NCUA has published a final rule amending its regulations in Part 701.32(b) limiting public unit and non-member deposits in federally insured credit unions (FICUs). These rules apply to federally insured state credit unions (FISCUs) by reference in §741.204.

NASCUS Legislative & Regulatory Affairs prepared a detailed summary of the final rule.

The Summary can be found here.

The House of Representatives passed the Secure and Fair Enforcement Banking Act (SAFE Act), which would provide some protections to credit unions and other financial institutions that serve state-authorized cannabis related businesses.

Earlier this year, NASCUS Leadership, its Regulator Board and Credit Union Advisory Council, approved a cannabis banking policy that supports federal safe harbor legislation, such as the SAFE Act, that would allow financial institutions to provide financial services to state authorized cannabis businesses and to third-party businesses that serve the cannabis businesses.

“We appreciate the House heeding our call and passing the SAFE Act,” said NASCUS President & CEO Lucy Ito. “It is imperative that credit unions and other financial institutions in the states that have legalized some form of cannabis use, be able to provide financial services to the state-authorized cannabis businesses in their communities. Without access to  financial institutions,  cannabis businesses would have to operate in cash, which creates public safety issues and fraud risks. While today’s House vote is monumental, the Senate must follow suit to ensure credit unions can serve their members and meet the needs of their communities by providing secure, financial services.”

NASCUS Comments: ANPR on compensation for loans, lines of credit to members

June 24, 2019

Gerard Poliquin
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Re: NASCUS – Comments on Advance Notice of Proposed Rulemaking: Compensation in Connection with Loans to Members and Lines of Credit to Members

Dear Mr. Poliquin:

The National Association of State Credit Union Supervisors (NASCUS)1 submits the following comments in response to the National Credit Union Administration’s (NCUA’s) public notice and request for comments on modernizing § 701.21(c)(8) concerning compensation in connection with loans to members. Incentive-based compensation tied to loan production is a complicated matter requiring nuance to balance a financial institution’s need to offer competitive compensation packages for key staff on par and in line with prevailing industry standards and practices against the risk of incentivizing bad loans or encouraging inappropriate risk taking.

NASCUS commends NCUA for issuing this Advance Notice of Proposed Rulemaking (ANPR) soliciting stakeholder input for modernizing the National Credit Union Share Insurance Fund’s (NCUSIF) approach to mitigating risk posed by inappropriate loan-based incentive compensation programs.2 We recommend NCUA consider an approach combining a general regulatory framework supported by guidance, relying on the supervisory process to identify and curb bad actors. We also recommend NCUA clearly identify, in separate provisions, the various credit union staff to which the rules apply. We also urge NCUA to consolidate the provisions applicable to state-chartered credit unions in §741 (NCUA’s share insurance rules for state credit unions).

That poorly designed and implemented loan-based incentive compensation programs can have disastrous effects on a financial institution is well documented.3 However, trying to use an all-encompassing prescriptive regulation to address the risks posed by poorly designed, implemented, or overseen programs can be a complicated undertaking. Imprecise or overbroad wording in a regulation can confuse stakeholders as to when compensation may be paid to staff or officials.4Further complicating matters, state credit union practices in developing and structuring incentive-based compensation varies widely. Many credit unions, particularly larger credit unions, might use third party vendors and compensation data from like-sized organizations outside of the credit union space to ensure competitive salary. Other credit unions develop their compensation plans internally or based on credit union specific salary studies. Differences in credit union staffing levels and organizational charts further complicates matters as some credit unions have multiple layers of staffing and oversight between the loan officer and the executive suite while others have much more limited staffing and overlapping responsibilities.

For these reasons, we do not believe a prescriptive one-size fits all approach is effective for supervising loan-based incentive compensation programs. Given the differences in credit union practices regarding loan-based incentive compensation, and the inherent nuances that distinguish a well-managed incentive compensation program from one that incentivizes inappropriate risk-taking, this is a subject better suited to guidance and supervisory review than to prescriptive rules.

NCUA Should Adopt General Rules Supported by Guidance

In its notice for comment, NCUA questions whether loan-based incentive compensation should be governed by a bright line rule.5 While some aspects of regulating this type of compensation might lend itself to bright line rules, such as prohibiting classes of employees from receiving such compensation, such as underwriters, in many other regards a bright line rule is impractical.

Prohibiting incentive compensation based on loan volume is illustrative of the nuances involved in supervising such arrangements. Ultimately, its is not “loan volume” alone that leads to imprudent risk taking, but rather “loan volume” absent any other controls, parameters, or other mitigating qualifications. In other words, a loan-based incentive compensation program tied to loan volume, where the loans to be generated were required to have pre-determined high credit scores and predetermined low loan-to-value ratios would not on its face be problematic.

