Compliance Challenge: Regulatory Blockbusters

August 1, 2008

Compliance Challenge: Regulatory Blockbusters

Over the July 4 weekend I saw both "Up the Yangtze" (a documentary) and "Ironman" (a genre I call "movies with big explosion budgets"). As I looked at everything I wanted to review with you this month, I thought "how would this play as a movie?"

Scene: The nation's leader stands among the ruins of Washington, D.C., after the asteroid hits the earth (visualize Morgan Freeman playing the president in "Deep Impact").

Or picture John Dugan, comptroller of the currency and chief regulator of national banks, standing in front of a meeting of the agency's compliance examiners recently, saying the following about the country's financial woes:

"We simply cannot take our eyes off compliance while we address safety and soundness. We know how to deal with credit issues, and we will work our way through these very difficult problems. What I don't want, though, is to finish dealing with the industry's safety and soundness issues only to find that we've allowed significant compliance problems to develop in their place…. The work you do serves important national interests."

His speech, "The Need to Stay Focused on Compliance Supervision," is interesting reading.

This would be a good story line to share with your management team on how closely compliance relates to safety and soundness, how compliance problems drain management time and resources, and, of course, how compliance serves important national interests!

CUBTRRA: The saga continues

Credits are rolling at the end of the "Lord of the Rings (Part I)," and you're thinking—or at least I was thinking—"Where's the rest of the movie?"


Or, you're reading the news stories about the House of Representatives passing some credit union regulatory relief provisions and thinking, "Does the story of the quest of CUBTRRA, the Credit Union, Bank and Thrift Regulatory Relief Act (H.R. 6312), have a happy ending?"

We'll have to wait for the sequel (Part II), which requires lights/camera/action by the Senate. The big unknown is whether Part II will be out this year.

CUBTRRA passed the House by voice vote. That means it's considered "noncontroversial." With the right alignment of the sun and the moon—and the House and Senate—the bill might become law.


Less than 30 legislative days remain for Congress to act before going home for the November elections, so it will take work and luck to get either the identical bill through the Senate or a similar bill through the Senate with a conference to work out the difference (or "ping-ponging" between the two chambers to resolve differences).

CUBTRRA contains about a dozen provisions affecting credit unions, including new opportunities to make business loans in low-income areas, new investment opportunities, and field-of-membership provisions. Here's a section-by-section summary of the provisions.

The one compliance-related provision that will jump out at you is Section 301, which would provide an exception to the distribution of your privacy notices annually. If your privacy policies and practices haven't changed over the prior year and your credit union doesn't share nonpublic personal financial information with affiliates, you wouldn't have to send out another notice.

We're anxious to see Part III of this regulatory relief saga—our own Credit Union of the Rings trilogy, which won't be ready for screening until 2009. Part III of regulatory relief will contain our highest legislative priorities, found in the Credit Union Regulatory Improvements Act (CURIA): Prompt corrective action reform and increasing the member business loan cap.

A mortgage too far

Scene: The "Poseidon" is upside down and adrift in the ocean. The last few survivors—every disaster movie has the obligatory child to be saved, typically by the 27-year-old, blonde bombshell nuclear scientist, but I digress—are braving challenge after challenge to find a way out.


Or, the country faces a housing meltdown and Congress is grappling with legislation to figure out how to rescue thousands facing foreclosure and upright the credit markets. The House has passed several housing-related bills, including one last fall that contained some Truth-in-Lending amendments.

In May, it passed the "American Housing Rescue and Foreclosure Prevention Act." And, the Senate is back at work (after failing to act before going home for the 4th of July) on its version of a housing bill.

Although they differ in significant details, both of these bills call for:

  • Raising the conforming loan limits permanently;
  • Launching a new Federal Housing Administration (FHA) program to guarantee the repayment of mortgages where borrowers are over their heads and the lender or investor agrees to write down the mortgage to something below the current appraised value of the house; and
  • Implementing a special tax credit for first-time home buyers and provisions that place a floor on the price drop in homes to bring some stability to mortgage lending.

Up to 400,000 families could benefit from this proposed program, but its success depends on a number of variables: lenders deciding to take the hit, investors being willing to negotiate, second lien holders being willing to walk away with little or nothing, someone being willing to refinance at the lower value, private mortgage insurance companies figuring out whether to pay out under their contracts with voluntary reductions, and so on.

And, only the people having real trouble making their mortgage payments—those most likely to have gotten in over their heads in the first place—can benefit from the proposed FHA program.

I bring up this legislation because mortgage reform legislation may be the last major financial bill bobbing out of Congress this year, and we have to keep a close eye on both the good and the bad that might be added. We're all interested in rescuing that little boy from having his home listed in foreclosure.

A Royale pain

Scene: A debonair James Bond sits in front of his computer in "Casino Royale" and logs onto an Internet gambling site. A big red alert pops up that reads: "Illegal, illegal!"


Or, in real life, a 20-something guy in a T-shirt and jeans writes a check to pay an Internet gambling loss and the U.S. government tells the credit union it's responsible for making sure that transaction doesn't take place.

The Unlawful Internet Gambling Enforcement (UIGE) Act of 2006 and the proposed implementing regulations issued by the Federal Reserve and the Treasury Department last fall are unworkable. Until now, I've been optimistic that sanity would prevail—meaning that either the law would be repealed or the agencies would be sent back to the drawing board.


At the end of June, the House Financial Services Committee considered a bill to put further regulatory action on hold and have the agencies come back to Congress with how they planned to define "illegal" Internet gambling. Unfortunately, committee action stalled on a 32-32 vote.

There's still hope that committee chair Barney Frank—who really doesn't like the 2006 law—will try again this month to get Congress to correct this regulatory mess. However, with the legislative clock ticking, I'm losing faith that sanity will prevail. But I do have some faith the agencies will continue to go really slow in finalizing UIGE Act regulations.

Coming attraction

The National Credit Union Administration (NCUA) has issued an "advanced notice of proposed rulemaking" to seek comments on what other changes it might make in the member business loan regulations. Specific proposals aren't on the table, but this is the time to come up with ideas on how the agency can broaden business lending within the confines of the current law.


Comments are due Aug. 25.

Just like you enjoy seeing great movies time and again, you can reread Compliance Challengesindex of Compliance Challenge questions, as well as a compliance articles from Credit Union Magazine going back to 1998 can be found on our compliance Web site.

As I thought of movie plots to associate with the issues credit unions face, they seem to have the common theme of being in the disaster genre (with a little James Bond thrown in). No comedies popped to mind, that's for sure. This must mean your compliance role equates to diverting disasters.

So, after facing this month's Compliance Challenge, take in a movie! I can recommend "Ironman." It's an "explosion movie" that actually has a plot.

On to this month's Compliance Challenge (for affiliated credit unions), which alerts you to one other issue coming down the pike, just to keep you reading.

Kathy Thompson is CUNA's senior vice president/associate general counsel of compliance and legislative analysis.