Summary: CFPB Proposed Rule re: TILA Definition for Seasoned Qualified Mortgage Loan Definition

12 CFR Part 1026

The Consumer Financial Protection Bureau

Prepared by the Legislative & Regulatory Affairs Department

September 2020

The Consumer Financial Protection Bureau (CFPB) is issuing this proposal to create a new category of Qualified Mortgages (QMs) because it seeks to encourage safe and responsible innovation in the mortgage origination market, including for certain loans that are not QMs or are only rebuttable presumption QMs under the existing QM categories.

Comments must be received by October 1, 2020.  The proposed rule can be accessed here.

Summary:

With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any residential mortgage loan.  Loans that meet Regulation Z’s requirements for “qualified mortgages” (QMs) obtain certain protections from liability.  Regulation Z contains several categories of QMs, including the General QM category and a temporary category (Temporary GSE QM loans) of loans that are eligible for purchase or guarantee by government-sponsored enterprises (GSEs) while they are operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA).

The Bureau is issuing this proposal to create a new category of QMs (Seasoned QMs) for first lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period. The Bureau’s primary objective with this proposal is to ensure access to responsible, affordable mortgage credit by adding a Seasoned QM definition to the existing QM definitions.

Under the proposal, a covered transaction would receive a safe harbor from Ability to Repay (ATR) liability at the end of a 36-month seasoning period as a Seasoned QM if it satisfies certain product restrictions, points-and-fees limits, and underwriting requirements and it meets performance and portfolio requirements during the seasoning period.  Specifically, a covered transaction would have to meet the following product restrictions to be eligible to become a Seasoned QM:

  • The loan is secured by a first lien;
  • The loan has a fixed rate, with fully amortizing payments and no balloon payment;
  • The loan term does not exceed 30 years; and
  • The total points and fees do not exceed specified limits.

For a loan to be eligible to become a Seasoned QM, the proposal would require that the creditor consider the consumer’s DTI ratio or residual income and verify the consumer’s debt obligations and income.  The proposal would not specify a DTI limit nor would it require the creditor to use appendix Q to Regulation Z in calculating and verifying debt and income.

Under the proposal, the loan generally would only be eligible to season if the creditor holds it in portfolio until the end of the seasoning period.  To become a Seasoned QM, a loan would have to meet certain performance requirements at the end of the seasoning period.  Specifically, seasoning would be available only for covered transactions that have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period.

Funds taken from escrow in connection with the covered transaction and funds paid on behalf of the consumer by the creditor, servicer or assignee of the covered transaction would not be considered in assessing whether a periodic payment has been made or is delinquent for purposes of the proposal.  However, creditors could (generally) accept deficient payments within a payment tolerance of $50 on up to three occasions during the seasoning period without triggering a delinquency for purposes of the proposal.

The proposal generally defines the seasoning period as a period of 36 months beginning on the date on which the first periodic payment is due after consummation.  Failure to make full contractual payments would not disqualify a loan from eligibility to become a Seasoned QM if the consumer is in a temporary payment accommodation extended in connection with a disaster or pandemic-related national emergency, as long as certain conditions are met.  However, time spent in such a temporary accommodation would not count towards the 36-month seasoning period, and the seasoning period could only resume after the temporary accommodation if any delinquency is cured either pursuant to the loan’s original terms or through a qualifying change as defined in the proposal.

The Bureau proposes that the final rule relating to this proposal would take effect on the same day as a final rule amending the General QM definition.  The Bureau proposed that the effective date of a final rule relating to the General QM Proposal would be six months after publication in the Federal Register.  The revised regulations would apply to covered transactions for which creditors receive an application on or after the effective date, which aligns with the approach the Bureau proposed to take in the General QM Proposal.

Comments Requested

The Bureau requests comment generally about any aspect of the proposed rule in addition to the specific questions posed below:

  • The Bureau requests comment on all aspects of the proposed rule that would be applicable to determining whether, by meeting the requirements of Section 1026.43(e)(7) for a particular loan, a creditor has demonstrated that the consumer had a reasonable ability to repay the loan according to its terms and the loan should be accorded safe harbor QM status.
  • The Bureau requests comment on whether there are other approaches to providing QM status to seasoned loans that would accomplish the Bureau’s objectives, such as providing a rebuttable presumption to non-QM loans that meet the requirements after a seasoning period, perhaps with a further seasoning period to gain safe harbor status.
  • The Bureau requests comment on whether the proposed Seasoned QM definition should exclude other subsets of covered transactions that might pose heightened consumer protection risks, or should be extended beyond first-lien mortgages in a manner that improves access to credit without introducing undue complexity in application.
  • The Bureau requests comment on whether and to what extent it should allow covered transactions that qualify as QMs under existing QM categories, including the EGRRCPA QM loan definition, to qualify for QM status under the proposed Seasoned QM category.
  • The Bureau invites comment on whether allowing other types of loans and payment schedules would facilitate appropriate access to credit while assuring protection of consumers’ interests covered by ATR requirements. Commenters who recommend alternative approaches are encouraged to submit data and analyses to support their recommendations.
  • The Bureau requests comment on whether the final rule, in addition to or instead of this approach, should cross-reference the “consider and verify” requirements for General QMs such as those in any final rule stemming from the General QM Proposal.
  • The Bureau requests comment on the general requirements that would be established for Seasoned QMs under proposal as well as any areas in which commentary may further clarify the proposed general requirements.
  • The Bureau requests comment on whether no more than two 30-day delinquencies and no 60-day delinquency is the appropriate standard for the number and duration of delinquencies that a covered transaction may have at the end of the seasoning period for purposes of proposed Section 1026.43(e)(7).
  • The Bureau requests comment on whether it is appropriate to impose a portfolio requirement on creditors considering the other proposed consumer protections in the proposal and the existing risk retention requirements for asset-backed securities.
  • The Bureau requests comment on whether the proposed requirements regarding consideration of the consumer’s DTI ratio or residual income and verification of the consumer’s debt obligations and income would be sufficient to ensure a similar outcome.
  • The Bureau additionally seeks comment on the duration of the portfolio requirement and arguments for and against the proposed requirement that creditors hold loans in portfolio until the end of the seasoning period in order for such loans to be eligible to become Seasoned QMs.
  • The Bureau solicits comment on all of the definitions it proposes in Section 1026.43(e)(7)(iv).
  • The Bureau seeks comment on whether it should include other sources of funds in proposed Section 1026.43(e)(7)(iv)(A)(5) as an additional measure to ensure payments in fact reflect ability to repay.
  • The Bureau is interested in whether it should include funds from subordinate-lien credit transactions made to the consumer by the creditor, servicer, or assignee of the covered transaction, or a person acting on such creditor, servicer, or assignee’s behalf, the reasons for or against treating such funds in the same way as proposed Section 1026.43(e)(7)(iv)(A)(5) would treat funds paid on behalf of a consumer by such persons; and how such a provision could be structured so as not to impact negatively consumers’ ability to access credit.
  • The Bureau solicits comment on its proposal to define the seasoning period generally as a period of 36 months beginning on the date on which the first periodic payment is due after consummation.
  • The Bureau also requests comment on alternative lengths that the Bureau should consider from the seasoning period; considerations and data that the Bureau should consider in determining the length of the seasoning period; and whether the length of the seasoning period should depend on the type of loan or QM status at origination (for example, whether the Bureau should provide a longer seasoning period for loans that are non-QM at origination than for loans that are rebuttable presumption loans at origination).
  • The Bureau invites comment on the proposal to exclude from the seasoning period the period of time during which a loan is subject to a temporary payment accommodation extended in connection with a disaster or pandemic related national emergency.
  • The Bureau invites comment generally on the proposed definition of a temporary payment accommodation in connection with a disaster or pandemic-related national emergency.
  • The Bureau seeks additional information or data that could inform quantitative estimates of PMI costs or APRs for these loans
  • The Bureau seeks additional information or data which could inform its quantitative estimates of the effects of the proposal
  • The Bureau seeks further information about whether litigation risks from non-QM status impedes depositories’ sale of non-QM loans to the secondary market
  • The Bureau seeks comment as to whether these effects can be ascertained
  • The Bureau requests comment on its analysis of the impact of the proposal on small entities and requests any relevant data

