Posts filed under ‘Compliance’
You can never have too much information, especially if your job is to help keep your credit union on the straight and narrow. When I started on my compliance journey, one of the greatest resources that I used, and continue to use to this day, were examination manuals.
Recently, federal examiners released an updated lending examination manual and because it includes the pending integrated mortgage disclosure requirements, it is well worth your read. For example, Section V-1.9 contains a great chart to answer the age old question of what costs should be included in mortgage finance charges. What these manuals do is provide concise but informative summaries on the issues that your examiners will be reviewing when they come into your credit union. Unfortunately, New York State’s Department of Financial Services does not have its manual available on its website. Perhaps that is something that can be addressed in the future. Even if you don’t do compliance, but just need to get a quick overview of a trending compliance issue, these manuals are a great place to start.
Another OCC resource to check out is the OCC’s semi-annual report on banking trends. Although many of the risks it highlights are hardly surprising, it is still worth taking a look. Like the NCUA, the OCC continues to be concerned with the usual suspects of evolving cyber threats, the temptation to relax underwriting standards too much as competition for loans heats up, and of course, interest-rate risks. Like their credit union counter parts, the OCC is concerned that smaller institutions in particular – those with less than $1 billion in assets – are still stretching out their investments too long in the search for higher yield. One day the examiners will be justified in this concern, I’m just not sure in what future decade.
Incidentally, one interesting little factoid that I pulled from the report has to do with auto lending. According to the OCC, 60% of loans originated by banks in the fourth quarter of 2014 had a term of 72 months or longer. In addition, the OCC is becoming concerned with collateral advance rates. It reports that the average loan to value ratio for used auto loans was 137%. In addition, loan to value ratios for borrowers with credit scores lower than 620 averaged 150%. Statistics like these justify the increased scrutiny that auto lending is getting from New York State Legislators and regulators.
Epilogue: DOL Posts Overtime Proposal
As expected, the U.S. Department of Labor formally posted proposed regulations increasing the salary threshold for employees to be considered exempt to $50,400. When the proposal came out, the Association staff HR guru Chris Pajak and I looked at some industry-wide numbers and this proposal could have a huge impact on many credit unions. For instance, many of the CEOs of the smallest credit unions have salaries hovering right around $50,000. The same is true for many of the people you probably consider exempt employees, such as your teller supervisors and your compliance directors. Even if these employees don’t typically work overtime, the regulations mean that if you currently don’t track the hours these employees work, you’re going to have to start.
One aspect of the proposed regulations that I haven’t talked about includes an exception for “highly compensated employees (HTE).” As a very general rule, if an employee receives a base salary of at least $23,000 but receives compensation of at least $100,000 and performs at least one of the functions of an exempt employee, then that employee is exempt from overtime pay requirements. The DOL is proposing to increase the HTE threshold from $100,000 to $120,000.
Epilogue: My Big, Fat Greek Default
Despite a last second request for emergency credit, Greece officially defaulted on a debt payment due to its international creditors last night. The next big date to look for is July 6, when the Greeks hold a referendum on whether or not to accept the latest loan bailout requirements.
Greece’s troubles are already having an impact on our economy. The stock market has tumbled, bond prices are gyrating, and with corporate profits declining in the second quarter it appears that those who thought that the economy was gaining momentum were, once again, overly optimistic.
On paper, the NCUA’s proposed shift away from a prescriptive MBL framework to a principles-based framework is everything credit unions could have hoped for and more. It does away with mandates like the two-year experience requirement and instead requires that credit unions that have $250 million or more in assets or that actively engage in MBL lending have detailed policies and procedures. But my guess is that while many credit unions will find the changes a welcome relief from certain aspects of compliance; others will soon be longing for the good old days of detailed MBL regulations. Here is why.
