Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/cuso/
Timestamp: 2019-04-19 02:51:17+00:00

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NCUA's Office of General Counsel (OGC) recently issued its third formal legal opinion of 2017. Dated September 26, 2017, the opinion letter concludes that the "individual policy" requirement in NCUA's fidelity bond rule does not prohibit a credit union from purchasing a fidelity bond that covers both the credit union and its credit union service organization (CUSO), provided the credit union owns at least 50 percent of the CUSO or the CUSO qualifies as a "nominee," as defined in the letter. See, NCUA Legal Opinion 17-0959.
Notably, the opinion represents a reversal from OGC's previous interpretations of the rule. Opinion 17-0959 supersedes two previous legal opinions on this topic issued in 2004 and 2014, respectively. See, NCUA Legal Opinions 04-0744 and 14-0311.
The Federal Credit Union Act (FCU Act) directs NCUA to require fidelity bond coverage for credit union employees who handle funds or collateral. See, 12 U.S.C. §1766(h). Part 713 of NCUA's regulations, which implements that provision, describes the fidelity bond and insurance coverage required for federal credit unions (the provision is also applicable to federally insured state-chartered credit unions by §741.221).
"[One] commenter was concerned that in [joint fidelity bond policies] a loss suffered by one or two of the joint policy holders could reduce the amount of coverage available for the other joint policy holders below the required minimum amount, i.e. two losses equal to the single loss limit of liability would exhaust the coverage available for all credit unions to zero even though some of these credit unions would not have suffered a loss. This commenter also noted a concern with the joint purchase of fidelity bond policies even when the policy purchased does not have an aggregate limit of liability. While it is true that a loss suffered by one credit union would not reduce the amount of coverage available to the other credit unions purchasing the policy, this commenter suggested that, when several credit unions purchase a policy in a group, they may not give adequate attention to providing for the specific risks faced by individual credit unions. Compromises might be made in coverage amounts that would not be made if the policy were purchased individually. In addition, this commenter argued that the joint policy holders might not adjust coverages in a timely manner because of the difficulty of doing so in a group purchasing scenario." See, 64 Fed. Reg. 28718, 28719 (May 27, 1999).
Based on these and other concerns, the NCUA Board clarified the rule to provide that a fidelity bond must be individually purchased by each credit union, but it did not define "individual policy."
In 2004, OGC was asked if a CUSO that provided management services for several credit unions could purchase a single fidelity bond with all its credit unions named as insureds. In opinion 04-0744, the office found that the joint bond was not permissible under §713.3(a), noting that "the principal reason for not permitting a credit union’s bond to cover additional insureds is to ensure that the coverage of the other insureds does not conflict with or in any way dilute the individual credit union’s required coverage."
In 2014, the office was asked to consider whether a credit union could include one or more CUSOs as additional insureds under its fidelity bond. Again, OGC opined that a federally insured credit union is required to obtain fidelity bond coverage under an individual policy, and could not include one or more CUSOs or other parties as additional insureds under its fidelity bond. See, NCUA Legal Opinion 14-0311. Citing the 2004 opinion and its rationale, OGC further noted that the requirement "prevents a claim against one insured from depleting coverage limits for the credit union."
In a departure from its position since 1999, OGC has now changed its opinion of the permissibility of certain joint coverage fidelity bond provisions. The reversal was precipitated by the office's recent review of bond forms approved by NCUA pursuant to §713.3(b), and the realization that several already-approved bond forms included joint coverage provisions. For example, some of the approved forms, which NCUA approved before the 1999 rule change, included nominee provisions, joint insureds provisions, and definitions of "insured" that include subsidiaries that are more than 50 percent owned by the insured. Given the "inconsistency between NCUA's approvals and [OGC's] legal opinions," the office now says that the "individual policy" requirement does not prohibit a credit union from covering its majority owned CUSO under its fidelity bond. A CUSO may also be covered if it otherwise qualifies as a nominee. However, joint coverage of non-majority-owned CUSOs or other entities continues to be impermissible. See, NCUA Legal Opinion 17-0959.
This change in position may lead to formal amendments or other revisions to the fidelity bond rule. The opinion notes that NCUA recently published a proposed regulatory reform agenda, which includes a recommendation to consider revisions to Part 713. See, 82 Fed. Reg. 39702, 39707 (Aug. 21, 2017).
Programming Note. NAFCU's offices will close at noon today and also be closed on Thursday and Friday in observance of Thanksgiving. We wish you all a safe and wonderful holiday. We'll be open and back to blogging on Monday. Happy Thanksgiving!
NCUA recently announced that CUSOs may begin their required annual reaffirmation with NCUA’s online CUSO Registry beginning on February 1. CUSOs have until March 1 to complete this mandatory process. This will be the first round of reaffirmations—NCUA’s CUSO Registry was first launched a year ago to implement changes made to the agency’s CUSO rule in 2013.
