Regulatory Alert 21-RA-01 CFPB Amends Ability-to-Repay/QM Rule under TILA

January 2021

The CFPB has issued 2 final rules amending the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) in Regulation Z. Both final rules below are effective March 1, 2021:

• The General QM Final Rulereplaces the existing 43% debt-to-income (DTI) ratio limit with price-based thresholds with a compliance date of July 1, 2021
• The Seasoned QM Final Rulecreates a new category of qualified mortgage

For more information, the CFPB provides a compliance guide and other resources.

• General QM Final Rule Amendment (12 CFR 1026.43)

Amendments to the QM rule remove the existing 43% DTI ratio limit and replaces it with a price-based limit and also remove Appendix Q.

The final rule retains the requirement to consider and verify the debt and income used to calculate a borrower’s DTI ratio or residual income as well as the existing product-feature and underwriting requirements, and limits on points and fees.

Price-Based Limits Replaces the 43% DTI

To qualify as a General QM loan pursuant to §1026.43(e)(2)(vi), the APR may not exceed the average prime offer rate (APOR) for a comparable transaction by more than the rule’s applicable threshold as of the date the interest rate is set. The thresholds are:

Lien Position	Loan Amount	Threshold
1st	Greater than or equal to $110,260	2.25%
1st	Greater than or equal to $66,156 but < $110,260	3.5%
1st	Less than $66,156	6.5%
Subordinate	Greater than or equal to $66,156	3.5%
Subordinate	Less than $66,156	6.5%

 

For first-lien loans secured by a manufactured home, the pricing thresholds are:

Loan amount < $110,260	Threshold 6.5%
Loan amount > $110,260	Threshold 2.25%

 

Consider and Verify Requirements (12 CFR 1026.43(e), (f)):

Lenders must consider the borrower’s current or reasonably expected income, assets, debt, alimony, child support, and monthly DTI ratio or residual income in the ATR determination. Written policies and procedures for evaluating ATR factors must be developed and maintained, and documentation for each loan showing how these factors were considered must be kept.

Lenders must verify the borrower’s income and debt consistent with the current general ATR standard, using reasonably reliable third-party records and reasonable methods and criteria.

• The Seasoned QM

Section 1026.43(e)(7) of the final rule creates the “Seasoned QM.” This subset of Qualified Mortgages have a safe harbor from ATR liability at the end of a 36-month seasoning period if the loan meets certain criteria. To be eligible, the loan must:

• Be secured by a 1^st lien
• Have a fixed rate, with fully amortizing payments and no balloon payment
• Have a term of 30 years or less
• Keep total points and fees within specified limits
• Not be defined as a Reg Z high-cost mortgage

In addition, Seasoned QMs generally may not be subject to commitment to be acquired by another person at time of consummation and must be held in portfolio until the end of the seasoning period. There are a few exceptions spelled out in the rule.

Performance Requirements

Seasoned QMs are subject to certain benchmarks tied to performance. Pursuant to          § 1026.43(e)(7)(ii)) & (iv)(A)(3)(ii)):

• At the ends of the seasoning period (36 months) loan can have no more than 2 delinquencies of 30 or more days and no delinquencies of 60 or more days
• The lender may accept deficient payments, within a payment tolerance of $50, on up to 3 occasions during the seasoning period without triggering a delinquency.

Regulatory Alert 20-RA-09 2021 Exemption Thresholds Adjustments Under the Truth in Lending Act (Regulation Z) and the Consumer Leasing Act

December 2020

NCUA’s Regulatory Alert notifies credit unions of the three annual exemption thresholds for 2021 related to 1) special appraisal requirements for higher-priced mortgage loans; and 2) consumer credit; and 3) lease transactions. The 2021 thresholds will be the same as the 2020 thresholds.

• Appraisals for Higher-Priced Mortgage Loans Exemption Threshold

The exemption threshold for 2021 will remain at $27,200 based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect as of 6/1/2020.

• Consumer Credit and Consumer Lease Exemption Thresholds (Regulation Z and Regulation M)

The exemption threshold for 2021 will remain at $58,300 based on the CPI-W in effect as of 6/1/2020.

CFPB Summary re: Statement of Policy on Applications for Early Termination of Consent Orders

12 CFR Chapter X

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

November 2020

Dodd Frank provides that the Consumer Financial Protection Bureau (CFPB) may enter into administrative consent orders where the Bureau has identified violations of Federal consumer financial law.  The Bureau acknowledges that there may be exceptional circumstances where it is appropriate to terminate a consent order before its original expiration date.  The Bureau has issued this policy statement setting forth a process by which an entity subject to a consent order may apply for early termination and articulates the standard that the Bureau intends to use when evaluating early termination applications.

The policy statement became effective on October 8, 2020 and can be found here.

Summary:

Under Dodd Frank, where the Bureau has found that an entity has violated Federal consumer financial law, the Bureau has the authority to settle claims against the entity by entering into an Administrative Consent Order.  Consent orders describe the Bureau’s findings/conclusions concerning the violations and generally impose injunctive relief, monetary relief such as redress and civil money penalties, and reporting, recordkeeping, and cooperation requirements.  Consent orders are negotiated by the Bureau and the entity (or entities) and generally have a five year term.  The Bureau believes that in most instances, the consent order should run its full, negotiated term.  However, the Bureau believes there may be exceptional circumstances when early termination of a consent order may be warranted.

The Bureau’s early termination policy sets forth a process by which entities subject to a consent order may apply for early termination.  The policy also lays out standards the Bureau intends to use when determining if early termination of a consent order is appropriate.  The Bureau notes that the policy is not binding on the Bureau and the Bureau’s Director intends to retain complete discretion and sole authority to terminate consent orders.

