Posts filed under ‘Compliance’
On Thursday, the NCUA finalized regulations eliminating the 5% aggregate limit on fixed assets for federal credit unions. It also established a single time period of six years from the date of a property’s purchase for an FCU to at least partially occupy the premises. These changes would have been important enough on their own, but there is even more going on here than meets the eye.
When NCUA first proposed doing away with its fixed asset rules for FCUs, it proposed replacing them with a requirement that credit unions implement a fixed asset management program (FAM). Commenters , including the Association, welcomed NCUA’s willingness to do away with the nettlesome fixed asset cap but expressed concern that the FAM requirement would end up being almost as burdensome to credit unions as the existing regulation.
In an example of the impact that comment letters can have, particularly when a three-member board is divided, NCUA eventually agreed to not only do away with the fixed asset cap but to eliminate the FAM requirement. This might sound like incredibly dry stuff, but it is yet another indication that NCUA is fundamentally re-examining its regulatory approach away from prescription towards greater flexibility in complying with safety and soundness mandates. The preamble states that the amendments reflect the Board’s recognition that it should give credit unions relief from a prescriptive limit on fixed assets but it stressed that investments in fixed assets “are, and will continue to be, subject to supervisory review.”
NCUA will attempt to achieve a balance between oversight and flexibility by issuing more guidance. Are we simply replacing one set of prescriptive rules with another that gives examiners more flexibility to decide what constitutes safety and soundness? This is the part of the preamble that I find so important. .
In response to these concerns, NCUA explains that the purpose of supervisory guidance and other interpretive rules is to advise the public of the Agency’s construction of statutes and rules that it administers” It further explains that “supervisory guidance regarding FCU ownership of fixed assets is not intended to supplant FCU’s business decisions or to impose rigid and prescriptive requirements on FCUs on the management of their investment in fixed assets.”
The rationale in the preamble is similar to NCUA’s rationale for radically altering the MBL regulations. It may take some getting used to for those of you who have grown used to complying with very specific mandates. As for those of you who are looking forward to increased flexibility, be prepared for thorough discussions with your examiner explaining why an approach taken by your credit union satisfies safety and soundness concerns.
It is an experiment well worth trying. Its success will depend not only on examiners but on the willingness and ability of credit unions to create individualized compliance programs Here is the final regulation.
NY’s Criminal Exacta
With Saratoga opening this past Friday maybe it’s only fitting that federal prosecutors secured an exacta last week First, Deputy Senate Majority Leader Tom Libous of Binghamton was convicted of lying to federal investigators about his efforts to obtain work for his son from lobbying firms. On Friday, State Senator John Sampson of Brooklyn, who once held the position of the Senate’s top Democrat, was convicted of Obstruction of justice charges. Both Senators automatically lose their seats.
With Republicans holding a one seat majority in the State Senate-Not including the Independent Democratic Conference and the Governor apparently committed to pushing hard for democrats to win the Libous seat when a special election is called, the political class is looking forward to the first major election since John Flanagan was named Majority leader following the indictment of Dean Skelos on corruption charges earlier this year. Cuomo was quick to praise Barbara Fiala, the former Department of Motor Vehicles commissioner who has announced that she will be seeking the Democrat nomination.
Consumer lending is about to get even more complicated for all credit unions, especially for those of you who provide loans to members of the military, their spouses and dependents.
Yesterday, President Obama announced a final rule expanding the protections afforded to military personnel getting consumer loans. The rule means that most military consumer loans, including credit cards, will eventually be subject to a Military Annual Percentage Rate cap of 36%. All of you should review this regulation. Credit unions are not exempt. It’s time to call your vendor and get ready to groan as you are taught about these mandates at an upcoming compliance conference.
First some context. In 2007, responding to reports of predatory lending and payday loan practices around military bases, Congress passed the Limitations on Terms of Consumer Credit Extended to Service Members and Dependents,” Act (10 USC 987). The Act gave the DOD discretion in deciding which loans would be subject to greater protections. It ultimately made payday loans, vehicle title loans, and refund anticipation loans subject to a special Military Annual Percentage Rate (MAPR) of 36%.
Consumer advocates argued that these regulations were both too narrow and too easy to circumvent. For example, payday loans of 92 days or $2,001 could be issued with impunity. To close this loophole, the DOD proposed regulations making virtually all consumer loans to members of the military and their dependents subject to the 36% MAPR and enhanced disclosure requirements. Lenders would have to consult a database to determine who was entitled to these protections.
At the time, I argued that this was a well-intended but hopelessly misguided proposal. The compliance burden of a new APR formula would discourage credit unions from making good loans. I was not alone in my concerns. NCUA issued a statement pointing out that credit unions would not be allowed to offer Payday Alternatives sanctioned by the NCUA. In fact, about the only regulator that had anything nice to say about the proposal was the CFPB. Need I say more.