Rather than a bright line rule, NCUA should focus on ensuring credit unions mitigate the riskier elements of the incentive compensation program, implement oversight of the program by the credit union’s board of directors, and using the supervisory assessment of the culture of safety and soundness within the institution. We recommend NCUA consider the guidance approach utilized by the Federal Deposit Insurance Corporation (FDIC) for banks.6 Using guidance and the supervisory process to curb unsafe and unsound incentive compensation practices allows for a more nuanced and adaptable response by regulators.

Guidance related to effectively administered loan-based incentive compensation programs should be associated with a general rule prohibiting unsafe and unsound practices with respect to incentive-based compensation. For example, the general rule could prohibit incentive-based compensation or fees paid to employees directly related to underwriting loans. Greater clarity could also be provided by specifying, and segregating, regulatory limitations that might apply to executive level staff as opposed to those that might apply to general management staff. Regulatory limitations could also be distinguished based on the lending portfolio, recognizing that residential real estate, auto, and commercial lending present different underwriting vulnerabilities that might be exacerbated by an affiliated incentive-based compensation program.

We anticipate that NASCUS’s preference for guidance will be met with trepidation by some within the credit union movement. We understand the unease with which some view broad discretionary authority for the regulator: state or federal. However, in this instance we firmly believe a case-by-case analysis within a framework of guidance, is the best approach for risk mitigation. A bright line prescriptive regulatory approach will, almost by necessity, hinder many credit unions in their ability to develop competitive incentive-based compensation programs. To allay concerns with regulatory discretion, we recommend that NCUA:

• publish the guidance and solicit comments before finalizing it
• explicitly clarify that supervisory findings related to incentive-based compensation are appealable under Part 746
• require NCUA to obtain concurrence of the state regulator before taking a supervisory action related to incentive-based compensation with a state credit union

Applicability to Federally Insured State Credit Unions (FISCUs)

NCUA applies its federal credit union prohibition on prohibited fees and incentive compensation income to FISCUs by reference in §741.203(a), which reads in relevant part:

“[a]ny credit union which is insured pursuant to title II of the Act must… [a]dhere to the requirements stated in part 723 of this chapter concerning commercial lending and member business loans, §701.21(c)(8) of this chapter concerning prohibited fees, and §701.21(d)(5) of this chapter concerning non-preferential loans…” — 12 C.F.R. 741.203(a)

Should NCUA continue to apply provisions of §701.21 to FISCUs, those provisions should be incorporated in full in §741. The current practice of incorporation by reference creates confusion among stakeholders. Incorporation by reference also creates an additional, and wholly unnecessary regulatory burden for FISCUs and examiners seeking to understand NCUSIF related compliance obligations.

The Ability of States to Obtain Exemption from the Rule

Part 741.203(a) provides an exemption from §701.21(c)(8) prohibitions for FISCUs “in a given state…if the state supervisory authority…adopts substantially equivalent regulations as determined by the NCUA Board…” NCUA should retain a state exemption provision related to the application of §701.21(c)(8) to FISCUs.
NCUA should exempt from this rule all FISCUs in a state that has state-specific limitations, regulations, or supervisory policies that address incentive-based compensation. Many states have comparable rules intended to curb abuses in incentive-based compensation programs. NCUA’s rule should defer to state rules with NCUA’s prohibitions acting as a default in the event a state has not addressed incentive-based compensation.

At a minimum, NCUA should modernize the “substantially equivalent” standard for exempting FISCUs to a “comparability” standard or a “sufficient risk mitigation” standard. That NCUA now acknowledges the current rule is confusing and outdated highlights the inherent problem with a “substantially equivalent” standard: it stymies supervisory innovation and regulatory progress. Broadening the standard for states to seek an exemption will allow for a diversity of approaches to curb materially risky practices.

NASCUS supports NCUA’s review of its existing rules regarding loan related incentive-based compensation. Currently §701.21(c)(8) is confusing and in need of substantial refinement to more precisely curb bad behavior while allowing credit unions to appropriately incentivize employees. We urge NCUA to proceed to proposed rulemaking utilizing recommendations submit herein, and to publish proposed guidance in conjunction with the rulemaking. We would be pleased to discuss these recommendations in detail at your convenience.

Sincerely,

– signature redacted for electronic publication –

Brian Knight
General Counsel

At GAC, state system out in force
with meetings, greetings — and top issues

Lawmakers, federal regulators, credit union trade groups, credit union industry groups and more were all in touch with NASCUS this week as its leadership and staff participated in the largest annual gathering of credit union advocates and supporters in Washington, D.C.

The Governmental Affairs Conference (GAC) of the Credit Union National Assn. (CUNA) served as the venue for the NASCUS meetings. According to reports, the GAC drew more than 5,000 participants – including broad representation from the state credit union system.