To assist CUSOs in complying with this annual requirement, NCUA will host a free 90-minute training webinar on the annual reaffirmation process this Wednesday, January 25 at 2:30 p.m. ET. Those who wish to learn how to update their CUSO Registry information for the upcoming annual registration period can register for the webinar here. The webinar will offer registrants the opportunity to ask NCUA staff questions about the annual registration process. Questions can also be sent beforehand to NCUA at WebinarQuestions@ncua.gov.
Don’t forget that the annual registration requirement is a contractual obligation of the CUSO; credit unions are not obligated to complete this process for their CUSOs. NCUA’s CUSO rule provides, among other things, that a credit union may invest in or loan to a CUSO only if certain conditions are met. One of those conditions is that the credit union must obtain a written agreement from a CUSO, before making an investment or loan to that CUSO, that the CUSO will directly submit annual reports to NCUA on an annual basis (a newly formed CUSO must file a report within 60 days of its formation). See, 12 C.F.R. §712.3(d)(4). Nevertheless, NCUA has made it clear that it will examine credit unions for their CUSO’s adherence to its contract and “credit unions may not make additional investments or loans to the CUSO until the CUSO satisfies the annual registration requirement.” See, NCUA 16-CU-02 (January 2016). As such, credit unions are expected to monitor for its CUSO’s compliance with the registration requirement as part of its ongoing due diligence. This can be accomplished with relative ease, since NCUA added a search feature to its registry in June 2016.
Since this is an issue that continues to pop up from time to time, and is raised by CUSOs and credit unions alike, let’s take this opportunity to revisit what it means to “primarily serve” credit unions or their members.
Under the CUSO rule, a “CUSO” is defined as “any entity in which a FICU has an ownership interest or to which a FICU has extended a loan, and that entity is engaged primarily in providing products or services to credit unions or credit union members.” It also includes a CUSO subsidiary, or “any entity in which a CUSO has an ownership interest of any amount, if that entity is engaged primarily in providing products or services to credit unions or credit union members.” 12 C.F.R. §712.1(d) (Emphasis added).
In addition, the rule imposes a customer base requirement for CUSOs: “An FCU can invest in or loan to a CUSO only if the CUSO primarily serves credit unions, its membership, or the membership of credit unions contracting with the CUSO. . .” 12 C.F.R. §712.3(b) (Emphasis added).
But how do we determine if an entity “primarily serves” credit unions or their members?
50 Fed. Reg. 10353, 10355 (March 26, 1986) (Emphasis added).
While NCUA purposefully did not define the term “primarily” in the regulation, in the past, the agency has determined that a majority, or 50 percent or greater, may be sufficient to meet the “primarily serves” requirement. See NCUA OGC Ops. 96-0741 (September 20, 1996); 01-0746 (August 7, 2001); 11-0642 (August 3, 2011).
But as every good Compliance Officer knows: The rule is the rule, except when it isn’t.
NCUA OGC Op. 96-1214 (January 22, 1997).
Thus, while in some cases a “50% or greater” standard may meet the “primarily serves” test for CUSOs, this is not always true. A number of variables must be considered, as noted in 96-1214, to determine if an entity meets the customer base requirement to qualify as a CUSO for the purposes of NCUA’s rule.
Clear as mud? For more information on the CUSO annual reporting requirements, be sure to register for Wednesday’s training webinar, or visit NCUA’s CUSO Registry webpage.
Many credit unions have discovered, just in the past few years, that being recognized as a Low-Income Credit Union (LICU) provided new and untapped benefits, such as an exemption from the MBL cap. More recently, many LICUs are discovering another designation can provide even more opportunities for strategic growth: the Community Development Financial Institution (CDFI) certification. Obtaining a CDFI designation can provide benefits such as grant funding, awards, and exclusion from certain rules, like the QM/ATR rule. This webcast will provide you with an overview of the certification process and specific examples of CDFI designation benefits.
On January 19, the Financial Crimes Enforcement Network (FinCEN) issued an advisory, FIN-2016-A001, to provide guidance on the list of jurisdictions identified by the Financial Action Task Force (FATF). The release of this advisory comes in response to FATF updating its list of jurisdiction with strategic Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) deficiencies.
FATF is an inter-governmental policymaking body that proposes international standards and policies to combat money laundering and terrorist financing. Since the late 1980’s, FATF has issued several recommendations that aim to protect the international financial system from money laundering and financing of terrorism risks. Moreover, FATF encourages greater compliance with the anti-money laundering standards. Most recently, FATF published two statements identifying those jurisdictions that are deemed to have “strategic deficiencies” in their anti-money laundering and counter terrorist financing regimes.