Applications for Early Termination

The Bureau intends to grant application for early termination of consent orders if it determines, in its sole discretion, that:

• The entity meets all of the eligibility criteria set forth below;
• The entity has complied with the terms and conditions of the consent order and
• The entity’s compliance position is “satisfactory” in the institutional product line (IPL) or compliance area (e.g. fair lending) for which the order was issued.

When an entity applies for termination, its application should demonstrate that these conditions are satisfied:

• The entity must be subject to a consent order the Bureau issued using its authority to conduct administrative adjudication proceedings.
• In order to protect consumers from unwarranted early terminations and preserve the resources of potential applicants and the Bureau, the Bureau only intends to consider applications for early termination under this policy from entities that meet certain threshold eligibility criteria. That criteria is as follows:
• The entity must be subject to a consent order the Bureau issued using its authority to conduct administrative adjudication proceedings. This policy does not apply to settlements approved and ordered by a court, which can only be terminated early by court order.  This policy does not apply to court orders that result from litigation.
• Only entities are eligible to apply for early termination under this policy. Individuals are not eligible. The Bureau only intends to grant early termination where, among other things, an entity demonstrates that its compliance management system is “satisfactory” in the institutional product line in which the consent order was issued.
• Entities may not apply for early termination under this policy within the first year after the entry of the consent order or at until at least six months after all compliance and redress plans required under the consent order been fully implemented, whichever is later.
• Entities are not eligible for early termination when the consent order imposes a ban on participating in a certain industry when the consent order issue involves violations of an earlier Bureau order or when there has been any criminal related to the violations found in the consent order.
• Finally, absent extraordinary circumstances, the Bureau does not intend to consider more than one request from an entity for termination of the same consent order. This eligibility requirement is intended to incentivize entities to submit complete applications at an appropriate time following the issuance of a consent order and to discourage serial requests that could pose a resource challenge for the Bureau.

Compliance with the consent order

When an entity applies for early termination, its application should demonstrate its full compliance with the consent order, including whether the entity has (when required) corrected violations of Federal consumer financial law; paid redress, civil money penalties or other monetary relief; adopted appropriate policies and procedures to ensure future compliance; submitted adequate reports; and maintained required records.

The Bureau intends to expeditiously review the entity’s compliance with the consent order and conduct follow up work as needed.  The Bureau generally intends to complete this compliance review within six months of receiving an application that the Bureau determines is complete, although the Bureau retains discretion over when to conduct the review to determine compliance with consent order provisions given the Bureau’s other supervisory/enforcement priorities.

The entity shall also demonstrate that is compliance management system for the IPL or compliance area at issue under the order is “satisfactory,” or the equivalent of a “2” rating under the Uniform Interagency Consumer Compliance Rating System.

Process for Submission and Review of Early Termination Applications

Unless otherwise directed in writing by the Bureau, an entity’s termination application should be submitted to the Bureau point of contact identified in the “Notices” section of the consent order.  Prior to submitting an application for order termination, an entity should contact the Bureau point of contact established in the consent order for additional guidance on the form of such a request.

In general, the entity’s application should demonstrate that the entity has satisfied all of the conditions set forth above.  The application may include exhibits and may reference prior written submissions to the Bureau as appropriate.  Any factual assertions an entity makes in its application should be made under oath by someone with personal knowledge of such facts.  The Bureau may request additional information from the entity when evaluating the application.  The Bureau may also consider any other information available to it regarding the entity, including information obtained from other government agencies or through other supervisory and enforcement activities involving the entity.

Bureau staff will make recommendations to the Bureau’s Director regarding whether to grant applications for early termination.  The Bureau’s Director intends to retain complete discretion and sole authority to terminate consent orders. The Director’s orders granting or denying termination applications will be posted on the Bureau’s online administrative docket and distributed to the entity.  Prior to the Director’s decision, an entity may withdraw its application at any time.

12 CFR Part 1074 (CFPB)

Prepared by NASCUS Legislative and Regulatory Affairs Division

November 2020

The OCC, Board, FDIC, NCUA and Bureau (collectively, “the agencies”) are inviting comment on a proposed rule that would codify the Interagency Statement Clarifying the Role of Supervisory Guidance issued by the agencies on September 11, 2018.   The proposed rule is intended to confirm that the agencies will continue to follow and respect the limits of administrative law in carrying out their supervisory responsibilities.  The 2018 statement reiterated well-established law by stating that, unlike a law or regulation, supervisory guidance does not have the force and effect of law.  As such, supervisory guidance does not create binding legal obligations for the public.  The proposal would also clarify that the 2018 Statement, as amended, is binding on the agencies.

Comments are due by January 4, 2021.  The proposed rule can be found here.

Summary 

The agencies recognize the important distinction between issuances that serve to implement acts of Congress (known as “regulations” or “legislative rules”) and non-binding supervisory guidance.  Regulations create binding legal obligations.  Supervisory guidance is issued by an agency to “advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power” and does not create binding legal obligations.

The agencies issued the Interagency Statement Clarifying the Role of Supervisory Guidance in 2018 to explain the role of supervisory guidance and the agencies’ approach to supervisory guidance.  The Statement noted that supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.  Supervisory guidance often provides examples of practices that mitigate risks, or that the agencies generally consider to be consistent with safety and soundness standards or other applicable laws and regulations, including those designed to protect consumers.

The 2018 Statement reiterates existing law and reaffirms the agencies’ understanding that supervisory guidance does not creating binding, enforceable legal obligations.  The Statement also reaffirms that the agencies do not issue supervisory criticisms for “violations” of supervisory guidance and describes the appropriate use of supervisory guidance by the agencies.  The agencies also expressed the following intentions within the Statement:

• Agencies will limit the number of numerical thresholds in guidance;
• Agencies will reduce the issuance of multiple supervisory guidance documents on the same topic;
• Agencies will continue efforts to make the role of supervisory guidance clear in communications to examiners and supervised institutions; and
• Agencies encourage supervised institutions to discuss their concerns about supervisory guidance with their appropriate agency contact.