Among those with whom NASCUS met with over the course of the four-day gathering: American Association of Credit Union Leagues (AACUL), National Association of Federally-insured Credit Unions (NAFCU), CUNA Mutual Group, and the National Association of Credit Union Service Organizations (NACUSO). NASCUS also sat down with representatives of NCUA and the Treasury Department. And, leaders of the association and staff discussed federal legislative issues key to the state system directly with selected lawmakers.

Top items on NASCUS’ discussion list included: NCUA Board reform (calling for at least one board member with state credit union supervisory experience on the NCUA Board, and an increase in the board size from three to five members); deference to state law in data breach notification legislation (where the state law is more stringent); clarity for serving legal marijuana businesses, and; a comparable exemption from the 21% excise tax on pre-existing executive compensation contracts for non-profits (such as state credit unions) in parity with for-profit entities for which pre-existing executive compensation contracts have been grandfathered.

“We had substantive discussions with each group and individual,” said Lucy Ito, NASCUS president and CEO. “In each case, the state system was met with strong respect and consideration. There is always more work to do – but our read from this week is that our messages were heard and appreciated.”

In addition to the meetings and discussions, NASCUS also hosted a reception in conjunction with the national meeting for the credit union system, drawing a unique group of state regulators and NCUA leaders, as well as representatives of state and federal credit unions, corporate credit unions, credit union service organizations (CUSOs), state leagues, and CUNA. NCUA Board Chairman J. Mark McWatters addressed group underscoring value of dual charter system.

STRONG SHOWING FOR STATE REGULATORS

A record number of state regulators were in attendance at this year’s GAC, showing their strong interest in and support of the future of the credit union system at large. Among the attendees: John Kolhoff, NASCUS chairman and commissioner, Texas Credit Union Department; Mary Ellen O’Neill, director, Financial Institution Division, Connecticut Department of Banking; Steve Pleger senior deputy commissioner, Georgia Department of Banking & Finance; Rose Conner, administrator, North Carolina Credit Union Division; Kim Santos, director, Wisconsin Office of Credit Unions; Janet Powell, manager, credit union program, Oregon Div. of Finance and Corporate Securities, Dept. of Consumer and Business Services; Charles Vice, commissioner, Kentucky Department of Financial Institutions. All are NASCUS Board members.

Also attending: Katie Averill, superintendent of credit unions, Iowa Department of Commerce, CU Division; Amy Hunter, director, Washington Division of Credit Unions; Denice Schultheiss, director, Michigan Office of Credit Unions.

PUB FEATURES NASCUS’ LEADER FOR INT’L WOMEN’S DAY …

On the eve of this week’s GAC, NASCUS’ Lucy Ito was featured late last week in the Credit Union Journal, a trade publication, in honor of International Women’s Day, celebrated last week (March 8). In the piece, the NASCUS leader discussed how NASCUS works to advance the role of women in the credit union movement, and gave kudos to those women who have contributed to her career.

In the latter area, Ito pointed to past and current state regulators Linda Jekel (recently retired from the WA Department of Financial Institutions Division of Credit Unions), Mary Ellen O’Neill (CT Department of Banking) and Mary Hughes (ID Department of Finance). “All have served as role models for straight-shooting, pragmatic, and creative problem-solving—assuring safety and soundness while fostering growth,” she told the publication.

Industry leaders earning shout outs from the NASCUS executive included Diana Dykstra of the CA/NV Credit Union Leagues, Teresa Freeborn of Xceed Federal Credit Union, Consultant Sarah Canepa Bang, and Shruti Miyashiro of Orange County’s Credit Union.

She also pointed out how NASCUS works as an organization for women’s advancement in credit unions. “As one of the few women leading a national credit union organization, I understand both the opportunities and challenges women face in the industry,” she said. “NASCUS routinely scans its own staff, elected leadership, regulators and credit union executives for visibility opportunities. Also, we include not only our women leaders and staff, but also our men leaders and staff in engagement with the World Council of Credit Unions’ Global Women’s Leadership Network events. Advancing women in the industry is not just a women’s issue.”

LINK:
CU Journal: She’s the boss: How women are advancing the credit union movement (subscription required)

… ‘COLLISION’ OPENS DOOR TO DISCUSSION OF FUTURE

Also this week (and again in connection with the GAC), NASCUS’ Lucy Ito participated in the “Underground Collision,” an event held in advance of the credit union meeting and hosted by consulting firm Mitchell Stankovic and Associates. The event included credit union executives and other leaders who discussed the future of the cooperative financial institutions in achieving their social mission. Ito addressed the business model that best fits the credit union cooperative model, including the idea of breaking up credit unions – which she rejected. “The credit union movement is still tiny when compared to banks; credit unions have about $1.5 trillion in assets, and banks have more than $18 trillion,” she told the group. “So breaking up credit unions would mean losing our collective scale. My fantasy is to have every single credit union participating in shared branching and shared ATMs. And we should remember there was a time when people said if we offered share drafts we would no longer be credit unions.”