FinCENs advisory acknowledges FATF’s update and provides guidance for financial institutions engaging with listed jurisdiction. These jurisdictions appear in two documents: (1) “FATF Public Statement”, which consists of jurisdictions that are subject to FATF’s call for countermeasures or are subject to Enhanced Due Diligence due to their Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) deficiencies; and, (2) “Improving Global AML/CFT Compliance: On-going Process,” which consists of jurisdictions identified by FATF to have AML/CFT deficiencies.
Based on FATF’s recent changes, FinCEN is recommending that financial institutions impose countermeasures or consider the risk arising due to a lack of sufficient progress in addressing AML/CFT deficiencies in the countries of Iran and the Democratic People’s Republic of Korea. FinCEN is also recommending that institutions apply enhanced due diligence for the country of Myanmar. FinCEN notes, however, that the country of Aleria has made progress in addressing its FATF action plan. As a result, Algeria has been removed from the “FATF Public Statement” and now includes this jurisdiction in its “Improving Global AML/CFT Compliance: On-going Process” document. The list of these countries in this document include Afghanistan, Algeria, Angola, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Panama, Papua New Guinea, Syria, Uganda, and Yemen.
FinCEN instructs financial institutions to continue to apply countermeasures to protect against AML/CFT risks. For more information, credit unions should consult the FinCEN Advisory.
Greetings compliance fans! Today begins the initial registration period for NCUA’s CUSO Registry. The CUSO Registry is the online system through which credit union service organizations (CUSOs) will report information directly to NCUA. Some of you may be wondering what impacts the CUSO Registry will have on federally insured credit unions and what resources are available for compliance officers. This blog post covers some of these issues, while providing some background for those of you who may be new to this issue.
For those of you who may be new to compliance or may need a refresher, prior to investing in or lending to a CUSO, federally insured credit unions must obtain an agreement from the CUSO that it will submit annual reports directly to NCUA and, if applicable, the appropriate state supervisory authority. See, 12 C.F.R. § 712.3(d)(4). Newly formed CUSOs must file a report within 60 days of formation. Starting today, these reports will be submitted through NCUA’s CUSO Registry.
CUSOs engaged in complex or high-risk activities such as lending, information technology, custody and safekeeping, or investment management services for credit unions must report additional information specified in NCUA’s CUSO Rule. See, 12 C.F.R. § 712.3(d)(4), (5). Credit unions are prohibited from making new loans to CUSOs that fail to satisfy the annual registration requirement and will be examined for compliance with the CUSO Rule.
The rule makes clear that the obligation for the credit union is to obtain an agreement from the CUSO that it will register with NCUA prior to investing in or lending to the CUSO. The rule does not require the credit union to register the CUSO with NCUA. Instead, the credit union is required to monitor the CUSO to ensure that it has fulfilled its contractual agreement to register on the CUSO Registry.
A reminder that the CUSO regulation applies to all levels, or tiers, of a CUSO’s structure. This means that any subsidiaries in which the CUSO has an ownership interest are treated as CUSOs if they are engaged primarily in providing products or services to credit unions or credit union members.
A notice that beginning today, CUSOs can access the CUSO Registry and related training materials at https://cusoregistry.ncua.gov. Credit unions and CUSOs can also find additional information, including FAQs, the CUSO Registry User Manual, and several quick guides on the CUSO Registry landing page here.
June 1, 2016 – CUSO Registry search function becomes available to all credit unions and the public.
The full text of the letter can be found here. Additional information on credit unions’ responsibilities when involved with CUSOs can be found here and here.
DMDC Extends MLA Database Deadline. In response to a letter sent by NAFCU and other financial trades, DMDC agreed to extend the deadline to seek direct access to the MLA database until February 15, 2016. If you have any questions about this deadline or the database, please email Brandy Bruyere, NAFCU’s Director of Regulatory Compliance, bbruyere@nafcu.org.
An extension, for consistency, of the CUSO rule to all federally insured credit unions. Prior to this change in November 2013, rules governing CUSOs only applied to federal credit unions.
Account for its transactions in accordance with generally accepted accounting principles.
Obtain an annual financial statement audit by a licensed certified public accountant.
Does the service provided by the CUSO benefit the existing members of the credit union?
Does the CUSO conform to the requirement of primarily serving credit union members and not other interests or parties?
Is a legal opinion needed to determine permissibility of the proposed structure of the CUSO?
Is the investment in or loan to the CUSO a suitable avenue for revenue growth or expanded services for members?
Introducing Nolan! I have been absent from blogging for a while because my husband and I welcomed baby Nolan in early October. Nolan was 9 pounds, 8 ounces at birth, good thing he came a few weeks early! Here are a few photos of our little guy, including one with his best dog buddy, Lemmy.
