CHARTING THE FUTURE FOR SMALL CREDIT UNIONS – COMPLIANCE UPDATE November 5, 2013

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This summary is general in nature and for informational purposes only. It should not be construed or relied upon as legal advice or legal opinion. Should you have

any questions concerning this summary, please contact:

Charlotte Whatley, VP-Compliance Services

cwhatley@cucenter.org

1-800-842-1242, x348

Copyright © 2013

Massachusetts Credit Union League, Inc.

New Hampshire Credit Union League

Credit Union Association of Rhode Island

New England Credit Union Services, LLC.

845 Donald Lynch Boulevard

Marlborough, MA 01752

LOOKING BACK…

Policies - troubled debt restructuring, interest rate risk, concentration risk, foreclosure, collections.

FORM Changes – many disclosure forms were updated because of the transfer of rules to the CFPB. The correct regulator information can be a tricky thing on disclosures especially if you’re dealing with a state-chartered credit union.

Garnishment of Federal Benefits

BSA e-Filing

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LOOKING BACK – CONT’D

ATM Fee Disclosures – stickers versus on-screen disclosures. Fee Disclosures are now only required on the screen displays.

COPPA – rule changes to strengthen the privacy rights of children – July 1, 2013.

Regulatory Thresholds –

HMDA - $42 million

Reg Z/Reg M - $53,000

HOEPA - $625 or 8%

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ON-GOING COMPLIANCE

SSCRA – Protections offered to servicemembers especially in the area of collections and foreclosures.

E-Services/E-Sign – Do your account agreements and home banking agreements

match up?

What controls are in place to handle fraud?

Is your bond coverage up to snuff?

How do you handle joint owner access? (Privacy considerations)

Cyber-security – Fraud controls, DDoS

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ON-GOING COMPLIANCE – CONT’D

Emergency Response/Disaster Recovery/Pandemic Preparedness – in light of another major catastrophe

Focus on communication plans;

Ensure backups not only of data but also of personnel, worksites, equipment vendors;

Treat as “living” documents.

Vendor Due Diligence - Must have an effective process for managing the risks of those relationships.

Marketing – Social Media

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THE CONSUMER FINANCIAL PROTECTION BUREAU

Conduct rule-making, supervision, and enforcement for Federal consumer financial protection laws;

Restrict unfair, deceptive, or abusive acts or practices;

Take consumer complaints;

Promote financial education;

Research consumer behavior;

Monitor financial markets for new risks to consumers;

Enforce laws that outlaw discrimination and other unfair treatment in consumer finance.

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THE NEW MORTGAGE RULES – JANUARY 2014

There are seven new mortgage lending rules. The CFPB has a Small Entity Compliance Guide plus videos for each rule.

Ability to Repay/Qualified Mortgage

Higher Cost Mortgages and Homeownership Counseling

Escrow Requirements for Higher Priced Mortgages

Mortgage Servicing

Appraisals for Higher Priced Mortgages

Appraisal Report Rule (Reg B)

Loan Originator Compensation

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MORTGAGE RULES - RECAP

Ability to Repay and Qualified Mortgage Standards – Applies to all consumer-purpose, closed-end mortgage loans

secured by a dwelling. Includes closed-end home equity loans whether first or sub-ordinate lien (Not HELOCs).

Higher-cost Mortgage and Homeownership Counseling Amendments – All federally related mortgage loans (first and sub-ordinate

liens).

Applies if assisted by a federal agency or is intended to be sold to Fannie/Freddie or Ginnie.

Escrow Requirements – Applies to first lien on principal dwelling

Exceptions apply for credit union’s under $2 billion

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MORTGAGE RULES – RECAP – CONT’D

Mortgage Servicing –

Small creditor exemptions apply.

Disclosure and Delivery Requirements for Copies of Appraisals –

First lien closed-end mortgage loans.

Appraisals for High-priced Mortgage Loans –

Higher-priced mortgage loans.

Loan Originator Compensation

HOEPA Restrictions –

Higher-cost mortgage loans secured by a consumer’s principal dwelling (includes HELOCs).

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ABILITY-TO-REPAY CRITERIA

Creditors generally must consider eight underwriting factors: current or reasonably expected income or assets;

current employment status;

the monthly payment on the covered transaction;

the monthly payment on any simultaneous loan;

the monthly payment for mortgage-related obligations;

current debt obligations, alimony, and child support;

the monthly debt-to-income ratio or residual income; and

credit history.

Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.

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COMPLAINT RESPONSE PROCESS

The CFPB is expecting a credit union to have a formalized complaint process:

Policy

Dispute resolution process

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IN A NUTSHELL - ERROR RESOLUTION

Credit union must…

Investigate problems

If an error occurred….

Make the transaction whole

Give the member a refund

Follow-up in writing

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UNAUTHORIZED TRANSACTIONS

Regulation E’s provisions regarding the liability of a consumer for unauthorized transfers will apply to the account-holding institution; and

Regulation Z’s provisions will apply to a creditor in connection with unauthorized use of a credit card.

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DISPUTE RESOLUTION: POLICIES, PROCEDURES & RECORDKEEPING

Develop and maintain written policies and procedures designed to ensure compliance with all error resolution requirements.

Record Retention

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Small credit union definition increased this year to $50 million

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FILING FINANCIAL & OTHER REPORTS – EFFECTIVE JANUARY 1, 2014

Coverage – all federally insured credit unions.

What - All financial, statistical, credit union profiles, and other reports required by the NCUA.

How - All reports will be required to be filed electronically with the NCUA.