SENATE GIVES NOD TO TWO NEW NCUA BOARD MEMBERS …

Rodney E. Hood and Todd M. Harper were confirmed by the Senate late Thursday to two seats on the NCUA Board, which (once they are sworn into office) will bring the board up to its full three-member complement for the first time since 2016. Republican Hood will take the place of Democrat Rick Metsger, whose term ended in August 2017 (he has been serving as a holdover since then). Harper – a Democrat — takes the seat formerly held by former Chairman Debbie Matz, who left the board in 2016. Hood’s term runs until August 2023; Harper’s term runs until April 2021. Current NCUA Board Member J. Mark McWatters is serving a term that ends in August of this year.

In a statement, NASCUS President and CEO Lucy Ito called the new board that will result once Hood and Harper take office as perhaps “the most qualified in NCUA history,” citing their professional backgrounds. She detailed: McWatters’ 4.5 years on the NCUA Board and more than 30 years’ experience as a lawyer and CPA in financial services; Hood’s previous, four-year service on the NCUA Board, plus his work in community development at Bank of America, Wells Fargo and JPMorgan Chase banks; Harper’s previous service as an NCUA senior executive and advisor to two board chairs, as well as his experience as a subcommittee staff director on Capitol Hill.

“The newly constituted board bodes well not only for NCUA, but also for the broader credit union system. We congratulate Mr. Hood and Mr. Harper and look forward to continuing our positive working relationship with Chairman McWatters and to developing strong relationships with the new Board Members.”

… WHILE FORMER BOARD APPROVES FINAL LENDING RULE

The NCUA Board – meeting Thursday for just 22 minutes, and for the last time with Board Member Rick Metsger– approved a final rule on loans and lines of credit to members, which the agency said was designed to make the regulation “more user friendly.”

The final rule, effective 30 days after publication in the Federal Register, does the following according to the agency:

• For federal credit unions: identifies in one section all maturity limits that apply to different types of their loans;
• For all federally insured credit unions: clarifies that the maturity date for a “new loan” under generally accepted accounting principles (GAAP) is calculated from the new date of origination; and
• regarding the limits for loans to a single borrower or group of associated borrowers, provides cross-citations to the specific loan participation and commercial loans limits in the general limit section of the regulation.

NASCUS, in its comment letter on the proposal, recommended that the agency retain in the final rule a provision that allows states to seek an exemption for federally insured, state chartered credit unions (FISCUs) if the prudential regulator of that state promulgates similar rules. NCUA preserved that provision in the final rule.

LINK:
Loans to Members and Lines of Credit to Members

METSGER, MCWATTERS LAUD COOPERATION

Earlier in the week, during the GAC, NCUA Board Chairman J. Mark McWatters and outgoing Board Member Rick Metsger told credit union representatives that their cooperative approach to regulation paid dividends to the credit union industry.

Metsger and McWatters, appearing during a GAC joint session, told the gathered credit union representatives that they oversaw reform and modernization during their tenure at NCUA (Metsger previously served as board chairman). That allowed both the agency and credit unions, McWatters said, “to navigate a rapidly evolving financial services marketplace while still maintaining safety and soundness.”

Metsger had some words of advice for credit unions: that they consider their product and service mix to ensure they are able to meet their members’ future needs.

McWatters’ term expires in August. Metsger’s term concluded in August 2017; he has been serving in holdover capacity.

LINK:
NCUA release: NCUA Board’s Partnership Transformed Regulatory Structure

REPORT NOTES ALTERNATING EXAM PROGRAM PILOT AS HIGHLIGHT

A program involving NASCUS that developed an alternating examination pilot program for state and federal regulators — and which got underway this year — is among the highlights noted by NCUA in its annual report issued this week.

The report notes that the pilot — developed by NASCUS and its six state regulator members with NCUA — is designed to provide insight into how an alternating examination program can improve coordination and optimize federal and state resources, “while still maintaining the safety and soundness of federally insured, state-chartered credit unions.” The report states that the program “will also explore potential improvements that can lead to better consistency and communication between the NCUA, as the insurer, and the prudential state regulatory agencies.”

In other areas, the NCUA report notes that it took 97 enforcement actions against FISCUs in 2018 (out of a total 278 taken against all federally insured credit unions in 2018 – or 35%). That’s fewer enforcement actions taken against FISCUs in 2017, when 99 enforcement actions were taken.