Over the last several months, NAFCU’s compliance team has received a number of questions from our members who have experienced some confusion with the CUSO rule. Today, I’d like to share a real-life question we’ve received over a dozen of times, the response we’ve been providing to our members, and the clarification provided late last week by the National Credit Union Administration (NCUA). The purpose of sharing our members’ question is to illustrate why the confusion arose. I’ve also provided the response from NAFCU’s compliance team to our members, and although it is accurate, you’ll want to use and rely on NCUA’s clarification which is located in NCUA Letter to Credit Unions 14-CU-07 (discussed further below).
We do not invest in or lend to a CUSO, but we do have a CUSO that we do other business with. Do we have to amend our written agreement with this CUSO? NCUA Letter to Credit Unions 13-CU-13 states that credit unions are required “to ensure that the CUSOs with which they do business agree to provide certain information directly to NCUA and the state supervisory authority, as applicable, on an annual basis.” This statement seems to include all CUSOs with which a credit union does business and not just those that the credit union invests in or lends to.
NCUA’s Letter to Credit Unions 13-CU-13 appears to have caused confusion amongst credit unions by including language that is broader than that required by the regulatory text. NAFCU has received a number of inquiries from our members on this issue and we are looking into it.
In the meantime, although 13-CU-13 seems to indicate broader coverage of the requirement to amend written agreements between credit unions and CUSOs, the regulatory text of the CUSO rule is limited to those CUSOs with which the credit union lends to or invests in. Usually, the regulatory text prevails which would mean that the requirement to amend agreements applies only to those CUSOs the credit union invests in or lends to; however, we hope to see further clarification from NCUA in the near future to clear up some of this confusion.
“[T]here has been some confusion as to which credit unions must enter into a written agreement requiring a CUSO to submit annual reports. This letter clarifies that only those FICUs investing in or lending to a CUSO are subject to this part of the CUSO rule.
NCUA further clarifies this issue in Legal Opinion Letter 14-0502.
“You have asked for clarification of a provision in NCUA’s newly amended credit union service organization (CUSO) regulation. Specifically, you have asked if a federally insured credit union (FICU) receiving products or services from a CUSO must enter into a written agreement in which the CUSO is obligated to submit an annual report to NCUA even if the FICU does not have an investment in or loan outstanding to the CUSO. The answer is no. The amended CUSO rule requires only those FICUs investing in or lending to a CUSO to obtain a written agreement requiring the CUSO to submit annual reports.
The NCUA Board amended the CUSO rule on November 21, 2013. The new rule requires, among other things, a FICU to contractually bind a CUSO to submit an annual report to NCUA. Specifically, new §712.3(d)(4) states: “A FICU must obtain a written agreement from a CUSO before investing in or lending to the CUSO” that the CUSO will “annually submit . . . a report directly to NCUA and the appropriate state supervisory authority, if applicable.” (Emphasis added).
In short, the confusion (regarding the above question) has come to an end. A credit union does not need to amend written agreements with all CUSOs with which it does business; rather, it must amend written agreements with those CUSOs it invests in or lends to.
First Vacation with the Family. Last weekend, my husband, children and I took our first vacation together as a family. We went to Virginia Beach and had a fabulous time. Here are some photos of the fun we had!
Recently, JiJi blogged about the NCUA’s adoption of a credit union service organization (CUSO) final rule. NCUA has issued Letter to Credit Unions 13-CU-13, outlining the primary changes to the CUSO-related rules, and providing an overview of what credit unions need to do as a result of the changes. These regulatory changes will become effective June 30, 2014. CUSOs will begin submitting reports to NCUA under new section 712.3(d)(4) when NCUA’s reporting system becomes fully operational by December 31, 2015.
For complete details, Letter 13-CU-13 is available in its entirety here. Also note, NAFCU’s Regulatory Affairs team will issue a Final Regulation summarizing the key aspects of this rule. Once it is available, it will be located here.
NAFCU Webcast – NCUA Update: Looking Ahead to 2014. On Tuesday, December 10th, from 2:00 – 3:30 p.m. ET, NAFCU’s Regulatory Affairs team will be discussing NCUA’s recent and expected actions for 2014, with a special focus on the newly-issued CUSO rule. Registration is still open - Sign Up Today! Remember, NAFCU's webcasts are available to anyone and everyone. On-demand webcasts are archived and available for up to 12 months after the live broadcast.
During last week’s open board meeting, the National Credit Union Administration (NCUA) took several important actions, including unanimously approving the final Credit Union Service Organization (CUSO) rule.
Effective June 30, 2014, the final CUSO rule will require CUSOs to annually provide basic profile information to the NCUA and the appropriate state supervisory authority. CUSOs engaging in certain complex or high-risk activities, such as credit lending, information technology and custody and investment management, will be required to report more detailed information, including audited financial statements and general customer information. The reporting burden is on the CUSO, not the credit union, but credit unions will need to update their written CUSO agreements to include the new requirements in the final rule.