This proposal is being issued in response to a petition that requested the agencies codify the 2018 interagency statement as well as provide additional clarification concerning questions that have arisen since the statement was issued.

Request for Comment

The agencies request comment on the following questions:

• Questions specific to communications regarding the supervisory guidance
  • Should examiners reference supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations when criticizing (through the issuance of matters requiring attention, matters requiring immediate attention, matters requiring board attention, documents of resolution, supervisory recommendations or otherwise) a supervised financial institution?
  • Are there specific situations where providing such examples would not be appropriate?
  • Is it sufficiently clear what types of agency communications constitute supervisory guidance? If not, what steps could the agencies take to clarify this?
  • Are there any additional clarifications to the 2018 Statement that would be helpful?
  • Are there other aspects of the proposal where you would like to offer comment?
• Questions specific to the plain language requirements re: Section 722 of Gramm-Leach Bliley Act
  • Have the agencies organized the material to suit your needs? If not, how could they present the proposed rule more clearly?
  • Are the requirements in the proposed rule clearly stated? If not, how could the proposed rule be more clearly stated?
  • Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification?
  • Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would achieve that?
  • Would more, but shorter, sections be better? If so, which sections should be changed?
  • What other changes can the agencies incorporate to make the regulation easier to understand?

CFPB Summary re: CARD Act Rules Review Pursuant to the Regulatory Flexibility Act; Request for Information Regarding consumer Credit Card Market

Docket No. CFPB 2020-0027

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

October 2020

The Consumer Financial Protection Bureau (CFPB) is requesting comment on two related but separate reviews. First, the Bureau is conducting a review of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).  As part of this review, the Bureau is seeking comment on the economic impact of the CARD Act Rules on small entities.  Information gathered for this review will be used to determine whether the rules should be continued without change or should be amended or rescinded, consistent with the stated objectives of applicable statutes to minimize any significant economic impact of the rules upon a substantial number of such small entities.  Additionally, the Bureau is conducting a review of the consumer credit card market, within the limits of its existing resources available for reporting purposes, pursuant to the CARD Act, and is seeking comment on a number of aspects of the consumer credit card market.

Comments are due by October 27, 2020.  The request for information can be found here.

Summary:

The CARD Act was signed into law in May 2009 and was intended to “establish fair and transparent practices related to the extension of credit” in the credit card market.

Regulatory Flexibility Action (RFA) Section 610 Review

The Regulatory Flexibility Act (RFA) requires each agency to consider the effect of certain rules it promulgates on small entities.  Section 610 of the RFA provides that each agency shall publish in the Federal Register a plan for the periodic review of the rules issued by the agency which have or will have a significant economic impact upon a substantial number of small entities.

According to Section 610, the purpose of the review is to determine whether such rules should be continued without change, or should be amended or rescinded, consistent with the stated objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of such small entities.  In each review, the Bureau will consider several factors:

• The continued need for the rule
• The nature of public complaints or comments on the rule
• The complexity of the rule
• The extent to which the rule overlaps, duplicates, or conflicts with Federal, State, or other rules; and
• The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.

Regarding the RFA Section 610 review, the Bureau asked the public to comment on the following:

• The current scale of the economic impacts of the rules on small entities and of their major components on small entities, including impacts on reporting, recordkeeping, and other compliance requirements.
• Whether and how those impacts on small entities could be reduced, consistent with the stated objectives of applicable statutes and the rules
• Current information relevant to the factors that the Bureau is required to consider in completing a Section 610 review under RFA, as directed above.

Where possible, the Bureau ask that commenters please submit detailed comments, data, and other information to support any submitted positions.

CARD Act Section 502(a) Review

Section 502(a) of the CARD Act requires the Bureau to conduct a review, within the limits of its existing resources available for reporting purposes, of the consumer credit card market every two years.  In addition, the Bureau is instructed to seek public comment as a part of this review.  The Bureau has issued four reports in relation to this review and will use the comments received from this Request for Information (RFI) to inform its next review.

The Bureau invites members of the public, including consumers, credit card issuers, industry analysts, consumer groups, and other interested persons to submit information and other comments relevant to the issues expressly identified, as well as any information they believe is relevant to a review of the credit card market.

The public is encouraged to respond generally to any or all of the questions below regarding the topic areas and are asked to indicate in their comments on which topic areas or questions they are commenting.

The terms of credit card agreements and practices of credit card issuers

• How have the substantive terms and conditions of credit card agreements or the length and complexity of such agreements changed over the past two years?
• How have issuers changed their pricing, marketing, underwriting or other practices?
• How are the terms of, and practices related to, major supplementary credit card features (such as credit card rewards, deferred interest promotions, balance transfers and cash advances) evolving?
• How have issuers changed their practices related to deferment, forbearance, or other forms of debt relief or assistance offered to consumers?
• How have creditors as well as third-party collectors changed their practices over the past two years of collecting on delinquent and charged-off credit card debt?
• Has the use of electronic communication (e.g. email or SMS) by creditors and debt collectors in connection with credit card debt grown or otherwise evolved?
• How are the practices of for-profit debt settlement companies changing and what trends are occurring in the debt settlement industry? How are creditors and non-profit credit counseling agencies responding to these changes and trends?

The effectiveness of disclosure of terms, fees, and other expenses of credit card plans

• How effective are current disclosures of rates, fees, and other cost terms of credit card accounts in conveying to consumers the costs of credit card plans?
• What further improvements in disclosure, if any, would benefit consumers and what costs would card issuers or others incur in providing such disclosures?
• How well are current credit card disclosure rules and practices adapted to the digital environment? What adaptations to credit card disclosure regimes in the digital environment would better serve consumers or reduce industry compliance burden?