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary:  CFPB Proposed Rule re: Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition

12 CFR Part 1026

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

August 2020

In this notice of proposed rulemaking, the Bureau proposes certain amendments to the General QM loan definition in Regulation Z.  Among other things, the Bureau proposes to remove the General QM loan definition’s 43 percent DTI limit and replace it with price-based threshold.  Another category of QMs are loans that are eligible for purchase or guarantee by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporate (Freddie Mac) otherwise known as “government sponsored enterprises” or GSEs, which operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA).  The GSEs are currently under Federal conservatorship.

The Bureau established a category of Temporary GSE QMs as a temporary measure that is set to expire no later than January 10, 2021 or when the GSEs exit conservatorship.  The Bureau’s objective with this proposal is to facilitate a smooth and orderly transition away from Temporary GSE QMs loan definition and to ensure access to responsible, affordable mortgage credit upon its expiration.

Comments must be received by September 8, 2020.  The proposed rule can be accessed here.

Summary:

With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any residential mortgage loan.  Loans that meet Regulation Z’s requirements for “qualified mortgages” (QMs) obtain certain protections from liability.  The Rule defines several categories of QMs.  One category is the General QM loan category.  General QM loans must comply with the rule’s prohibitions on certain loan features, its points-and-fees limits, and its underwriting requirements.  For General QMs loans, the ratio of the consumer’s total monthly debt to total monthly income (DTI) ratio must not exceed 43 percent.  The rule requires that creditors must calculate, consider, and verify debt and income for purposes of determining the consumer’s DTI ratio using the standards contained in appendix Q of Regulation Z.

The Bureau is proposing a price-based General QM loan definition to replace the DTI-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction, is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.  A loan would meet the General QM loan definition only if the APR exceeds APOR for a comparable transaction by less than two percentage points as of the date the interest rate is set.  The proposal would provide higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions and would retain the existing product-feature and underwriting requirements and limits on points and fees.

Although the proposal would remove the 43 percent DTI limit, it would require that creditors consider the consumer’s income or assets, debt obligations, and DTI ratio or residual income and verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling that secures the loan and the consumer’s current debt obligations, alimony, and child support.  The proposal would remove appendix Q.  However, to prevent uncertainty, the proposal would clarify the requirements to consider and verify for these items.

 

In conjunction with this proposal, the Bureau has also issued a related proposal regarding a second, temporary category of QM loans commonly referred to as the “GSE patch.  The group of mortgages (i) comply with the same-loan-feature prohibitions and points-and-fees limits as General QM loans and (ii) are eligible to be purchased or guaranteed by the GSEs while under the conservatorship of the FHFA.   Unlike the General QM loans, the rule does not prescribe a DTI limit for temporary GSE QM loans.  Thus, a loan can qualify as a temporary GSE QM loan even if the consumer’s DTI ratio exceeds 43 percent, so long as the loan is eligible to be purchased or guaranteed by either of the GSEs.  In addition, the rule does not require creditors to use appendix Q to determine the consumer’s income, debt or DTI ratio for temporary GSE QM loans.

The GSE patch loan definition expires when either the GSEs exit conservatorship or on January 10, 2021.  The Bureau is issuing this proposal to update the definition of “General QM loans” to address concerns that GSE patch loans would not qualify as General QM loans either because the consumer’s DTI ratio is above 43 percent or because the creditor’s method of documenting and verifying income or debt does not comply with appendix Q.  Additionally, in the related GSE Patch proposal, the Bureau is proposing to extend the Temporary GSE QM loan definition to expire upon the effective date of final amendments to the General QM loan definition or when the GSEs exit conservatorship, whichever comes first.

The Bureau proposes that the effective date of the final rule relating to this General QM loan proposal would be six month after publication in the Federal Register.

Comments

  • The Bureau does not intend to issue a final rule amending the General QM loan definition early enough for it to take effect before April 1, 2021. The Bureau requests comment on this proposed effective date and seeks comment on whether there is a day of the week or time of the month that would most facilitate implementation of the proposed changes?

 

  • The Bureau requests comment on certain alternative approaches that would retain the DTI limit but would raise it above the current 43% limit and provide a more flexible set of standards for verifying debt and income in place of Appendix Q.

 

  • Bureau requests comment on whether the rule should retain the current thresholds separating the safe harbor from rebuttable presumption General QM loans and whether the Bureau should adopt higher or lower safe harbor thresholds? The Bureau encourages comments to suggest specific rate spread thresholds for the safe harbor.

 

  • Bureau requests comment on whether it may be appropriate to set the safe harbor threshold for first-lien transactions lower than 1.5 percentage points over APOR in light of the comparatively lower delinquency rates associated with high DTI loans at lower rate spreads, as reflected in Tables 5 and 6.

 

  • Bureau requests comment on whether it may be appropriate to set the safe harbor threshold for first liens higher than 1.5 percentage points over APOR?

 

  • Bureau requests comment on whether a safe harbor threshold of 2 percentage points over APOR would balance considerations regarding access to credit and ability to repay?

 

  • The Bureau requests comment on an appropriate threshold to separate QM loans from non-QM loans

 

  • The Bureau requests comment on its tentative determination not to amend the grounds on which the presumption of compliance can be rebutted.

 

  • Bureau requests comment on whether to amend the grounds on which the presumption of compliance can be rebutted, such as where the consumer has a very high DTI and low residual income. Whether and how to define “very high DTI.”

 

  • The Bureau requests comment on all aspects of the proposed approach for the presumption of compliance.

 

  • The Bureau requests comment, including data or other analysis, on whether a safe harbor for QMs that are not higher priced is appropriate and, if so, on whether other requirements should be imposed for such QMs to receive a safe harbor?