- Obtain an annual financial statement audit by a licensed certified public accountant.
A new requirement that CUSOs must agree to report information directly to NCUA and to the state regulator, as applicable. CUSOs that offer complex or high-risk services—like credit and lending; information technology; and custody, safekeeping and investment management services—must report more detailed information, including financial statements and general customer information.
Any subsidiary in which a CUSO has an ownership interest in any amount will be subject to the rule if the subsidiary is primarily engaged in providing products or services to credit unions or their members.
CUSOs will begin submitting reports to NCUA under new section 712.3(d)(4) when NCUA’s reporting system becomes fully operational by December 31, 2015.
You can find the final CUSO rule here. Also note, NAFCU’s Regulatory Affairs staff will issue a Final Regulation summarizing the key aspects of this rule. Once it is available, it will be located here.
Approval of a 2014 Overhead Transfer Rate of 69.2 percent to fund the Share Insurance Fund’s activities.
For detailed information on all actions taken during the open meeting, take a look at this message from NAFCU and NCUA’s Board Action Bulletin.
Earlier this month, FinCEN issued a notice and reminder to non-bank residential mortgage lenders and originators (RMLOs) to remind them of their new compliance obligations under FinCEN’s regulations. On February 14, 2012, FinCEN published a final rule requiring RMLOs to develop an anti-money laundering (AML) program and report suspicious activity. The effective date of this rule was April 16, 2012, and the compliance date was August 13, 2012.
(i) Residential mortgage lender. The person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement. The term “residential mortgage lender” shall not include an individual who finances the sale of the individual's own dwelling or real property.
RMLOs are also required to file suspicious activity reports (SARs) but they are not required to comply with currency transaction reporting (CTR) requirements. (Note: these large currency transactions remain subject to reporting on FinCEN Form 8300).
In addition to the notice and reminder, FinCEN has created a page on its website with more information for RMLOs subject to the rule.
This extended delay (and, hopefully, complete rescission) of these proposals follows NAFCU's advice in our comment letters to NCUA (CUSO Comment Letter and Loan Participation Comment Letter).
NCUA Regulatory Review. NAFCU is still looking for comments for our Comment Letter to NCUA on their annual regulatory review of 1/3 of their regulations. NAFCU's Regulatory Alert (12-EA-12) has additional details. Feel free to send along any and all suggestions for changes to NCUA's regulations to reduce the regulatory burden on credit unions. Comments are due to NAFCU by July 6th and to NCUA directly by August 3rd.
Q&A with NAFCU's Compliance Team. The July/August issue of NAFCU's The Federal Credit Union magazine has a lengthy Q&A with JiJi, Bernadette, Mike, Shari and myself. If you always wanted to put a face to the folks writing the blog posts or helping with compliance questions - here is your chance! Enjoy!
NCUA will be discussing its final rule on credit union service organizations (CUSOs) at its next Board Meeting on June 21. As you may recall, the proposal has been around for about a year, but with the 290 or so comment letters received, including one from NAFCU, finalizing the proposal has required NCUA to take a look at some of its provisions as initially written in the proposal. The likelihood of potential changes to the original proposal stems from the fact that a large number of commenters opposed many of the agency’s proposed provisions.
Would extend NCUA’s regulatory reach over CUSOs by requiring CUSOs to submit financial reports annually to the NCUA and state regulators. The reports would provide the regulators with financial information, a list of services the CUSO provides, a customer list, and information about the CUSO’s board and management.
Would extend the CUSO rule, including the proposed financial reporting requirement, to CUSO subsidiaries.
Would extend a number of provisions in the CUSO rule that only apply to federal credit unions to federally-insured state chartered credit unions (FISCUs) as well.
In a recent Washington Post article, NCUA Chairwoman Debbie Matz stated that some items for consideration before the proposal is finalized is the frequency of the reporting requirements and also giving CUSOs 60 days, rather than the proposed 30, to register with the agency. Other considerations will relate to placing parameters or limitations on the investment cap.
For more details on what the original proposal entails, here is the proposal from last summer. Affected sections of NCUA’s rules and regulations include Parts 712 and 741.222.
Last week, the CFPB issued a proposed rule to define "larger participants" in two consumer financial services markets. The proposal targets the debt collection and consumer reporting markets. Earlier this year, the CFPB issued a Notice and Request for Comment on how best to define "larger participants" and on which markets to focus on.
The Notice and Request for Comment was issued when the CFPB did not have a Director. Without a Director, the CFPB had been unable to regulate nonbank institutions - including defining "larger participants." Now that the CFPB has a Director, it can move forward with its NonBank Supervision Program.
Dodd-Frank gave the CFPB authority to supervise any nonbank entity in three markets: (1) mortgage origination and servicing; (2) payday lending; and (3) private education lending. The CFPB has the ability to supervise entities operating in these markets regardless of their size.