- Most importantly, with great power comes great responsibility. The changes give responsible credit unions greater flexibility on the assumption that credit union boards and senior management have the expertise to properly administer complex MBL programs. On a practical level, your credit union should maintain many of the constraints existing regulations already impose on them. All that NCUA is allowing you to do is responsibly modify those policies to reflect the unique attributes of your credit union.
- Credit unions really won’t know how much flexibility they have until they start seeing the guidance from NCUA that will be used as the basis for future examinations. Take a look at some previous guidance issued by the NCUA and you will soon realize that they can be just as prescriptive as regulations but without the benefit of having gone through a comment period as is required of proposed amendments.
- Examiners will also have more flexibility. One of the most common refrains of credit unions is that there is too much inconsistency among examiners. A principles-based system could produce even more confusion. If the system works properly, examiners will justifiably ask tough questions to assess a credit union’s due diligence. For example, it is appropriate for an examiner to ask what criteria they use in assuring that their MBL staff is qualified. It is not appropriate for an examiner to confuse his or her beliefs as to what constitutes the “best criteria” with the only safe and sound way of making MBL loans.
- Principles-based regulation is not without its risks. Whereas your erstwhile compliance officer can now go to her erstwhile CEO and say “You can’t make that loan because it violates an NCUA regulation,” under the principles-based approach she can only say “You shouldn’t make that loan because it violates our lending policies.” When times are good, bending of the rules won’t matter; but if we learned anything from 2007-08 it’s that we usually won’t know that the good times have ended until it’s too late.
- The proposal hastens the divide between big and small credit unions. Credit unions with $250 million or more in assets will have to implement detailed policies. Those with less than $250 million in assets that are not regularly originating MBL loans will not. On a policy level, this makes sense. But in the name of mandate relief, the industry is willingly going along with proposals that divide big and small credit unions more effectively than bankers ever could. Every time the industry agrees to further divisions along asset lines, it is making it that much easier for Congress to one day tax larger credit unions.
There are two approaches to being a caddy of a professional golfer. One time I went to the Woman’s US Open on Long Island and was surprised by how involved some of the caddies were, not only in picking out clubs but in helping to position some of the world’s best players before they shot. They did everything but swing. This is a prescriptive approach to caddying: intricately lay out every step taken to insure the best results.
Then there is a principles-based approach. The caddy recognizes that he is simply assisting someone who already knows what he is doing. He hands out the proper club and might suggest a putting line but you hardly seem him in the picture. His goal is to stay out of the way of his charge’s proper execution.
On Thursday, the NCUA not only proposed radical revision to its Member Business Loan (MBL) regulations, but also a radical revision of how it regulates MBL activities. Specifically, NCUA is proposing to shift from a prescriptive approach to a principles-based approach. This means that many of the nettlesome provisions of the MBL loan process will be eliminated. Those credit unions most actively involved in MBL loans will instead have to have detailed policies and procedures that are unique to their membership and lending practices. Examiners will judge these practices against guidance developed by NCUA. (http://www.ncua.gov/about/Documents/Agenda%20Items/AG20150618Item6b.pdf)
For the record, I think it’s a great and original idea that is well worth trying, but whether it ultimately has a positive or negative impact will vary widely based on the competency of individual credit unions and how much flexibility credit unions in general are given by examiners. Some credit unions will relish the increased flexibility; others will find the lack of specific bright line rules less helpful. In today’s blog, I’m going to go over the positives of the proposal and in tomorrow’s I will outline the potential negatives.
Just how radical is this proposal? The amendments clarify that the MBL cap is a multiple of a credit union’s net worth requirements, not a fixed percentage of assets. Another part of the proposal that could provide MBL cap relief has to do with the introduction of a commercial loan category. Commercial loans are loans that wouldn’t be counted against a credit union’s MBL cap. For example, under existing regulations a mortgage to purchase a second home that is not the borrower’s primary residence is an MBL (assuming the mortgage is for at least $50,000). Such loans would be classified as commercial loans and not counted against the MBL cap. The idea closely tracks NCUA’s Risk-Based Capital proposal.