The adequacy of protections against unfair or deceptive acts or practices relating to credit cards plans

• What unfair, deceptive, or abusive acts and practices exist in the credit card market? How prevalent are these acts and practices and what effect do they have? How might any such conduct be prevented and at what cost?

The cost and availability of consumer credit cards

• How have the cost and availability of consumer credit cards (including with respect to non-prime borrowers) changed since the Bureau reported on the credit card market in 2019? What is responsible for changes (or absence of changes) in costs and availability? Has the impact of the CARD Act on cost and availability changed over the past two years?
• How, if at all, are the characteristics of consumers with lower credit scores changing? How are groups of consumers in different score tiers faring in the market? How do other factors relating to consumer demographics or financial lives affect consumers’ ability to successfully obtain and use card credit?

The safety and soundness of credit card issuers

• How is the credit cycle evolving? What, if any, safety, and soundness risks are present or growing in this market, and which entities are disproportionately affected by these risks?
• How, if at all, do these safety and soundness risks to entities relate to long-term indebtedness on the part of some consumers, or changes in consumers’ ability to manage and pay their debts?
• Has the impact of the CARD Act on safety and soundness changed over the past two years?

The use of risk-based pricing for consumer credit cards

• How has the use of risk-based pricing for consumer credit cards changed since the Bureau reported on the credit card market in 2019? What has driven those changes or lack of changes? Has the impact of the CARD Act on risk-based pricing changed over the past two years?
• How have CARD Act provisions relating to risk-based pricing impacted (positively or negatively) the evolution of practices in this market?

Consumer credit card product innovation

• How has credit card product innovation changed since the Bureau reported on the credit card market in 2019? What has driven those changes or lack of changes? Has the impact of the CARD Act on product innovation changed over the past two years?
• How have broader innovations in finance, such as (but not limited to) new products and entrants, evolving digital tools, greater availability of and new applications for consumer data, and new technological tools (like machine learning), impacted the consumer credit card market, either directly or indirectly? In what ways do CARD Act provisions or its implementing regulations encourage or discourage innovation? In what ways do innovations increase or decrease the impact of certain CARD Act provisions or change the nature of those impacts?

Click on this link for the presentation by John Lass and C. Alan Peppers (members only)

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2020

NCUA and the other federal banking agencies (FBAs) have issued a joint statement updating their guidance regarding how they evaluate enforcement actions that are required by statute when financial institutions fail to meet BSA/AML/CFT obligations.

The statement:

• clarifies that isolated or technical violations or deficiencies are generally not considered the kinds of problems that would result in an enforcement action
• addresses how the agencies evaluate violations of individual BSA components (the Pillars) including examples of violations that would and would not result in a cease and desist order
• describes how the agencies incorporate CDD and recordkeeping requirements into evaluation of the internal controls Pillar of the BSA compliance program

Summary

Section 8(s) of the FDIA and section 206(q) of the FCUA requires FDIC and NCUA (respectively) examination programs include a review of the institution’s BSA/AML compliance program and that reports of examination describe any problem with the program. The statutes require the agencies issue a cease and desist if an institution has failed to establish and maintain a BSA/AML compliance program or has failed to correct any problem with the program previously reported to the institution by the agency.

Communicating Supervisory Concerns about BSA/AML Program

If FDIC or NCUA identify any supervisory concerns relating to an institution’s BSA/AML compliance program, the agency may communicate those concerns by various formal and informal means including:

• informal discussions between examiners and management during the examination or the supervisory process
• formal discussions between examiners and the board of directors as part of or following an examination, or as part of the ongoing supervision processes
• written communications from examiners or the Agency to the board of directors or senior management communicating concerns regarding the BSA program
• inclusion of a finding in the Report of Examination (ROE) or in other formal communications from an Agency to the institution’s board or management

The Joint Statement reiterates that BSA program deficiencies must be identified in a ROE or other written document reported to an institution’s board of directors or senior management as a violation of law or a matter that must be corrected. Certain isolated or technical violations of law and other issues or suggestions for improvement may be communicated through other means.

Program Failure Rising to Cease and Desist

The agencies provide the following examples of program violations that would rise to the level of the issuance of a cease and desist order:

• The institution fails to have a written BSA compliance program, including a customer identification program, that adequately covers the required program components or pillars
• The institution fails to implement a BSA compliance program that adequately covers the required program components or pillars
• The institution has defects in its BSA compliance program in one or more program components or pillars that indicate that either the written BSA/AML compliance program or its implementation is not effective, for example where the deficiencies are coupled with other aggravating factors such as:
  • highly suspicious activity creating a potential for significant money laundering, terrorist financing, or other illicit financial transactions
  • patterns of structuring to evade reporting requirements
  • significant insider complicity
  • systemic failures to file CTRs, SARs, or other required BSA reports

The agencies note that other types of deficiencies, including a deficiency in implementing a Pillar may not result in a cease and desist, unless the deficiencies are so severe they render the BSA program ineffective. The Joint Statement provides as an example an institution with deficiencies in its procedures for providing required BSA training could be subject to examiner criticism and/or supervisory action other than the issuance of a cease and desist order, unless the training program deficiencies are so severe or significant that the overall BSA program, taken as a whole, is not effective.

Failure to correct a previously reported problem with the BSA Program

The Joint Statement notes the agencies shall issue cease and desist orders when an institution fails to correct a BSA program problem previously reported to the institution by the agency. The 2 important determinations if a cease and desist would be issued are:

• The previously reported “problem” should involve substantive deficiencies in one or more of the required components or pillars of the BSA program; and
• To be “previously reported” the deficiency should have been communicated to the institution’s board or senior management in a ROE or other supervisory communication as a violation of law or regulation that is not isolated or technical, or as a matter that must be corrected.