For other consumer markets, the CFPB must define "larger participants" and their recent proposed rule for the debt collection and credit reporting markets was their first steps in that direction.
The CFPB still has the ability to define "larger participants" in these markets in the future. The CFPB would need to propose a separate proposed rule to cover these markets (or add new markets) in the nonbank supervision process.
March NAFCU Webcasts. NAFCU has a pair of webcasts coming up in March that might be of interest. Remember, NAFCU's webcasts are open to everyone. They are also available for viewing for a year after the original live webcast. Thus, if you and your colleagues can't make the live webcast - you can still view the content at a later date. This "on-demand" feature also works great for sharing the webcast with others at your credit union who could benefit from the information.
Wednesday, March 7, 2012: Preparing for the Heightened Scrutiny of CUSOs featuring Katherine Weber of The Weber Law Firm.
Thursday, March 15, 2012: Powers of Attorney and Subpoenas - The Risks, Abuses and Potential Liabilities of Credit Unions featuring Andy Keeney of Kaufman & Canoles.
The full listing of NAFCU's live and on-demand webcasts can be found here. Additionally, we are always looking for webcast ideas that would be useful to credit unions. If you have ideas or suggestions, please email us at compliance@nafcu.org.
NCUA recently published two legal opinion letters. One discusses a credit union service organization's (CUSO) ability to lease property to credit unions and the members of affiliated credit unions. The letter, NCUA Legal Opinion Letter 11-0642, is very detailed and fact specific so be sure to view the full letter.
"We do not consider IRS treatment of an expense to be determinative of whether a loan qualifies for MBL treatment under NCUA Part 723. Similarly, the fact that an item may be purchased for a non-business purpose is not controlling. For example, a $50,000 loan to purchase an automobile for use as a taxicab or package delivery truck is an MBL and not a personal loan. It is the loan’s actual purpose and amount, absent any applicable exemptions, that determine whether the loan is an MBL.
It is our view the instrument loan provides a means for your professional musician members to purchase a musical instrument for use in their trade as paid musicians. The musical instrument is a tool of the musician’s trade and is acquired for use in a business capacity. Therefore, where a loan to a member for this purpose totals $50,000 or more when aggregated with other such loans to the member, the loan is an MBL and subject to Part 723." (emphasis added).
Michigan Alert: Perhaps not the most scientific poll - but Good Morning America viewers did name Sleeping Bear Dunes on Lake Michigan the "Most Beautiful Place in America."
If you get a chance to visit northern Michigan, you will not be disappointed.
The CFPB now has authority for the consumer laws and regulations. This means they are the agency with authority to interpret Regulation Z; the Fair Credit Reporting Act; the SAFE Act regulations; Regulation B; Regulation E; Truth in Savings regulations and the list goes on.
Unfortunately, this is leaving financial institutions with a lot of uncertainty. Let's use a concrete example - the recent clarifications to the Credit CARD Act - implemented in Regulation Z.
Credit unions below $10 billion in assets will be examined by NCUA.
So, we have one agency finalizing a regulation but authority transfers to a new agency soon after and a third agency examines institutions.
I know the paint isn't even dry on the CFPB - but I guess I was hoping the CFPB would be providing some guidance to the industry. Currently, their webpage is completely consumer focused with three guidance documents (none clarifying existing requirements) tucked on the very bottom of the page.
NAFCU's issued Regulatory Alerts on the CFPB's Disclosure of Records and Information proposal as well as NCUA's Credit Union Service Organization (CUSO) proposal. Both can be found here.
We've also issued our Regulatory Final on NCUA's interim final rule for Remittances under 12 C.F.R. 701.30.
I may have missed the 100 day countdown to the wedding - but I didn't miss the 30 day countdown to college football - specifically Michigan football (YouTube) - yesterday. This doesn't reflect my priorities, however. I will continue to argue it is extremely difficult to track 100 days when months have different number of days.
My brothers and I at the 2006 Michigan-Wisconsin game.
If you are not a Michigan fan - you are still welcome at the Big House. You just might not have as good of seats (and you will be a bit outnumbered).
Proposed CUSO Rule. At last Thursday's Board meeting, NCUA introduced a proposed rule regarding CUSO's. If your credit union works with a CUSO (or CUSOs), this is an issue to follow. The proposed rule would require CUSOs to file financial reports directly with the NCUA and the appropriate state supervisory authority and it would require any CUSO subsidiaries to follow rules and regulations applicable to CUSOs. Additionally, it would implement investment limits for federally-insured state-chartered credit unions that are "less than adequately capitalized." The proposed rule can be found here.