But wait . . . there’s more. Currently, there is a host of concentration limits placed on MBL loans and a corresponding list of available waivers. The proposal would do away with seven such limits and waivers. This means, for example, that credit unions would no longer have to get personal guarantees for their loans; would no longer be subject to a specific loan to value ratio and would no longer have to have someone with at least two years of experience overseeing your MBL program.
If you participate out portions of your MBLs, another change has to do with the definition of “associational borrowers.” Current regulations limit how much money can be lent to any one such borrower and by proposing a narrower definition your credit union will have greater flexibility in making and selling loans.
Okay, you ask, so what is the catch? In place of the existing prescriptive regulations, credit unions will have to have detailed policies explaining why they structure their MBL programs the way they do.
The good news is that you no longer have a regulatory requirement to get personal guarantees when you make MBL loans. The bad news is that your policies and procedures better explain the circumstances under which the credit union grants such loans. The good news is your credit union will no longer have to have someone with two years of MBL experience. The bad news is it will need policies and procedures outlining the minimum qualifications of its MBL employees. Examiners will be the ultimate arbitrators of your efforts.
Credit unions with both assets less than $250 million and total commercial loans less than 15 percent of net worth that are not regularly originating and selling or participating out commercial loans would be exempted from creating and implementing these more involved procedures. Still this new approach means big responsibilities for larger credit unions and their boards. More on that tomorrow.
I have some good news this morning. CFPB Director Richard Cordray announced yesterday that the Bureau was moving back the effective date of the integrated disclosure mortgage requirements from August 1st to October 1. (http://www.consumerfinance.gov/newsroom/statement-by-cfpb-director-richard-cordray-on-know-before-you-owe-mortgage-disclosure-rule/) The announcement comes after the Bureau had steadfastly resisted increasingly desperate calls from Congress and industry stakeholders to delay the effective date. In its statement, the Bureau explained that it was proposing the new effective date after discovering an administrative error that would have resulted in a two week delay in implementing the regulation.
The integrated disclosure rules require that closing disclosures be received by a home buyer three business days before a mortgage loan is “consummated.” The two month delay gives credit unions more time to prepare for these changes and it also gives us more time to clarify a core concern of New York credit unions: When a loan is considered “consummated” for purposes of NYS law. Stay tuned.
FED Holds Its Fire On Rate Hike…For Now
Even as it sees signs of an economy growing at a moderate pace, the Fed decided yesterday not to raise short-term interest rates. Instead it stressed, to the extent that it publicly stresses anything, that it will probably raise rates by the end of the year. It also is continuing to rollover its existing portfolio of Mortgage Backed Securities it purchased during its period of Quantitative Easing. (http://www.federalreserve.gov/newsevents/press/monetary/20150617a.htm)
If you are hoping for a reprieve from those razor-thin Net interest Margins don’t hold your breath. And remember, this period of historically low rates comes as the Bureau is expected to propose restrictions on overdraft fees in the coming months. Yes, expect running a credit union to be as challenging as ever.
One more depressing thought: This recovery, as anemic as it is, can’t last forever. What would the Fed or a divided Congress be able to do to fight another downturn? As the Economist pointed out in a recent editorial the economic recovery is entering its sixth year and if another contraction occurs, as a result of a Greek Default for example:
“Rarely have so many large economies been so ill-equipped to manage a recession, whatever its provenance… Rich countries’ average debt-to-GDP ratio has risen by about 50% since 2007. In Britain and Spain debt has more than doubled. Nobody knows where the ceiling is, but governments that want to splurge will have to win over jumpy electorates as well as nervous creditors.” (http://www.economist.com/news/leaders/21654053-it-only-matter-time-next-recession-strikes-rich-world-not-ready-watch)
Move Over Alex
Alexander Hamilton, the nation’s first Treasury Secretary, will have to share space on the $10 bill with a yet unnamed woman. The Treasury announced that, starting in 2020, it will either start issuing some bills with Hamilton on one side and the unnamed matriarch on the other or a mix of bills, some with Hamilton and some with his female counterpart. My vote would be Maria Reynolds who would serve as a reminder that our politicians haven’t changed as much as we think we have and yet we managed to grow into a great country.