 

  • Bureau requests comment on whether an approach that increases the DTI limit to a specific threshold within a range of 45 to 48 precent and that includes more flexible definitions of debt and income would be a superior alternative to a price-based approach.

 

  • Bureau requests comment on whether an alternative approach that adopts a higher DTI limit and a more flexible standard for defining debt and income could mitigate these concerns and provide a superior alternative to the price-based approach?

 

  • Bureau requests comment on whether such an approach would adequately balance considerations related to ensuring consumers’ ability to replay and maintaining access to credit.

 

  • Bureau requests comment on whether to retain a specific DTI limit for the General QM loan definition, rather than or in addition to the proposed price-based approach

 

  • Bureau requests comment on whether increase the DTI limit to a specific percentage between 45 and 48 percent would be a superior alternative to the proposed price-based approach and, if so, what specific DTI percentages would be expected to affect access to credit and would be expected to affect the risk that the General QM loan definition would include loans for which the Bureau should not presume that the consumers who receive them have the ability to repay

 

  • Bureau requests comments on whether increasing the DTI limit to a specific percentage between 45 to 48 percent would better balance the goals of ensuring access to responsible, affordable credit and loan definition with a 43 percent DTI limit, 90.6 percent of conventional purchase loans were safe harbor QM loans and 95.8 percenter were safe harbor QM or rebuttable presumption QM loans.

 

  • The Bureau requests comment on the macroeconomic effects of a DTI-based approach as well as whether and how the Bureau should weigh such effects on amending the General QM loan definition.

 

  • Bureau requests comments on whether, if the Bureau adopts a higher specific DTI limit as part of the General QM loan definition, the Bureau should retain the price-based threshold of 1.5 percentage points over APOR to separate safe harbor QM loans from rebuttable presumption QM loans for first-lien transactions.

 

  • Bureau requests comment on whether to adopt a hybrid approach in which a combination of a DTI limit and a price-based threshold would be used in the General QM loan definition.

 

  • Bureau requests comment on whether a DTI limit of up to 50 percent would be appropriate under these hybrid approaches that incorporate pricing into the General QM loan definition given that the pricing threshold would generally limit the additional risk factors beyond the higher DTI ratio.

 

  • Bureau requests comment on whether these hybrid approaches or a different hybrid approach would better address concerns about access to credit and ensuring that the General QM criteria support a presumption that consumers have the ability to repay their loans.

 

  • Bureau requests comment on whether the approach in proposed Section 1026.43(e)(2)(v) could be applied with a General QM loan definition that includes a specific DTI limit.

 

  • Bureau requests comment on whether the alternative method of defining debt and income in proposed Section 1026.43(e)(2)(v)(B) could replace appendix Q in conjunction with a specific DTI limit.

 

  • Bureau requests comment on whether allowing creditors to sue standards the Bureau may specify to verify debt and income, as would be permitted under proposed Section 1026.43(e)(2)(v)(B), as well as potentially other standards external stakeholders develop and the Bureau adopts would provide adequate clarity and flexibility while also ensuring that DTI calculations across creditors and consumers are sufficiently consistent to provide meaningful comparison of a consumer’s calculated DTI to any DTI ratio threshold specified in the rule.

 

  • Bureau requests comment on what changes, if any, would be needed to proposed Section 1026.43(e)(2)(v)(B) to accommodate a specific DTI limit. For example, the Bureau requests comment on whether creditors that comply with guidelines that have been revised but are substantially similar to the guides specified above should receive a safe harbor, as the Bureau has proposed.

 

  • Bureau seeks comment on its proposal to allow creditors to “mix and match” verification standards, including whether the Bureau should instead limit or prohibit such “mixing and matching” under an approach that incorporates a specific DTI limit.

 

  • Bureau requests comment on whether these aspects of the approach in proposed Section 1026.43(e)(2)(v)(B), if used in conjunction with a specific DTI limit, would provide sufficient certainty to creditors, investors, and assignees regarding a loan’s QM status and whether it would result in potentially inconsistent application of the rule.

 

  • Bureau requests comment on all aspects of the proposed special rule that would be required in proposed Section 1026.43(b)(4) to determine the APR for certain loans for which the interest rate may or will change

 

  • Bureau requests comment on whether additional clarifications may be helpful with respect to cash flow underwriting and verifying whether inflows are income under the rule.

 

  • Bureau requests comment on whether the proposed commentary for Section 1026.43(e)(2)(v)(A) provides sufficient clarity as to what creditors must do to comply with the requirement to consider income/assets, debt obligations, alimony, child support, and DTI or residual income, and whether it creates impediments to consideration of other factors or data in making an ATR determination.

 

  • Bureau requests comment on whether it should retain the monthly payment calculation method for DTI, which it is proposing to move from Section 1026.43(e)(2)(vi)(B) to proposed Section 1026.43(e)(2)(v)(A).

 

  • Bureau requests comment on whether proposed Section 1026.43(e)(2)(v)(A) and its associated commentary sufficiently address the risk that loans with a DTI that is so high or residual income that is so low that a consumer may lack ability to repay can obtain QM status

 

  • Bureau requests comment on whether the rule should provide examples in which a creditor has not considered the required factors and, if so, what may be appropriate examples

 

  • Bureau requests comment on whether the rule should provide that a creditor does not appropriately consider DTI or residual income if a very high DTI ratio or low residual income indicates that the consumer lacks ability to repay but the creditor disregards this information and instead relies on the consumer’s expected or present equity in the dwelling.

 

  • Bureau requests comment on whether the rule should specify which compensating factors creditors may or may not rely on purposes of determining the consumer’s ability to repay.

 

  • Bureau seeks comment on the tradeoffs of addressing these ability to repay concerns with undermining the clarity of a loans’ QM status.

 

  • Bureau seeks comment on the impact of the COVID-19 pandemic on how creditors consider income or assets, debt obligations, alimony, child support and monthly DTI ratio or residual income.

 

  • Bureau seeks comment on proposed Section 1026.43(e)(2)(v)(B) and related commentary, including on whether it should retain appendix Q as an option for complying with the Rule’s verification standards.

 

  • Bureau seeks comment on whether proposed Section 1026.43(e)(2)(v)(B) and related commentary would facilitate or create obstacles to verification of income, assets, debt obligations, alimony and child support through automated analysis of electronic transaction data from consumer account records

 

  • Bureau seeks comment on whether the rule should include a safe harbor for compliance with certain verification standards, as the Bureau proposes in proposed comment 43(e)(2)(v)(B)-3, and, if so, what verification standards the Bureau should specify for the safe harbor.

 

  • Bureau requests comment about the advantages and disadvantages of the verification requirements in each possible standard the Bureau could specify for the safe harbor

 

  • Bureau requests comment on whether creditors that comply with standards that have been revised but are substantially similar should receive a safe harbor, as the Bureau proposes.