The previously reported problem should be substantially the same as those previously reported to the institution to result in a cease and desist pursuant to this policy. The agencies acknowledge that certain types of problems with an institution’s BSA/AML compliance program may not be fully correctable before the next examination or within the planned timeframes for corrective actions due to unanticipated issues/developments. The Joint Statements notes that in such cases the agency need not issue a cease and desist if it determines the institution has made acceptable substantial progress toward correcting the problem.

Enforcement Actions for Other BSA/AML Requirements

The agencies may take formal or informal enforcement actions to address violations of BSA requirements other than the BSA compliance program or the Pillars such as CDD, beneficial ownership, foreign correspondent banking, and CTR/SAR requirements. Consistent with the treatment of program violations, isolated or technical violations of these non-program requirements are generally would not result in enforcement actions.

Suspicious Activity Reporting Requirements

The agencies will cite a violation of the SAR regulations, and will take appropriate supervisory action, if the institution’s failure to file SARs evidences a systemic breakdown in its policies, procedures, or processes to identify and research suspicious activity, involves a pattern or practice of noncompliance with the filing requirement, or represents a significant or egregious situation.

Other BSA Reporting and Recordkeeping Requirements

Finally, the Joint Statement notes other BSA reporting and recordkeeping requirements including requirements applicable to cash and monetary instrument transactions and funds transfers, CTR filing and exemption rules, due diligence, certification, and other requirements that may be applicable to customer accounts and foreign correspondent and private banking accounts. These additional regulatory requirements are evaluated as a part of the internal control component or Pillar of the institution’s BSA/AML compliance program.

Prepared by NASCUS Legislative & Regulatory Affairs Department
September 2020

FinCEN has issued a final rule applying BSA compliance program requirements to privately insured credit unions (PICUs) and other financial institutions without a functional federal regulator.  The Final Rule requires minimum standards for anti-money laundering programs for PICUs and extends customer identification program requirements and beneficial ownership requirements to those banks not already subject to these requirements.

NASCUS Note: As a practical matter, state regulators had already required under state rules that PICUs comply with the BSA in the same manner and to the same extent as all other covered banks and credit unions.

The Final Rule may be read here. The rule is effective November 16, 2020. 

Summary

The final rule formally  extends the following BSA/AML requirements to privately insured credit unions and other entities lacking a functional federal regulator.

AML Programs – Section 352 of the USA PATRIOT Act requires financial institutions to establish AML programs that, at a minimum, include:

1. the development of internal policies, procedures, and controls
2. the designation of a compliance officer
3. an ongoing employee training program
4. an independent audit function to test programs

CIP – Section 326 of the USA PATRIOT Act requires FinCEN to prescribe Customer Identification Program (CIP) regulations requiring financial institutions to establish procedures for account opening that:

1. verify the identity of any person seeking to open an account
2. provide for maintaining records of the information used to verify the member’s/customer’s identity, including name, address, and other identifying information
3. determine whether the person appears on government lists of known or suspected terrorists or terrorist organizations

Correspondent Accounts – Section 312 of the USA PATRIOT Act requires financial institutions that administer correspondent or a private banking accounts in the United States for a non-U.S. person to subject the accounts to certain AML measures designed

to detect and report possible money laundering through the accounts. Section 5318(i)(2) of the BSA specifies additional standards for correspondent accounts maintained for certain foreign banks and sets minimum due diligence requirements for private banking accounts for non-U.S. persons.  Specifically, covered financial institution must:

1. ascertain the identity of the beneficial owners of, and sources of funds deposited into, private banking accounts
2. conduct enhanced scrutiny of private banking accounts related to senior foreign political figures and their families and associates

Joint Statement Summary

Joint Statement on Additional Loan Accommodations Related to COVID-19

August 2020

The Federal Financial Institutions Examination Council (FFIEC) has issued a Joint Statement to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans near the end of initial loan accommodation periods  applicable during the COVID-19 pandemic. The FFIEC intends the principles in the joint statement to be tailored to a financial institution’s size, complexity, and loan portfolio risk profile, as well as the industry and business focus of its customers/members.

Background

To address the impact of the COVID-19 crisis, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) providing several forms of relief to businesses and borrowers. In addition, some states and localities have provided similar credit accommodations and many financial institutions have voluntarily offered other credit accommodations to their borrowers.

At issue is that some borrowers will be unable to meet their obligations at the end of these initial COVID-19 related accommodations due to continuing financial challenges.  Furthermore, some financial institutions will have difficulty assessing credit risk going forward due to difficulty in distinguishing between the unique impact of COVID, the impact of government intervention programs, and lasting financial deterioration.

The FFIEC encourages institutions to consider prudent accommodation options that can benefit borrowers while facilitating the institution’s ability to collect on the loan.

FFIEC identifies the following principles to guide institutions in working with borrowers as loans near the end of the initial accommodation period:

• Prudent Risk Management Practices

Prudent risk management means measuring and monitoring the credit risks of loans that receive accommodations to identify any deterioration in credit worthiness and potential loss exposure in a timely manner. This may include applying and adjusting loan risk ratings or grades and making appropriate accrual status decisions on loans affected by the pandemic. The FFIEC notes that following a loan accommodation, institutions generally re-evaluate the loan’s risk ratings based on the borrower’s current debt level, current financial condition, repayment ability, and collateral.  A reasonable accommodation need not result in an adverse risk rating solely because of a decline in the value of underlying collateral.

When executing accommodations, institutions should provide borrowers clear, accurate, and timely information regarding the accommodation.

• Well-Structured and Sustainable Accommodations

When a borrower continues to experience financial challenges after an initial accommodation, it may be prudent to consider additional accommodation options to mitigate potential losses for both the borrower and the institution. A well designed and effective accommodation will be based on an evaluation of how the borrower has been affected by financial hardship and the potential for future performance.