The actions in 2018 against FISCUs were: 69 unpublished Letters of Understanding and Agreement (LUAs); 14 preliminary warning letters; nine conservatorships, and; five cease-and-desist orders.

Last year’s numbers were much lower than those reported in 2014, according to the report, when 454 enforcement actions were taken, 36% of those against FISCUs (or 164 actions). Those included 139 LUAs, according to the report.

LINK:
NCUA Releases 2018 Annual Report

MARIJUANA BIZ BANKING BILLS IN PLAY

Legislation to allow credit unions to safely serve their members’ related needs in states where marijuana is legal was introduced in the House last week, setting the stage for more discussion and – perhaps – a vote on the floor.

H.R. 1595, the Secure and Fair Enforcement (SAFE) Banking Act of 2019, was introduced by Rep. Ed Perlmutter (D-Colo.) with Reps. Denny Heck (D-Wash.), Steve Stivers (R-Ohio), and Warren Davidson (R-Ohio). To date, the bill is co-sponsored by 113 other House members.

The legislation proposes to give legal cannabis-related businesses access to financial institution services and exempt from federal prosecution (or investigation) those financial institutions and their employees solely for providing services to state-authorized cannabis-related businesses. According to the bill text, it would “harmonize federal and state law concerning cannabis-related businesses and allow these businesses access to banking services,” according to a draft of the bill. Last month, the House Financial Services Committee held a first-ever hearing on cannabis-related banking, as well as the legislation.

There are other cannabis-related bills pending in the Congress, among them H.R. 1119 and S.421, the “Responsibly Addressing the Marijuana Policy Gap Act of 2019.” Offered (in the House) by Rep. Earl Blumenauer (D-Oregon) and (in the Senate) by Sen. Ron Wyden (D-Oregon), the legislation would (among other things) prohibit federal credit union and banking regulators taking actions against a credit union or bank “solely because the depository institution provides or has provided financial services to a marijuana-related business,” and as long as the institution is providing service to legal cannabis-related businesses under state law.

LINKS:
HR 1595 – Secure and Fair Enforcement (SAFE) Banking Act of 2019

H.R.1119 – Responsibly Addressing the Marijuana Policy Gap Act of 2019

S.421 – Responsibly Addressing the Marijuana Policy Gap Act of 2019

CFPB PAYDAY LOAN RULE, MLA TOP TOPICS AT SENATE HEARING

Revisions to the payday lending rule, and supervisory authority over the Military Lending Act (MLA), were two points of focus for senators during a hearing with the director of the CFPB this week. In a hearing that was dominated by Democrats (only four Republicans appeared at the hearing to ask questions, out of 13 total on the committee), CFPB Director Kathleen (“Kathy”) Kraninger told the Senate Banking Committee that she has an “open mind” regarding revisions to the payday rule, and reiterated her call to Congress that it give CFPB explicit authority (through legislation) to supervise for MLA compliance.

The Democrats were skeptical of both, criticizing the CFPB’s proposed payday loan rule provisions and voicing angst over the MLA issue. On the revisions to the “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the payday rule), which would remove mandatory underwriting provisions of the regulation, senators chastised Kraninger saying the change would only increase profits to payday lenders. But the CFPB director held her ground, saying the bureau “has a responsibility to look at the full record” of the rule, and a court stayed the rule’s implementation after the bureau pledged a “reconsideration of its process” in developing the regulation.

On MLA supervision (which the bureau said last year it would cease conducting supervisory exams over because it lacked specific authority to do so), Kraninger noted she has written to the speaker of the House and vice president asking them to consider draft legislation that she said would give her agency clear authority to supervise for compliance. But the senators told her she already had the authority. ““I am frankly appalled that you have decided that MLA is not in your supervisory authority,” Sen. Jack Reed (D-R.I.) said.

MARK YOUR CALENDARS FOR NASCUS 101 (APRIL 25)

Don’t forget that the official NASCUS 101 Member Orientation is coming on April 25, a one-hour (no charge) webinar that brings together members, prospective members or anyone else interested in NASCUS to better understand the unique tools and benefits NASCUS offers. Attendees also hear from their peers—a member network of state regulators, credit unions, credit union leagues, and other system supporters—and how they leverage their NASCUS membership. The webinar ends with a Q&A session. Advance registration required; sign up today!

LINK:
Agenda, registration for April 25 NASCUS 101 webinar (no charge)

BRIEFLY: Congratulations to award winners; UDAAP findings listed in first CFPB highlights for ’19

Congratulations to 2019 Herb Wegner Award Winners Diana Dykstra, president and CEO of the California and Nevada Credit Union Leagues; Crystal Long, president and CEO of Government Employees CU (in El Paso, Texas) and; Nusenda Credit Union (New Mexico). The California and Nevada Credit Union Leagues, as well as GECU are NASCUS members … Findings of unfair, deceptive, or abusive acts or practices connected to auto loan servicing, deposits, mortgage servicing, and remittances are described in the winter 2019 edition of the Consumer Financial Protection Bureau (CFPB) Supervisory Highlights. The highlights, and all recent CFPB reports, are listed on the NASCUS website under our CFPB pages.