Here are some of the highlights:
- Federal credit unions are authorized to offer PAL loans with a maximum interest rate of 28%. The final rule does not exempt PAL loans from the MAPR cap. Instead credit unions providing these loans to military personnel will be authorized to exclude the application fee when calculating the MAPR. This addresses NCUA’s concern that the 36% MAPR cap is so restrictive that credit unions could not legally offer these payday loan alternatives to the military. It doesn’t address the larger issue about the increased compliance burden.
- The proposal expanded the MAPR cap to credit cards. In the preamble to the final rule the DOD “recognizes that imposing the interest-rate limit of 10 U.S.C. 987(b) on credit card products likely would result in dramatic changes to the terms, conditions, and availability of those products to Service members and their families.” Its solution is to exempt credit card loans from the MAPR until October 2017. After that, credit cards will receive a qualified exemption for fees that are both “bona fide” and “reasonable.”
- The proposed regulations required lenders to consult a nationwide database when making consumer loans in order to determine if someone is entitled to these protections: The final rule allows creditors to “unilaterally assess the status of a consumer ” by either using the MLA Database or a consumer report obtained from a nationwide consumer reporting agency. The preamble states that “Under either mechanism, a creditor must timely create and thereafter maintain a record of the information so obtained.“
The regulation is effective October 1, 2015 with. compliance required by October 3, 2016. Credit cards are not subject to its provisions until October 3, 2017 with the Secretary of Defense authorized to push compliance out another year.
There is much more to talk about but hopefully I scared you enough to review the regulation.
Here are links for more information from the DOD and a previous blog:
Flood Insurance Escrow Requirements Clarified
Yesterday, federal regulators, including the NCUA, announced final regulations clarifying escrow and force-placed insurance requirements under the Biggert-Waters Reform Act of 2012 and its subsequent amendments in 2014. Most importantly, a credit union with less than $1 billion in assets will not be required to escrow flood insurance premiums and fees if, as of July 6, 2012, it was not required by applicable federal or state law to escrow taxes or insurance for the term of the loan and did not have a policy requiring escrow of taxes and insurance. The escrow requirement applies to insurance made, increased, renewed or extended starting January 1, 2016.
As early as this week, New York is expected to take its next big step toward legalizing the distribution of marijuana for medical purposes. Its Department of Health is expected to announce the five companies that will be responsible for producing and distributing cannabis throughout the State. These five entities will be authorized to establish up to four “dispensing facilities,” meaning that if all goes according to plan, on January 5, 2016, qualified ailing New Yorkers will be able to purchase and use cannabis.
Regardless of whether you think medical marijuana is the greatest wonder drug since penicillin or that legalizing drugs will unleash refer madness across the state, New York is entering into a legal haze, which is unlikely to clear any time in the near future. Most importantly, cannabis remains illegal as a matter of federal law. This has several implications for states such as New York that have legalized marijuana. Most importantly, as I’ve discussed in previous blogs, credit unions are still responsible for filing Suspicious Activity Reports (SARS) on institutions with accounts that engage in the business of legally selling marijuana pursuant to state law. The Department of Justice and FinCEN have issued guidance authorizing credit unions and banks to issue so-called “marijuana limited SAR filings.”
The basic idea is that the Department of Justice and FinCEN will not prosecute certain types of legal marijuana businesses so long as they do not, among other things: distribute marijuana to minors; facilitate distribution of drug money to criminal gangs, facilitate the distribution of marijuana to states where it is not legal; use legal marijuana sales as a pretext to sell illegal drugs; or aid in the growing of marijuana on public land where it poses public safety or environmental risk. Institutions that choose to help legal marijuana dispensaries take on a huge oversight responsibility. They will have to have the ability to monitor these companies on an ongoing basis to make sure that they are complying with the federal government’s criteria. The amount of paper work and staff is enough to prevent all but the largest institutions from aiding these organizations.
Does this mean that New York’s law will not impact your credit union? Not by a long shot. For example, your HR department will have to decide how to deal with the employee who informs you that she uses medical marijuana. In addition, even though there are only a total of 20 dispensaries at this point, many of you may have business accounts with doctors who may become certified prescribers of marijuana. In my opinion, such activities will require your credit union to exercise increased oversight of these accounts.
Now I don’t mean to scare anyone away. New York is implementing one of the most tightly regulated medical marijuana industries in the country. As a result, it should be easier to comply with oversight requirements. However, at the end of the day cannabis remains illegal as a matter of federal law. Until Congress takes a serious look at this issue, there is nothing to stop a future President from ordering the DOJ to prosecute businesses that legally dispense drugs on the state level.
Let’s say one of your best employees is leaving because her husband found his dream job as a yoga instructor in Idaho. You love her work and she loves working for the credit union. You both decide that she will do work for the credit union as a consultant. She won’t manage anyone and she can work when she wants as long as she gets the special projects assigned to her done on time. She is free to consult for other credit unions as well but probably won’t have the time. Is she an employee or an independent contractor?