 

  • Bureau seeks comment on whether the rule should include examples of revisions that might qualify as substantially similar, and if so, what types of examples would provide helpful clarification to creditors and other stakeholders

 

  • Bureau seeks comment on whether it would be helpful to clarify that a revision might qualify as substantially similar where it is a clarification, explanation, logical extension or application of a pre-existing proposition in the standard.

 

  • Bureau seeks comment on its proposal to allow creditors to “mix and match” requirements from verification standards, including whether examples of such “mixing and matching” would be helpful and whether the Bureau should instead limit or prohibit such “mixing and matching” and why

 

  • Bureau seeks comment on whether the Bureau should specify in the safe harbor existing stakeholder standards or standards that stakeholders develop that define debt and income.

 

  • Bureau seeks comment on whether the potential inclusion or non-inclusion of Federal agency or GSE verification standards in the safe harbor in the future would further encourage stakeholders to develop such standards.

 

  • Bureau seeks comment on whether the final rule should establish in Section 1026.43(e)(2)(vi)(A) a different rate spread threshold and, if so, what the threshold should be.

 

  • Bureau seeks comment on whether the General QM rate spread threshold should be higher than 2 percentage points over APOR. The Bureau requests commenters provide data or other analysis that would support providing QM status to such loans, which the Bureau expects would have higher risk profiles.

 

  • Bureau seeks comment on whether the General QM rate spread threshold should be set lower than 2 percentage points over APOR.

 

  • Bureau seeks comments on whether creditors may be expected to change lending practices in response to the addition of any rate spread threshold in the definition of General QM and how that would affect the size of the QM market.

 

  • Bureau seeks comment on whether the Bureau should consider adjusting the pricing thresholds in emergency situations and, if so, how the Bureau should do so.

 

  • Bureau seeks comment, including data or other analysis, on whether the final rule in Section 1026.439(e)(2)(vi)(B) through (C) should include different rate spread thresholds at which smaller loans would be considered General QM loans, and if so, what those thresholds should be.

 

  • Bureau seeks comments on whether the General QM rate spread threshold for first-lien loans should be higher or lower than the rate spread ranges set forth in Table 9 for such loans with loan amounts less than $109,987 and greater than or equal to $65,939 and for such loans with loan amounts less than $65,939.

 

  • Bureau requests commenters to provide data or other analysis that would support providing General QM status to such loans taking into account concerns regarding the consumer’s ability to repay and adverse effects on access to credit.

 

  • Bureau requests comments including data or other analysis, on whether the final rule in Section 1026.43(e)(2)(vi)(D) through (E) should include different rate spread thresholds at which subordinate lien loans would be considered General QM loans, and, if so, what those thresholds should be.

 

  • Bureau requests comment on whether the General QM rate spread threshold for subordinate lien loans should be higher or lower than the rate spread ranges set forth in Table 10 for such loans with loan amounts greater than or equal to $65,939 and for such loans with loan amounts less than $65,939.

 

  • Bureau requests commenter provide data or other analysis that would support providing General QM status to such loans taking into account concerns regarding the consumers’ ability to repay and adverse effects on access to credit.

 

  • Bureau requests comment, including data and other analysis, on whether the rule should include a DTI limit for smaller loans and subordinate lien loans.

 

  • Bureau requests comment on all aspects of the proposed special rule in proposed Section 1026.43(e)(2)(vi)

 

  • Bureau requests data regarding short-reset ARMs are those step-rate mortgages that would be subject to the proposed special rule, including default and delinquency rates and the relationship of those rates to price.

 

  • Bureau requests comment on alternative approaches for such loans, including the ones discussed above, such as imposing specific limits on annual rate adjustments for short-reset ARMs, applying a different rate spread, and excluding such loans from General QM eligibility altogether.

 

 

 

 

 

 

NCUA Risk Alert: 20-Risk-02 COVID-19 Fraud Schemes

August 2020

NCUA issued Risk Alert 20-RA-02 to inform credit unions about fraud risks associated with the COVID-19 pandemic. The economic dislocation resulting from the pandemic, the various government programs implemented to mitigate those effects, and the altered operations of credit unions managing the pandemic present opportunities for criminal elements to exploit vulnerabilities and compromise credit unions and their members.

Financial Institution Fraud

NCUA recommends credit unions review risks related to:

Other federal agencies are good resources on evolving pandemic related fraud trends:

Small Business Administration Loan Fraud

The SBA is administering 2 loan programs, the Paycheck Protection Program and the Economic Injury Disaster Loans, to provide relief to business impacted by the pandemic. The most common red flags for fraud related to these programs are:

  • PPP applications with manipulated or fraudulent supporting documentation.
  • PPP applications w/different names that contain nearly identical application information & supporting documentation originating from the same IP address.
  • Recently established fake businesses with no internet presence & having minor differences between names on the application & business registration documents.
  • Existing accounts always have low balances with no history of payroll expenses.
  • New accounts that appear to have been created solely to apply for or receive SBA funds. The accounts had no previous business activity and funds are quickly transferred after receipt of SBA loan proceeds.
  • After loan advances or proceeds are deposited into an account, funds are immediately withdrawn in cash, wired out, transferred to an investment account, used to purchase luxury assets not associated with typical business-related expenses, or used to start an entirely new business.

Credit unions should report suspected fraud to the SBA Office of the Inspector General (SBA OIG). Additional guidance on PPP loans is available in SBA Procedural Notice 5000-20036. The SBA OIG has also published a lender alert regarding EIDL.

Business Tax Credits Fraud

NCUA’s Risk Alert provides information on the CARES Act Employee Retention Credit and the Credit for Sick and Family Leave. Both programs provide for eligible employers to receive an advance of the credits to help meet weekly payroll. Suspected fraud related to the programs should be reported to IRS Criminal Investigation. Red flags of fraud related to these programs include:

  • U.S. Treasury check deposits while receiving loan proceeds from SBA programs. Businesses are only allowed to take advantage of the Employee Retention Credit or the PPP program. They may not take advantage of both programs.
  • Inflated wages or numbers of employees to increase the amount of tax credits or advances received through a U.S. Treasury check.
  • U.S. Treasury check deposits into accounts with no indication of business or payroll activity.
  • U.S. Treasury check deposits used to pay personal expenses.

Unemployment Insurance Fraud

The CARES Act provides additional unemployment insurance funding for eligible individuals through multiple unemployment assistance programs including the Pandemic Unemployment Assistance (PUA) program. These programs disburse their benefits by various means are attractive targets for fraud. The most common red flags associated with these programs include:

  • Account receives unemployment benefits from another state without a reasonable explanation or from multiple other states.
  • A single account receives unemployment benefits for multiple individuals.
  • New accounts are opened, or existing accounts lack transactional activity, then suddenly used to collect unemployment benefits.
  • Imposter schemes, where a fraudster poses as an official entity to defraud victims, such as obtaining personally identifiable information to fraudulently file for unemployment insurance benefits.
  • Money mules, where an individual knowingly or unknowingly obtains money on behalf of, or at the direction of, someone else to improperly obtain unemployment insurance benefits.