LINK:
NASCUS CFPB news, updates

A panel of federal appeals court judges has ruled that the structure of the Consumer Financial Protection Bureau (CFPB) is constitutional, overturning an earlier decision in the U.S. Court of Appeals for the D.C. Circuit, and that the consumer protection bureau is an “independent” agency.

The decision could set the stage for an appeal to the Supreme Court.

“Because we see no constitutional defect in Congress’s choice to bestow on the CFPB Director protection against removal except for ‘inefficiency, neglect of duty, or malfeasance in office’, we sustain it,” the panel of judges wrote in their decision, referring to the agency’s structure.

The 7-3 decision issued by the 10 members of the D.C. Circuit appeals court panel, sitting “en banc” (meaning appeals judges from within the circuit), found that the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) shielding the Director of the CFPB from removal without cause is “consistent with Article II” of the U.S. Constitution.

“The Supreme Court 80 years ago sustained the constitutionality of the independent Federal Trade Commission, a consumer-protection financial regulator with powers analogous to those of the CFPB,” stated the court’s decision, written by Judge Nina Pillard for the majority. “In doing so, the Court approved the very means of independence Congress used here: protection of agency leadership from at-will removal by the President. The Court has since reaffirmed and built on that precedent, and Congress has embraced and relied on it in designing independent agencies.”

The panel was reviewing an Oct. 11, 2016 decision (CFPB v. PHH) by a three-judge panel of the appeals court that overturned a lower court decision. The appeals court panel ruled that the single-director structure of the CFPB as devised is unconstitutional, representing too great a concentration of executive power – and that the director, consequently, must serve at the will of the president (and not be subject for removal only “for cause”).

That court also ruled that CFPB, going forward, could no longer be considered an independent agency.

In February 2017, the CFPB was granted the “en banc’ review by the appeals court. Since then, the director of the agency (Richard Cordray, appointed by President Barack Obama), has stepped down. President Donald Trump in November tapped Mick Mulvaney as acting director.

In a statement, House Financial Services Committee Chairman Jeb Hensarling (R-Texas), a frequent critic of the CFPB under the Obama administration, said he was disappointed by the decision and that hoped the Supreme Court will review the ruling in short order.

“Even though I have total confidence in Acting Director Mulvaney’s vision, the fact remains that no one person in America – especially someone who is unelected – should have the authority to unilaterally control whether working Americans can get a mortgage or a checking account,” he said. “The Bureau’s consumer protection mission is important, but no government agency – no matter how well-intentioned – should be able to evade common sense checks and balances that are necessary for accountability.”

Meanwhile, the firm that brought the original lawsuit against CFPB (PHH Corp.) gave no indication it intended to appeal to the Supreme Court. In a statement, the company focused solely on its original claim in the case regarding fees for mortgage reinsurance. Since the decision leaves intact a lower court decision which removed a multi-million dollar fine assessed against the company by the bureau, it is less likely that it will, according to some reports.

“The decision by the full D.C. Circuit Court of Appeals to uphold the panel’s ruling to overturn former Director Cordray’s decision under RESPA with respect to our former mortgage reinsurance activities, which includes vacating the $109 million penalty, is an important and gratifying outcome for PHH and the industry,” the company stated. “We continue to believe that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects. Regarding the remand, we will continue to present, if necessary, the facts and evidence to support our position that mortgage insurers did not pay more than reasonable market value to PHH affiliated reinsurers.”

LINK:
‘En banc’ decision in appeal of PHH v. CFPBCFPB Case

A series of “requests for information” to determine if the Consumer Financial Protection Bureau (CFPB) is fulfilling its “proper and appropriate functions to best protect consumers” will be published in coming days, the acting director of the federal agency said Wednesday.

In a release, Acting CFPB Director Mick Mulvaney said he is issuing the call for “evidence” of the agency’s functions in performing its role through the RFIs to provide the public am opportunity to provide feedback and suggest ways to “improve outcomes for both consumers and covered entities.”

The information requests, Mulvaney said, would seek comment on enforcement, supervision, rulemaking, market monitoring, and education activities.

“In this New Year, and under new leadership, it is natural for the Bureau to critically examine its policies and practices to ensure they align with the Bureau’s statutory mandate,” Mulvaney said. “Moving forward, the Bureau will consistently seek out constructive feedback and welcome ideas for improvement.