With the subtlety of a bull in a china shop, the US Department of Labor yesterday released guidance clarifying the legal test to be used determine if our consultant is an independent contractor or an employee in disguise. If you hire independent contractors, then this guidance is a must read.
Under the Fair Labor Standards Act, if you “permit or suffer” an individual to work then that individual is your employee. (I’m not making this up: Congress says that if you are suffering at the hands of an employer you must be an employee).
Not surprisingly, this antiquated phraseology is not of much use to employers. Over the years it has fallen on the courts and regulators to determine how to apply this language. The purpose of yesterday’s legally binding guidance is to emphasize to employers that the Fair Labor Standards Act has an expensive definition of employee, one that the DOL feels has been misapplied to the detriment of millions of employees denied benefits as independent contractors.
According to the DOL, the ultimate issue to be analyzed in deciding whether or not our consultant is an independent contractor is not how much independence she exercises but how dependent the contractor is on the credit union. As explained in the guidance:
Unlike the common law control test, which analyzes whether a worker is an employee based on the employer’s control over the worker and not the broader economic realities of the working relationship…An entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent [on the business for which she is working].
To determine whether your employee turned consultant is an employee in disguise, you are going to examine these criteria: the extent to which the work performed is an integral part of the employer’s business; the worker’s opportunity for profit or loss depending on his or her managerial skill; the extent of the relative investments of the employer and the worker; whether the work performed requires special skills and initiative; the permanence of the relationship; and the degree of control exercised or retained by the employer.
Remember these are criteria to be considered, not elements that all have to be present for a person to be an employee. Ultimately, you have to weigh all of these factors and apply them to your situation. As you do so, remember that on both the state and federal level the regulators are emphasizing proper classification of employees in their oversight regimes.
One more thing. The IRS has an interest in seeing that you have properly paid your taxes, so it has its own test to decide whether that consultant you hired is an employee. The IRS still considers factors the DOL doesn’t consider relevant. You can find the IRS’s criteria at.
I will be back on Monday. I hope everyone enjoys their weekend.
Whenever I get a chance I like to remind credit unions of the big issues right around the bend. It’s important to pullback the lens and look at the forest instead of the trees.
One of the biggest shifts on the horizon is the movement of NACHA towards mandatory same-day settlement of ACH transactions. It’s important not only because of its operational impact but also because, when fully implemented, it could either provide needed compensation for credit unions or conversely become the next frontier of regulator micro management in the name of so called consumer protection.
Under existing NACHA rules, ACH payments are settled by the next business day. New rules, once fully phased in over a three stage process starting in September 23, 2016 , mandate that NACHA network participants must be able to process payments the day they are received if requested to so by the financial institution that originates the transaction (The ODFI). Specifically same-day settlement requests received by Receiving Depository Financial Institutions by 1030AM Eastern Time will have to be processed by 1:00 PM and payments received by 3:00 would have to be processed by 5:00PM.
My guess is that your average consumer or business, when they give it any thought, doesn’t understand why the banking system has any float periods in an age when money is moved at the speed of light. They have a point. NACHA is moving towards a system in which customers are offered the option of faster processing; the increased cost and hopefully a little profit (God forbid!) will be paid by the consumer or business that wants faster settlement. For large banks and credit unions with a high volume of originations the idea is a no brainer.
A mandatory rule is really the only way to get the ball rolling on this long overdue innovation. In 2010 Federal Reserve Banks began offering an optional FedACH® SameDay Service but the Fed reports that, in the five years since its introduction, the FedACH SameDay Service has received a lukewarm embrace with fewer than 100 depository institutions currently using the service. The Fed points out that, while ODFIs may be able to realize value from the service through enhanced ACH product offerings, smaller institutions with less origination volume have been reluctant to invest the time and money it may take to upgrade their systems.
To help address this issue under the new rules RDFIs will receive a fee of 5.2 cents for every same-day transaction they process. Only time will tell if this is enough. If financial institutions are allowed to function like regular businesses it should be easy to adjust this fee if institutions aren’t being fairly compensated. Unfortunately, as same day processing becomes the norm regulators, led by the CFPB, may seek to cap these fees if they think they are too high.
NACHA originally proposed a fee of 8.2 cents but reduced it in the final regulation. In its comment letter on the NACHA proposal the Federal Reserve expressed concern that “Through its effect on fees to originators, the interbank fee will likely reduce usage of the same-day ACH service from what it would be absent a fee, and ultimately limit the benefits that end users derive from it.”
In other words, regulators are already suggesting that they and not consumers are best positioned to know what fees are reasonable. It’s this kind of thinking that will give the U.S. the most regulated but antiquated payments system in the advanced world.
Is that really what consumers want?
Here is a resource for more information.
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.