Suspected fraud related to these programs should be reported to the Department of Labor Office of the Inspector General.

Reporting Fraud

In addition to reporting suspected fraud to the appropriate federal agency, credit unions may also contact NCUA’s Fraud Hotline (800.827.9650), an NCUA Regional Office or their SSA.

As appropriate, credit unions should also file SARs with FINCEN with suspected COVID-19 related fraud. SAR filings should include:

  • The type of fraud or scam (by name if possible; i.e imposter scam)
  • affected programs
  • identifying information when possible such as IP addresses

Regulatory Alert 20-RA-07 CFPB Issues Amendments to Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule

August 2020

In July, the CFPB issued a final rule amending parts of the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule (Payday Rule). NCUA notes that although the CFPB Payday Rule became effective on January 16, 2018, the compliance dates are currently stayed pursuant to a court order issued because of pending litigation.

The CFPB’s July changes rescinded 3 provisions of the Payday Rule:

  • The requirement for a lender to determine a borrower’s ability to repay before making a covered loan
  • The underwriting requirements for making the ability-to-repay determination
  • Certain recordkeeping and reporting requirements

The July amendments made no changes to provisions related to:

  • Provisions relating to payment withdrawal restrictions
  • Notice requirements and related recordkeeping requirements for covered short-term loans
  • Covered longer-term balloon payment loans

The CFPB Payday Rule

The Payday Rule covers the following products:

  • Short-term loans that require repayment within 45 days of consummation/advance, regardless of the cost of credit
  • Longer-term loans with certain types of balloon-payment structures or require a payment substantially larger than all others, regardless of the cost of credit
  • Longer-term loans with a cost of credit exceeding 36% APR and have a payment mechanism that gives the lender the right to initiate transfers from the consumer’s account without further action by the consumer

The rule excludes from coverage purchase money security interest loans, real estate secured credit, credit card accounts, student loans, non-recourse pawn loans, Reg E overdraft services and overdraft lines of credit, employer wage advance programs, and no-cost advances.

In addition to the exempted loan products listed above, the rule conditionally exempts the following otherwise covered loan products:

  • Alternative loans that conform to the NCUA’s PALs I requirements (conforming non-PALs loans)
  • PALs I loans made by FCUs
  • Otherwise-covered loans made by a lender that, together with its affiliates, does not originate more than 2,500 covered loans in a calendar year and did not do so in the preceding calendar year (Accommodation Loans) so long as the lender and its affiliates did not derive more than 10% of their receipts from covered loans during the previous year

Key CFPB Payday Rule Provisions Affecting Credit Unions

NCUA notes several key provisions of the rule that affect credit unions:

  • Finance charges must be calculated the same way the finance charge under Regulation Z is calculated
  • Generally, the lender may not attempt more than 2 withdrawals from a consumer’s account. If a second withdrawal attempt fails due to insufficient funds, the lender must provide consumer a consumer rights notice and a specific new authorization to make additional withdrawal attempts
  • Written compliance policies and procedures must be established
  • Evidence of compliance must be maintained for 36 months after the date on which a covered loan is no longer an outstanding loan

 

CFPB Payday Rule Effect on NCUA PALs I, PALs II, and Non-PALs Loans

PALs I
The Payday Rule provides a safe harbor for PALs I FCU loans and therefore those loans are not subject to the rule.
12 CFR 701.21(c)(7)(iii)

PALs II
Depending on the loan’s terms, an FCU’s PALs II loan may be a conditionally exempt alternative loan or an accommodation loan under the Payday Rule.  12 CFR 1041.3(e)  Also, a loan that complies with all PALs II requirements and has a term longer than 45 days is also exempt.

 Non-PALs
To be exempt from the Payday Rule a non-PAL must comply with the applicable parts of 12 CFR 1041.3 as outlined below:

  • Comply with the requirements of an alternative loan and accommodation loan (12 CFR 1041.3(f))
  • Not have a balloon feature
  • Be fully amortized and not require a payment substantially larger than all others, and otherwise comply with all the terms and conditions for such loans with a term of 45 days or less

For loans longer than 45 days, must not have a total cost exceeding 36% per annum or a leveraged payment mechanism, and must comply with the terms and conditions for such longer-term loans.

The CFPB has also issued FAQs and a compliance guide related to the Payday Rule.

 

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Legal Opinion Automated Loan Underwriting System – Segregation of Duties for Loan Officers

June 16, 2020

NCUA’s legal opinion reinterprets existing NCUA interpretations of the permissibility of loan disbursements resulting from the use of an automated loan underwriting system (ALUS). The Legal Opinion applies to FCUs. At issue are:

In this opinion, NCUA partially reverses its position that an MSR can not both input data into an ALUS and oversee the disbursement of funds in certain fact specific circumstances where internal controls are sufficient to mitigate the risk of fraud.

Background

Section 1761c(b) of the FCU prohibits an individual from having the authority to disburse funds of an FCU for any loan or line of credit for which that individual approved the loan application as a loan officer. When the credit review process is automated with an ALUS, someone must enter the application data into the system.

 In 2002, NCUA determined that an FCU employee entering data into an ALUS is responsible for the accuracy of the information and is acting akin to a loan officer and therefore could not also oversee the disbursement of funds pursuant to § 1761c(b).

In 2010, NCUA issued another legal opinion related to the use of ALUS concluding that it is permissible for an FCU to use a fully automated loan underwriting system but reiterated that the same employee may not both input the applicant’s data into the ALUS and disburse the loan funds.

NCUA’s Evolving View

While the 2002 and 2010 legal opinions consistently viewed an employee entering data into an ALUS as the equivariant of a loan officer, NCUA now believes that with advances in technology and changes in credit union operations, that many no longer always be the case.

 Specifically, NCUA notes that loan officers are responsible for more than formulaic underwriting: they evaluate the character of the borrower and the likelihood of repayment as well as ensuring loan terms and procedures comply with credit union policies and applicable compliance requirements. In contrast, an FCU employee working with an ALUS today may be limited to strictly performing data entry with no other responsibilities or knowledge of the loan approval process.

In such cases, NCUA now opines that with certain safeguards in place, it might be possible for the same employee to serve the function of data entry into the ALUS as well as oversee the disbursement of the loan. NCUA suggests the following safeguards may make this type of arrangement permissible:

  • strictly limit the employee’s duties in the ALUS context to data processing and other necessary administrative functions that are separate and distinguishable from loan officer duties
  • develop internal procedures to maintain a segregation of duties between the data entry employee and the loan officer outside of the ALUS function so there is no confusion about what duties each performs
  • establish internal checks and balances to:
  • effectively monitor that data entry employees are correctly inputting data into the ALUS and correctly disbursing funds based on ALUS credit decisions
  • detect any instances of fraud or embezzlement
  • exclude data entry employees from any involvement with the ALUS other than accurate data input and proper disbursements

 

Legal Opinion Reasonable Proximity Analysis

June 10, 2020

 NCUA’s Legal Opinion addresses FCU field of membership and the term “reasonable proximity,” as used in the Federal Credit Union Act (“FCUA”) and whether it establishes a statutory constraint related to proximity. NCUA answered “No” there was not a statutory constraint on the term “reasonable proximity” that would impose a limit such as a maximum distance between the location of the group and the location of the FCU.