CFPB Reform? The House passed HR 1315, The Consumer Financial Protection Safety And Soundness Improvement Act of 2011, late last Thursday. It would replace the CFPB director with a 5-person commission and allow the Financial Stability Oversight Council to challenge the CFPB with a majority vote rather than the 2/3 vote currently required. The bill would of course have to pass the Senate and be signed by the President. You can find more on this in this NAFCU News item.
Hot Dog. So, the members we've talked to this past week have been asking us just how hot is it in DC? Well, the picture below should give you a good idea (I cannot take credit for the picture - that came to us from our fearless leader Fred Becker, or rather, his better half). Some of you have been experiencing temperatures just as hot, if not hotter, so stay cool everyone.
NCUA LOL. NCUA has issued a legal opinion letter that discusses the CUSO customer base issue. For a credit union to be able to invest in a CUSO, that CUSO must primarily serve credit union members. As NCUA points out in the letter there is no bright line test for this "primarily serves" requirement. The letter notes some of the factors to be considered and expresses NCUA's stance that the requirement is ongoing throughout the credit union's investment.
FRB. Yesterday, the Federal Reserve released two press releases regarding annual dollar amount adjustments. The first is in relation to HOEPA loans (also known as high-cost loans or section 32 loans). The Fed is required on an annual basis to adjust the dollar amount of the fee-based trigger. For 2012 that dollar amount will be $611. As the press release notes, this does not affect higher-priced mortgage loans, which are determined using a different rate-based trigger.
Second, the Federal Reserve has announced the exemption threshold for Regulations M and Z. For 2012, the threshold will be $51,800, meaning that leases/loans at or below $51,800 will be subject to Regs M/Z (note that private education loans and mortgage loans are subject to Reg Z regardless of amount).
Maybe it's all of that compliance training, but our blog readers sure do notice the small details. A couple of weeks ago I quietly changed my name, but it didn't get past you guys. Yes I did get married and I truly thank you all for your well wishes! We were actully married this past October in my home state of Ohio. We took a chance on the weather for an outdoor ceremony and got lucky with a gorgeous sunny weekend. I've had many requests for pictures over the last few months so here we go - I had a hard time picking just a couple to capture the day but here's my best shot.
Each morning, there is a green coating of pollen on my car.
It is very hard to find nasal decongestant at the local pharmacy.
Now, on to the compliance stuff.
A 2009 FDIC financial institution letter that outlines exactly what should be on the ATM.
(d) Exception for damaged notices. If the notice required to be posted pursuant to section 1693b(d)(3)(B)(i) of this title by an automated teller machine operator has been posted by such operator in compliance with such section and the notice is subsequently removed, damaged, or altered by any person other than the operator of the automated teller machine, the operator shall have no liability under this section for failure to comply with section 1693b(d)(3)(B)(i) of this title.
I always forget about that one. Hat tip to Bill, for reminding me of that restriction. Mahalo, Bill.
CUSOs. There's been a good deal of compliance "internet chatter" about NCUA examinations and CUSOs. If your credit union has a CUSO, does that CUSO have its own business plan? Its own BSA risk assessment and anti-money laundering program? Does your credit union's board have a clear picture of the various risks involved with the CUSO's activities? These questions appear to be popping up during exams. To be honest, the questions don't appear to be all that unreasonable.
Editor's Note: NAFCU follows the Federal Government's operating schedule. Due to an ice storm, Los Federales are under a "2 hours delay." NAFCU will do the same, opening at 11 a.m. (EST) today.
Many credit unions are rethinking how they do their business and who they do their business with. Many credit unions have found out that a credit union service organization, or CUSO, might be just the thing. CUSOs can be a great way to better serve a credit union's membership, either as a business partner or the credit union's affiliate.
The credit union and CUSO must be held out to the public as a separate enterprise.
The federal credit union may not dominate the CUSO to the extent that the CUSO is no more than a department of the credit union.
In addition, before a credit union may invest in a CUSO, the federal credit union must obtain written legal advice as to whether the CUSO is structured in a way that preserves legal separateness.
The section isn't that long, so if your credit union is interested in establishing or investing in a CUSO, it is well worth a read.
Not too long ago, I shared my general outlook for 2011. That post dealt more with general trends. But we do expect some specific things. Regarding NCUA, look out for the following in 2011.
Regulations on interest rate and concentration risks. If you've been keeping up with the Material Loss Reviews issued by NCUA's Office of Inspector General, you already know that concentration risk has played a huge role in credit union failures. And that risk affects more than just credit unions. I was at a meeting recently where an OTS and OCC official both agreed that concentration risks played a role in every major bank failure as well.
Member business lending. Rather than a major overhaul, look for NCUA to incorporate guidance documents into the regulation.
CUSOs. NCUA will ramp up its focus on CUSOs, and they may seek examination authority.
Examinations. NCUA will overhaul its examiner's manual. This is one process to track closely. In my view, the examiner's manual is a massive guidance document that can affect your operations and NCUA examinations. For that reason, it is very important to see how they change it.
