NAFCUs Annual Regulatory Compliance Update November 6, 2014 2:00 - PowerPoint PPT Presentation

NAFCU’s Annual Regulatory Compliance Update November 6, 2014 2:00 – 3:30 p.m. ET Presented by: • JiJi Bahhur , NCCO, Director of Regulatory Compliance • Bernadette Clair , NCCO, CAMS, Senior Regulatory Compliance Counsel • Eliott C. Ponte , Regulatory Compliance Counsel

Roadmap • Earlier this year • NCUA – Supervisory Focus – Finals and Proposals – Other Issues and Guidance • CFPB – Finals and Proposals – Ongoing Initiatives and Enforcement – CFPB’s Tea Leaves • Also in the News

Earlier This Year • NCUA & CFPB Updates , by NAFCU’s Regulatory Affairs Team, May 7, 2014 • Final Rules (went into effect in first part of 2014): – CFPB’s Mortgage Regulations – Derivatives – Access to Emergency Liquidity/Central Liquidity Facility – Loan Participations – Stress Testing and Capital Planning – Voluntary Liquidation

NCUA Update

2014 NCUA Supervisory Focus • Noted Areas of Risk: – Interest Rate Risk – Cybersecurity Threats – Money Services Business and Private Student Lending • Compliance – Loan Participation Rule – Credit Union Service Organization Rule – CFPB’s Ability to Repay – Qualified Mortgage Standards • Examiners have flexibility to “narrow or expand the scope of an exam”

NCUA Update Final Rules

CUSOs Credit Union Service Organizations (CUSOs) • NCUA Board released final CUSO rule, requiring CUSOs to provide annually basic profile information to the NCUA and the appropriate state supervisory authority. • High-risk or complex activities require more detailed reporting. • Reporting burden on CUSO. • CU must amend written agreements with those CUSOs it lends to or invests in. • Effective June 30, 2014.

NCUA Update Proposed Rules

Risk-Based Capital Key Concerns : • Proposed rule to replace current calculation of net worth within statutory capital and prompt corrective action (PCA) regulations with new risk-based capital (RBC) requirements • Would revise the risk- weights for many of NCUA’s current asset classifications and require higher minimum levels of capital for federally-insured natural person credit unions with concentrations of assets in real estate loans, member business loans (MBLs) or higher levels of delinquent loan s – More restrictive than the risk-weighting at the FDIC under Basal III – Does not accurately capture risks associated with non-delinquent first mortgage real estate loans, investments, MBLs, and CUSOs

Risk-Based Capital Key Concerns (continued) : • Would set forth a process where NCUA could require an individual federally-insured natural person credit union to hold higher levels of risk-based capital based on supervisory concerns raised by agency examiners. – What’s wrong with that? – NCUA can increase credit union’s individual RBC requirement through the examination process if it subjectively believe the credit union needs additional capital based on the credit union’s balance sheet risk.

Risk-Based Capital • Feedback – unprecedented – 2,000+ comment letters (6,000/2,000 = 1/3) – King-Meeks Letter (324 signatures from Congress) – Johnson-Crapo Letter – MBA, Home Builders, Realtors • Next steps? – Second Comment Period – Might be issued by the end of 2014 – Expect NCUA to pull back weighting, extend implementation period https://www.nafcu.org/capitalreform/

Associational Common Bond Proposal • Proposed amendments to the associational common bond provisions of NCUA’s Chartering and Field of Membership (FOM) manual. • Follows after NCUA’s OCP Letter to FCUs 13-FCU-03 (re advertisements stating FCU’s FOM “open to anyone”). • Amendment seeks to : – Establish a threshold requirement that an association not be formed primarily for the purpose of expanding membership – Expand the “totality of the circumstances” test by adding an eighth factor regarding corporate separateness – Grant automatic approval into the credit union’s FOM to certain categories of groups