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LIQUIDITY & CONTINGENCY FUNDING PLANS – EFFECTIVE MARCH 31, 2014

Coverage – all federally insured credit unions.

For credit unions under $50 million -

Must maintain a basic written liquidity policy.

The policy must provide a framework for managing liquidity and a list of contingent liquidity sources that can be employed in emergency situations.

Must be approved by the credit union’s board of directors.

Action Item: Create a policy and present to BOD for approval prior to March 31, 2013.

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LIQUIDITY & CONTINGENCY FUNDING PLANS – CONT’D

For credit unions over $50 million:

In addition to a written liquidity policy credit unions must have a contingency funding plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls in emergencies.

Action items:

Create a policy and present to BOD for approval prior to March 31, 2014.

Establish and document a contingency funding plan prior to March 31, 2014.

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DORS – LETTER TO CREDIT UNIONS 13-CU-09

Documents of Resolution –

Designed to streamline the Examination Report.

Designed to set clearer expectations of examiners and improve the overall exam process.

Designed to create consistency.

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LOAN PARTICIPATIONS

Risk Retention Requirements - originating lender required to maintain 10% of participation.

Concentration Limits - Single originator limit - $5 million or 100% of net worth.

Single borrower limit – 15% of a credit union’s net worth.

Policies - Establish limits on amounts purchased by each loan type.

Cite concentration limits.

Due diligence.

Contracts - 9 factors.

Waivers

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TRAINING VIDEOS AVAILABLE - OSCUI

NCUA released a new video highlighting the training programs available to small and low-income credit unions.

These courses, developed and led by the staff in NCUA’s Office of Small Credit Union Initiatives (OSCUI), are designed to strengthen small credit unions.

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NCUA EXAMINATION FOCUS

Technology: Examiners will review how well CUs put risk-management controls into place when expanding the use of technology.

Balance sheets: Examiners will explore whether CUs are appropriately managing earnings and capital without adding undue levels of interest rate, liquidity and credit risk.

Operations: Examiners will look into CUs’ control of operational risks – and their use of internal controls.

Other concerns: NCUA will focus on CUs’ “unique risks associated with unconventional products” -- the agency provides as examples CU-funded benefit plans and private student loan programs.

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THE YEAR’S BUZZ WORDS

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FAIR LENDING – IT’S TIME FOR A QUIZ!

What law promotes the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age?

The Equal Credit Opportunity Act

What regulation implements Equal Credit Opportunity Act (ECOA)?

Regulation B

What agency has regulatory authority under ECOA?

The Consumer Financial Protection Bureau (CFPB)

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FAIR LENDING, CONT’D

What law changed regulatory authority under ECOA from the Federal Reserve Board to the CFPB?

The Dodd-Frank Wall Street Reform and Consumer Protection Act.

What federal agency has the lead role in administering the Fair Housing Act?

U.S. Department of Housing and Urban Development (HUD).

True or False: HUD has the authority to investigate allegations of discrimination against credit unions?

True!

True or False: The Fair Housing Act covers all transactions secured by a dwelling.

True! The Fair Housing Act covers all mortgage loans, including home equity loans.

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FAIR LENDING, CONT’D

What law requires lenders to report loan applications received annually? The Home Mortgage Disclosure Act (HMDA).

Which laws are reviewed for compliance during a fair lending examination? The Equal Credit Opportunity Act (ECOA), Fair Housing Act, and

Home Mortgage Disclosure Act (HMDA).

True or False: Credit unions’ marketing practices are not subject to review during a fair lending examination. False! Marketing practices should be reviewed closely.

What federal agencies have fair lending enforcement authority for credit unions? (there are four) The U.S. Department of Justice, NCUA, HUD, and the CFPB have fair

lending enforcement authority for credit unions.

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OTHER BUZZ WORDS…

UDAAP

Disparate Impact/ECOA

Deceptive Marketing

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CULTURE OF COMPLIANCE – CONSUMER COMPLIANCE OUTLOOK, SECOND QUARTER 2013 OUTLOOK

Institutions that treat compliance controls as an overlay — to be performed after the fact or fixed when the auditor comes through — miss the boat.

These institutions incur much higher compliance costs and find that the expense associated with maintaining compliance discourages the offering of new products and services.

The institution that operationalizes a culture of compliance functions much more efficiently and is able to provide a good variety of services to fulfill its customers’ financial needs.

(Source: http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/2013/second-quarter/perspectives-on-consumer-protection-conversation-with-

governor-duke.cfm )

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CULTURE OF COMPLIANCE, CONT’D…

How can compliance examiners’ activities foster this culture of compliance? The way we communicate can guide them either toward the

model of “compliance as a check box” or toward the model of “compliance as part of the way business is done.”

If our discussions with our supervised institutions focus on enumerating violations found, management’s response will be limited to correction of those violations after the fact. This kind of “gotcha” mentality only brings about temporary corrections of problems in isolation.

(Source: http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/2013/second-quarter/perspectives-on-consumer-protection-

conversation-with-governor-duke.cfm

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CULTURE OF COMPLIANCE QUESTIONS TO CONSIDER…

How does the responsibility for compliance flow from the board to the teller?

Who owns the compliance risk?

Is there a process for new products and rules?

Is the compliance function independent of the business units?

What are the communication channels among the business units, senior management, and the board?

Is compliance risk integrated into ERM?

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CONTACT INFORMATION: Charlotte Whatley, VP – Compliance Services

New England Credit Union Services, LLC

cwhatley@cucenter.org

800-842-1242 x348

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