As explained in this Huffington Post Blog from 2011:
“In the summer of 1791, Hamilton was the target of what a modern-day espionage novel would call a “honey trap,” set by a blonde 23-year-old named Maria Reynolds. Hamilton then became the target of outright blackmail, by the woman’s husband (who was quite likely in on the whole scheme from the beginning), while Hamilton continued to see Maria for more than a year. This information eventually found its way into the hands of his political enemies, who confronted Hamilton. Hamilton explained that he was not (as had been charged) been playing fast and loose with the nation’s money; but rather he had merely been playing fast and loose with another man’s wife, and paying him off for the privilege, out of his own pocket.”
Today he would be charged with Structuring to evade BSA reporting requirements.
Incidentally, Hamilton was also NYS’s first Chancellor of its Board of Regents and you can find his portrait in the Education Department building in Albany. (http://www.huffingtonpost.com/chris-weigant/americas-first-political-_b_1080813.html)
At the Association’s Annual Convention the man who stole the show was none other than NCUA’s newest board member, J. Mark McWatters. Usually, attendees listen in respectful silence as the board member du jour explains how he feels the pain of being over-regulated while in the next breath explaining the need for additional regulation.
But in McWatters, we have at least one board member who sincerely believes the fewer regulations, the better. And, he seems to believe that when regulations are necessary they should be focused as narrowly as possible on the issue they seek to address. I’ve never seen any audience respond so well to a lawyer in my life, especially one who feels the need to mention he’s a lawyer about once every thirty seconds. His message was like catnip in a room full of kittens.
I also drank a good bit of his Kool-Aid. The part of his speech that got me the most intrigued was when he raised the possibility that NCUA could, if it wanted to, raise the MBL cap, at least for larger credit unions, without additional legislation. This is not a theoretical discussion. At its Board Meeting this Thursday, NCUA will be unveiling proposed MBL reforms and McWatters urged the audience to scrutinize and comment on this proposal.
First, a quick primer. The Federal Credit Union Act does not explicitly cap Member Business Loans (MBL) at 12.25% of a credit union’s assets. Instead, it caps MBLs at the lesser of 1.75 x the actual net worth of the credit union or 1.75 x the minimum net worth required for a credit union to be well-capitalized. Since credit unions have to have at least a 7% net worth to be well-capitalized, we have all gotten used to assuming that the MBL cap is 12.25%. However, take a closer look at the statute, as McWatters urges, and here is where it gets interesting.
As we all know from NCUA’s Risk-Based Capital proposal, NCUA feels it has the authority to define when complex credit unions, which it is seeking to define as those with $100 million or more in assets, are well-capitalized. If NCUA has its way, such credit unions will be well-capitalized only if they have a minimum Risk-Based Capital ratio of 10%. An argument can be made that based on a plain reading of the statute, these credit unions’ MBL cap would be 17.5%. Intriguing, isn’t it?
Of course, as NCUA has made abundantly clear, reasonable minds can differ about what constraint the Act actually places on credit unions. Still this interpretation is certainly supported by the statute and deserves to be given serious consideration by the entire Board.
Few things get people as nervous as a conversation about race. In part this reflects the fact that the vast majority of decent people don’t want to be insensitive to the concerns of others, and in part it reflects the fact that issues of race are so complicated that no one really thinks a frank dialogue will bring about much consensus.
The latest entry into this muddled mess of policy confusion is The Joint Guidance on Joint Standards for Assessing the Diversity Policies and Practices of entities that are regulated by federal financial regulators, including the NCUA. It can best be described as a non-mandate mandate. On the one hand, it establishes a suggested framework for financial institutions to use in assessing their efforts towards creating and encouraging a diverse workforce. On the other hand, the guidance stresses that the proposed framework is completely voluntary and geared towards institutions with 100 or more employees which are, not coincidentally, already subject to workforce diversity reporting requirements.