 

The decision to offer additional accommodations to a borrower should be based on the risk assessment and potential collectability of the specific credit. For both consumer and commercial credit, the FFIEC notes that such an evaluation typically includes assessing:

• the borrower’s financial condition and repayment capacity
• whether conditions have affected collateral values or the strength of guarantees

For commercial credits, this would also include:

• evaluating both actual and projected cash flows of a borrower’s business

Because the pandemic may have a long-term adverse effect on a borrower’s future earnings, underwriting decisions may have to rely more heavily on projected financials in the absence of traditional documentation.

• Consumer Protection

The FFIEC Statement includes the following principles for effective consumer compliance risk management:

1. Provide accommodation options that are affordable and sustainable
2. Provide clear, conspicuous, and accurate communications and disclosures to inform the borrowers of the available options
3. Provide communications and disclosures in a timely manner to allow adequate time for both the borrower and the institution to consider next steps, which may include:
4. payment deferral, loan modification, or loan extension
5. Base eligibility and payment terms on consistent analyses of financial condition and reasonable capacity to repay
6. Ensure policies and procedures reflect the accommodation options offered by the institution and promote consistency with applicable laws and regulations such as:
7. Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Servicemembers Civil Relief Act (SCRA), Truth in Lending Act (TILA), and UDAP rules
8. Provide appropriate training to staff
9. Ensure risk monitoring, audit, and consumer complaint systems are adequate to evaluate compliance with applicable laws, regulations, policies, and procedures
10. Provide complete and accurate information to borrowers and servicers and ensure post-transfer servicing is consistent with the loan agreement

Accounting and Regulatory Reporting

The FFIEC stresses the importance of following applicable accounting and regulatory reporting requirements for all loan modifications (as the term is used in GAAP and regulatory reporting instructions), including maintaining appropriate allowances for ALLL and ACL. Appropriate methodologies for calculating ALLL or ACL consider all relevant information such as changes in borrower financial condition, collateral values, lending practices, and economic conditions resulting from the pandemic.

Institutions should review the CARES Act § 4013 (NASCUS note: See helpful OCC Guide) and the Interagency Statement on Loan Modifications & Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (TDR) for a limited period of time to account for the effects of the pandemic and the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013.

• If an institution electing to account for a modification under § 4013, an additional loan modification could also be eligible if each modification is 1) related to COVID; 2) on a loan not more than 30 days past due as of 12/21/2019; and (3) executed between 3/1/2020 and the earlier of 60 days after the end of the National Emergency or 12/31/2020.
• For non-CARES Act § 4013 loan modifications, any additional modifications should be viewed cumulatively in determining whether the additional modification is a TDR.

 

For example, if modifications for a loan are all COVID event related, in total represent short-term modifications (e.g., 6 months or less combined), and the borrower is contractually current (i.e., less than 30 days past due on all contractual payments) at the time of the subsequent modification, management may continue to presume the borrower is not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and the subsequent modification of loan terms would not be considered a TDR.

 

• For all other subsequent loan modifications, institutions can evaluate subsequent modifications by referring to applicable regulatory reporting instructions and internal accounting policies to determine whether such modifications are accounted for as TDRs under ASC Subtopic 310-40, “Receivables-Troubled Debt Restructurings by Creditors.” For additional guidance, institutions can reference Interagency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings.

The FFIEC notes that the loan’s payment date is governed by the due date stipulated in the loan agreement and therefore past due status should be reported in accordance with the revised contractual terms of a loan.

• Internal Control Systems

Institutions should periodically test internal controls related to managing accommodations to ensure they are functioning properly to mitigate risk. Such testing typically confirms:

• Accommodation terms are extended with appropriate approvals
• Accommodations offered to borrowers are presented and processed in a fair and consistent manner and comply with applicable laws and regulations
• Servicing systems accurately consolidate balances, calculate required payments, and process billing statements for the full range of potential repayment terms that exist once the accommodation periods end
• Staff involved in all aspects of lending, collections and making accommodations are qualified and can handle expected workloads
• Borrower and guarantor communications, and legal documentation, are clear, accurate, and timely, and in accordance with contractual terms, policy guidelines, and federal and state laws and regulatory requirements
• Risk rating assessments are timely and appropriately supported

The members of the FFIEC are the FRB, FDIC, NCUA OCC, CFPB, and state regulators.

 

-End-

Joint Statement Summary

Federal and State Financial Regulatory Agencies Issue Interagency Statement on Supervisory Practices Regarding Financial Institutions Affected by Hurricane Laura and California Wildfires

September 2020

NCUA, the Federal Bank Regulators (FBAs), and state regulators issued this Joint Statement in recognition of the serious impact of Hurricane Laura and the California wildfires on the customers/members and operations of many financial institutions in affected disaster areas. The Statement highlights several areas where institutions might be affected and the corresponding supervisory perspective:

• Lending – Prudent efforts to modify existing loans in affected areas should not be subject to examiner criticism. Loan modifications should be evaluated on a case-by-case basis to determine whether they are classified as a TDR.
•  Temporary Facilities – For institutions in affected areas facing disruptions in staffing, power, and other operational challenges, regulators will expedite, as appropriate, requests to operate temporary facilities to provide more convenient availability of services to consumers/members affected by the disasters. 
•  Publishing Requirements – Damage in the disaster areas may affect compliance with publishing and other rules related to branch closings, relocations, and temporary facilities. Affected institutions experiencing disaster-related difficulties in complying with these rules should contact their regulators.
•  Regulatory Reporting Requirements: Affected institutions anticipating difficulty meeting the agencies’ reporting requirements should discuss their situation with their primary federal and/or state regulator. to discuss their situation. The agencies do not expect to assess penalties or take other supervisory action against disaster affected institutions that take reasonable and prudent steps to comply with the agencies’ regulatory reporting requirements.
•  Community Reinvestment Act (CRA): Institutions may receive CRA consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas in their assessment areas or in the states or regions that include their assessment areas. See this CRA Q&A.
•  Investments: The agencies realize local government projects may be negatively affected by Hurricane Laura and California wildfires. Institutions should monitor municipal securities and loans affected by these disasters.

