers. There also has been discussion of revising checking/share draft account disclosures to create a single-page disclosure of fees and terms.
Changes are occurring in all product areas, so part of your regulatory strategy must be to track new and amended regulatory requirements. Early tracking allows you to help shape the rule by commenting and to prepare in advance to make implementation of the final rule easier.
The advance preparation includes budgeting for additional resources (forms, staff, or training) that you might need for implementation. And in this fast-paced, ever-changing regulatory environment, credit unions must always look ahead to the next possible changes, while still focusing on your most important asset—members.
ANDREA STRITZKE is vice president of regulatory compliance at PolicyWorks, Des Moines, Iowa.