NCUA views “reasonable proximity” as including a geographic component but will continue to assess it on a case-by-case basis.

The FCUA permits a group to be added to a multiple common bond FCU’s field of membership when it is neither practicable nor reasonably safe and sound for the group to charter its own credit union. The FCUA further instructs that the group to be added must be “within reasonable proximity” to the FCU. NCUA notes that the context of the FCUA and the traditional definition of proximity requires a geographic determination.

The NCUA’s Chartering Manual requires added groups to be within reasonable geographic proximity of the credit union and within the service area of at least one of FCU’s service facilities.” However, the Chartering Manual does not include a specific distance or mileage limitation into its definition of reasonable proximity. NCUA notes that given geographic and population density diversity throughout the country, explicit mileage limits can cause unfair results and are therefore not appropriate. As a result, NCUA uses a case-by-case approach in chartering decisions when interpreting reasonable proximity.

-End-

 

FinCEN Guidance FIN-2020-G002

Frequently Asked Questions Regarding Customer Due Diligence (CDD) Requirements for Covered Financial Institutions

August 3, 2020

FinCEN has issued updated responses to 3 FAQs regarding CDD requirements for covered financial institutions.  The FAQs clarify the regulatory requirements related to:

  • obtaining customer information
  • establishing a customer risk profile
  • performing ongoing monitoring of the customer relationship to assist with CDD compliance obligations

These FAQs are in addition to those that were published on July 19, 2016 and April 3, 2018.  More information is available on FinCEN’s CDD webpage.

I. Customer Information – Risk-Based Procedures

The first question asks about the extent of the information to be collected on members at account opening: whether information about expected activity must be collected on all customers at account opening, or on an ongoing or periodic basis; whether media searches must be done on all customers at account opening or on an ongoing basis; and whether a financial institution needs to know its customer’s customer when providing services to another financial institution.

FinCEN provides the following responses in the revised FAQs:

  • The CDD Rule does not categorically require the collection of any particular customer due diligence information (other than that required to develop a customer risk profile, conduct monitoring, and collect beneficial ownership information).
  • The performance of media searches or the collection of customer information from a financial institution’s bank customers is a risk-based decision at the discretion of the financial institution.
  • A covered financial institution may make a risk-based determination that a customer’s risk profile is low and additional information is not necessary.
  • Covered financial institutions must establish policies, procedures, and processes for determining whether and when, on the basis of risk, to update customer information to ensure that customer information is current and accurate.

II. Customer Risk Profile

The second question asked whether financial institutions must use a specific method to risk rate customers or automatically characterize as high-risk customers and products that are identified as such in government publications.

FinCEN answered that there is no requirement that covered institutions use a specific method or categorization to establish a customer risk profile. Furthermore, there is no requirement to automatically categorize as “high risk” products or customer types listed in government publications.

III. Ongoing Monitoring of the Customer Relationship

Question three asked whether CDD requires financial institutions update customer information on a specific schedule.

FinCEN answered that there is no categorical requirement that financial institutions update customer information on a continuous or periodic schedule. The requirement to update customer information is risk based and should be undertaken based on normal monitoring. If monitoring reveals a change in customer information relevant to assessing the risk posed by the customer, then the customer information should be updated accordingly. Some financial institutions may decide as part of their policies to review customer information on a regular or periodic basis.

 

-End-

Summary: Proposed Rule re: Higher Priced Mortgage Loan Escrow Exemption (Regulation Z)

12 CFR Part 1026

The Consumer Financial Protection Bureau

 Prepared by the Legislative and Regulatory Affairs Department

 July 2020

The Bureau is proposing to amend Regulation Z, which implements the Truth in Lending Act, as mandated by Section 108 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRPCA). The amendments would exempt certain insured depository institutions and insured credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans.

Comments must be received by September 21, 2020.  The proposed rule can be found here.

Summary:

Regulation Z, which implements the Truth in Lending Act, requires creditors establish an escrow account for certain higher-priced mortgage loans (HPMLs) with some exemptions.  Section 108 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRPCA) required the Bureau to issue regulations that provide a new exemption from TILA’s escrow requirement for loans made by certain insured depository institutions and insured credit unions.

New Section 1026.35(b)(2)(vi) would exempt from the Regulation Z HPML escrow requirement any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if (i) the institution has assets of $10 billion  or less; (ii) the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year; and (iii) certain of the existing Regulation Z HPML escrow exemption criteria, or those of any successor regulation are met.

In addition, the proposal would implement the EGRRPA section 108 statutory directive and would remove obsolete text from the official interpretation of Regulation Z.

The Bureau proposed that the amendments included in this proposal take effect for mortgage applications received by an exempt institution on the date of the final rule’s publication in the Federal Register.

Comments:

  • The Bureau seeks comments on its proposed amendments to Section 1026.35 and on the need for the proposed changes and the impact on consumers of extending the exemption of the escrow requirements in Section 1026.35(b)(1).
  • The Bureau seeks comment on whether the proposed effective date is appropriate, or whether the Bureau should adopt an alternative effective date.
  • The Bureau request information regarding any additional data or studies that could help quantify the benefits and costs to consumers and covered persons of the proposed rule.
  • The Bureau requests comment on the analysis provided in the rule and request information regarding any relevant data that should be included.

 

Summary: CFPB Request for Information on the Equal Credit Opportunity Act and Regulation B

The Consumer Financial Protection Bureau

Prepared by the Legislative and Regulatory Affairs Department

 August 2020

 The Consumer Financial Protection Bureau seeks comments and information to identify opportunities to prevent credit discrimination, encourage responsible innovation, promote fair, equitable and nondiscriminatory access to credit address potential regulatory uncertainty, and develop viable solutions to regulatory compliance challenges under the Equal Credit Opportunity Act (ECOA) and, its implementing regulation, Regulation B. Regulation B covers creditor activities before, during and after the extension of credit.

Comments must be received by December 1, 2020.  The RFI can be accessed here.

Summary:

The Equal Credit Opportunity Act (ECOA), which is implemented by Regulation B, makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction:

  • On the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract);
  • Because all or part of the applicant’s income derives from any public assistance program; or
  • Because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.

Creditors are also prohibited from making any oral or written statement ( in advertising or otherwise) to applicants or prospective applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.

Comments:

The Bureau seeks comments on the actions it can take or should consider taking to prevent credit discrimination, encourage responsible innovation, promote fair, equitable and nondiscriminatory access to credit, address potential regulatory uncertainty and develop viable solutions to regulatory compliance challenges under ECOA and Regulation B.