For more information, refer to the Interagency Supervisory Examiner Guidance for Institutions Affected by a Major Disaster.

 

-End

FinCEN                                             

Advance Notice of Proposed Rulemaking (ANPR)

Anti-Money Laundering Program Effectiveness             

Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department

September 2020

 The Financial Crimes Enforcement Network (FinCEN) has issued an ANPR to make substantial changes to the BSA regulatory framework with the potential to provide institutions greater flexibility in administering their BSA programs. FinCEN seeks comments on whether to establish a standard that BSA compliance programs be “effective and reasonably designed” and defined as programs that:

• assesses and manages risk as informed by a financial institution’s own risk assessment process, including consideration of AML priorities to be issued by FinCEN consistent with the proposed amendments
• provides for compliance with BSA requirements
• provides for the reporting of information with a high degree of usefulness to government authorities

FinCEN also seeks comment on whether to impose an explicit requirement for a risk assessment process and for the Director of FinCEN to issue a list of national AML priorities every two years.

In addition to these general comments, FinCEN asks 11 specific questions for commenters to address.

The proposed rule may be read here. Comments are due to FinCEN November 16, 2020.  

Summary

The BSA/AML/CFT compliance regime today is built upon several foundational laws:

• The Currency and Foreign Transactions Reporting Act of 1970 (The BSA)
• The Money Laundering Control Act of 1986 (MLCA)
• The Annunzio-Wylie Anti-Money Laundering Act of 1992 (Annunzio-Wylie)
• The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act)

As the financial sector has continued to innovate and embrace emerging technological advances, FinCEN has sought to ensure the BSA regime keeps base with the rapidly changing financial services marketplace as well as to evolving threats of illicit finance, such as money laundering, terrorist financing, and related crimes.

One way in which FinCEN works to keep apace with changes in the marketplace and threat landscape is through the work of the Bank Secrecy Act Advisory Group’s (BSAAG) AML Effectiveness Working Group. The BSAAG was created by the 1992 Annunzio-Wylie Act for the purpose of facilitating dialogue between the private sector and FinCEN.

BSA Advisory Group Recommends Changes

 In June, 2019, the BSAAG created an Anti-Money-Laundering Effectiveness Working Group (AMLE WG) to develop recommendations for strengthening the BSA by increasing its effectiveness and efficiency in order to allow financial institutions to reallocate resources to better focus on national BSA/AML/CFT priorities set by the government. The AMLE WG developed the following recommendations for improving the BSA (many of which form the basis for this ANPR):

1. Developing and Focusing on AML Priorities

The AMLE WG recommended that the BSA/AML regime be refocused to place greater emphasis on having institutions provide useful information to authorities in line with national AML priorities over focusing on auditable processes. This approach also favors promotion of clearer standards for evaluating the effectiveness of AML programs. The AMLE WG recommended that the relevant government agencies consider:

• Publishing a regulatory definition of AML program effectiveness
• Developing and communicating national AML priorities as set by government authorities
• Issuing clarifying guidance for financial institutions on the elements of an effective AML program

2. Reallocation of Compliance Resources

To facilitate BSA compliance, the AMLE WG recommended that activities that are not required by law/regulation be eliminated and the agencies consider:

• Clarifying current requirements and supervisory expectations with respect to risk assessments, negative media searches, customer risk categories, and initial and ongoing customer due diligence
• Revising existing guidance or regulations in areas such as PEPs and the application of existing model-risk-management guidance to AML systems to improve clarity, effectiveness, and compliance

3. Monitoring and Reporting

The AMLE WG recommended that AML monitoring and reporting practices be

modernized and streamlined to maximize efficiency, quality, and speed while still giving due consideration for privacy and data security.  The AMLE WG recommended:

• Clarifying expectations and updating practices for keep-open letters and suspicious activity monitoring, investigation, and reporting, including SARs based on grand jury subpoenas or negative media
• Supporting potential automation opportunities for high-frequency/low-complexity SARs and CTRs and possibly streamlining continuing SARs

4. Enhancing Information Sharing

To enhance communication of national AML priorities, typologies, and emerging threats, the AMLE WG recommended:

• Establishment of a working group with stakeholders (law enforcement, regulators, and financial institutions) to identify, prioritize, and recommend national AML priorities and communication of typologies, red flags, and other information related to national AML priorities
• Leveraging existing public/private information-sharing initiatives between the public and private BSA information sharing protocols and provisions
• Assessing options for institutions to receive feedback on BSA reports they file

5. Advance Regulatory Innovations

The AMLE WG recommended continuing to encourage financial institutions to utilize

innovation and pursue more effective and efficient BSA compliance practices.  The AMLE WG also recommended studying the impact of financial technology and other emerging non-bank financial service providers on the AML regime.

Specific Proposals in the ANPR

• Defining an “Effective and Reasonably Designed” AML Program

FinCEN seeks comment on whether it should clearly define a requirement for an “effective and reasonably designed” AML program in BSA regulations. FinCEN believes that incorporating an “effective and reasonably designed” AML program requirement with a clear definition of “effectiveness” would allow financial institutions to more efficiently allocate resources. Existing regulations already require AML programs be “reasonably designed” but do not define the term.