This and That. NCUA may also overhaul its investment rule (Part 703) and it may direct examiners to review new credit union products/services at each exam.
Keep in mind that we can't say for certain that NCUA will act on any one of these issues. But based on our conversations with NCUA officials, these are some of the areas of interest. Stay tuned!
Earlier this week, the Federal Reserve issued a proposed rule designed to (in my own words) shut down a few loopholes found within Regulation Z's rules for credit cards. The rule does three main things.
If you waive interest charges, such a practice is deemed to be a promotion and will need to follow promotion requirements. Some credit card issuers were planning to manage credit risk by charging a member, for example, a 16 percent APR. But as long as the member would pay on time, the issuer would waive 3 percent of the APR. So, the member would have, in effect, a 13 percent APR credit card. If the member slips up, the issuer would revoke the benefit. This proposal says that such a practice is a promotion, so you have to give them a firm time, not less than six months, for how long the "interest waiver" will be in place, and what the rate will be after that. You won't be able to end promotions simply because a card holder makes one late payment, for example. In addition, the proposal clarifies that existing balances earned under a waiver promotional program are protected at the lower balance, unless the borrower becomes more than 60 days delinquent.
Under the proposal, application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. The Fed gives a good example: "Because the total amount of these fees cannot exceed 25 percent of the account's initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening." I don't think that this is necessarily bad for credit unions. This clarification makes it much harder for credit card "sharks" to offer these fee-heavy credit cards. That makes our credit cards more attractive.
Finally, if the proposal goes final in its current form, when you evaluate a consumer's ability to make the required payments before opening a new credit card account or increase the credit limit on an existing account, you'll have to consider information regarding the member's independent, individual income, rather than his or her household income. That shouldn't be a big deal, but it could trigger a change to your policy and procedures.
This is a proposal, so these proposals may be tweaked when the Fed issues a final rule.
While the proposal tackles the three main issues noted above, it addresses quite a few other issues as well. It clarifies what would be considered a credit card and charge card, and it addresses employee preferential rates. If your shop offers credit cards, you'll need to work through the whole rule. NAFCU is preparing a Regulatory Alert on the Fed's proposal, so stay tuned.
NCUA holds its NCUA Board Meeting today. They're addressing their RegFlex regulation and its Merger Partner Registry, among other things. The draft board items will be available this morning here.
The Fed's Outlook Live seminar series will be offering a free webinar on HMDA and CRA reporting, to be held November 17th. Hopefully, they'll hit the HMDA stuff first.
NCUA has issued Legal Opinion Letter 10-0856 to clarify that, for purposes of NCUA's rules and regulations, a CUSO may serve as a loan broker for loans used to finance the purchase of New York City tax cab medallions. NCUA stresses, though, that other laws and regulations may apply.
Last week, NCUA issued Legal Opinion Letter 08-0302 (May 1, 2008). You may access it here. In the guidance, NCUA clarified how a CUSO may provide the "direct experience" needed under NCUA's member business lending regulation and further discussed "conflict of interest issues" surrounding member business lending.
In the legal opinion letter, NCUA clarified that a credit union may use the services of a CUSO to satisfy the direct experience even though the CUSO may not be independent of the transaction. That being said, NCUA appeared to find issues with a specific fee arrangement between a credit union and its CUSO.
As always, I recommend that you read the letter in its entirety, especially if your credit union does member business lending.
The Official Advertising Statement. NCUA is looking at proposed changes to Part 740 of its rules and regs. From our sources, the change doesn't sound major, but it might affect credit union advertising.
NCUA is looking at proposed changes to Parts 712 and 741, which will affect credit unions with CUSOs.
NCUA will also look at proposed changes to Parts 701 and 705 of its rules and regs to clarify the definition of "low-income."
There are other minor items on the agenda, which you can access here.
As I noted last week, NAFCU recently held its annual Regulatory Compliance School in Alexandria, Virginia. 123 attended. 76 sat for exams. Hats off to them all! Here are a few photos from the event.
NCUA reviews all regulations every three years to “update, clarify and simplify existing regulations and eliminate redundant or unnecessary provisions,” in compliance with IRPS 87-2, Developing and Reviewing Government Regulations. The Office of General Counsel reviews one-third of the regulations each year, identifying those we think should be amended.
Those are fairly meaty regulations. Stay tuned.
The First Annual NAFCU Compliance Blog Holiday Decoration Contest winner is "Blue Christmas." First of all, you have to appreciate people that decorate themselves. Also, how can you argue against the King? For all of you who participated, thank you. Thank you very much.
For those who are calling me today, here's a good barometer of my mood: the score of Saturday's Steelers-Jags game. Hint: I'm a Steelers fan.

References: §1766
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