The Bureau encourages comments to share their views on all or a subset of the questions included below. The questions are not meant to be exhaustive; the Bureau welcomes additional relevant comments on these topics.

  • Disparate impact:
    • Should the Bureau provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B? If so, on what way?
  • Limited English Proficiency:
    • The Bureau seeks to understand the challenges specific to serving LEP consumers and to find ways to encourage creditors to increase assistance to LEP consumers. Should the Bureau provide additional clarity under ECOA and/or Regulation B to further encourage creditors to provide assistance, products, and services in languages other than English to consumer with limited English proficiency? If so, in what ways?
  • Special Purpose Credit Programs:
    • The special purpose credit programs provisions under ECOA/Regulation B provide targeted means by which creditors, under certain circumstances, can meet “special social needs” and “benefit economically disadvantaged groups.” Should the Bureau address any potential regulatory uncertainty and facilitate the use of SPCPs? If so, in what ways?
  • Affirmative Advertising to Disadvantaged Groups:
    • The official interpretation to Regulation B provides that creditors may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor. Should the Bureau provide clarity under ECOA/Regulation B to further encourage creditors to use such affirmative advertising to reach traditionally disadvantaged consumers and communities? If so, in what way?
  • Small Business Lending:
    • ECOA and Regulation B protect business owners from discrimination because of race, color, national origin, sex and other protected characteristics. In what way(s) might the Bureau support efforts to meet the credit needs of small businesses, particularly those that are minority owned and woman owned?
  • Sexual Orientation and Gender Identity Discrimination
    • In June 2020, in Bostock v. Clayton County, the Supreme Court rules that the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 encompasses sexual orientation discrimination and gender identity discrimination. Should the Supreme Court’s decision in Bostock affect how the Bureau interprets ECOA’s prohibition against discrimination on the basis of sex? If so, in what way?
  • Scope of Federal Preemption of State Law
    • Regulation B alters, effects or preempts only those state laws that are inconsistent with ECOA and/or Regulation B and then only to the extent of the inconsistency. What are examples of potential conflicts or intersections between state laws, state regulations, and ECOA and/or Regulation B and should the Bureau address such potential conflicts or intersections? Should the Bureau provide further guidance to assist creditors evaluating whether state law is preempted to the extent it is inconsistent with the requirements of ECOA and/or Regulation B?
  • Public Assistance Income
    • ECOA makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction because all or part of the applicant’s income derives from any public assistance program. Should the Bureau provide additional clarity under ECOA and/or Regulation B regarding when all or part of the applicant’s income derives from any public assistance program? If so, in what way?
  • Artificial Intelligence and Machine Learning
    • The Bureau noted in its April 2020 annual fair lending report to Congress that financial institutions are starting to deploy AI and machine learning across a range of functions. Should the Bureau provide more regulatory clarity under ECOA and/or Regulation B to help facilitate innovation in a way that increases access to credit for consumers and communities in the context of AI/machine learning without unlawful discrimination? If so, in what way?
    • Should the Bureau modify requirements or guidance concerns notifications of action taken, including adverse action notices, under ECOA and/or Regulation B to better empower consumers to make more informed financial decisions and/or to provide additional clarity when credit underwriting decisions are based in part on models that use AI and machine learning? If so, in what way?
    • ECOA Adverse Action Notices
    • Under the ECOA and Regulation B, a statement of reasons for adverse action must be specific and indicate the principal reason(s) for the adverse action. Should the Bureau provide any additional guidance under ECOA and/or Regulation B related to when adverse action has been taken by a creditor, requiring a notification that includes a statement of specific reasons for the adverse action? If so, in what way?

 

 

 

Regulatory Alert 20-RA-06 Treatment of Certain COVID-19-Related Loss Mitigation Options Under the Real Estate Settlement Procedures Act

August 2020

NCUA’s Regulatory Alert notifies credit unions of the CFPB’s interim final rule amending Regulation X (RESPA) that added a temporary exception to Subpart C to Reg X for certain COVID-19-related loss mitigation options. The rule became effective July 1, 2020.The rule allows a loan mortgage servicer to offer a borrower a loss mitigation option based on an evaluation of limited information collected from a borrower if certain criteria are met.

Reg X generally a mortgage loan servicer to exercise reasonable efforts to obtain all documents and information to complete a loss mitigation application from a borrower, and assess the borrower for all loss mitigation options available to the borrower based on the completed application. There are 2 exceptions:

  • When a servicer has exercised reasonable diligence in obtaining the documents and information to complete a loss mitigation application, but a loss mitigation application remains incomplete for a significant period of time under the circumstances without further progress by a borrower to make the loss mitigation application complete
  • When a servicer offers a short-term payment forbearance program or a short-term repayment plan to a borrower based upon an evaluation of an incomplete loss mitigation application.

The interim final rule adds a third temporary exception that is designed allow servicers to offer a payment deferral option offered by Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency (FHFA), and a loss mitigation option for FHA insured loans.

To qualify for the 3rd exception, a credit union must meet 3 criteria:

  • Allow a borrower to delay paying all forborne principal and interest payments, and all principal and interest payments that are due and unpaid, until:
    • the mortgage loan is refinanced
    • the mortgaged property is sold
    • the term of the mortgage loan ends
    • for a mortgage insured by FHA, the mortgage insurance terminates
  • Not charge or accrue interest on any amounts a borrower may delay paying through the loss mitigation option; not charge any fee in connection with the loss mitigation option; and waive all existing late charges, penalties, stop payment fees, or similar charges promptly upon a borrower’s acceptance of the loss mitigation option
  • Terminate any pre-existing delinquency when a borrower accepts the loss mitigation offer

Under the interim final rule, when a borrower accepts a loss mitigation offer, a credit union is not required to comply with requirements of 1024.41(b)(1) and (2), which apply to an application a borrower submitted before the credit union made its loss mitigation offer.

Credit unions must also comply with other Regulation X requirements after a borrower accepts a loss mitigation offer. For example:

  • If a mortgage loan becomes delinquent again (at any time), a credit union would have to satisfy the early intervention requirements of 1024.39
  • If the borrower submitted a new loss mitigation application, the credit union would have to comply with the usual loss mitigation procedures

Small Servicer Exemption and the Prohibition on Certain Foreclosure Activities

NCUA notes that credit unions engaged in servicing mortgage loans that qualify as small servicers (they service 5k or fewer loans, all of which they or an affiliate own or originated) are not subject to the provisions of Regulation X relevant to this Regulatory Alert and are not affected by the amendment in the interim final rule. However, a small servicer is subject to the prohibition on certain foreclosure activities in Regulation X.5

Credit unions should read the provisions of the interim final rule and Reg X to determine the effect on their operations.