Specifically, FinCEN is considering defining an “effective and reasonably designed” AML program as one that contains the following 3 elements:

1. Identifies, assesses, and reasonably mitigates the risks resulting from illicit financial activity — including terrorist financing, money laundering, and other related financial crimes — consistent with both the institution’s risk profile and the risks communicated by relevant government authorities as national AML priorities;
2. Assures and monitors compliance with the recordkeeping and reporting requirements of the BSA; and
3. Provides information with a high degree of usefulness to government authorities consistent with both the institution’s risk assessment and the risks communicated by relevant government authorities as national AML priorities.

A. Identifying and Assessing Risks

FinCEN is considering whether to make a risk assessment an explicit regulatory requirement. FinCEN notes that a Federal Banking Agency Joint Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision issued in 2019 underscored the importance a risk-based approach to compliance. Comments are sought on whether such a requirement would complicate compliance efforts.

B. Consideration of the Strategic AML Priorities in the Risk-Assessment Process

FinCEN also seeks comments on whether the proposed definition of an “effective and reasonably designed” AML program would require financial institutions to consider and integrate national AML priorities into their risk-assessment processes.  Specifically, FinCEN askes for feedback on whether:

1. The Director of FinCEN should issue national AML priorities, to be called its “Strategic Anti-Money Laundering Priorities,” every two years.
2. Those priorities should be considered, among other information, in a financial institution’s risk assessment.

C. Risk Management and Mitigation Informed by Strategic AML Priorities

In addition to asking whether FinCEN should publish Strategic AML Priorities and whether those priorities should be incorporated into the risk assessment, FINCEN seeks comments on whether an “effective and reasonably designed” AML program should require that financial institutions reasonably manage and mitigate the risks identified in the risk-assessment process by taking into consideration the Strategic AML Priorities.

D. Assuring and Monitoring Compliance with the Recordkeeping and Reporting Requirements of the BSA

FinCEN seeks comment on whether BSA program obligations should be based on the risks identified by the financial institution. The agency notes that nothing in the ANPR would change BSA recordkeeping or reporting requirements.

E. Providing Information with a High Degree of Usefulness

In the ANPR, FinCEN discusses the importance of the BSA providing information with a high degree of usefulness to government authorities and notes that proposed changes would explicitly define providing information with a high degree of usefulness to government as a goal of the AML program.

 

Specific Questions

 In addition to the discussion of proposed changes above, FinCEN included a list of 11 specific questions:

Question 1	Does this ANPR make clear what FinCEN is considering for an “effective and reasonably designed” AML program? If not, how can the concept be modified to provide greater clarity?
Question 2	Are the ANPR’s 3 proposed core elements and objectives of an “effective and reasonably designed” AML program appropriate? Should FinCEN make any changes to the 3 proposed elements of an “effective and reasonably designed” AML program in a future notice of proposed rulemaking?
Question 3	Are the changes to the AML regulations under consideration in the ANPR an appropriate mechanism to achieve the objective of increasing the effectiveness of AML programs? If not, what different or additional mechanisms should FinCEN consider?
Question 4	Should regulatory amendments to incorporate the requirement for an “effective and reasonably designed” AML program be proposed for all financial institutions currently subject to AML program rules? Are there any industry-specific issues that FinCEN should consider in a future notice of proposed rulemaking to further define an “effective and reasonably designed” AML program?
Question 5	Would it be appropriate to impose an explicit requirement for a risk-assessment process that identifies, assesses, and reasonably mitigates risks in order to achieve an “effective and reasonably designed” AML program? If not, why? Are there other alternatives that FinCEN should consider? Are there factors unique to how certain institutions or industries develop and apply a risk assessment that FinCEN should consider? Should there be carve-outs or waivers to this requirement, and if so, what factors should FinCEN evaluate to determine the application thereof?
Question 6	Should FinCEN issue Strategic AML Priorities, and should it do so every two years or at a different interval? Is an explicit requirement that risk assessments consider the Strategic AML Priorities appropriate? If not, why? Are there alternatives that FinCEN should consider?
Question 7	Aside from policies and procedures related to the risk-assessment process, what additional changes to AML program policies, procedures, or processes would financial institutions need to implement if FinCEN adds the requirement for an “effective and reasonably designed” AML program, as described in this ANPR? Overall, how long of a period should FinCEN provide for implementing such changes?
Question 8	As financial institutions vary widely in business models and risk profiles, even within the same category of financial institution, should FinCEN consider any regulatory changes to appropriately reflect such differences in risk profile? For example, should regulatory amendments to incorporate the requirement for an “effective and reasonably designed” AML program be proposed for all financial institutions within each industry type, or should this requirement differ based on the size or operational complexity of these financial institutions, or some other factors? Should smaller, less complex financial institutions, or institutions that already maintain effective BSA compliance programs with risk assessments that sufficiently manage and mitigate the risks identified as Strategic AML Priorities, have the ability to “opt in” to making changes to AML programs as described in this ANPR?
Question 9	Are there ways to articulate objective criteria and/or a rubric for examination of how financial institutions would conduct their risk-assessment processes and report in accordance with those assessments, based on the regulatory proposals under consideration in this ANPR?
Question 10	Are there ways to articulate objective criteria and/or a rubric for independent testing of how financial institutions would conduct their risk-assessment processes and report in accordance with those assessments, based on the regulatory proposals under consideration in this ANPR?
Question 11	A core objective of the incorporation of a requirement for an “effective and reasonably designed” AML program would be to provide financial institutions with greater flexibility to reallocate resources towards Strategic AML Priorities, as appropriate. FinCEN seeks comment on whether such regulatory changes would increase or decrease the regulatory burden on financial institutions. How can FinCEN, through future rulemaking or any other mechanisms, best ensure a clear and shared understanding in the financial industry that AML resources should not merely be reduced as a result of such regulatory amendments, but rather should, as appropriate, be reallocated to higher priority areas?

-End-