The voluntary framework encourages credit unions to establish: quantifiable standards for assessing their commitment to diversity and inclusion; policies and procedures to foster diversity and inclusion by, for example, reaching out to minority and women’s organizations to expand their applicant pool; and policies for hiring minority contractors. Credit unions should make these efforts as transparent as possible by posting policies to their websites, for example. Credit unions are urged to assess how well they are achieving these goals and are also encouraged, but not required, to share these self-assessments with their regulators.
Does the Guidance apply to small credit unions? On paper yes, but the preamble to the policy statement tells us that: “When drafting these standards, the Agencies focused primarily on institutions with more than 100 employees. The Agencies know that institutions that are small or located in remote areas face different challenges and have different options available to them compared to entities that are larger or located in more urban areas. The Agencies encourage each entity to use these standards in a manner appropriate to its unique characteristics.” I would put this in your file for the day an examiner tries to ding you for not complying with this guidance.
As for those of you who do have at least 100 employees, even though the guidance is wholly voluntary, my guess is you already do much of what is suggested in this guidance. Taking a look at this guidance and incorporating it into your existing practices isn’t a bad idea if only because today’s voluntary guidance may someday become tomorrow’s mandate. This is particularly true if regulators conclude that institutions aren’t doing enough to foster diverse workplaces.
It’s usually not good news when credit unions are one of the lead stories in the Wall Street Journal and today is no exception. The paper is reporting that fifty credit unions have been identified in a “confidential” FinCEN Report citing “their increased vulnerability to potential money laundering.” Crucially, the report was based on data analysis and didn’t accuse credit unions of wrong doing. Nevertheless, it expressed concern about the increased exposure to money-services businesses.
First, let’s put the report in context. For those of us who follow regulation, it’s not surprising that FinCEN is scrutinizing MSB relationships. MSB is a catch-all definition referring to businesses that engage in check cashing, wire transfers, travelers checks and pre-paid cards, among other services. They present unique risks from a BSA standpoint because they are cash intensive operations that are themselves subject to BSA reporting requirements. There is nothing wrong with a credit union opening an account for these businesses, provided of course, that the MSB is within its field of membership. But, regulators correctly point out, as I commented on in a previous blog, that credit unions that take on MSBs as members also take on heightened compliance responsibilities.
Late last year, North Dade Community Development Federal Credit Union was effectively put out of business after it was fined by FINcen for its lack of oversight of its MSBs. In addition, NCUA came out with a supervisory letter in 2014 stressing that even as MSBs provide valuable services to customers, the cash intensive nature of the businesses “may pose elevated risk for potential money-laundering activities.” As a result, credit unions that service MSB accounts within their fields of membership are expected to “exercise heightened due diligence” when overseeing these accounts.
Now that the genie is out of the bottle, it’s important that credit unions get the word out to the public at large that, contrary to the implication of the article, they, regardless of their size, make incredibly diligent efforts in the aggregate to comply with BSA regulations. I know this to be true as someone who has been involved in countless conversations related to BSA compliance. Also, let’s keep in mind that regulators are more than willing to cripple small institutions in the name of BSA compliance.
Whereas for the behemoth, the BSA fine is just the cost of doing business, the article correctly points out that money-launderers are increasingly turning to smaller institutions that they perceive as more vulnerable to money laundering. But it incorrectly suggests that larger institutions should no longer be the primary focus of BSA compliance. The reality is that with their defined field of membership, credit unions are ideally suited to scrutinize the activities of their members. There is nothing about the credit union model that makes it inherently more vulnerable to money laundering and to suggest otherwise is to let the bigger institutions, some of which have flagrantly ignored BSA rules for the last decade, off the hook.