The acting director said much can be done to facilitate greater consumer choice and efficient markets “while vigorously enforcing consumer financial law in a way that guarantees due process.”

According to the agency’s release, the first RFI will seek comment on Civil Investigative Demands (CIDs), which are issued during enforcement investigations. Comments, the agency said, will help the Bureau evaluate existing CID processes and procedures, and to determine whether changes are warranted.

LINK:

CFPB Release: Acting Director Mulvaney Announces Call for Evidence Regarding Consumer Financial Protection Bureau Functions

A congressional repeal of the rule banning use of arbitration agreements for most financial products was formally signed into law by President Donald Trump Wednesday, following a close vote in the Senate and a personal appeal by Consumer Financial Protection Bureau (CFPB) Director Richard Cordray to Trump to veto the legislation.

Earlier in the week, Cordray wrote to Trump in a personal appeal to veto the repeal of the CFPB rule, which would have allowed consumers to join in class actions over disputes about financial products, including credit cards and bank accounts. The Senate on Oct. 24 passed the repeal resolution by a one-vote margin (51-50), cast by Vice President Mike Pence; the House passed the resolution earlier this year. The repeal was passed under the auspices of the Congressional Review Act (CRA).

“I think you really don’t like to see American families, including veterans and service members, get cheated out of their hard-earned money and be left helpless to fight back,” Cordray wrote. “I know that some have made elaborate arguments to pretend like that is not what is happening, ” he wrote. “But you are a smart man, and I think we both know what is really happening here.”

Despite Cordray’s plea, Trump signed the repeal bill; the White House issued no statement about his action.

However, Acting Comptroller of the Currency Keith Noreika – who publicly challenged the CFPB’s data supporting the rule – issued a statement, saying he applauded Congress and the president for vacating the rule. “The rule would have harmed consumers even as it provided no benefit in deterring bank misbehavior or preventing customer abuse,” Noreika said, noting that the regulation likely would have significantly increased the cost of credit for hardworking Americans and “taken away a valuable tool for resolving differences among banks and their customers.”

Under the CRA, once a rule is repealed it may not be reissued in substantially the same form – nor may a new rule that is substantially the same be issued – “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original,” according to the statute, passed in 1996.

Proposed changes to NCUA rules regarding voluntary mergers are opposed by NASCUS, primarily because of the proposal’s lack of deference to state law, the association for the state credit union system wrote in its official comment letter to the agency.

In addition, NASCUS pointed out several other problematic areas and asserted that the agency should have issued the proposal as an advance notice of proposed rulemaking (ANPR) rather than a proposed rule, given the uncertainty of the rule’s application to FISCUs.

The proposed rule, as presented by NCUA, would revise the procedures a federally insured credit union must follow to merge voluntarily with another credit union. At its meeting in May (when the proposal was issued), NCUA staff noted that the proposal addresses concerns of the agency that “merger packets” presented to members in advance of merger decisions are not “serving members’ needs.” The proposal is also aimed, staff said, at clarifying contents and format of the member notice of the merger “so that members of merging federal credit unions have better information about the merger transaction.” Further, the proposal would require merging FCUs to disclose all merger-related compensation for certain employees and officials of the merging FCU.

In its comment letter, NASCUS made clear that the proposal should not apply to FISCUs. “With respect to a FISCU, NCUA’s sole concern should be mitigating risk to the National Credit Union Share Insurance Fund (NCUSIF),” NASCUS Executive Vice President and General Counsel Brian Knight wrote. “In the absence of any clear and compelling nexus between the activity being regulated and risk to the NCUSIF, NCUA should defer to state law. Nowhere in the preamble to the proposed rule does NCUA articulate an NCUSIF risk that would compel extension of this proposal to FISCUs.”

NASCUS also pointed out that FISCUs are already subject to more extensive disclosure requirements than are FCUs. For example, the NASCUS letter noted, all FISCUs must complete annual Internal Revenue Service Form 990 filings, which require disclosure of any compensation paid to directors and officers, the compensation paid to “key employees” (employees earning more than $150,000.00 in reportable compensation, and “highly paid” employees (the top 5 employees earning more than $100,000.00 in reportable compensation)

In other areas, NASCUS asserted that the proposal – especially with respect to FISCUs – should have been issued as an ANPR. “On its face, the proposal as published is unclear as to what exactly NCUA proposes to apply to FISCUs,” NASCUS wrote. “This lack of clarity in the proposal puts the state system at a disadvantage evaluating the rule.”