Letter to Credit Unions 20-CU-23 Annual Voluntary Credit Union Diversity Self-Assessment

August 2020

NCUA issued LTCU 20-CU-23 to encourage credit unions to completing NCUA’s Annual Voluntary Credit Union Diversity Self-Assessment. NCUA notes that in 2018, 81 credit unions completed the assessment and last year that number increased to 118. NCUA believes the Diversity Self-Assessment is “a valuable tool for credit unions seeking to make a stronger commitment to diversity, inclusion, and equity” and can help industry strengthen its commitment to those principles.

NCUA aggregates the data from submissions and issues a report on the state of diversity, equity, and inclusion throughout the credit union system. No respondents are identified in the report.

NCUA notes that the Diversity Self-Assessment is available to be completed year-round but that most credit unions complete it at year-end. NCUA encourages credit unions to voluntary commit to completing the  Annual Voluntary Credit Union Diversity Self-Assessment by emailing [email protected] and pledging to submit the survey by year-end.

Letters to Credit Unions 20-CU-22 Update to NCUA’s 2020 Supervisory Priorities

July 2020

NCUA issued LTCU 20-CU-22 to update its Supervisory Priorities listed in LTCU 20-CU-01 in light of developments related to the COVID-19 pandemic. NCUA notes that given the challenges presented by the pandemic, the agency will be:

  • updating the Examiner’s Guide to include additional guidance for examiners and review procedures
  • scheduling eligible credit unions for examination in accordance with the extended examination cyclepursuant to the 2016 NCUA Exam Flexibility Initiative
  • conducting risk-focused examinations, concentrating on areas of highest risk, new products and services, and compliance on all other credit unions

Information on the NCUA’s response to the pandemic is available at Coronavirus (COVID-19): Information for Federally Insured Credit Unions and Members.

Updated Exam Priorities for 2020 Q3 and Q4

 Bank Secrecy Act Compliance/Anti-Money Laundering

NCUA will continue to conduct BSA/AML reviews with an emphasis on CDD and beneficial ownership requirements (effective May 11, 2018). NCUA will also focus on proper filing of SARs and CTRs and reviews of bi-weekly 314(a) information requests.

(NASCUS Note: On August 3, 2020 FINCEN issued updated FAQs related to CDD.)

NCUA participates on an interagency working group with FinCEN and other FBAs which has to date:

NCUA has a Bank Secrecy Act Resources webpage with additional information.

  • Coronavirus Aid, Relief and Economic Security Act

NCUA has added the CARES Act as a supervisory priority and its examiners will review credit unions’ good faith efforts to comply with the Act.

For more information, see LTCU 20-CU-07, Summary of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

 Consumer Financial Protection

NCUA will continue to examine for compliance with applicable consumer financial protection regulations during every examination including:

  • Electronic Fund Transfer Act (Reg E) – Examiners will evaluate EFT policies & review initial account disclosures & Reg E error resolution
  • FCRA – Examiners will review credit reporting policies & procedures and the accuracy of reporting to credit bureaus, particularly the date of first delinquency
  • GLBA – Examiners will evaluate credit union protection of non-public data
  • Small dollar lending – Examiners will test for compliance with the NCUA PALs rules & review other credit union short-term, small-dollar loan programs
  • TILA (Reg Z) –Examiners will evaluate whether finance charges and annual percentage rates are accurately disclosed, and late fees are levied appropriately
  • Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA) – For credit unions that have not received a recent review, examiners will review credit union compliance with the MLA and SCRA

NCUA will also emphasize review of the following regulatory changes enacted since the start of the COVID-19 pandemic:

  • EFT Act (Regulation E) –Examiners will evaluate compliance with the Remittance Transfer Rule safe harbor threshold & fee changes
  • TILA (Reg Z) –Examiners will also evaluate practices related to recent changes in TRID and Reg Z Rescission rules in response to the pandemic

 Credit Risk Management and Allowance for Loan and Lease Losses

NCUA is shifting its priority from reviewing underwriting standards  and concentrations risk (NCUA expectations discussed in 10-CU-03, Concentration Risk) to reviewing adequacy of ALLL accounts.  Because of the delay to CECL, NCUA will not be assessing transition to the CECL standard until further notice. However, credit unions must still maintain an ALLL account in accordance with FASB ASC Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment).

To evaluate the adequacy of credit unions’ ALLL accounts NCUA will review:

  • ALLL policies and procedures
  • ALLL reserving methodology & including modeling assumptions
  • Adherence to GAAP
  • Independent reviews of credit union reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor

NCUA references additional resources, including:

 NCUA will also review credit union policies and the use of loan workout strategies, risk management practices, and new strategies implemented to assist borrowers impacted by the pandemic.

 Information Systems and Assurance (Cybersecurity)

NCUA is shifting its focus from performing ACET cybersecurity maturity assessments to evaluating critical security controls. NCUA is also piloting an Information Technology Risk Examination solution for Credit Unions (InTREx-CU) which is intended to harmonizes the IT and Cybersecurity examination procedures shared by the FDIC, FRB, and some state financial regulators to ensure consistent approaches are applied to community financial institutions. The InTREx-CU will be deployed to identify gaps in security safeguards, allowing examiners and credit unions to identify and remediate potential high-risk areas through the identification of critical information security program deficiencies as represented by an array of critical security controls and practices.

The NCUA has also published information on the increased cybersecurity threats resulting from the COVID-19 pandemic. See NCUA’s Cybersecurity Resources website and NCUA’s Frequently Asked Questions for Federally Insured Credit Unions.

 LIBOR Transition Planning

On July 1, 2020, FFIEC issued a Joint Statement on Managing the LIBOR Transition that highlighted the risks that will result from the transition away from LIBOR. NCUA will continue assessing credit unions’ exposure and planning related to a transition away from LIBOR using the NCUA’s LIBOR Assessment Workbook.

 Liquidity Risk

NCUA will continue to review liquidity risk management and planning in all credit unions, and will place emphasis on:

  • The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting
  • Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds)
  • Scenario analysis for liquidity risk modeling, including changes in share compositions and volumes
  • The potential effects of low interest rates and the decline of credit quality on the market value of assets, funding costs and borrowing capacity
  • The adequacy of contingency funding plans to address any potential liquidity shortfalls

More information is available in the NCUA’s Examiner’s Guide.

 Serving Hemp-Related Businesses

NCUA will continue to collect data thru the examination process on credit unions serving Hemp businesses. See LTCU 20-CU-19, Additional Guidance Regarding Servicing Hemp-Related Businesses and FinCEN’s June 29, 2020 guidance.

 Modernization Updates

 NCUA Connect and MERIT

In September 2019, NCUA began piloting both a new user portal (NCUA Connect) and a new examination tool, the Modern Examination and Risk Identification Tool (MERIT).

Following challenges related to the COVID-19 pandemic, the NCUA has delayed the rollout, training and launch of these applications to all examination staff until the second half of 2021. However, the agency will continue to use MERIT in 2020 and 2021 in both a pilot and limited-release capacity.

Additional information about these applications is available on the NCUA website.