Associational Common Bond Proposal • Quality Assurance Review (QAR) – Preamble of the final rule highlights NCUA OCP’s ongoing process of reviewing associational groups on a case-by-case basis to determine compliance with current associational common bond requirements. – If NCUA finds these associations no longer meet the totality of the circumstances test, it will remove them from the credit union’s field of membership. • NAFCU’s Stance – Opposition to threshold determination; inappropriate and unnecessary because of existing rules – QAR could usurp associations that were previously approved under the Chartering and Field of Membership manual

Fixed Assets • Proposed on July 31, 2014. Comment period closed October 10, 2014. • The current rule limits FCUs investments to 5% of its shares and retained earnings. – Exception: FCUs can obtain a waiver to exceed 5%. • The proposed rule will: – Remove the requirement to have FCUs seek NCUA’s approval before exceeding 5% investment into fixed assets. • Before exceeding 5%, a FCU must implement a Fixed Assets Management program, which includes: (1) a written board policy, (2) board oversight, and (3) ongoing internal controls. – Allow FCUS to set their own investment limits

Fixed Assets cont. • The current rule (cont.): – The current rule requires FCUs to occupy a premises (expansions) it acquires within one year, unless the board adopts a resolution that contains definitive plans for full occupation. • The proposed rule will (cont.): – Establish a single time period for partial occupancy of premises acquired for future expansion. – Eliminates the requirement to apply for a waiver from the partial occupancy rules within 30 months of property acquisition. • Overall, NAFCU thinks this is a step in the right direction – NAFCU has been working on getting the NCUA to update this rule. See NAFCU’s Dirty Dozen. • For more information, see Reg. Alert 14-EA-20

Securitization • Proposed on June 26, 2014. Comment period closed August 25, 2014. • The proposed rule adds a new provision to 12 C.F.R. Part 721: – Proposed rule states the NCUA believes FCUs and FISCUs have the power to securitize loans. • Restricted to the loans it originates (no re-underwriting). • Does not prevent FCU from pooling loans that can be sold in secondary markets (but it cannot be a security).

Securitization cont. • The proposed rule cont. – Authorizes a credit union to create a special purpose vehicle or entity to hold the assets that collateralize the asset-backed security. • Can be a LLC, Trust, Partnership, or Corporation that is limited to acquiring and financing the assets. • Cannot be a CUSO because this is not a preapproved CUSO activity. • Special entity must be isolated from creditors of the FCU in the event of insolvency.

Securitization cont. • The proposed rule cont. – Seven minimum safety and soundness requirements • Compliance with all laws and regulations • Independent risk management • Annual audit • Board knowledge (must understand the risks) • Management expertise • Board approved policies • Internal controls • For more information, see Reg. Alert 14-EA-16

Examination sites • Proposed on December 23, 2013. Comment period closed January 23, 2014. • This proposed rule would amend NCUA regulations (12 C.F.R. Part 701) to temporarily require examinations and other contacts with NCUA staff to occur in a FCU’s business office or other public location. • This proposed rule would also require all FCUs to maintain and monitor an email address, a telephone number, or both, dedicated exclusively for the credit union’s business purposes.

Appraisals • Proposed on June 16, 2014. Comment period closed August 25, 2014. • Under the proposed rule, the NCUA will eliminate its regulation (12 C.F.R. 701.31(c)(5)) requiring a FCU to make available a copy of the appraisal used in connection with a member’s application for a loan secured by a first lien on a dwelling. – This regulation is duplicative because Regulation B requires FCUs to do the same thing.

Appraisals Cont. • This proposed rule would also amend NCUA’s appraisal regulations, specifically 12 C.F.R. § 722.3(a)(5), by expanding the current exemption for certain transactions involving existing extension of credit. – This proposal would allow a FCU to refinance or modify a real estate-related loan without having to obtain an appraisal if: (1) there is no advancement of new monies (excluding monies to cover closing costs); or (2) if there is adequate collateral protection, even with the advancement of new monies. • The proposed rule would also make a technical amendment to the definition of the term “application.” – It just removes a parenthetical quote regarding Regulation B.