Other problematic areas of the proposal, NASCUS wrote, include:

• Definitions of “covered persons” and scope of compensation, which NASCUS described respectively as dubious (since there is no asset threshold set – which could result in modest-sized credit unions required to report all their employees) and “too broad.”
• The requirement that 24 months of board minutes which reference a merger is “overly broad,” noting that federal and state supervisors already have unlimited access to a credit union’s board minutes, books and records.
• “Member to member” communication requirements (in disseminating information about a proposed merger) raises concern about “practical operation” of the provision. “NCUA should more carefully consider whether the potential for acrimony among members is outweighed by the marginal benefit of compelling the credit union to send unsolicited member communications to other members,” NASCUS wrote. “Ultimately, it is the credit union’s reputation at risk in member-to-member communications. Disclaimers aside, members receiving an unwanted communication will lay blame on the credit union as the transmitter of the communique.”

 

Comments are due next week (Monday, July 31) about revised thresholds for reporting open-end lines of credit, proposed by the Consumer Financial Protection Bureau (CFPB), as noted in a summary posted by NASCUS today.

The summary notes that CFPB is looking for comments in two key areas:

• Whether or not the bureau should temporarily increase the open-end transactional coverage threshold. If so, whether to raise the threshold to 500 or to a larger or smaller number.
• Whether, if the bureau elects to increase the open-end transactional coverage threshold, it should do so for a period of two years or a longer/shorter period of time.

“The Bureau has engaged in industry outreach regarding the final rule and has been advised that the current open-end line of credit transactional threshold (less than 100 originated) is too low,” the NASCUS summary states. “As a result, the Bureau is now proposing to increase the exemption threshold for two years—calendar years 2018 and 2019.”

The summary notes that, under the proposed rule, institutions that originate fewer than 500 open-end lines of credit in either of the two preceding calendar years would not be required to collect and report data for a temporary, two year period.  The open-end line of credit reporting threshold will return to the previous standard effective January 1, 2020.

Four key changes to the methodology for determining the “overhead transfer rate” (OTR) of funds from the National Credit Union Share Insurance Fund (NCUSIF) to cover a percentage of the annual NCUA budget are outlined in a new summary published by NASCUS.

In late June, the NCUA Board issued a proposed rule designed to enhance the “transparency” of the OTR by, the agency stated, simplifying the rate’s methodology. Last year, the board set the OTR at 67.7% — meaning that funds from the insurance fund would cover a little more than two-thirds of the agency’s operating budget. The summary points out that NCUA is proposing four key changes for setting rate in the future:

• Time spent examining and supervising federal credit unions would be allocated as 50% insurance related;
• All time and costs that the agency expends in supervising or evaluating the risks posed by federally insured, state-chartered credit unions (or other entities, such as vendors or CUSOs) will be allocated as 100% insurance-related;
• Time and costs related to NCUA’s role as charterer and enforcer of consumer protection and other non-insurance-based laws governing the operation of credit unions (such as field of membership requirements) are allocated as 0% insurance related;
• Time and costs related to NCUA’s role in administering federal share insurance and the Share Insurance Fund are allocated as 100% insurance related.

“NCUA would use the above principles to categorize hours allocated in its budget in order to formulate a portion of the OTR,” the NASCUS summary points out.

A 60-day comment period has been set by the agency for the proposed rule; comments are due Aug. 29.

LINK:
NASCUS Summary: Proposed rule, NCUA Revised Overhead Transfer Rate Methodology

Condensing 14, three-column Federal Register pages into essentially four typewritten pages, the NASCUS summary of NCUA’s recently proposed rule on its appeal procedures gets down to the meat of the proposal while making clear that the proposal does not cover supervisory actions taken by state regulators – only those taken by federal supervisors.

But the proposal does “homogenize” appeals processes covered in eight separate rules, in cases in which a decision rendered by a regional director or other program office director is subject to appeal to the Board. These kinds of decisions are regarded as “informal” decisions by NCUA. They include:

• Part 709 Claims of a Creditor of an Insolvent FICU under an NCUA Alternative Resolution Dispute Process;
• Payment of Claims Regarding Federally Insured Shares or Deposits;
• Chartering and Field of Membership (which apply solely to federal credit unions);
• Community Development Loans;
• Golden Parachutes;
• Investment Authority;
• Change of Officials for Troubled or Newly Chartered Credit Unions;
• Conversions and Mergers.

“Formal” agency determinations are not covered under the proposal, the NASCUS summary points out. Those formal determinations include Administrative Procedure Act (APA) adjudications, formal NCUA enforcement actions, prompt corrective action (PCA) orders, matters under jurisdiction of NCUA’s Supervisory Review Committee, creditor claims in liquidation, delegated final agency actions, others (such as FOIA requests).

The summary also notes that the proposal includes a new, recommended appeals rule, which establishes six new areas under section 746 of NCUA rules, covering such items as “request for consideration,” “appeal to the board,” and “procedures for an oral hearing.”

Comments on the proposal are due Aug. 7.

Link:

Summary: NCUA Appeal Procedures